LOS ANGELES, (3/15/12)--A federal judge in Los Angeles has rejected motions by Western Corporate FCU officials seeking payment of legal costs and indemnification from the National Credit Union Administration (NCUA) during the agency's lawsuit against them over the failure of WesCorp. But he is allowing the officials to amend their indemnification claim based on state law.
U.S. District Judge George H. Wu, in an opinion filed Monday, dismissed the counterclaims of the officials seeking to have NCUA pay their costs during the lawsuit, saying they must submit administrative claims with NCUA after their cases are concluded.
NCUA had argued that an advancement or reimbursement order "would directly interfere with the NCUA's exercise of its powers as a liquidating agency of WesCorp." The judge's ruling said that instead, the WesCorp officials "must follow the route of judicial review of the denial of their administrative claims for damages."
The agency had asserted the best WesCorp officials could get would be "the issuance of a certificate for claim in liquidation entitling [them] to a pro rata share of the liquidation assets available to the class of general creditors….Any judgment ordering payment of any fees to which the officer defendants might otherwise be entitled as damages would therefore run afoul of [U.S. Code] section 1787 (g) given the NCUA's role as liquidating agent of WesCorp," said the court document.
Wu wrote that "it would indeed appear that any relief this court might fashion actually ordering the NCUA to pay the officer defendants--whether by virtue of an 'advancement' or 'reimbursement' order or by way of declaratory relief determining that the officer defendants have a right to such payment--would 'restrain or affect' the NCUA's exercise of its powers."
The judge also denied that the WesCorp officers have a right to indemnification based on a California labor law provision, but is allowing them to amend their counterclaims by April 14 to add indemnification claims under the California corporate code. The WesCorp officials claimed that WesCorp's Policy 21 "maximum extent" provision transforms the provision for permissive indemnification under California law into a provision for mandatory indemnification.
However, NCUA argued that recently enacted regulation in section 701.33 of the Federal Credit Union Act "precludes any mandatory indemnification because it provides for discretionary expense payments and, even in that situation, requires that certain findings be made which have not yet been made." The defendants "have no right to indemnification or reimbursement of defense costs until the Court renders judgment in their favor on the NCUA's claims (or, presumably, unless and until the NCUA makes the necessary findings and exercises its discretion in the officer defendants' favor.)
"The only way in which the officer defendants' claim to indemnification rights would be ripe for adjudication now--albeit with the issuance of any relief delayed until later would be if they were correct in reading of Policy 21 that it effective requires indemnification regardless of whether they are the prevailing parties on the NCUA's claims against them…If they are incorrect in that view, their indemnification claim is not ripe because they have not yet prevailed," said the judge.
WesCorp was hard hit by losses related to mortgage-backed securities. NCUA's lawsuit had alleged that senior WesCorp executives were negligent in monitoring the investments of the corporate and that there was a breach of fiduciary duty and fraud related to investments that resulted in $6.8 million in portfolio losses (News Now Jan. 24). The executives filed counterclaims and affirmative defenses against NCUA, alleging the agency was aware of WesCorp's investment strategies and approved of and encouraged the strategies.
The former WesCorp executives named as defendants in the lawsuit are: CEO Bob Siravo; Chief Financial Officer Todd Lane; Chief Investment Officer Bob Burrell; Chief Risk Officer Timothy Sidley and Human Resources Director Thomas Swedberg. NCUA and Sidley entered into a settlement agreement last week.