MEDFORD, N.Y., and MADISON, Wis. (1/8/10)--Suffolk FCU, a New York credit union that incurred losses when the CU National Mortgage/U.S. Mortgage Corp. fraudulently sold 189 of its mortgage loans to Fannie Mae, filed a lawsuit Monday against its insurer, seeking coverage of the losses under a bond policy. Suffolk, of Medford, N.Y., lost nearly $42.4 million when the two mortgage companies sold the loans without authorization to Fannie Mae, the credit union maintains in the complaint, filed against Madison, Wis.-based CUNA Mutual Insurance Society (CUMIS). The suit was filed in the U.S. District Court for the Eastern District of New York. At issue is whether the fraudulent losses are covered by the credit union's bond policy with CUMIS, according to court documents obtained by News Now. It seeks damages for breach of contract and a declaratory judgment that it is entitled to coverage under a fidelity bond issued by the insurer. CU National Mortgage and U.S. Mortgage filed for Chapter 11 bankruptcy in February last year. It listed more than $200 million in debts to Fannie Mae and to 19 credit unions, including Suffolk FCU (News Now May 4). CUNA Mutual told News Now Thursday that there are three cases currently related to the bond coverage: Suffolk's; a similar one filed in December by Educational Systems FCU of Greenbelt, Md.; and a declaratory judgment action sought by CUNA Mutual in a Wisconsin court. CUMIS filed two declaratory judgment actions in June and August in Wisconsin state court asking the court to declare that the surety bonds did not cover the losses from the fraud (News Now Dec. 23). The court served the actions, and the case was moved to federal court in mid-December. "Our desire would be to have the action we filed in Wisconsin determine the coverage issue for all affected credit unions," Phil Tschudy, CUNA Mutual media relations manager, said. In December, Tschudy said that the company believes other entities have liability for the losses credit unions suffered but it was looking for ways to assist the credit unions in seeking compensation for the losses (News Now Dec. 8). The president of CU National Mortgage, Michael McGrath pleaded guilty in June to defrauding the credit unions and Fannie Mae. He admitted to conspiring with others to fraudulent sell credit unions loans and use the proceeds to finance U.S. Mortgage's operations and investments for himself and the company (News Now June 12 and Dec. 23).