On Compliance: Can Expelled Federal Credit Union Members Sue in Federal Court?

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Michael S. Edwards Photo

5 minutes

The details of the new rule that’s set to go into effect Aug. 25 will likely be sorted out during litigation.

The National Credit Union Administration Board in July 2023 issued a final rule updating the federal credit union bylaws to implement the Credit Union Governance Modernization Act of 2022’s new option allowing boards of directors of federal credit unions to expel members “for cause” by a two-thirds vote. 

The rule defines “for cause” to include: (a) the member engaging in substantial or repeated violations of the FCU’s membership agreement; (b) substantial or repeated disruption—including dangerous or abusive behavior—of the credit union’s operations; or (c) fraud, attempted fraud or conviction of other illegal conduct in relation to the credit union. 

The final rule also gives members the right to request a hearing before the FCU’s board before being expelled (which may be held virtually or in person based on the FCU’s policy). In addition, the rule’s preamble discusses the right for an expelled member to complain to NCUA or bring a “private right of action” to become reinstated. FCUs may implement this new member expulsion option by updating their bylaws after the regulation takes effect on Aug. 25. 

Federal or State Court?

What is not clear from the final rule, however, is whether an expelled member’s “private right of action” discussed in the preamble would be brought in federal or state court. In response to a public comment arguing that there should be no private right of action under the Governance Modernization Act, the board wrote: “The Board notes that the Act does not include an express private right of action. The Board neither intends to establish a private right of action with this final rule nor preclude a private right of action that may be available under existing law. FCUs should consider legal risks when establishing their policies.” 

Until about 15 years ago, NCUA’s guidance was clear that members alleging that their FCU had violated its bylaws were required to bring an action in state court. In 2007, however, the NCUA Board reincorporated the FCU bylaws into federal regulations because the agency was “concerned that the policy of requiring members to enforce rights granted in the Bylaws in state courts has resulted in members being unable to enforce rights granted in the Bylaws.” Reincorporating the bylaws into NCUA rules allowed the agency itself to bring enforcement actions to remedy bylaw violations. 

Simply having a federal law on a subject, however, does not create a private right of action allowing an aggrieved individual to file a federal court case. A 1975 U.S. Supreme Court decision, Cort v. Ash, held that whether a federal statute creates an implied private right of action should be decided based on the consideration of four factors: 1) whether the plaintiff is in the class for whose benefit the statute was enacted; 2) whether there is any indication of legislative intent, explicit or implicit, either to deny or to create a private right to enforce; 3) whether a private right to enforce would be consistent with the underlying purpose of the statute; and 4) whether the cause of action is traditionally in the purview of state law, such that a federal right to enforce would be inappropriate.

Later decisions, however, have been more restrictive. In Alexander v. Sandoval, for example, a 2001 decision about implied private rights of action under Title VI of the Civil Rights Act of 1964, the U.S. Supreme Court held that federal courts should determine whether the statute passed by Congress “displays an intent to create not just a private right but also a private remedy.” Even then, however, the Supreme Court construed the right narrowly, holding that the implied private right of action created for statutory violations of the Civil Rights Act did not give aggrieved individuals the ability to bring a private right of action over alleged violations of Department of Justice regulations implementing the act because the statutory language at issue gave the enforcement right over regulatory violations to DOJ.

Implied Right of Action?

The question, therefore, is whether Congress intended to create an implied private right of action for expelled members to bring a case in federal court when it adopted the Governance Modernization Act of 2022 (see pages 824-25 for the full text of the law). The statute, and the NCUA regulation implementing the statute, provide five basic member rights: 1) a right to notification of a pending expulsion for cause; 2) a right to a hearing before the FCU’s board of directors; 3) a right that at least two-thirds of the FCU’s board must vote in favor of the member’s expulsion; 4) a right to be notified that they have been expelled; and 5) a right to request to be reinstated. The act also defines the term “for cause” and authorizes the NCUA Board to define other statutory terms by rulemaking. 

I would argue that Congress did not intend to create an implied private right of action when it adopted the Governance Modernization Act because, even when applying the less-restrictive four-factor test in Cort v. Ash, there is no indication Congress intended to create a private right of action per se and FCU bylaw litigation has traditionally been the purview of state law. Further, under the reasoning of Alexander v. Sandoval, Congress arguably did not show an intent to create a private remedy under federal law even if it did create private rights to notices, a hearing and so forth. NCUA is also empowered to bring regulatory enforcement actions to remedy alleged FCU bylaw violations, much like the DOJ was in Alexander v. Sandoval.

Yet, those arguments are not definitive because the Governance Modernization Act has never been litigated. The real test will be whether attorneys who frequently sue financial institutions in federal court for alleged Truth in Lending Act violations or similar federal causes of action also decide to represent expelled credit union members. If so, expect a big fight in federal court to settle this issue.

Michael S. Edwards is an attorney-at-law with extensive experience representing credit unions, community banks and credit union organizations in the United States and around the world on a wide range of regulatory, compliance and other legal matters. Now with his own law firm based in the Washington, D.C., area, Edwards previously served as SVP/advocacy and general counsel of the World Council of Credit Unions and was senior assistant general counsel in the regulatory advocacy section of the Credit Union National Association.

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