Pennsylvania Bankers v. Dept. of Banking

CourtCommonwealth Court of Pennsylvania
Citation893 A.2d 864
PartiesPENNSYLVANIA BANKERS ASSOCIATION and the Pennsylvania Business Bank, Petitioners v. PENNSYLVANIA DEPARTMENT OF BANKING AND TRUMARK FINANCIAL CREDIT UNION, Respondents Pennsylvania Bankers Association, Pennsylvania Business Bank, Fulton Bank, and Premier Bank, Petitioners v. Pennsylvania Department of Banking, Pennsylvania Department of Revenue, The Attorney General of the Commonwealth, and Freedom Credit Union, Respondents Pennsylvania Bankers Association and the Pennsylvania Business Bank, Petitioners v. Pennsylvania Department of Banking, Respondent Pennsylvania Bankers Association and the Northwest Savings Bank, Petitioners v. Pennsylvania Department of Banking, Respondent.
Decision Date01 March 2006

Raymond P. Pepe, Harrisburg, for petitioner, PA Bankers Association.

Linda Carroll, Deputy Chief Counsel and Howard G. Hopkirk, Sr. Deputy Attorney

General, Harrisburg, for respondent, PA Department of Banking.

Daniel T. Fitch, Philadelphia, for respondent, TruMark Financial Credit Union.

Francis X. Crowley, Philadelphia, for respondent, Freedom Credit Union.

Richard T. Wargo, Jr., Harrisburg, for intervenor, PA Credit Union Association.

BEFORE: COLINS, President Judge, and SMITH-RIBNER, Judge, and PELLEGRINI, Judge, and FRIEDMAN, Judge, and LEADBETTER, Judge, and COHN JUBELIRER, Judge, and SIMPSON, Judge.


These procedurally complex consolidated cases present issues of first impression which are of great interest to credit unions and banks. The core issue is whether credit unions which convert from group-based to community-based membership obtain an unfair competitive advantage over banks.

A. Statutory Background

Credit unions were first covered by legislation in Pennsylvania in 1933.1 The current Credit Union Code, 17 Pa.C.S. §§ 101-1504, was enacted in 1990. This codified statute permits credit unions to be chartered for the general purpose "of promoting thrift among its members, creating a source of credit for such members at reasonable rates of interest and providing an opportunity for its members to use and control their own money on a democratic basis in order to improve their economic and social condition." 17 Pa.C.S. § 301(a). Since inception, membership in Pennsylvania credit unions has been based on a common bond, which must be specified in the articles of incorporation.2

Unlike banks, which are for-profit corporations owned by stockholders, credit unions are owned by depositors. 17 Pa.C.S. §§ 501(b)(1), 505(a); see Utah Bankers Ass'n v. America First Credit Union, 912 P.2d 988 (Utah 1996). Technically, a depositor does not deposit funds into a credit union but purchases shares in the corporation. 17 Pa.C.S. § 505(a); see Utah Bankers Ass'n. Credit unions are considered non-profit corporations and are exempt from federal taxation, Id.; see 26 U.S.C. § 501(c)(14)(A), and from state taxation on their profits. 17 Pa.C.S. § 517. However, they are subject to tax on real estate they own. 17 Pa.C.S. § 517. Banks, on the other hand, are subject to all types of taxation, including taxation on profits. Utah Bankers Ass'n.

The Credit Union Code was extensively amended, effective February 2003.3 One of the amendments extended the powers of a credit union by providing Federal parity, that is, the power

[t]o engage in the activity of . . . expanding its field of membership as authorized by section 109 of the Federal Credit Union Act (48 Stat. 1219, 12 U.S.C. § 1759), subject to reasonable conditions, limitations and restrictions as may be imposed by the [Department of Banking], including, but not limited to, conditions, limitations and restrictions based upon safety and soundness.

17 Pa.C.S. § 501(e)(2). This provision references Section 109(b) of the Federal Credit Union Act, 12 U.S.C. § 1759(b), which permits membership of credit unions to be based on common bonds of association or of geography, in the case of "community credit unions" serving "persons or organizations within a well-defined local community, neighborhood or rural district."

