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Pennsylvania Bankers Association v. Pennsylvania Dep't of Banking

September 28, 2009


The opinion of the court was delivered by: Judge Simpson

Argued: June 10, 2009




I. Statutory History .........................3

II. Factual and Procedural History ...................5

A. Historical Background ............... ..5

B. Procedural Background ................7

1. Department Proceedings .................7

2. Commonwealth Court Proceedings .......... 10

a. Current Appellate Proceedings ....... 10

b. Original Jurisdiction Proceedings ........ 11

c. Related Appellate Proceedings ....... 13

III. Current Appeal....................... 14

A. Well-Defined Local Community ........... 15

1. NCUA Manual .................. 16

2. Metropolitan Statistical Area ........... 18

3. Sharing of Interest and Interaction ........ 20

4. Region v. Local Community .............. 28

B. Compliance with Statutory Law ............... 30

1. Banking Code of 1965 and Department of Banking Code .......... 30

2. Statutory Construction Act ........... 31

3. Credit Union Code ............... 34

C. Official Notice ................... 36

D. Due Process .................... 39

1. Non-Disclosure Provision ............... 40

2. Conestoga ................... 40

3. Developments since Conestoga .......... 42

4. Discussion ...................... 43

a. Interests Affected ............... 46

b. Risk of Erroneous Deprivation ....... 49

c. Government's Interest .............. 52

IV. Conclusion ......................... 54

V. Appendix .......................... 55

A. Order of November 10, 2008............... 55

B. Orders of April 15, 2009................ 58

C. Orders of May 11, 2009................. 60

D. Orders of May 21, 2009................. 62

These consolidated cases raising questions of first impression in our appellate jurisdiction are here on remand from the Supreme Court. This is the fourth Commonwealth Court decision, and the seventh appellate court decision spawned by a complex dispute between banks and credit unions in Pennsylvania.

Here, the Pennsylvania Department of Banking (Department) permitted two state-chartered credit unions to convert their fields of membership from employer group-based to community-based, pursuant to recent amendments to the Credit Union Code, 17 Pa. C.S. §§101-1504. Several banks and a bankers' association appealed the orders allowing conversion. We are generally asked whether the Department erred in allowing the conversions or denied due process.

I. Statutory History

In a prior decision, explained below, we examined the history and purposes of credit unions. See Pa. Bankers Ass'n v. Pa. Dep't of Banking & TruMark Fin. Credit Union, 893 A.2d 864 (Pa. Cmwlth. 2006) (Pa. Bankers-Appellate I), rev'd and remanded, 598 Pa. 313, 956 A.2d 956 (2008) (Pa. Bankers-Appellate II). Since inception, Pennsylvania credit union legislation required membership based upon a common bond of association identified in the articles of incorporation.*fn1 In 2002, however, the General Assembly extended the powers of credit unions by providing federal parity. A credit union may now engage in the activity of creating, amending or 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 [D]department, including, but not limited to, conditions, limitations and restrictions based upon safety and soundness.

17 Pa. C.S. §501(e)(2). In turn, Section 109 of the Federal Credit Union Act provides that a community credit union, as proposed here, shall be limited to "[p]ersons or organizations within a well-defined local community, neighborhood, or rural district." 12 U.S.C. §1759(b)(3). The Federal Credit Union Act requires the National Credit Union Administration Board (NCUA) to prescribe by regulation the definition of a "well-defined local community, neighborhood, or rural district." 12 U.S.C. §1579(g)(1).

The NCUA promulgated rules setting forth the requirements for establishing a "well-defined local community" as follows: the geographic area's boundaries must be clearly defined; the charter applicant must show the area is a "well-defined local community, neighborhood, or rural district;" and, the residents must have common interests and/or interact. 63 Fed. Reg. 72037 (December 30, 1998). As more fully discussed below, at the heart of this matter is whether the expanded area for credit union service constitutes a "local community."

II. Factual and Procedural History

A. Historical Background

In 1939, employees of Bell Telephone Company founded Bell Telephone Employees Credit Union, which later became Philadelphia Federal Credit Union. After converting from a Federally-chartered credit union to a state chartered credit union, it changed its name to the Philadelphia Telco Credit Union. It now operates under the name TruMark Financial Credit Union (TruMark).

Headquartered in Bucks County, TruMark's field of membership consists of 500 select employer groups located throughout Bucks, Chester, Delaware, Montgomery and Philadelphia Counties. As discussed below, these same five counties comprise the "local community" proposed for membership conversion. TruMark maintains branch offices in Chester, Montgomery and Philadelphia Counties, and it employs 200 people to serve 76,491 members. Its assets total $760 million.

