Vensure Federal Credit Union v. National Credit Union Administration ( 2011 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
)
VENSURE FEDERAL CREDIT UNION,)
)
Plaintiff, )
)
v. ) Civil Action No. 11-785 (RMC)
)
NAT!GNAL CREDIT UN10N ) _
ADMIN`ISTRATION, )
)
Defendant. )
)
MEMORANDUM OPIN`ION
On April 15, 201 1 , National CreditUnion Administration ("NCUA") placed Vensure
Federal Credit Union ("Vensure") into conservatorship, pursuant to the Federal Credit Union Act,
12 U.S.C. §§ 1751 et seq. Vensure filed a petition to show cause challenging the conservatorship
under 12 U.S.C. § l75l(h)(3), which requires "the Board to show cause why it should not be
enjoined from continuing such possession and control." 12 U.S.C. § 175 1(h)(3). Because a statutory
ground existed for NCUA to impose a conservat0rship, and because NCUA has established through
the administrative record and an evidentiary hearing that its imposition was neither arbitrary nor
capricious, the Court finds that NCUA has shown cause. The Court will deny Vensure’s application
to terminate NCUA’s possession and control of its assets.
I. FACTS
A. Hist0ry
NCUA is a federal agency "that charters and regulates federal credit unions." Compl.
[Dkt. #l] 11 2. Vensure is a federal credit union located and regulated by NCUA in the state of
Arizona. See Compl., Attached Decl. of John Iorillo dated April 24, 2011 ("Iorillo Decl.") 11 2.
Vensure began its operations in 1955 as the Grand Adirondack Federal Credit Union ("Grand
Adirondac ") in the state of New York. ld. ‘[| 5. in late 2008, Grand Adirondack changed
management and moved to Florida. Id. 11 6. In March 2009, it again changed management and
moved to Arizona. Id. 11 5-6. During its prior management, NCUA had noted several deficiencies,
and in March 2009, Grand Adirondack signed a letter of understanding with NCUA to correct these
deficiencies Id. ‘[[ 6. ln March 2010, NCUA found Grand Adirondack to be in full compliance and
released it from the restrictions contained in the letter agreement Ia’. 11 l1. At that point, Grand
Adirondack changed its name to Vensure. Id. ‘l[ 1l.
B. The Business of Vensure
Vensure is a credit union unlike most others because its revenue stems from non-
traditional business activities. F or the past two years, Vensure has "generated most of its revenues
through providing automated clearinghouse ("ACH") services to Trinity Global Corp. ("'l`rinity"),
a member client that itself processes payments for two of the world’s largest online poker sites:
PokerStars and Full Tilt Poker." Id. ‘\l 2. "ACH payments are a means of payment by which banks
send instructions to each other to move money across accounts." Id. "They are one of the most
efficient methods of transferring money electronically." Id. The poker sites "allowed players to
deposit money into their accounts held on poker sites, and to withdraw money from their individual
bank accounts, via ACH transfers.” Id. As an interrnediary, Vensure received a fee per each ACH
transaction. Id.
There can be a problem with ACH transactions, however, which is best explained by
NCUA's chief complaint within its Confidential Statement of Grounds in Support of Order of
Conservatorship:
See Administrative Record ("AR") [Dkt. # 14] at 9.’
Beyond ACH transactions, Vensure asserts that it was initiating new business
activities in more traditional credit union areas; such as debit cards, intemet banking, mobile
banking, and a newly announced loan program.z 1d.1|1l20-23.
’ All Administrative Record page numbers correspond to the upper right hand comer Bate
Stamp Numbers within the record.
2 During the May ll,~ 2011, show cause hearing, Mr. Iorillo, Vensure’s CEO, testified that
no loans had been actually processed when the conservatorship was imposed, although there had
3
C. NCUA Regulation
Despite the March 2010 letter stating Vensure was in full compliance, NCUA noted
within that same letter that "the [NCUA] plans to continue to work closely with [Vensure] to ensure
the continued vitality of [its] credit union." See id. at 139. On June 30, 2010, NCUA issued an
Examination Report, noting several problems with Vensure. See id. at 95~126 ("June Report"). A
portion of the June Report noted that "the volume of wires, in numbers and dollars, at your small
credit union is unusual and presents risk not only with the transaction themselves but also in the area
of compliance," and that "[s]trategic risk is high due to reliance on one major source of
income-Trinity Global Commerce Corp." Id. at 99-100. The June Report questioned the legality
of Vensure’s processing of intemet gambling payments and requested legal opinions to support it.