B. Department of Banking Proceedings

Later in 2003, three state-chartered credit unions gave formal notice to the Department of Banking (Department) of their intent to take advantage of this statutory change and to expand their fields of membership to geography-based community credit unions. These credit unions were: (1) Corry Jamestown Credit Union (Corry Jamestown), located in northwest Pennsylvania; (2) Philadelphia Telco Credit Union d/b/a TruMark Financial Credit Union (TruMark), located in the greater Philadelphia area; and (3) Freedom Credit Union (Freedom), also located in the greater Philadelphia area (collectively, Credit Unions).

The Pennsylvania Bankers Association, the Pennsylvania Business Bank, Northwest Savings Bank, Fulton Bank and Premier Bank (collectively, Banks) protested the notices. Over strenuous objections,4 Banks' petitions for intervention were granted.5 The cases proceeded to consolidated hearings.6

On December 22, 2004, the Secretary of Banking issued three orders, one for each credit union (First Orders). All three orders dismissed Banks as intervenors. These dismissals are the basis for some of the issues currently before the Court. The Secretary of Banking also permitted conversion of membership fields for Tru-Mark7 and Freedom8 (Conversion Orders). The Conversion Orders are the bases for other issues raised in the Court.

C. Commonwealth Court Proceedings

Regarding Corry Jamestown, the First Order dismissed Banks and remanded the application to the Department for further proceedings on this credit union's ability to serve its defined community. The First Order was appealed to this Court9 at No. 158 C.D.2005.10


As to TruMark, a dual jurisdiction action was filed with this Court at 42 M.D. 2005. The action has appellate and original jurisdiction components. In the appellate component, the order dismissing Banks as intervenors and allowing TruMark's conversion as well as nine preliminary orders are challenged. In the original jurisdiction component, a declaratory judgment regarding the tax exempt status of state-chartered credit unions is sought.11 Outstanding preliminary objections to the original jurisdiction component will be addressed in a separate opinion.


Regarding Freedom, the First Order dismissing Banks was also appealed to this Court at No. 157 C.D.2005.

Further, the Conversion Order was the basis for a related dual jurisdiction action at No. 98 M.D.2005. The appellate component is an appeal from the Conversion Order and nine preliminary orders. In the original jurisdiction component, Banks seek a declaratory judgment that tax exemption for state-chartered credit unions is unconstitutional. Preliminary objections to the original jurisdiction component are pending, and they will be addressed in a separate opinion.

II. Appeal

This opinion is limited to appellate issues. Banks raise five issues on appeal: whether the Department erred in limiting the Banks' participation in the hearings by restricting access to certain information and by dismissing them as intervenors; whether the Department erred in determining that the greater Philadelphia region constitutes a well-defined local community; whether the Conversion Orders are supported by substantial evidence; whether the Department improperly used official notice; and, whether a statutory restriction regarding confidential materials is unconstitutional.

As to standard of review, the court shall affirm the adjudication unless it shall find that the adjudication is in violation of the constitutional rights of the appellant, or is not in accordance with law, or that the statutory provisions controlling practice and procedure of Commonwealth agencies have been violated in the proceedings before the agency, or that any finding of fact made by the agency and necessary to support its adjudication is not supported by substantial evidence. 2 Pa.C.S. § 704.

III. Standing

The threshold issue is whether Banks proved standing. In the First Orders, the Secretary of Banking dismissed Banks as intervenors because they failed to prove standing during the hearings.


On this issue, Banks assert their dismissal as intervenors violated the administrative regulations governing intervention found at 1 Pa.Code § 35.31,12 as well as fundamental due process requirements. They averred their interests would be adversely affected by unfair competition if credit unions were authorized on a tax-exempt basis to offer services generally equivalent to banks in entire regions of Pennsylvania without the same degree of regulatory scrutiny applied to banks. Relying on case law13 and Section 103 the Banking Code of 1965 (Banking Code),14 Banks argue financial institutions as a matter of law have legally protected interests affected by credit union conversion.

The Department counters that Banks pled an interest to support standing, and they were granted permission to participate in hearings; however, they failed to prove any harm or disadvantage during the hearings. Also, the Department contends that as a matter of law the status of credit unions cannot be the basis for a finding of unfair competition because: the alleged competition arises under a different regulatory scheme; competition is expected among banks and other financial institutions; and, based on case law,15 the tax status of an entity is an insufficient reason.

Banks rejoin that their threatened interests are substantial because credit union expansions per se decrease the scope of competitive opportunities available to banks. Their interests are direct because potential lost profits represent a discernible adverse effect upon which standing may arise. Their interests are immediate because they fall within the class of persons intended to be protected by the previously cited...

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