In November 2003, TruMark filed with the Department an application for charter conversion to serve a community field of membership (Conversion Notice). The amendment to TruMark's articles of incorporation would allow TruMark to convert its field of membership from employer-based memberships to geographic, or community, based memberships. In particular, TruMark sought to convert its field of membership to persons who live, work, worship, or attend school and businesses and other legal entities in Bucks, Chester, Delaware, Montgomery and Philadelphia Counties (proposed community). The Department published notice of TruMark's Conversion Notice in the Pennsylvania Bulletin.

Freedom Credit Union (Freedom) was established in 1934 as the Philadelphia Teachers' Credit Union. Throughout the years, Freedom's field of membership grew to include Delaware and Montgomery County teachers as well as administrative and teaching employees of universities, colleges and tax-supported schools. It employs 82 people, and its current field of membership includes 173 select employer groups. Freedom's assets total $265 million. It maintains branch offices in Bucks, Montgomery, and Philadelphia Counties.

In October 2003, Freedom submitted to the Department a community charter application (collectively, Conversion Notices). It sought to convert its field of membership from employer-based memberships to a community field of membership consisting of persons who live, work, worship, perform volunteer services, attend school, or participate in associations headquartered in, and businesses and other legal entities located in the same five counties proposed in TruMark's Conversion Notice as well as in the New Jersey Counties of Burlington, Camden, and Gloucester. The Department published notice of Freedom's Conversion Notice in the Pennsylvania Bulletin.

B. Procedural Background

1. Department Proceedings

After publication of the Conversion Notices, the Pennsylvania Bankers Association and the Pennsylvania Business Bank (collectively, Banks) petitioned to intervene in TruMark's and Freedom's (collectively, Credit Unions) conversion proceedings. In addition, several banking institutions petitioned to intervene in Freedom's Conversion Notice, namely, Fulton Bank, Premier Bank, and Lafayette Ambassador Bank.*fn2

In response to Banks' petitions to intervene, the Department issued an order appointing a Presiding Officer to preside over hearings on the Conversion Notices. The Secretary reserved the right to enter a final decision without a recommendation from the Presiding Officer. Reproduced Record (R.R. at 719a). The Department expressly provided that the General Rules of Administrative Practice and Procedure, 1 Pa. Code §§33.1-35.251, applied to the proceedings.

The Department also granted Banks intervenor status pursuant to 1 Pa. Code §35.31(b).

Early in the proceedings, the Presiding Officer was confronted with a discovery issue: whether Banks were entitled to complete copies of the Credit Unions' Conversion Notices, which included proprietary information such as business plans and marketing plans. For reasons more fully discussed below, the Presiding Officer did not grant Banks unfettered access to Credit Unions' Conversion Notices. Instead, the Presiding Officer ordered Credit Unions to turn over those portions of their Conversion Notices to which they voluntarily agreed as well as any other public documents appended to their Notices (Disclosure Order). The Presiding Officer's order gives rise to the due process issue in the current appeal.

The Presiding Officer held three days of hearings. The evidence focused on whether the proposed five-county area constitutes a "well-defined local community" as that term appears in the NCUA's 2003 Chartering and Field of Membership Manual (Manual). In support of their Conversion Notices, Credit Unions offered the testimony of Dennis Dollar, former chairman of the NCUA, and Richard Stein, president of Klios, Inc., an economic consulting firm. Credit Unions also offered the testimony of their respective chief executive officers. For their part, Banks offered the testimony of Pete Leggett, a senior economist for the American Bankers' Association; Christopher McKenna, an expert in management science and operations research; and Michael Young, an urban and regional planner. Banks also offered the deposition of John Spier, a consultant for National Penn Bank who was qualified as an expert in the areas of marketing and business plans; resources necessary to implement said plans; and Credit Unions' ability to operate in a manner consistent with safety and soundness.

On December 22, 2004, the Department entered two final orders. The first order approved TruMark's Conversion Notice. The Department determined TruMark met its burden of proving the proposed community constitutes a "well-defined local community" consistent with the NCUA Manual. The Department also concluded Banks failed to prove they would be adversely affected by TruMark's charter conversion.

The second order addressed Freedom's application. The Department concluded that Freedom met its burden with respect to the five Pennsylvania counties identified in its Conversion Notice but not as to the three New Jersey counties. Accordingly, the Secretary remanded the matter for consideration of whether Freedom possesses the necessary resources to serve the proposed community in a manner consistent with the safety and soundness of a credit union and for the imposition of conditions, limitations and restrictions. Also, the order dismissed Banks as intervenors on the basis they failed to prove their property interests would be adversely impacted by Freedom's charter conversion.

2. Commonwealth Court Proceedings

a. Current Appellate Proceedings

Banks timely petitioned for review of the Department's orders.*fn3

Speaking through your current author, an en banc panel of this Court discerned no error in the Department's dismissal of Banks as intervenors. See Pa. Bankers-Appellate I. We did not address Banks' substantive claims.

