ORLANDO, Fla.-A federal court this morning dismissed a suit brought by New York's Sperry Associates Federal Credit Union over failed participations it bought from the MBLs CUSO of Eastern Financial Florida CU, the failed Florida giant that was acquired in 2009 by Space Coast Credit Union.
The U.S. District Court for the Middle District of Florida ruled that neither Eastern Financial or its successor Space Coast CU were responsible for the MBL participations sold by Eastern Financial's CU Business Capital LLC because the CUSO was a legally distinct entity and thus "not an alter ego" of the one-time $2.4-billion credit union.
"There is insufficient evidence to indicate that Eastern Financial exerted the degree of control over CUBC that is needed to establish an agency relationship, or that the two disregarded their distinct identities and used their corporate status to defraud, as is required to find them alter-egos," wrote U.S. Judge Charlene Honeywell in this morning's ruling.
The suit revolves around two 2006 loans totaling $37.4 million originated by CU Business Capital in which the $340-million New York credit union bought $4.5 million worth or participations. One loan, for $22.4 million, financed the purchase of 120 acres of speculative real estate in St. Lucie County, Fla., the other, for $15 million, financed the purchase of three New York apartment buildings.
In its suit, Sperry Associates FCU says that the CUSO was a legal agent of Eastern Financial, which chartered the organization, retained a majority ownership and even shared employees with the CUSO, and so Eastern Financial was an "alter ego," or a legally responsible entity.
The suit says Sperry Associates FCU bought the loans based on the underwriting of the Eastern Financial CUSO and the loans have been significantly devalued be -cause of the Florida real estate bust, leaving it with a loss. Sperry Associates, which also lost more than $2 million in participations it bought from Cal State 9 CU, asserts that Space Coast CU, as the successor to Eastern Financial, is responsible for any losses it has realized from the two loans.
The suit claimed that Space Coast, as part of a purchase and assumption agreement ac quiring the remnants of Eastern Financial, received cash from NCUA that Space Coast is legally bound to share under contractual agreements related to the loan participations.
In its ruling, the court also dismissed allegations of fraud, finding that in order to prove fraud, Sperry Associates had to establish "willful misconduct or gross negligence" under the terms of the participation agreement and failed to do so. "To hold a party liable for gross negligence, a court must find that a defendant had knowledge of the existence of circumstances constituting a clear and present danger and yet still undertakes a conscious, voluntary act or omission which is likely to result in injury," wrote Judge Honeywell in granting Space Coast CU's motion for summary judgment dismissing the case.