Tennessee Appeals Court Affirms a Proposed Credit Union Bank Acquisition

A Tennessee appeals court unanimously ruled Monday that state law permits the acquisition of the $950 million Financial Federal Bank (FFB) by the $1.2 billion Orion Federal Credit Union, ending a two-year legal battle, for now.

The state’s regulator, the Tennessee Department of Financial Institutions (TDFI), which brought the case before the Appeals Court, said Tuesday it is currently in the process of considering its options. One option may include filing an appeal with the Tennessee Supreme Court. Orion declined to comment at this time. The bank’s lawyer did not respond to CU Times‘ request for comment.

On Aug. 11, 2021, the Memphis-based credit union said it signed a purchase and assumption agreement to substantially buy all of FFB’s assets and assume its liabilities in an all-cash transaction.

The transaction alarmed Tennessee bankers. In an email from Tennessee Bankers Association (TBA) President Colin Barrett to the organization’s members, he outlined a “parade of horribles that would allegedly result if the transaction proceeded,” according to court documents. Barrett also received an email from an upset TBA member who complained that banks cannot compete with credit unions on interest rates and other terms for home loans and called for the TBA “to take an aggressive stand” against the proposed purchase.

TDFI Commissioner Greg Gonzales met with the TBA board of directors on Aug. 13, 2021. They discussed how the proposed CU-bank acquisition could be challenged, according to court documents. A few days later, the TBA sent an email to Gonzales identifying “potential roadblocks” to nix the deal.

By October, the TDFI filed a lawsuit claiming state law prohibits the federal credit union from acquiring the bank. In November, a Davidson County Chancery Court judge granted an injunction requested by TDFI which temporarily blocked the acquisition until a hearing was held.

According to court documents, the state regulator’s central issue involved the statutory interpretation under the Tennessee Banking Act as to whether the term “acquire” prohibits Orion’s purchase of all or substantially all of the assets and assumption of the liabilities of FFB. The TDFI argued that the credit union is not a bank holding company or other banking institution that is authorized to acquire a state-chartered bank, such as FFB. Additionally, the state regulator said that while Orion meets the Tennessee Banking Act’s broad definition of a “company,” it is not a “bank holding company” and cannot acquire, form or control a bank.

However, the credit union and the bank argued in court documents that the Tennessee Banking Act does not define the term “acquire,” and the meaning of “acquire” or “acquire a bank” should be derived from the plain and unambiguous language used in the statute. What’s more, Orion and FFB’s legal argument primarily focused on the corporate world of mergers and acquisitions, including provisions of the Tennessee Corporation Act, to support their position that the purchase of all or substantially all of a bank’s assets is a purchase transaction, not an acquisition prohibited under Tennessee’s banking law.

In May 2022, Davidson County Chancery Court Judge Patricia Moskal ruled in favor of Orion and the bank. By June, the state regulator appealed that ruling, which was heard before the Appeals Court in Nashville in December, which placed the proposed acquisition on hold.

The Appeals Court ruling concluded, however, that the interpretation of Tennessee’s law as to whether the credit union could legally buy the bank rests on the definition of the word “bank” not the word “acquire.”

“The statute explicitly defines ‘bank’ to ‘mean any company that accepts deposits in Tennessee that are eligible for insurance under the Federal Deposit Insurance Act.’ And it defines ‘company’ by reference to federal law, specifically the Bank Holding Company Act. That Act defines ‘company’ to ‘mean any corporation, partnership, business trust, association or similar organization,’” the three-judge panel of the Appeals Court wrote. “So when Tennessee Code uses ‘bank,’ it means the organization in whatever legal form it may take, not its assets. Here, the legal form taken by Financial Federal is that of a Tennessee corporation. So, in this context, the statutory prohibition on a ‘company that is not a bank holding company … acquir[ing], form[ing] or control[ing] a bank’ prohibits acquisition of the corporation. It does not prohibit the acquisition of all or substantially all of the corporation’s assets. The corporation as a legal entity is distinct from its assets.”

READ MORE: The Tennessee Appeals Court Ruling.