Thursday, April 8, 2010

Director Liability

In a letter to the editor of Credit Union Times in the March 24, 2010 issue, Henry Wirz, President of SAFE Credit Union, objected to credit union directors’ exposure to personal liability. He wrote:

“Bob Fenner [NCUA’s General Counsel] opined that the WesCorp board of directors has no indemnity. What does that mean? It means that all of our volunteers who claim indemnity under a board resolution (that is most of our volunteers) have no indemnity. That means whenever the NCUA comes in and takes over a credit union that any board member loses his indemnity and has to dig into his own pockets to defend himself.”

He worries that if “directors do not have indemnity, then who will serve?”

Henry, welcome to the world that bank directors have lived under for the last twenty years. Bank directors can be held personally liable for losses when a bank fails. FDIC writes that “[l]awsuits against former directors and officers of failed banks result from a demonstrated failure to satisfy the duties of loyalty and care.” See FDIC’s Statement Concerning the Responsibilities of Bank Directors and Officers.


  1. But who would sue the director of a credit union? What damages would one be seeking? If all the stakeholders in a CU get their money back, what cause would one have for suing?

  2. One BIG difference: Bank directors get PAID.
    Nothing like having to pay for a volunteer position.

  3. There are some credit unions that pay their directors. I know that state chartered credit unions in Pennsylvania, Rhode Island, and Texas have the authority to pay their directors. I would suggest looking at the Form 990 for Pennsylvania State Employees CU and Navigant CU.

    Also, many credit union directors receive non-cash benefits.

  4. Paid or not, credit union directors are and should be held to the same fiduciary and ethical duties as a bank director, if not higher. Just had this very long discussion over lunch with an expert. Credit unions are in for a serious wake up call in this area over the next few years.

  5. Yes, but bank directors are compensated for sitting on their publicly traded boards. Which are also regulated by multiple public agencies, which your employer despises as well.

    Credit Union Directors are volunteers, the CU is owned by the members of the CU and they are not compensated.

    Once again, Keith, you are mixing facts up to server your employer's interest.

  6. In fact, the non-pay benefits extended to credit union directors are a potential area for abuse. More than one credit union has experienced scandal when "non-paid" directors decided to compensate themselves in other ways at the expense of the credit union and its members.

  7. Keith and Wayne, what are you saying? Since the beginning of banking in America, there has only been limited liability for outside directors of chartered financial firms. That important aspect has allowed our institutions and economy to grow to become the strongest in the world. It seems that if NCUA as a federal agency/regulator acting on behalf of the government strips outside directors of indemnity, it could set a horrible precedent for all of banking. The list of outside directors of our nation’s banks reads like the Who’s Who of American society and commerce. This move by federal regulators could set up a situation making each of them personally responsible for the unrecoverable multi-hundred billion dollar costs for TARP assistance, the failures of hundreds of banks, and any other losses occurring as a related consequence given the financial system’s culpability for the economic meltdown.

    This action by NCUA should frighten everyone in banking. Hopefully, NCUA is wrong. Luckily, right now the DOJ doesn’t have enough attorneys to prosecute all the new exposures for bank officers and directors under FDIC Financial Institution Letter (FIL--87--92). If things change, watch out.

  8. Mr. Abernathy: Like directors giving themselves a lower interest rate on home loans? Sorry, that is only a for-profit perk as credit union laws prohibit giving volunteers rates not available to the general membership.

  9. interesting how misinformed people can be. a director having only limited liability is the reason america's economy and institutions are the top in the world? so much for capitalism, innovation and american ingenuity and overall desire to win. guess its mostly a matter of limited liability.
    cu directors arent paid? some are. most arent-directly. they do however, travel to hawaii, vegas, st barts, take cruises, etc. bring their spouses multiple times per year and bring home next to nothing that the CU follows thru on.
    its pay, it just doesnt show up as "income earned".

  10. To clarify, yes it is limited liability for capitalism using other people's money, innovation using other people's money, american ingenuity and overall desire to win using other people's money and all with limited liability.

  11. Mr. Leggett, I stand correct. I looked up the 990 for Penn CU and they did have $123,000 worth of director compensation. But there are some additional facts:
    - This is unique, not uniform in the industry. Most states explicitly prohibit this.
    - As to the "non-cash" benefits, i assume it is educational expense, travel, etc. Are you advocating eliminating director education? I think both sides need MORE of this, not less (no matter the cost)
    - Penn CU is a $3B cu and paid about $123k. Republic Bank is a $1B and paid about double. Both had similar results.

    Of course, I do advocate having directors (bank , cu or not) who have a vested interest in the outcome (long term) of their business. I think what appears to be unfair is that a great majority of directors (if my fact is wrong, prove me wrong) get no enumeration but apparently have substantial personal risk.

    is this fair?

  12. I am not advocating the end of director education. Director education is crucial, if directors are to perform their jobs.



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