Inside the Fight to Stop the Merger of Butler Heritage FCU

When they couldn’t get straight answers from the board of directors about their small credit union’s merger with a larger credit union, a group of 15 members took the exceedingly rare step of filing a lawsuit to block it.

And they won.

Last June an Ohio Magistrate Judge granted these members a preliminary injunction that blocked and forced the cancellation of the consolidation, even after the NCUA’s conditional approval and after the majority of members of the $10.9 million Butler Heritage Federal Credit Union in Middletown voted in favor of merging with the $321 million MyUSA Credit Union, which is also based in Middletown. What’s more, in January, a state judge granted the 15 members a default judgement, which means they won their case outright.

But these members know the hard fight to preserve their small credit union in their small working-class town 29 miles northeast of Cincinnati is not over, and the future of BHFCU remains uncertain because it has been struggling financially for years. The credit union has not turned a profit since 2018 and its financial condition continues to deteriorate. Since that year, the credit union’s membership has dropped from 1,498 to its current membership of 865, according to NCUA Call Reports.

BHFCU’s first quarter results showed its net worth stands at 6.82%, though higher than its net worth of 5.44% at the end of last year’s first quarter. What’s more, its management ratios of share, loan, asset and investment growth has plunged into double-digit negative territory, while its membership dropped by more than 8% during this year’s first quarter, according to NCUA financial performance reports.

In addition to the legal proceedings that are still pending in Butler County Common Pleas Court in Hamilton, members have sent several complaint letters to the NCUA about their credit union’s alleged violations, irregularities and other issues about the proposed merger. Despite these member concerns and a court-ordered preliminary injunction, the federal agency conditionally approved the consolidation.

In its response letters to members, the NCUA noted the agency’s long-standing policy not to become involved in internal federal credit union disputes unless there are safety and soundness concerns or threats to fundamental material credit union member rights. BHFCU members, however, contended there are indisputable safety and soundness concerns that have been brewing for years, and their fundamental material rights have been violated. But to no avail, the members have repeatedly asked the NCUA to conduct an investigation.

In a June 2, 2023, court ruling that granted a preliminary injunction that blocked the merger, Butler County Common Pleas Magistrate Judge Daniel W. Gehr wrote: “Plaintiffs have produced at least sufficient smoke to suggest there might be a fire.”

But in its court filing that asked Judge Gehr to set aside the preliminary injunction, a BHFCU lawyer countered, “The magistrate’s order identifies the smoke and cannot point to an actual fire that would meet the clear and convincing evidence standard needed to support the preliminary injunction. Instead, the actual ongoing harm to the membership at large which will be exacerbated by the magistrate’s order place all members, Plaintiffs included, in a precarious position that is better left to be managed by the federal entity tasked with overseeing credit union mergers, the National Credit Union Administration.”

The preliminary injunction placed the merger on hold until the merger issues would be resolved, but in July MyUSA called off the consolidation agreement. In January, Butler County Common Pleas Judge Greogory S. Stephens granted a motion for default judgement that was filed by the 15 members because MyUSA and BHFCU failed to file any answer to the default judgement motion.

Judge Stephens also deferred a ruling on the mootness of the case since the merger had been cancelled and moved the legal proceedings to resolve the issue to case management. This requires both sides to participate in a discovery process to exchange requested documents, conduct depositions and interrogatories, a list of written questions that one side sends to the opposing party and vice versa. This process can take months or longer before both sides either decide to negotiate a settlement or go to trial.

The 15 BHFCU members managed to secure the preliminary injunction because they were able to meet the court’s four standard requirements to grant a preliminary injunction by showing that they were likely to succeed on the merits of their lawsuit’s claims, that they would suffer irreparable harm, that the injunction would not harm third parties and that the public interest would be served.

Judge Gehr noted during the preliminary injunction hearing held on May 23, 2023, was not to argue whether the merger is necessary or even in the best interest of BHFCU members.

“Rather, Plaintiffs (the 15 BHFCU members) requested relief is found in their allegation that the process used by BHFCU’s board and officers to conduct the membership vote seeking approval of the merger were in violation of BHFCU’s charter and federal regulations,” he wrote. “Plaintiffs’ claims include those of impropriety both in the merger vote on April 4, 2023, itself, as well as in a vote at an annual meeting on December 28, 2021, in which two pro-merger officers were elected.”

It was after attending these meetings that members decided to file the lawsuit.

“We went to an annual meeting and we asked questions of the board members, just simple questions that they couldn’t answer and refused to answer,” Kathy Wright told CU Times, noting that the board abruptly ended the meeting so that members could not ask any more questions. She is one of the 15-member plaintiffs.

Another plaintiff, Stephen Snider, said this lawsuit is important because the people who are running the credit union have not been transparent with members, only giving half-truths when members have asked for information.

“They’re destroying the credit union and they’ve driven the value of the credit union down so much and lost so many members because of their inability to do what they’re supposed to do,” Snider said.

