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ReprintsCourt backs credit union's $7.7M award in loan default case resulting from staff misconduct
A credit union that racked up multimillion-dollar losses on defaulted high-risk auto loans after its employees failed to perform lending duties has gotten relief from a federal appeals court.
The Sixth Circuit U.S. Court of Appeals upheld an award of more than $7.7 million in favor of Michigan First Credit Union against its fidelity bond insurer, CUMIS Insurance Society Inc., because it agreed with the trial jury that three of the credit union's employees intentionally disregarded policies for the credit union's indirect-lending program. CUMMIS maintained the credit union had acquiesced in the violations.
Michigan First Credit Union began providing indirect lending in July 2003, allowing borrowers to apply for financing at dealerships in southeastern Michigan.
Under the program, a third-party administrator automatically OK'd low-risk loans. High-risk applications were reviewed by two credit union employees based on specific key factors, including borrowers' intent and capacity to repay, total and escalating debt, assets, and job security.
The case
In October 2003 an internal credit union audit identified a policy violation, but the credit union's vice president of lending assured the CEO that no problems existed.
However, subsequent credit union audits discovered hundreds of policy violations responsible for "numerous defaults." At that point, the vice president of lending admitted failing to monitor the program.
After learning of the sizable losses stemming from the indirect lending program, the credit union filed a claim for the maximum under its $5 million fidelity bond with CUMIS. The fidelity bond provided the credit union coverage for losses caused by an employee's failure to "faithfully perform" his or her trust. The credit union said it had suffered financial harm as a result of its employees' disregard of its lending policies. CUMIS denied the claim, and the credit union sued.
A jury awarded the credit union the full $5 million plus $50,000 in audit costs. The trial judge added $2.7 million in interest.
Appellate ruling
The appeals court affirmed the verdict, finding sufficient evidence that the vice president and two subordinates failed to "faithfully perform" their duties and comply with the policy. That included failure to apply the mandatory key factors.
One expert testified that some loans fell so clearly outside the policy likely no other credit union would have approved them.
"Such flagrant lending errors could not have been made without consciously disregarding the lending policy," Judge Richard Griffin wrote for the three-member panel.
The court also found no proof to support CUMIS' argument that the credit union's board knew such violations were occurring and acquiesced to them.
CUMIS spokesman Rick Uhlmann wouldn't say whether the company plans to appeal further.
Michigan First Credit Union's actual losses stemming from its employees were more than $1 million higher than the policy limit, says its lawyer, Patricia Corkery of Southfield, Mich.
The credit union also incurred losses stemming from false or erroneous information submitted by a number of participating dealerships, which it sued separately. In one such case, the credit union won a $360,000 jury award from now-defunct suburban Detroit dealership Al Long Ford in October 2008.
Corkery also said the credit union discharged the vice president responsible and reassigned his subordinates, who later resigned.
She said the credit union's indirect-lending program now works directly with dealerships rather than through a third-party administrator.
You can reach Eric Freedman at freedma5@msu.edu.