Id. at 101 . The June Report also voiced a prescient concem regarding "the risk to capital that these
short~term extensions of credit pose if Trinity were in bankruptcy proceedings, or became insolvent,
and were unable to fulfill its credit obligations." ld. at ll7.
On November 12, 2010, the General Counsel of NCUA found, after reviewing
Vensure’s proffered legal opinions regarding the legality of processing gambling-related payments,
that "Vensure FCU’s current activity of providing payment processing services for Trinity and
Pokerstars.net is irnpermissible." ld. at 155 (Mem. from General Counsel to Director, Region V of
NCUA). This legal opinion resulted in a January 18, 201 l, Preliminary Warning Letter, directed at
Vensure, which sought "to identify and provide formal notification of regulatory violations and
unsafe and unsound practices requiring immediate correction." Id. at 157. The Preliminary Warning
Letter noted three issues: ( 1 ) illegality ofinternet gambling=related payments, which NCUA directed
been one loan application filed.
Vensure to cease immediately; (2) fund transfers "that currently threaten [Vensure's] credit union’s
safety and ~soundness;” and (3) alleged conflicts of interest within management at Vensure and
Trinity. See id. at 157-58.
Vensure responded on January 19, 201 l, indicating its intent to review and clarify its
legal opinions to support the legality of its business model, reliant on intemet gambling-related
payments, Id. at 161 . On January 21, 201 1, NCUA responded indicating Vensure must cease these
activities "immediately.” ld. at 165 (emphasis in original). On January 25, 201 1 , Vensure requested
clarification of any objections to its legal opinions and also questioned NCUA’S authority to act
under its Preliminary Waming Letter. Id. at 167. On January 28, 201l, Vensure again wrote to
NCUA to report that its Board had decided to cease ACH processing activities related to online
poker and had done so, despite a potential lawsuit for failure to give notice before cancellation. Id.
at 167. However, on January 31, 20l1, Vensure sent a follow-up letter noting it could not cease
processing activities due to a contractual obligation to give 180 days notice to Trinity before ceasing
ACH payments, therefore, "processing activity will recommence today," but will cease
upon the sooner of (i) 180 days (effective from January 28th), or (ii)
a determination by a competent legal authority- either the NCUA in
an administrative hearing or a court - that the processing activity is
illegal. Of course, if there is a contrary determination in the interim
that the processing activity is lawful, the termination will be
rescinded.
Id. at 179-80. On February 8, 201 l, Vensure sent another letter to NCUA with additional legal
opinions to support the legality of ACH transactions involving on-line games. Id. at 183. ' A
February l7, 2011 letter from NCUA to Vensure acknowledged Vensure’s legal opinions and its
planned termination of services with Trinity. Id. at l89.
D. U.S. Attorney Ac_tion
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the United States Attorney’s Office for the Southem District of New York filed criminal and civil
suits against, inter alia, PokerStars and Full Tilt Poker. See Iorillo Decl. 11 16. As part of its civil
complaint, the United States sought forfeiture of funds held by PokerStars and Full Tilt Poker in
various financial institutions, including Trinity’s account at Vensure. Id. 1] 16; Ex. 15 at 7. That
same day, after a Board Meeting to discuss the fate ofVensure, NCUA imposed its conservatorship.
See AR at 2-5 ("Order of Conservatorship") and 13-32 ("Hearing Transcript").
E. NCUA Conservatorship
NCUA gave as grounds for its conservatorship:
NCUA also provided further detail behind these reasons within its Statement of
Grounds. Vensure contests the imposition of the conservatorship, arguing that the grounds given
are arbitrary and capricious,
II. LEGAL STANDARDS
A. Standard of Review
Neither the statute itself nor the D.C. Circuit has given guidance on the appropriate
standard of review for the imposition of a federal conservatorship, Because a certain lack of notice
and ex parte process is inherent in imposing conservatorships, arguments have been made that a de
novo standard of review is appropriate See In re Conservatorship of the Polz`sh & Slavic F ederal
Credit Union, 99~cv-2406 (JBW), 1999 U.S. Dist. LEXIS 10762 *4 (E.D. N'Y July 9, 1999); C0llie
v. Federal Home Loan BankBd., 642 F. Supp. 1147, 1149-52 (N.D. Ill. 1986); Haralson v. Fea'eral
Home Loan Bank Bd., 655 F. Supp. 1550, 1559-60 (D.D.C. 1987). The majority of circuits,
however, have decided that an "arbitrary and capricious” standard is appropriate.’ See In re
Conservatorshz`p of the Polish & Slavic F ederal Credit Union, 1999 U.S. Dist. LEXIS 10762 *4-5
(citing First Natz'onal Bank & Trust v. Department of the Trea.s'ury, 63 F.3d 894'(9th Cir. 1995),
Franklz'n Savz`ngs Assoc. v. Ojice of Thrift Supervz'sion, 934 F.2d 1127 (lOth Cir. l99l), Woods v.
