California Credit Union Loses Multimillion Dollar Taxi Medallion Lawsuit

A jury found that a city agency did not breach a lender agreement with the $1.3 billion San Francisco Federal Credit Union that forced it to foreclose on hundreds of taxi medallion loans worth millions of dollars.

According to court records, the jury reached its verdict over the contract dispute last month and that the credit union could be held responsible for paying the attorney fees and costs of the San Francisco Municipal Transportation Agency (SFMTA), a state court judge ruled on Nov. 8.

When San Francisco FCU filed its breach of contract lawsuit in 2018, suing the SFMTA for more than $28 million, the credit union was managing $50 million in taxi medallion loans and an additional $35 million in participation loans.

“This case was always about a bank bailout, plain and simple,” former San Francisco City Attorney Dennis J. Herrera said in an Oct. 4 prepared statement when the jury’s verdict was announced following a 15-day trial held in San Francisco Superior Court. “We’re pleased the jury saw through the disinformation being put out by the other side.”

San Francisco FCU and its lawyers did not return several CU Times phone and email requests for comment. It is unknown whether the credit union intends to appeal.

“The City and Credit Union have a contract. The city has not broken that contract, so taxpayers should not have been forced to bail out this bank,” Herrera said. “For years, the credit union kept the profits its medallion loans generated. It didn’t share those profits with taxpayers. Now under new management, the credit union was seeking to have taxpayers foot the bill for its investment choices. If the credit union had succeeded, not a penny of that money would have gone to drivers. We’re looking forward to putting this case behind us so the focus can return to meaningful improvements in the taxi marketplace.”

But San Francisco taxicab drivers are reportedly still struggling to repay their taxi medallion loans. An Oct. 27 article posted by Marketplace, a nonprofit news organization, reported that one taxicab driver was using his Social Security income help repay his loan and another driver lost his home to keep making his loan payments.

In 2010, the SFMTA launched a new program of transferable taxi medallions for a purchase price of $250,000 per medallion, which are city licenses that give drivers the right to operate a taxi in San Francisco. In that same year, San Francisco FCU signed a lending agreement with the agency to sell $250,000 loans to taxi drivers.

Court documents showed the credit union underwrote and financed the purchase of more than 700 transferable medallions for its taxi driver members, which accounted for more than $125 million in loans secured by the medallions. San Francisco FCU said the city generated about $64 million in revenue from the medallion program.

Starting in 2012, however, taxi drivers saw their revenue substantially decline because of growing competition from Uber, Lyft and other transportation providers. By 2016, the taxi medallion marketplace collapsed because no one was willing to buy medallions and drivers were unable to repay their loans. Foreclosures skyrocketed from .07 per month to 6.3 per month. When the credit union filed its amended lawsuit against the SFMTA in May of 2018, San Francisco FCU reported it foreclosed on at least 118 medallion loans that represented more than $20 million.

According to NCUA Financial Performance Reports, San Francisco FCU posted a net loss of more than $4 million in 2017. And while it recorded a net gain of $5.7 million in 2018 and $11.4 million in 2019, the credit union had a net loss of $31.3 million at the end of 2020. San Francisco FCU has not shown any losses in the first three quarters of this year, according to NCUA Financial Performance Reports.

“The SFMTA simply abandoned its responsibility to maintain the market for transferable medallions and failed to involve the credit union in any efforts to maintain the market, separate and apart from anything it may claim to have done to mitigate taxi drivers’ hardship,” San Francisco FCU wrote in its lawsuit. “Because the SFMTA lured the credit union into this mess through a series of promises and representations, the credit union is now sitting on well over $20 million worth of tin — which represents the fixed price value of the medallions set by, promised by and maintained by the SFMTA — while the SFMTA is sitting on its hands.”

San Francisco FCU argued in its lawsuit that the SFMTA guaranteed its loans, with promises to regulate the transportation market to ensure that there would always be willing purchasers for taxi medallions, and with promises to buy back the medallions if there were no willing buyers for foreclosed medallions.

However, the SFMTA countered in court documents that no such guarantee appears in the lender agreement the credit union claimed that the agency breached.

Instead, the SFMTA said it made no promises to regulate taxi competitors, and that the agency promised to buy back medallions in only one narrow circumstance that was wholly within its control: If the SFMTA made the regulatory decision to end the transferable medallion program. But the SFMTA claimed it never ended the program.

“Instead — as Plaintiffs (San Francisco FCU) pleadings admit — it (the SFMTA) has continued to try to revive demand for taxicabs. And it stands ready to transfer medallions to any qualified and willing buyer who comes forward,” the SFMTA argued in its answer to San Francisco FCU’s claims.

The jury found that in five of the credit union’s six breaches of contract claims, the agency did not violate the lender agreement. However, the jury found that in one of the breaches of contract claims that the SFMTA did prevent San Francisco FCU from receiving the benefits of the lender agreement by not formally declaring an end to the medallion sales program. Nevertheless, the jury also determined that the agency did not act unfairly and without good faith by not formally declaring an end to the medallion sales program.