Nat'l Credit Union Admin. Bd. v. Cumis Ins. Soc'y, Inc.

• Decision Date: 07 April 2015
• Docket Number: CASE NO. 1:11 CV 1739
• Parties: NATIONAL CREDIT UNION ADMINISTRATION BOARD, as Liquidating Agent of St. Paul Croatian Federal Credit Union, Plaintiff, v. CUMIS INSURANCE SOCIETY, INC., Defendant.
• Court: U.S. District Court — Northern District of Ohio

NATIONAL CREDIT UNIONADMINISTRATION BOARD,as Liquidating Agent ofSt. Paul Croatian Federal Credit Union, Plaintiff, v. CUMIS INSURANCE SOCIETY, INC., Defendant.

CASE NO. 1:11 CV 1739

THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF OHIO EASTERN DIVISION

April 7, 2015

MAGISTRATE JUDGE GREG WHITE

MEMORANDUM OPINION & ORDER

This matter is before the Court for consideration of (1) Plaintiff National Credit Union Administration Board, as Liquidating Agent of St. Paul Croatian Federal Credit Union's Motion for Summary Judgment (Doc. No. 90); and, (2) Defendant CUMIS Insurance Society's Motion for Summary Judgment¹ (Doc. No. 88.)

For the following reasons, Plaintiff's Motion for Summary Judgment (Doc. No. 90) is DENIED; and, Defendant CUMIS's Motion for Summary Judgment (Doc. No. 88) is DENIED.

I. Procedural Background

On August 18, 2011, Plaintiff National Credit Union Administration Board, as Liquidating Agent of St. Paul Croatian Federal Credit Union (hereinafter "Plaintiff" or "Liquidating Agent") filed a Complaint against Defendant CUMIS Insurance Society (hereinafter "Defendant" or "CUMIS"). (Doc. No. 1.) Therein, Plaintiff alleges that, on April 30, 2010,² the National Credit Union Administration Board placed the St. Paul Croatian Federal Credit Union (hereinafter "St. Paul") into involuntary liquidation due to insolvency and appointed itself the Liquidating Agent pursuant to 12 U.S.C. ¶ 1787(a)(1)(A). Id. at ¶ 6. As Liquidating Agent, Plaintiff asserts it "assumed all right, title and interest of St. Paul by operation of law." Id. at ¶ 7. The Complaint contains one count, seeking a declaratory judgment that CUMIS owes coverage under a fidelity bond it issued to St. Paul for losses arising from employee or director dishonesty. Id. at ¶¶ 8-19, 32-34. CUMIS filed its Answer on October 24, 2011. (Doc. No. 3.)

A case management conference was conducted on November 29, 2011, at which time the Court set a discovery deadline of September 1, 2012 and a dispositive motions deadline of October 1, 2012. (Doc. No. 14.) These deadlines were extended no less than seven times, in large part due to the parties' numerous discovery disputes.³ Ultimately, the discovery deadlinewas extended to July 28, 2014 and the dispositive motions deadline was extended to October 29, 2014. See Non-Document Order dated April 15, 2014; Doc. No. 71.

The parties timely filed cross motions for summary judgment on October 29, 2014. (Doc. Nos. 88, 90.) Briefs in Opposition were filed on December 5, 2014, and replies were filed on December 22, 2014. (Doc. Nos. 97, 98, 99, 100.)

II. Factual Background

St. Paul Croatian Federal Credit Union was established in 1943 to serve members of St. Paul Croatian Parish. (Doc. No. 98-4 at 3.) See also Material Loss Review of St. Paul Croatian Federal Credit Union, National Credit Union Administration, Office of Inspector General Report # OIG-10-16 (hereinafter "OIG Report") at p. 4 (Oct. 7, 2010). It began with a small branch office in Cleveland. (Raguz Depo. at Tr. 18-20, 23-25.)

In 1989, Anthony Raguz ("Raguz") was hired by St. Paul to work as a teller and loan officer. (Raguz Depo. at Tr. 4-15.) At that time, there were three people working in the Cleveland branch: Joe Plavac; Debbie Politi; and, Mr. Raguz. Id. at Tr. 14. Mr. Plavac served as the manager. Id. In 1996, Mr. Plavac retired and Mr. Raguz became the "guy in charge."⁴ Id. at Tr. 16. By this time, the Cleveland branch had hired several additional tellers, bringing the total number of employees up to five. Id.

Around this same time, St. Paul opened a branch in Eastlake, Ohio. Id. at Tr. 16-18.Initially, the Eastlake branch was relatively small, employing only two people. Id. at Tr. 18. It grew, however, and, sometime between 2000 and 2002, St. Paul obtained a larger space for its Eastlake branch. At that time, three employees remained in the Cleveland branch while the Eastlake branch expanded to four tellers and two to three customer service people. Id. at Tr. 18-19, 22-24. Mr. Raguz testified Ms. Politi was the "office manager" of the Cleveland branch, while Mirjana Zovkic became the "office manager" of the Eastlake branch.⁵ Id. at Tr. 18-24.