F ederal Home L0an Bank Bd. , 826 F.2d 1400 (5th Cir. 1987), and Guaranty Savings &L0an Assoc.
v. F ederal Home L0an Bank Bd., 794 F.2d 1339 (Sth Cir. 1986)); see also Gibralter Sav. v. Ryan,
772 F. Supp. l290, 1292 (D.D.C. 1991) (applying "arbitrary and capricious" standard). in allaying
concerns with an ex parte administrative record, i.e. having no hearing or response from an affected
credit union in the record, such courts have allowed "new evidence before the district court, but only
for the lirr1ited purpose of determining whether the administrative record constituted a sufficient
basis for the agency’s decision.” See id.
On May ll, 2011, this Court held a show cause hearing and allowed Plaintiff to
contest the completeness of the administrative record by supplemental evidence. As noted within
the May 1 l, 201 1 show cause hearing, the question of the applicable standard of review is irrelevant
because the Court finds NCUA has shown cause under both an "arbitrary and capricious” standard
3 Vensure suggests that Bingham v. First Central Credit Union might provide a different,
less deferential standard: "the sole inquiry on judicial review is whether a statutory ground
existed for the FHLBB's appointment of a conservator or a receiver." 927 F.2d 282, 286 (6th Cir.
l99l). As noted in Cz'tizens to Preserve Overton Park, Inc. v, Volpe, however, "[s]crutiny of the
facts does not end . . . with the determination that the Secretary has acted within the scope of his
statutory authority[; it] requires a finding that the actual choice made was not ‘arbitrary,
capricious, an abuse of discretion, or otherwise not in accordance with law."’ 401 U.S. 402, 416
(1 971), abrogated on other grounds by Calzfano v. Sanders, 430 U.S. 99 (1977). Therefore,
there is always a two-part inquiry in administrative decisions: (l) is there initial authority to
make a decision; and (2) if so, is the decision made under that authority "arbitrary, capricious, an
abuse of discretion, or otherwise not in accordance with law."
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of review and a de novo standard of review."
B. 12 U.S.C. § 1786
Under § 1786(h)(1), NCUA may "ex parte without notice, appoint itself or another
as conservator and immediately take possession and control of the business and assets of any insured
credit union." See 12 U.S.C. § 1786(h)(1). To do so, one of several factors has to be present;
relevant here is "when the Board determines that such action is necessary to conserve the assets of
any insured credit union or to protect the Fund or the interests of the members of such insured credit
union." 12 U.S.C. § l786(h)(1)(A).
III. ANALYSIS
NCUA imposed a conservatorship upon Vensure, explaining that_
AR =1*6»@“>11“€1$ for
Conservatorship. Such an action is squarely authorized by the statute; the question for the Court is
whether such a decision was "arbitrary and capricious" or unreasonable on a de novo review. The
Court finds it was not. Considering the facts as they were understood on April 15, 2011-the date
of the imposition of the conservatorship-such a decision was thoughtful, well-reasoned, and within
the sound discretion of NCUA.
At the end of the evidentiary hearing on May 1 1, 201 1, the Court made the following
findings of fact:
" NCUA argues for an "arbitrary and capricious" standard, with which Vensure appears to
agree: "Your honor, the only issue for, before the Court after this hearing is whether the NCUA's
conservatorship action was arbitrary and capricious on the admin record they have provided."
See Reply to Pl.’s Response to Court’s May l1, 2011 Preliminary Findings ("NCUA Reply")
[Dkt. # 35] at 7 n.2 (citing Transcript of May ll, 2011 at 107).
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And so I find that NCUA was professionally anxious about the
operation of Vensure both when it was Adirondack, but most
particularly when it moved to Arizona and became Vensure without
notice, without clarity as to who is in charge or what business it’s in,
et cetera, and then began examining that. And expressing its concem
that the business model was inapplicable to what a credit union
normally does . . . .
