Corporate Separateness

By:  Michael Mulvey


One of the benefits of forming a CUSO is the limited liability protection offered to a CUSO’s investor(s). In order to maintain this protection, the CUSO and investing credit union(s) must maintain corporate separateness. This means the two entities’ operations are separate and distinct from each other. The reason this is important is because in the event of litigation, plaintiffs will attempt to break down the limited liability protection and hold the credit union liable for the actions of the CUSO. This is known as vicarious liability.

NCUA Rules and Regulations Part 712.4(a) requires that “A FICU and a CUSO must be operated in a manner that demonstrates to the public the separate corporate existence of the FICU and the CUSO.”  The Regulation lists six (6) business practices to maintain corporate separateness. Avoiding vicarious liability to the credit union is the goal and the six (6) business practices are but a means to accomplish that goal.

The following is a list of the six (6) listed business practices and how they apply to a credit union:

1.      Its respective business transactions, accounts, and records are not intermingled.

In a successful vicarious liability lawsuit, the parent company is not maintaining separate books and records from its subsidiary company. It is important to keep separate books and records for the CUSO. The CUSO should have its own operating account and accounting ledger. While in some cases a credit union may consolidate the CUSO onto its ledger, the CUSO should maintain separate accounting records.

2.     Each observes the formalities of its separate corporate procedures.

A CUSO is a separate business entity from the credit union. Like the credit union’s bylaws, the CUSO will have its own governing documents stating the CUSO’s governance structure and the rights of its investor(s). The CUSO’s Board should have regular meetings and keep the minutes of each meeting. All major decisions should be documented in the minutes or by resolution in accordance with the CUSO’s governing documents.

3.     Each is adequately financed as a separate unit in the light of normal obligations reasonably foreseeable in a business of its size and character.

The key here is the CUSO should be adequately capitalized and have the necessary insurance coverage for the type of business. To determine the necessary amount of capital required, I recommend clients prepare a business plan to determine how much capital is needed to operate a successful business. While there is no set threshold amount for adequate capitalization, generally courts look to see if there is sufficient capital to cover foreseeable operations and obligations.?

If the CUSO does not have sufficient capital to operate as an independent business, a court may decide the CUSO is a division of the credit union and allow for a plaintiff to bring a claim against the credit union.

4.    Each is held out to the public as a separate enterprise.

This is an important consideration in making sure no one is misled as to whether the person is dealing with the credit union or the CUSO.  To prevent any confusion between the credit union and the CUSO each entity should have separate phone numbers, email domains, company letterhead, business cards and operating accounts. If the credit union and the CUSO operate in the same building, the CUSO should have separate office space with appropriate signage in the building. Lastly if the credit union provides links to the CUSO’s services on its website there should be proper disclosures letting the person know they are dealing with the CUSO.

5.     The Credit Union does not dominate the CUSO to the extent that the CUSO is treated as a department of the Credit Union.

Every wholly owned CUSO I know has a board consisting of the staff and/or directors of the investing credit union, with an occasional outlier that has one or two people not affiliated with the credit union who also serve on the CUSO board. It would not make any business sense to have a subsidiary controlled by people other than individuals associated with the owners.  However, those boards should not be dominated by the directors of the investing credit union.  If the CUSO’s board is dominated by the credit union’s directors, it is evidence to suggest the CUSO and credit union are not separate and distinct entities.

6.     Unless the credit union has guaranteed a loan obtained by the CUSO, all borrowings by the CUSO indicate the credit union is not liable.

It is important for lenders to understand the credit union will not be held liable for the borrowings of the CUSO. This again reinforces the fact the CUSO is a separate and distinct entity that operates independently from its investing credit union(s).

If you have any questions or concerns about maintaining corporate separateness between your credit union and CUSOs feel free to reach out. I am happy to discuss this topic with you.