At some point in 2000, Mr. Raguz began making fraudulent loans; i.e., accepting bribes in exchange for authorizing loans. Id. at Tr. 28-30. Mr. Raguz testified that, at first, only approximately 5 to 10% of the credit union's loans were fraudulent. Id. at Tr. 34-36. However, he stated "it got progressively more as time went on."⁶ Id. at Tr. 36. In order to conceal his fraudulent conduct, Mr. Raguz sought to avoid reporting loans as delinquent since delinquent loans had to be identified in reports submitted to the National Credit Union Administration ("NCUA") Id. at Tr. 40-41, 46-47. Mr. Raguz employed a variety of practices to accomplish this goal.

Mr. Raguz used the term "cover" to describe one such practice. Id. at Tr. 38. In order to "cover" a loan, Mr. Raguz would create a loan for a fictional person or entity and then use those loan proceeds to make payments on delinquent (or soon to be delinquent) loans, thus preventing them from being reported to the NCUA. Id. at Tr. 38-40, 54-56. Specifically, Mr. Raguzexplained "covering" loans as follows:

Q: * * * You made up loans to cover loan payments?

A: Yes. Made up fictional business loans, okay, and then use that money to cover the loans.

Q: So can you give me an example of how- so Joe Smith would come in and give you a-

A: No. No one came in. We made up a fictional loan, not a real person, not a real entity. Wrote a check.

Q: Of $50,000? $100,000?

A: Maybe even more. Maybe even a couple hundred thousand dollars. Then, put the check back in the system and covered all these loans.

Q: Made payments on the loans that were—

A: Right. The other loans that were going delinquent.

Id. at Tr. 38-39. Mr. Raguz "covered" both fraudulent loans (i.e., loans associated with bribes) as well as legitimate loans that, for one reason or another, were delinquent or about to become delinquent. Id. at Tr. 39-40.

Mr. Raguz also engaged in a practice he called "resetting" to conceal his fraudulent scheme. Id. at Tr. 41. "Resetting" was the process of taking a loan balance plus accrued interest, and resetting it as a new loan. Id. at Tr. 41-42. As Mr. Raguz explained:

Q: And if those loans were going to go delinquent, you would do this covering process that you're describing?

A: Yes. Now, there's two ways we did it. We either covered it that way, or we reset it. Resetting is like a refinance. Basically, take your loan balance plus all the interest and reload it. That's the simplest definition. Principal balance plus accrued interest and reset it.

Q: Okay. So just to give an example, if I had a $10,000 principal balance left in 2006, and I also have $2,000 of accrued interest, you would reset theloan at $12,000?

A: Right, because that would take the interest off the accrual and take you off the delinquency list.

Q: Wouldn't I be right back on the delinquency list?

A: In three months, yes, sir.

Q: What would you do in that example that I gave you?

A: We kept resetting. Sometimes we covered, and we reset.

Id. at Tr. 41-42.

Finally, Mr. Raguz testified he would "burn" a "bad loan" in order to avoid reporting it as delinquent. Id. at Tr. 96-97. He described "bad loans" as loans that were not being paid for one reason or another. Id. at Tr. 97. Mr. Raguz chose not to write these loans off because it would have required him to adjust the delinquency rates and loan allowance. Id. Instead, he "burned" them by making "them disappear through a fraudulent transaction." Id.

It is undisputed that Mr. Raguz's fraudulent conduct continued from 2000 up until the collapse of St. Paul in April 2010. It is further undisputed that St. Paul experienced tremendous asset growth during this time period. According to an October 2010 report prepared by Lillie & Company, St. Paul had total assets of $52 million and a loan portfolio of $42 million as of December 31, 2001. (Doc. No. 98-4 at 4.) By March 31, 2010, St. Paul's total assets had grown to $250 million and its loan portfolio to $240 million. Id. Moreover, the Lillie & Company report observed that "[d]uring this period, [St. Paul] had virtually no delinquent loans or charge offs." Id. See also OIG Report at p. 17 (Oct. 7, 2010) ("In spite of the economic downturn and contrary to other credit unions, St. Paul reported zero loan delinquency and charge-offs from 2004 to 2009.")

In its regulatory capacity, the NCUA conducted periodic examinations of St. Paul throughout the relevant time period.⁷ During these examinations, NCUA examiners generally visited St. Paul and reviewed its records. (Raguz Depo. at Tr. 80-87; Doc. No. 89-1.) The NCUA thereafter prepared Examination Reports setting forth its analysis of "major risk areas" in St. Paul operations, as well as findings regarding St. Paul's financial condition, the quality of its management, and the "risk of loss to member capital and the National Credit Union Share Insurance Fund." (Doc. No. 89-1.) NCUA Examination Reports from 2004 to March 2009 indicated St. Paul consistently reported a zero delinquency rate. See OIG Report at 17; Doc. No. 89-1. Moreover, in Examination Reports for the period between December 2007 and March 2009, the NCUA found St. Paul had a CAMEL⁸ composite rating of 2, which meant it had determined St. Paul to be "fundamentally sound" and "stable" with "[o]nly moderate weaknesses [that] are well within the board of directors' and management's capabilities and willingness to correct." See Doc. No. 90-3 at 21; Appendix A- NCUA's Camel Rating System (CAMEL) at http://www.ncua.gov/Resources/Documents/LCU2007.12ENC.pdf. These Examination Reports were provided to the St. Paul Board and Supervisory Committee. (Raguz Depo. at 86-87.)

St. Paul also engaged an outside auditor, George Hanks, to perform yearly audits during this time period. (Raguz Depo. at Tr. 67-68, 71; Calevich Depo. at Tr. 64-65,...