Payout Priorities in Involuntary Liquidation

96-1238 / July 1997
Payout Priorities in Involuntary Liquidation

July 31, 1997

Christopher Turner, Corporate Counsel
Southwest Corporate Federal Credit Union
7920 Belt Line, LB-109
Dallas, TX 75240

Re: Payout Priorities in Involuntary Liquidation Your Letter of December 19, 1996.

Dear Mr. Turner:

Southwest Corporate Federal Credit Union (SCFCU) proposes to purchase share certificates from its member credit unions, secured by the credit unions' eligible obligations. You have asked what the payout priority would be for the resulting secured share certificates in the event of an involuntary liquidation. Because our view is that a federal credit union (FCU) does not have the authority to secure shares with eligible obligations, except as expressly provided in the Federal Credit Union Act (the Act), we do not reach the issue of payout priorities.

You rely on Section 107(13) of the Act as authority for an FCU to pledge its eligible obligations to secure shares. 12 U.S.C. §1757(13). This section was amended in 1977, as part of the Credit Union Modernization Act, and granted an FCU the authority to pledge the eligible obligations of its members. Credit Union Modernization Act of 1977, Pub. L. No. 95-22, 91 Stat. 49 (codified as amended in scattered sections of 12 U.S.C.). It was already in effect at the time Section 121(b) was added to the Act. Section 121(b) gives an FCU express authority to pledge its assets to secure the payment of funds deposited by state, federal or local governments or Indian tribes. 12 U.S.C. §1767(b). This provision was added to the FCU Act in 1987 as part of the Competitive Equality Banking Act. Competitive Equality Banking Act of 1987, Pub. L. No. 100-86, 101 Stat. 656 (codified as amended in scattered sections of 12 U.S.C.). The pledging of assets as security for accounts is limited to funds deposited by federal, state or local governments or Indian tribes. Although the Office of General Counsel letter dated April 23, 1984, referred to in your letter cites Section 121 as authority for FCUs to pledge any of their assets when acting as depositories of public monies, at that time the authority was based on the express power of FCUs to act as "fiscal agents" of the United States Treasury and regulations prescribed by the Secretary of the Treasury. FCUs were not given independent authority to pledge their assets to secure the payment of funds deposited by federal, state or local governments or Indian tribes until 1987, when Section 121(b) was added to the Act. The reference to Section 107(13) in the April 23, 1984, letter was in error as explained below.

Section 107(13) was not intended to allow FCUs to pledge eligible obligations, which consist primarily of member loans, for shares. If it were, there would have been no reason to add Section 121(b) in 1987. Section 121(b) carves out a narrow exception for the pledging of assets to secure shares. This narrow exception would not have been necessary if Section 107(13) already allowed assets to be pledged to shares
under any circumstance. The maximum, expressio unius est exclusio alterius, applies to Sections 121(b) and107(13). "As the maxim is applied to statutory interpretation, where a form of conduct . . . and things to which it relates are designated, there is an inference that all omissions should be understood as exclusions." SUTHERLAND STATUTORY CONSTRUCTION §47.23 (5th ed. 1992).

Further, a plain meaning interpretation of Section 107(13) suggests that "pledge" is limited to securing obligations. The plain meaning rule of statutory construction states that "words should be given their common and approved usage." SUTHERLAND §46.01. "Pledge" is traditionally defined as a transaction where property is transferred "by a debtor to his creditor, to be kept until the debtor's obligation is discharged." 72 C.J.S. 2d Pledges §2 (1987). A share certificate is classified as an equity account at the FCU where the account is maintained and not a liability account creating a debtor/creditor relationship. See, 12 U.S.C.§ 1757(6). Since a share certificate is not a debt obligation, an FCU may not pledge its eligible obligations as security for it except as authorized by Section 121(b).

Finally, Section 6030.6 of NCUA's Accounting Manual discusses the accounting treatment for "Pledge of Eligible Member Obligations as Security". It states that a credit union may pledge member loans as collateral for loans. There is no provision for pledging member loans as collateral for shares.

Because we have determined that it is impermissible for an FCU to pledge loans as security for shares, there is no need to address the question concerning payout priorities.

Sincerely,

Sheila A. Albin Associate General Counsel

GC/MFR:bhs SSIC 3600 96-1238

Last modified on
11/27/20