No insurance coverage for largest credit union failure in U.S. history

When the NCUA filed a claim with Cumis Insurance Society, Inc., to collect on a fidelity bond that Cumis had issued to St. Paul in February 2010 (2010 Bond), which was to provide $5 million in coverage for employee or director dishonesty, Cumis denied coverage.

Cumis asserted that coverage for Raguz had terminated before the inception of the 2010 Bond because board member Robert Calevich had known — before February 2010 — that Raguz had committed dishonest acts by repeatedly failing to disclose reportable delinquencies to the board and the NCUA.

The NCUA sued Cumis in federal court, seeking a declaratory judgment that its claims were covered by the 2010 Bond, and seeking compensatory damages including interest and attorneys' fees.

At trial, Calevich testified that:

1. He "knew in fact there had to be at least some delinquencies" based on his prior experience as St. Paul's secretary-treasurer although Raguz was filing reports that said there were no delinquencies;
2. The board had concerns about the zero delinquency rate;
3. The board had raised these concerns to Raguz from time to time; and
4. Raguz had never provided a solid answer to the board's concerns.

The judge found that the 2010 Bond's termination provision applied to deny coverage and, accordingly, ruled in favor of Cumis.

Taken as a whole, the court said, the evidence showed that Calevich knew Raguz was falsely representing that St. Paul had a zero delinquency rate in financial reports to the board. Significantly, when "the reported delinquencies suddenly stopped," Calevich testified he became concerned because he "knew, in fact, there had to be at least some delinquencies" based on his own experience as a board member. The court found that this testimony, combined with Raguz's subsequent refusal to provide a "solid answer" in response to the board's inquiries about the sudden lack of reportable delinquencies, established that Calevich "learned of" Raguz's dishonesty within the meaning of the 2010 Bond's termination provision.

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The NCUA appealed the denial of coverage to the Sixth Circuit. It argued that the magistrate judge had applied the wrong test and had determined only that Calevich should have known of Raguz's dishonest act, whereas the bond's termination provision required that Cumis prove that Calevich had actually known of his dishonest act.

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The chief operating officer is spending the next 14 years in prison. (Photo: Shutterstock)

Directors ignored warning signs, says Sixth Circuit

The Sixth Circuit affirmed the trial court.

In its decision, the circuit court rejected the NCUA's argument that the judge had determined only that Calevich should have known of Raguz's dishonest act and found that the judge had decided that Calevich had actually known of Raguz's dishonest act. The important premise behind the judge's analysis, according to the appeals court, was that, through its termination provision, the bond anticipated (and mandated) that the credit union's directors would be vigilant in their oversight of their employees; that failure to exercise that vigilance would terminate the bond's coverage; and that the directors clearly and repeatedly had failed to police Raguz despite recognizing the obvious evidence that something was amiss, which pointed to Raguz's dishonesty.

The circuit court also found that the NCUA had waived its argument that because the 2010 Bond was a claims-made bond that continued in force until canceled, the termination provision did not terminate all coverage entirely, but instead merely terminated Cumis' "liability for any loss … occurring after the effective date of such termination" (that is, the date of the discovery of the employee dishonesty) — even though the termination-triggering discovery had occurred before the inception of the 2010 Bond.

The case is National Credit Union Administration Board v. Cumis Insurance Society, Inc.

FC&S Legal comment

What happened to Raguz?

In 2011, Raguz pled guilty to six counts, including bank fraud, money laundering and bank bribery. In November 2012, Raguz was sentenced to 14 years in prison and ordered to pay more than $72.5 million for his role in the failure of St. Paul.

As federal prosecutors explained, Raguz, of Mentor, Ohio, issued more than 1,000 fraudulent loans totaling more than $70 million to more than 300 account holders at St. Paul from 2000 to April 2010. He accepted more than $1 million worth of bribes, kickbacks and gifts in exchange for the fraudulent loans, according to court documents.

Raguz oversaw the issuing of loans to hundreds of account holders with little or no assets, income or employment history, according to court documents. He also oversaw scores of "loan resets" in which older loans were fraudulently repaid with new loans in the names of false nominees, including "Auto Truck Company" and "B.S. Construction," according to court documents.

The money laundering counts stemmed from Raguz's issuance of checks totaling $371,800 drawn on his St. Paul account payable to The Vanguard Group, according to court documents.

St. Paul, in Eastlake, Ohio, went into conservatorship and then forced liquidation in April 2010. That resulted in a $170 million loss to the National Credit Union Share Insurance Fund. 

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Steven A. Meyerowitz, Esq., is the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law Report, and the founder and president of Meyerowitz Communications Inc. Email him at smeyerowitz@meyerowitzcommunications.com.