The opinion of the court was delivered by: CHARLES H. TENNEY
Plaintiff, the Grand Union Mount Kisco Employees Federal Credit Union (the "Credit Union"), a federally insured and chartered credit union, brings this civil action against its former treasurer, defendant Stanley Kanaryk ("Kanaryk"), for common law fraud and breach of fiduciary duty in the management of the Credit Union's financial affairs. The Credit Union is a New York corporation and Kanaryk is a citizen of Florida; therefore, diversity jurisdiction is proper under 28 U.S.C. § 1332(a) (1988). Plaintiff also claims jurisdiction under 28 U.S.C. § 1331, on the basis of an implied federal cause of action and federal common law. On September 29 and 30, 1993, this court held a two day bench trial. At the end of trial, defendant moved pursuant to Fed. R. Civ. P. 52(c) to dismiss the proceeding for failure to prove a prima facie case, and this court reserved decision on the motion. For the following reasons, the motion is granted.
Pursuant to Federal Rule of Civil Procedure 52(a), the court finds the following facts:
1. The plaintiff, Grand Union Mount Kisco Employees' Federal Credit Union, is a federally insured and chartered credit union operating under the rules and guidelines of the National Credit Union Administration ("NCUA"). At the time of the events which form the basis of this suit, the Credit Union had approximately 500 members and over $ 3,000,000 in assets. Trial Transcript ("Tr.") 237.
2. The Credit Union employed the defendant, Stanley Kanaryk, as treasurer from 1978 until he retired on October 1, 1987, after having announced his intention to retire in April of that year. Tr. 237. Kanaryk was eighty years old at the time of the trial. Id. His employment was originally to be on a part-time basis. Tr. 234-38. Kanaryk was the only paid officer of the Credit Union. Prior to his employment with the Credit Union, Kanaryk served as an auditor with the NCUA for eleven years. Tr. 234-35.
3. Kanaryk prepared the Credit Union's financial statements and was responsible for setting up appropriate reserves for bad loans on Credit Union balance sheets. Joint Pre-Trial Order ("JPTO"), Agreed Finding of Fact ("FF") # 10. Kanaryk shared responsibility for maintaining the Credit Union's financial statements and records with two loan officers, who were responsible for keeping records on outstanding loans.
4. At trial, the Credit Union attempted to prove Kanaryk's fraudulent intent and breach of fiduciary duty by focusing on his actions during a discrete time period, September 1986 to September 1987 (the "relevant period"). Tr. 2.
6. The Board's responsibilities also include consideration and approval or disapproval of investment decisions and advice suggested by the treasurer. Jt. Exh. 49. As shown in the minutes of Board meetings during the relevant period, investment decisions were frequently discussed among Board members. Jt. Exhs. 23, 24, 30, 31, 32, 33, 34, 35, 55, 56, 60.
7. At trial, Kanaryk testified that his investment strategy for the Credit Union was to maintain a diversified portfolio of investments by segregating assets roughly into thirds: one third was in cash (in the form of checking accounts, certificates of deposit and money market funds), one third was in loans to members and one third was in securities. Tr. 247-48. Approximately $ 700,000 to $ 790,000
of the securities investments were in mutual funds under a Dean Witter Reynolds Inc. account, entitled "Dean Witter U.S. Government Securities Trust Account," (the "Dean Witter Account"). Approximately another $ 109,000 to $ 234,000
was in mutual funds under an E.F. Hutton account, entitled the "HIS Government Securities Series," (the "E.F. Hutton Account"); an additional $ 180,000 to $ 190,000
was in mutual funds under a W.J. Nolan account, entitled the "Franklin U.S. Government Securities Fund" (the "W.J. Nolan Account"). Most of the investments in these accounts were in mutual funds, the underlying securities of which were pooled government-guaranteed mortgages, or "Ginnie Maes."
8. Plaintiff's expert at trial, Mr. Lloyd Cazes ("Cazes"), is an experienced certified public accountant who presently provides accounting services to the Credit Union.
