Burch v. National Credit Union Administration

Filing 22

ORDER granting defendant's 6 motion to dismiss. Only defendant's counterclaims remain. Signed by Judge Frederick J Martone on 03/06/12. (ESL)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Plaintiff,
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vs.
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National Credit Union Administration in)
its capacity as conservator for AEA)
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Federal Credit Union,
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Defendant.
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CV 11-02309-PHX-FJM

Todd Burch,

ORDER

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The court has before it defendant's motion to dismiss (doc. 6), plaintiff's response
(doc. 12), and defendant's reply (doc. 14).
I

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In 2004 plaintiff purchased land in Yuma, Arizona to develop the Tuscan Ranch

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Subdivision. Two years later, using money loaned to him by Yuma Community Bank,

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plaintiff purchased a property consisting of nineteen condominium units in the process of

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being converted into the Reflections Assisted Living Facility ("the Reflections project").

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Plaintiff was approached by an employee of AEA Federal Credit Union (“AEA”), the AEA

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Chief Lending Officer (“CLO”).

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Community Bank and coming to AEA because of AEA’s capitalized (versus monthly)

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interest payments. Plaintiff was informed that AEA would continue to loan him funds so that

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he could complete and sell the Reflections project and host its grand opening, and complete

The CLO spoke to plaintiff about leaving Yuma

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and sell the forty acres at Tuscan Ranch 1 and the fifty acres at Tuscan Ranch 2. AEA agents

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stated to plaintiff that AEA was solvent, any loans would not exceed limitation amounts, and

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that AEA would manage plaintiff’s loans fairly if he began banking with it. In reliance on

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these representations, plaintiff began banking with AEA on August 10, 2006. Plaintiff paid

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off the $500,000 he owed Yuma Community Bank, withdrew all of his funds, and transferred

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these funds to AEA. AEA provided plaintiff with a credit line of over two million dollars.

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Plaintiff held the Reflections project grand opening in February 2009, which

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generated no sales. In March 2009, plaintiff turned the Reflections project into an Assisted

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Living Facility using funding provided by AEA. AEA's CLO left the bank in December

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2009. In February 2010, AEA informed plaintiff that one of his lines of credit was $300,000

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rather than the $1.3 million he thought it was. On February 12 , 2010, AEA denied plaintiff's

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access to this line of credit. Plaintiff filed for bankruptcy relief. He alleges that AEA began

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falsely reporting that plaintiff was behind on his loan payments beginning in June 2010.

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Between July and December of that year, plaintiff funded the Reflections project with a

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combination of cash and funds borrowed from family and friends. The National Credit

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Union Administration ("NCUA") assumed control of AEA's operations on December 17,

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2010 and placed AEA into a conservatorship.

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Plaintiff originally filed this action in the Superior Court of Arizona in Yuma County

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asserting three claims for relief: (1) fraudulent misrepresentation; (2) breach of implied

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covenant of good faith and fair dealing (tortious breach of contract); and (3) defamation. The

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Superior Court granted the NCUA's motion to substitute as the real party in interest for AEA.

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NCUA subsequently removed to this court. On February 1, 2012, plaintiff recorded three

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notices of lis pendens that reference this action. The next day, AEA acquired these

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properties at a trustee's sale.

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The NCUA moves to dismiss all of plaintiff's claims pursuant to Rule 12(b)(6), Fed.

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R. Civ. P. In addition, the NCUA filed a counterclaim, asserting two counts: (1) temporary

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and preliminary injunction requiring plaintiff to immediately release the lis pendenses and

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refrain from recording similar documents; and (2) an award of treble damages under A.R.S.
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§ 33-420(A) for the filing of the lis pendenses (doc. 15).
II

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NCUA argues that plaintiff's claims for fraudulent misrepresentation and breach of

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the implied covenant of good faith are barred by the D'Oench doctrine and its statutory

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counterpart, 12 U.S.C. §§ 1787(b)(9)(A), 1788(a)(3). Under the statute, agreements between

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a plaintiff and a credit union that "tend[] to diminish or defeat the right, title, or interest of

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the Board, in any asset acquired by it" must be (1) in writing; (2) executed by the credit union

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at the time the asset was acquired; (3) approved by the board of directors as reflected in the

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board's minutes; and (4) an "official record of the credit union" from the time of execution

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in order to be asserted against the NCUA. 12 U.S.C. § 1788(a)(3); see also id. §

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1787(b)(9)(A) ("any agreement which does not meet the requirements set forth in section

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1788(a)(3) of this title shall not form the basis of, or substantially comprise, a claim against

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the liquidating agent or the Board"). An institution's promise to perform in the future and a