The BHFCU members alleged that the annual meeting was held in an improper venue, proxy votes were improperly permitted at the annual meeting despite the charter’s prohibition of them, insufficient notice of the merger vote was provided, and electronic votes were permitted on the merger despite electronic votes not being authorized by the credit union’s charter.

BHFCU has denied the lawsuit’s allegations.

During the preliminary injunction hearing, Snider testified under oath that all the allegations in the members’ 21-page lawsuit were accurate to his knowledge.

According to Judge Gehr’s ruling, BHFCU never cross-examined Snider on the accuracy of the lawsuit’s specific allegations, including the allegations of misconduct in the voting process.

The only evidence BHFCU presented was the testimony of Margaret Hale, MyUSA’s director of member services, who did not contradict or deny any allegation concerning the voting process during either the 2021 annual meeting or the 2023 merger approval, and did not offer counter-testimony that the procedures were proper, according to Judge Gehr’s ruling.

Her only testimony addressed some of the reasons behind the merger, specifically that both membership and assets had been declining over a number of years. And while Snider testified that the potential loss of the federal charter and federal insurance would be harmful, Hale never disputed that testimony. Though BHFCU would lose the NCUA’s deposit insurance, it would still have deposit insurance coverage with private insurer, ASI, which also provides deposit insurance at MyUSA.

“Further, despite her contention that the merger was desirable to improve the credit union’s financial position, she provided no testimony that failure to approve the merger in any particular time frame would cause any harm to BHFCU whatsoever,” Judge Gehr wrote in his ruling.

However, BHFCU noted in its court filings that Hale also testified that BHFCU would fail if it did not merge with MyUSA. Additionally, during the preliminary injunction hearing, the magistrate judge prevented Snider’s testimony from establishing voting irregularities because he “lacked the requisite foundation to support his opinion,” according to BHFCU’s court filings.

At no point, BHFCU said, did it falsify votes in any election or special meeting.

The credit union also said the members’ lawsuit was nothing more than mere speculation that the merger and conversion of BHFCU from a federal credit union to a state credit union backed with private insurance would be irreparably harmful.

After the preliminary injunction hearing but before Judge Gehr issued his ruling, BHFCU filed a motion to terminate the preliminary injunction because the credit union received a May 30 letter from the NCUA indicating that BHFCU has satisfied the NCUA’s requirements for the consolidation, including that the merger vote had been certified. Court documents showed of the 309 BHFCU members who cast a ballot, 230 members voted for the merger and 79 members voted against it. The federal agency’s deadline to complete the merger was set for Nov. 30.

Although Judge Gehr wrote in his ruling that he could schedule the case for a final decision well before the NCUA deadline, also noting that completing the merger would result in the loss of federal insurance, one of the asserted harms that justified the injunction.

Judge Gehr granted the preliminary injunction, in part, because it served the public interest of ensuring the integrity of institutions such as credit unions.

“It is important that the public be able to trust the processes and regulations governing financial institutions,” he wrote. “History has shown all too well the impact upon individuals as well as the economy in general, when public trust in financial institutions fails and the system is permitted to run amok.”

Soon after the preliminary injunction was granted on June 2, BHFCU filed a motion to set aside the magistrate’s ruling.

BHFCU argued the state’s county court was not the proper forum to enforce federal laws and regulations pertaining to federally insured credit unions, and the conflict between the magistrate’s order and the NCUA’s approval of the merger “unequivocally demonstrates as much.”

“The conflicting magistrate’s order which precludes Defendants (BHFCU) from taking necessary action toward completing the merger cannot be permitted to stand and poses as a separation of powers dilemma and a constitutional crisis which must yield to the entity tasked with prescribing and enforcing the laws and regulations applicable to credit union mergers, i.e., the National Credit Union Administration,” BHFCU wrote in its motion.

Although BHFCU claimed the magistrate’s order did not properly determine the factual issues of this case, the credit union motion to set aside the preliminary injunction was denied by Butler County Common Pleas Judge Gregory S. Stephens.

“The court finds no error in the magistrate’s findings of fact or conclusions of law,” Judge Stephens wrote in his January ruling.

Last summer, MyUSA canceled its merger and terminated a management relationship with BHFCU after its former CEO left at the end of 2021. Currently, the $1.6 billion Superior Credit Union in Lima, Ohio is managing the credit union.

Because this case is still in litigation, MyUSA President/CEO James Miles declined to comment.

“Superior Credit Union is only providing management services to maintain daily operations at Butler Heritage,” Superior President/CEO Phil Buell said. “Any questions regarding the legal case should be directed to the (BHFCU) Board Chair John Terrill or MyUSA Credit Union.”

Terrill did not respond to several CU Times phone and email requests for comment.

READ MORE: Butler Heritage FCU Members v. Butler Heritage FCU

READ MORE: Butler Heritage FCU’s Response to Lawsuit