Crucial Case Clarifies FCU Access to Federal Courts

August 25, 2020 at 10:25 am Leave a comment

Here’s an easy question for you, as you grab your second cup of coffee.  In what state is your credit union a citizen?  The answer, at least legally speaking, is not as clear cut as you think and this ambiguity could have important implications for your credit union if it is federally chartered.

Humor me on this one: I’m going to delve into some basic civil procedure, but trust me, it’s something worth knowing about.

Our Founding Fathers were pretty smart guys.  If you’re combining 13 distinct colonies into one nation, you better figure out how to fairly resolve legal disputes between citizens of different states.  So the Constitution created a Federal court system to be filled with judges who were not dependent on local politicians.  Today, Federal law provides that when citizens of different states have a legal dispute worth at least $75,000, they can access the Federal courts.  This is a crucial operational mechanism for national companies which don’t have to worry about bringing legal disputes in 50 different states, each with its own unique rules.  It’s also important for credit unions particularly as they grow larger and vendor services can now be contracted for from just about anywhere in the country.

Today 28 U.S. Code § 1332(c)(1), which regulates the jurisdiction of Federal courts  provides that “a corporation shall be deemed to be a citizen of every State and foreign state by which it has been incorporated and of the State or foreign state where it has its principal place of business”.  This seems clear enough but as Navy Federal Credit Union found out, it’s far from clear how this statute applies to Federal credit unions.

Navy Federal Credit Union sued LTD Financial Services, a company incorporated outside of Virginia.  Navy had sold some loans with the stipulation that the buyer would not sell them to third parties without Navy’s permission.  Not only did the buyer sell off some of its loans but the new buyer engaged in collection practices which reflected poorly on Navy.

Navy is headquartered in Virginia but it has branches in more than 30 states.  The defendant got the case dismissed.  It successfully argued that as a Federal credit union, Navy could not be considered a citizen of the state of Virginia since it was not both incorporated and headquartered in Virginia under Federal law.

Fortunately, for Federal credit unions and for people looking for credit union blog content, the Court of Appeals for the 4th Circuit recently reversed this ruling.  For this court, § 1332 extends citizenship to any Federal credit union in the state where is had its principal headquarters irrespective of the fact that it was chartered under Federal law.

Navy and other larger credit unions can breathe a sigh of relief.  Or can they?  Other jurisdictions are beginning to take a look at this issue and reaching different conclusions.  Most importantly, for my fellow New Yorkers, in Parks Heritage Fed. Credit Union v. Fiserv Sols., Inc., 2017 WL 74280 the court ruled that:

The general rule with respect to federal credit unions is that they are not considered to be a citizen of any particular state for the purpose of establishing diversity of citizenship. Rather, they are considered stateless `national citizens’ that are not amenable to § 1332(a) jurisdiction.”

This case is interesting because it shows how diversity can be used as both a sword and shield for Federal credit unions.  In this case it was Fiserv that wanted to bring the contract dispute in Federal court and Parks Heritage that successfully argued for keeping the case on the state level.


Entry filed under: Federal Legislation, Legal Watch. Tags: , , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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