TAMPA, Fla. (9/16/09)--Twenty-eight borrowers from nine states filed a lawsuit Sept. 9 in a U. S. District Court in Tampa, Fla., against Michigan-based Huron River Area CU and several real estate venturers over Florida speculative land deals that contributed to the failures of Huron River, and Norlarco FCU and New Horizons Community FCU. Also named in the suit is Huron River's liquidating agency, the National Credit Union Administration (NCUA). NCUA assumed control of the credit union in February 2007 and liquidated it the following November. It is in the process of trying to collect on loans made by the credit union in the undeveloped Cape Coral and Lehigh Acres projects in Florida. Those developments went bust when the real estate market bottomed out. Among the defendants are Russ Whitney and his firm, the Whitney Education Group, which conducts real estate investment seminars throughout the U.S. under the name "Millionaire University" (MU); Michael O. Kane and Gulfstream Realty; United Mortgage; the Construction Loan Co. (CLC) and other partners. The suit alleges that the defendants worked together in an enterprise to sell, develop, finance, market and manage Florida real estate to and for MU students, who were the targets of the fraud. CLC acted as Huron River's agent for a Florida construction loan program and would close the construction loans and attempt to assign each loan to the credit union. The assignments were allegedly "illegal and void because the plaintiffs were not legal members of Huron River Area CU," according to the complaint filed. The plaintiffs are from California, Florida, Illinois, Maryland, Massachusetts, Minnesota, Michigan, Tennessee and Texas. The case is similar to a lawsuit filed by nearly 60 borrowers in a Circuit Court in Florida, now in U.S. District Court in Ft. Myers, Fla. That suit was filed on July 31, 2007, against both Huron and Norlarco. Although the plaintiffs are different, both sets of plaintiffs are represented by the same law firm, Conwell Kirkpatrick of Tampa, Fla., and many of the allegations are identical. In both cases, plaintiffs alleged violations of the Racketeer Influenced Corrupt Organization (RICO) Act. In July, the Department of Justice, representing NCUA in the case, filed a motion for sanctions against the lawyers and plaintiffs of the earlier lawsuit, asserting that the plaintiffs' RICO claims against Huron River Area CU "had no evidentiary support." No rulings have been made on the sanctions motion. Plaintiffs in the new lawsuit also present as evidence for their arguments a copy of the NCUA Office of Inspector General's Nov. 26, 2008, Material Loss Review of the Huron River Area CU. The report analyzes why the credit union failed and concludes the credit union:
* Did not exercise due diligence by evaluating the third-party relationship held with its lender, CLC; * Allowed CLC to concentrate a majority of the credit union's loan portfolio in the speculative Florida real estate construction project; * Allowed CLC to make construction loans to applicants outside the credit union's approved field of membership; * Misclassified construction loans and violated NCUA's Member Business Loan limits; * Did not have adequate liquidity controls in its asset liability management policy; and * Failed to develop or follow adequate plans to guide the direction of the credit union and the Florida construction loan program.
The report also said management of the credit union was not forthcoming with examiners about the construction loan program and may have ignored warnings regarding the expected decline of housing values, especially those in the Florida market. In the earlier lawsuit, NCUA presented a D'Oench Doctrine argument--that federal common law and the Federal Credit Union Act bar suits and recoveries of this type against NCUA when it is acting as the liquidating agent of a federally insured credit union. On Sept. 3, the judge gave the plaintiffs and defendants 11 days to present the status of their mediation efforts from the case filed in 2007. No ruling has been made yet. In the latest suit, the plaintiff borrowers ask for a jury trial; for the court to declare their loans held by the liquidating agent as illegal and void; and for a judgment that NCUA has no standing to enforce the terms of the loans.