On further appeal, a divided Supreme Court reversed. Pa. Bankers-Appellate II. Banks, the Court majority concluded, continued to have standing as a public interest party.*fn4 In particular, the Court declared the Department erroneously revoked Banks' standing after allowing intervention pursuant to 1 Pa. Code §35.31(b) without qualification and an indication it required additional evidence on standing. Accordingly, the Supreme Court reinstated Banks as parties and remanded the matter to this Court for resolution of Banks' remaining claims.

b. Original Jurisdiction Proceedings

In conjunction with their appeal from the Department's December 2004 orders approving Credit Unions' Conversion Notices, Banks filed a declaratory judgment action in our original jurisdiction seeking a declaration that certain provisions of the Credit Union Code are unconstitutional. Opposing parties filed preliminary objections, alleging Banks lacked standing to bring a declaratory judgment action. Opposing parties also demurred to Banks' constitutional challenges.

Again speaking through your current author, an en banc panel of the Court sustained the preliminary objections in part and overruled them in part. See Pa. Bankers Ass'n v. Pa. Dep't of Banking, (Pa. Cmwlth., Nos. 42 M.D. 2005, 98 M.D. 2005, filed March 1, 2006) (memorandum opinion on issues in original jurisdiction) (Pa. Bankers-Original I), appeal quashed, 597 Pa. 1, 948 A.2d 790 (2008) (Pa. Bankers-Original-II). Summarizing, we found Banks sufficiently pled standing in order to challenge the constitutionality of certain provisions of the Credit Union Code, although we put Banks on notice that they would need to prove the facts pled. Slip Op. at 8-9. We likewise overruled a demurrer to Banks' equal protection and uniformity of taxation claims. However, we sustained a demurrer to Banks' claims the Credit Union Code's exemption from taxation provisions are unconstitutional. We also determined Banks failed to sufficiently plead that the Credit Union Code violates the constitutional provision governing taxation of corporations. In the end, Banks' uniformity of taxation and equal protection claims remained. We then directed Banks to file a responsive pleading within the prescribed time.

Banks appealed our order disposing of the preliminary objections, and upon application, the original jurisdiction proceedings were stayed. The Supreme Court subsequently quashed Banks' appeal as interlocutory. Pa. Bankers-Original II.

Thereafter, we dissolved the stay and directed discovery to be complete by May 15, 2009, and trial to be held in late June 2009. See Order of November 10, 2008 (Appendix).

Toward the end of the allotted period for discovery, Banks sought to partially discontinue the original jurisdiction issues. They sought to preserve those issues decided against them in preliminary objections and to discontinue all other issues. If approved, the partial discontinuance would obviate the need for a trial and allow an immediate appeal on the issues where interlocutory appeal was previously quashed. Because Banks had not yet proved standing so as to preserve any original jurisdiction issues, the Court declined to approve a partial discontinuance. See Orders of April 15, 2009 (Appendix).

Ultimately, Banks declined the opportunity to prove standing or the factual basis for their constitutional challenges raising uniformity of taxation and equal protection claims. Banks voluntarily discontinued all original jurisdiction issues. See Orders of May 29, 2009 (Appendix).

c. Related Appellate Proceedings

While the cases involving TruMark and Freedom proceeded through the state courts, a similar case involving Belco Community Credit Union was also progressing. The Department considered Belco's request to convert its membership to community-based, with the "local community" identified as a seven-county area of south-central Pennsylvania. The Department denied the request of several banks and the bankers' association for a hearing and for access to Belco's confidential information. Belco's application was deemed approved.

On appeal to this Court, the banks challenged the failure to hold a hearing. They also challenged the Department's refusal to allow discovery of proprietary information, raising arguments almost identical to those raised in the current appeal. Speaking through Judge (now Senior Judge) Friedman, a panel of this Court vacated the deemed approval allowing Belco's membership conversion and remanded for a hearing. Because the Court decided that withholding the proprietary information denied due process to the banks, we directed that the banks have access to the information on remand. Pa. Bankers Ass'n v. Pa. Dep't of Banking, 910 A.2d 767 (Pa. Cmwlth. 2006) (Belco I), rev'd and remanded, 599 Pa. 496, 962 A.2d 609 (2008) (Belco II).

On further appeal, a divided Supreme Court reversed and remanded. Belco II. The majority concluded the banks failed to establish standing and waived any right to a hearing. The Court also held that in the absence of standing, a due process right to discovery did not attach. The case was remanded to this Court to address remaining constitutional challenges arising from the banks' discovery requests.

Justice Saylor authored a dissenting opinion, joined by Chief Justice Castille, in which he expressed the view that the banks' standing was adequately stated. Regarding the discovery of confidential material, the dissenting justices would remand to the Department to determine the scope of materials to be provided and the conditions for disclosure. They noted that much of the information ...

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