Tr. 23, 76. At trial, Cazes, who reviewed Credit Union financial statements and supporting financial records prepared by Kanaryk during the relevant period, testified that the statements were inaccurate in their presentation of loan losses and investment losses suffered by the Credit Union. Cazes also testified that the monthly financial statements did not conform to generally accepted accounting principles ("GAAP") for financial institutions or to NCUA guidelines. Specifically, Cazes noted that according to both GAAP for financial institutions and NCUA guidelines, changes in the valuation of mutual fund investments had to be recorded monthly in order to reflect the lower of market value or cost. Accordingly, Credit Union financial statements had to record any diminution of value below cost in the mutual fund investments in a line item entry for investment losses. Tr. 30.
9. Prior to September, 1986, the Credit Union's financial statements indicated a loss of $ 10,000 in the investment accounts. After September, 1986, this figure was increased to about $ 17,000. Cazes testified that his review of financial statements from September, 1986 through June, 1987 indicated that, while the Credit Union invested an additional $ 84,000 in the Dean Witter Account alone during that time, and increased investments in other accounts as well, the line item entry for investment losses did not change, but remain fixed at approximately $ 17,000. Mr. Cazes noted that this was likely an inaccurate figure and that given the volatility of the Ginnie Mae mutual fund market at that time, losses should have been higher. Tr. 35. Cazes testified that the line item entry for investment loss also increased in the May, 1987 financial statement. The figure went from $ 17,000 to about $ 24,000.
10. Kanaryk did not dispute that the NCUA examiners rebuked the Credit Union's Board on several occasions for failing to keep accurate records of losses in Credit Union investment accounts. Jt. Exhs. 105, 60. After these audits, NCUA examiners expressed their apprehension and disapproval at meetings open to all members of the Credit Union. Several members of the Credit Union's Board, including the supervisory committee, were present at these meetings.
11. Cazes also testified that the Credit Union's line-item entries for cash reserves on outstanding loans to members during the relevant period both failed to meet NCUA regulations and failed to accurately reflect the dollar amount of loans that were technically in default as of January, 1987. Specifically, Cazes testified that, pursuant to section 1762 of the National Credit Union Act, credit unions must maintain reserves equal to six percent of outstanding loans. The Credit Union's balance sheet as of June, 1987, showed $ 1,191,155 in loans and cash reserves for loan losses of $ 10,262. In August, 1987, these reserves were increased to $ 41,243, most likely in response to suggestions by NCUA examiners. However, according to Cazes' own estimations based on his review of the financial records, the proper amount that should have been allocated to cash reserves as of January, 1987 was $ 38,000.
In addition, Cazes calculated a statutory six percent reserve requirement for the Credit Union in the amount of $ 71,469 as of June, 1987. Tr. 61-64.
12. Cazes testified that, based upon his review of the Credit Union's financial records, the Credit Union did not have enough earnings to declare a dividend in June of 1987. However, because the financial statements misrepresented the Credit Union's fiscal position, it appeared that earnings were sufficient and the Board authorized dividends of $ 67,466, collectively. Tr. 66.
13. At trial, Mr. Clarence LaBarge, a forklift operator at the Mount Kisco Grand Union and a member of the Credit Union's supervisory committee during the relevant period, testified that under the Credit Union's charter, the committee was responsible for conducting an annual independent audit. LaBarge testified that an independent auditor was usually retained for these audits. Tr. 111-12.
14. LaBarge testified that the Board regularly examined the Credit Union's financial statements at meetings. Tr. 113. However, he was not aware of errors or misrepresentations in the statements until June, 1987, when Mr. Anthony Oliviera, an examiner for the NCUA, contacted the Board and advised it to liquidate some of its mutual fund accounts, particularly the E.F. Hutton Account, which had accrued large losses. These losses were not accurately depicted in the Credit Union's financial statements at that time. Tr. 66.
15. LaBarge also testified that, when confronted with the NCUA examiner's findings and recommendations in June, 1987, Kanaryk questioned the competence and ability of the examiners, drawing on his own eleven years of experience as a NCUA examiner. Tr. 117. According to LaBarge, Kanaryk maintained throughout this period that the NCUA was engaged in "scare tactics" and was being overly cautious.