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representation concerning the "truthfulness of a warranted fact" are two examples of

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agreements tending to diminish the interest of the NCUA in an asset. See Langley v. FDIC,

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484 U.S. 86, 92-93, 108 S. Ct. 396, 401-02 (1987). The statute codifies the D'Oench doctrine

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announced by the Supreme Court in 1942, which protects bank authorities from actions

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"founded on undisclosed conditions or deceptive documents." Brookside Assocs. v. Rifkin,

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49 F.3d 490, 493 (9th Cir. 1995). The impact of the doctrine is that a customer may not have

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a claim against the NCUA based on a credit union's unwritten promise, even if that promise

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involved fraud. See id. at 494; see also Langley, 484 U.S. at 92-93, 108 S. Ct. at 401-02

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(definition of agreement includes fraudulent representations).

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According to the NCUA, plaintiff's fraudulent misrepresentation claim is founded

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upon two alleged oral misrepresentations made by the AEA CLO. First, the CLO's promise

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that AEA would continue to loan plaintiff the needed funds for his businesses, and second,

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the CLO's promise that AEA was solvent and plaintiff could rely on its financial statements.

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A promise to lend more money in the future is an agreement that diminishes the NCUA's

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interest in the assets it acquired from the credit union. Thus, it is an agreement under 12
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U.S.C. § 1788(a)(3). Similarly, a promise that AEA is solvent is a representation of the

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truthfulness of a warranted fact - the institution's financial solvency. Because these

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agreements were oral, plaintiff cannot enforce them against the NCUA. 12 U.S.C. §

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1788(a)(3). Similarly, plaintiff's breach of implied covenant claim is based on AEA's

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promise to plaintiff that it would financially support him in the development of the Tuscan

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Ranch subdivision. Again, this is an oral promise to lend money in the future, which is

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unenforceable against the NCUA.

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Plaintiff's defamation count also fails to state an actionable claim. The NCUA as

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conservator stands in the shoes of the AEA. See id. § 1787(b)(2)(A)(i) (NCUA succeeds to

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all "rights, titles, powers, and privileges" of credit union). Thus, plaintiff's allegations of

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AEA's defamatory statements must be brought against the NCUA. Tort claims, however,

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must be brought against the United States, not against a federal agency. 28 U.S.C. § 2679(a).

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The Federal Tort Claims Act (FTCA) provides the exclusive remedy for tort actions brought

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against the United States. Id. § 2679(b)(1). Defamation claims, however, are squarely

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excluded from the FTCA. Id. § 2680(h). Accordingly, plaintiff cannot succeed on his

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defamation claim against the NCUA.

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Plaintiff's response does not address the impact of 12 U.S.C. § 1788(a)(3) on his fraud

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and breach of covenant claims, and does not address the defamation claim at all. Instead, he

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argues that the loan agreements themselves are in writing and are illegal and unenforceable

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as a per se violation of 12 U.S.C. § 1757(5)(A)(x) (part of the Federal Credit Union Act),

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which states that a loan issued by a credit union cannot exceed ten percent of the "credit

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union's unimpaired capital and surplus." This is a new theory of liability that does not appear

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in plaintiff's complaint. To the extent that plaintiff asks to amend his complaint to state a

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claim against the NCUA for violation of 12 U.S.C. § 1757(5)(A)(x), such amendment would

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be futile. This is because no private cause of action - whether express, implied, or created

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by federal common law - exists under the Act. See Jesinger v. Nev. Fed. Credit Union, 24

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F.3d 1127, 1132 (9th Cir. 1994) (declining to create federal common law right of action

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under the Federal Credit Union Act); Ridenour v. Andrews Fed. Credit Union, 897 F.2d 715,
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719-22 (4th Cir. 1990) (no express or implied right of action under the Federal Credit Union

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Act other than exceptions created by Congress).1 Thus, plaintiff cannot pursue an action

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against the NCUA for loans that fail to comply with statutory requirements. See Acciard v.

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Whitney, 2:07-CV-476-FTM-36DNF, 2010 WL 6813952 at *3-*4 (M.D. Fla. Sept. 17, 2010)

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(no private right of action under the Federal Credit Union Act for plaintiffs to challenge

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nonconforming loans).
III

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IT IS ORDERED GRANTING defendant's motion to dismiss (doc. 6). Only
defendant's counterclaims remain.
DATED this 6th day of March, 2012.

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The two statutory exceptions creating causes of action for employee whistleblowers,
12 U.S.C. § 1790b, and usury interest, 12 U.S.C. § 1757(5)(A)(vii), are not relevant here.
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