But 1 think NCUA gave Vensure sufficient notice of its concems, of
the nature of its concerns and its desire to require Vensure to change
its business model which Vensure was slow to take as advice on
which it should act perhaps for perfectly lawful reasons and valid
reasons, 1 don’t even question those. 1 just have to find it didn’t read
the tea leaves, it didn’t take action, and it then left itself terribly at
risk if something should happen to its access to Trinity’s funds which
indeed happened.
lt didn’t happen because of NCUA. lt happened because of criminal
enforcement or investigation This is not to suggest that Trinity
engaged in any criminal behavior, 1 have no idea. But there is a
criminal investigation going on which led to an order to seize or
B.'eeze Trinity assets which meant Vensure didn’t have access to them
anymore.
The business model collapsed in a heartbeat. Since there were
inevitably and always empty retums, as I’ve labeled them, meaning
money handling that came back with insufficient funds, Vensure was
left with the obligation to pay up on those and no access to Trinity
monies, exactly the risk foreseen by NCUA and not previously
experienced by Vensure . . . .
I cannot find that NCUA on this record acted arbitrarily and
capriciously or irrationally or unlawfully in putting this credit union
into conservatorship.
1 make that conclusion regardless of whether I’m making original
findings of fact which 1 have just kind of articulated or reviewing the
record from which 1 am drawing the facts that I just articulated . . . .
lt may be that had Vensure management been allowed to maintain the
business through this perfect storm of events, they would have been
able to hasten their attention to new lines of business. But they did
not do so for months and months and months and I don’t think can
now be heard to cry wolf that they haven’t been given that
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opportunity once the perfect storm happened.
See NCUA Reply at 2-3 (citing Transcript of May l1, 2011 at 127-31).
The volume and amount of the ACH transactions had been a consistent, voiced
concern ofNCUA. See June Report (noting "the risk to capital that these short-term extensions of
credit pose if Trinity were in bankruptcy proceedings, or became insolvent, and [were] unable to
fulfill its credit obligations"); see also Preliminary Warning Letter (noting that f`und transfers
currently "threaten [Vensure’s] credit union’s safety and soundness"). NCUA suggested early that
Vensure should change its business model to a more traditional credit union model. Vensure claims
it was beginning to do so, but it waited too long and lost access to Trinity funds when they were
frozen. The U.S. Attorney’s action, coupled with Vensure’s failure to diversify, placed Vensure at
terrible risk. This type of scenario was an NCUA concem that had previously been voiced as early
as June 2010, The agency predictably took action not only to protect Vensure and its customers, but
also the National Credit Union Share insurance Fund that would have funded any potential run.§
Assuming arguendo that the concem of ACH empty-return transactions was a valid
ground for NCUA to act, Vensure reasons that the remaining grounds were without merit and thus
the decision on conservatorship was arbitrary and capricious. See Response to the Court’s
Preliminary Discussion [Dkt. # 32]'. As noted by Vensure, "[w]hen an agency relies on multiple
grounds for its decision, some of which are invalid," a court may only "sustain the decision [if] one
ll
is valid and the agency would have acted on that ground even if the other[s] were unavailable."
Casz'no Airlines, Inc. v. Nat'l Transp. Safety Bd., 439 F.3d 715, 718 (D.C. Cir. 2006). The Court
finds that NCUA has demonstrated that the freezing of Trinity’s assets on April 15, 201 l, c'.e. the
removal of Vensure’s source of revenue and leaving Vensure to pay ACH returns with its own assets,
was an emergency of such proportions and impact on Vensure that the agency would have acted on
those grounds alone.° Further, its rationale is adequately noticed in the Statement of Grounds. See
Statement of Grounds, AR at 7-1 1 (focusing on Trinity as Vensure’s primary source of revenue and
volatility of ACH transaction retums).
IV. CONCLUSION
For the reasons stated above, NCUA has shown cause, pursuant to 12 U.S.C. §
175l(h)(3), that a statutory ground existed for it to impose a conservatorship and that such an
imposition was not arbitrary, capricious, unreasonable, or unlawful. The Court will deny Vensure’s
request to enjoin the NCUA’s conservatorship, A memorializing Order accompanies this
Memorandum Opinion.
Date: June 24, 2011 /s/
ROSEMARY M. COLLYER
United States District judge
° Vensure attacks the expression of embarrassment by an NCUA Board member that the
U.S. Attorney froze Trinity assets before NCUA acted to place Vensure in conservatorship, Even
so, the reasons for NCUA action remain legitimate and essentially proved by the sequence of
events.
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