16. Mr. Roland Trepasso, currently chief steward at the Mount Kisco Grand Union, was on the Credit Union supervisory committee and was a Board member during the relevant period. Trepasso testified that, approximately in August of 1987, a conflict arose between the NCUA examiners and Kanaryk concerning the Credit Union's investments in certain mutual fund accounts. This conflict concerned losses on investments in the Dean Witter, E.F. Hutton and W.J. Nolan Accounts. According to Trepasso, the NCUA strongly recommended liquidating at least some of these accounts, which had lost money in the souring market for mortgage-backed securities. Kanaryk, on the other hand, advised against liquidating any of the Credit Union's positions in these accounts. His position apparently was that, while these investments were currently losing money, this loss would only be realized if the Credit Union hastily sold off its investments in the then-deflated market. The Board initially followed Kanaryk's advice. Tr. 126-47.
17. Trepasso also testified that Kanaryk advised the Board to declare a dividend for the financial quarter ending in September, 1987, partially out of concern that failure to declare a dividend would cause a "run on the members" -- in other words, would frighten depositors into withdrawing funds on deposit with the Credit Union. Tr. 134.
18. Mr. William J. Brown, chief steward in the trucking department at the Mount Kisco Grand Union, was president of the Credit Union during the relevant period and is currently president. Tr. 149. Brown testified that sometime in September of 1987, the Board had a meeting at which they decided not to declare any dividend for the quarter ending September 31, 1987. Present at the meeting were representatives of Credit Union Management Service ("C.U.M.S.") and Kanaryk. Brown testified that Kanaryk advocated declaring a dividend and was unhappy with the decision not to do so. Tr. 154.
19. Brown testified that the Credit Union routinely limited withdrawals by members to operational accounts, rather than capital accounts. He also testified that Kanaryk had always written his own checks when withdrawing funds from his Credit Union account with no objection from the Board.
20. Brown testified extensively concerning Kanaryk's authorship of extraneous marks on Jt. Exhs. 96, 97, 98, which are copies of account statements from Dean Witter, W.J. Nolan and E.F. Hutton, respectively; Jt. Exh. 99, which is a marked up copy of the Credit Union's balance sheet dated August 31, 1977; and Jt. Exh. 100, which is a variety of worksheets on the value of the W.J. Nolan and E.F. Hutton accounts. Ostensibly, this testimony was elicited to suggest the state of Kanaryk's mind while he was preparing the inaccurate financial statements. Brown testified that he believed Kanaryk to be the author of the extraneous marks on Jt. Exhs. 96, 97, 98, 99; and to have authored at least a portion of Jt. Exh. 100. Tr. 173-80. On cross-examination, Kanaryk's counsel successfully demonstrated inconsistencies between exhibits known to be in Kanaryk's handwriting and those at issue. Tr. 185. Furthermore, plaintiff failed to establish or account for the whereabouts of the exhibits between the time of their alleged authorship and the trial date. During this period of time, approximately six years, the Credit Union's financial statements and worksheets were accessible to a succession of accounting firms, Credit Union members and NCUA examiners. This, coupled with Kanaryk's credible denial of authorship, prevents the court from concluding that Kanaryk actually authored the extraneous comments on the account statements and the other documents.
21. Mr. George Barker was secretary of the Credit Union in June of 1987. He testified that at a Board meeting on June 22, 1987, he sponsored a motion to pay dividends for the quarter ending June 31, 1987 on the basis of Kanaryk's assurances that the Credit Union was not losing money and could afford to pay out dividends at that time. Tr. 215. Barker also testified that the Board decided to follow Kanaryk's advice because he was their "leader." Tr. 217.
23. Kanaryk also testified that he understood the lesser of market value or cost rule as intended to guard against situations where the Credit Union does not have enough cash or liquidity to satisfy "shareholder demand" -- demands placed on Credit Union member deposit accounts. Kanaryk testified that he believed the Credit Union to be sufficiently protected during the relevant period because as much as a third of the Credit Union's $ 3,000,000 in assets were in the form of bank accounts -- money easily accessed to satisfy any sudden increase in withdrawal demand by the members. Tr. 247.
24. Kanaryk testified that, although the Credit Union Board appointed a credit committee and a delinquent loan committee to monitor loans made to members, these committees did not do their ...