RICHARDSON, Texas — In a case that appears to center around anoffer from a credit union that wanted to buy a stake in a highlysuccessful commercial lending CUSO, discussions of a bankconversion and unpaid compensation packages, three formerexecutives with Texans Commercial Capital, LLC have filed a lawsuitagainst the CUSO, Texans Credit Union and its President/CEO DavidAddison.

In a lawsuit filed on Dec. 29, 2006, former Texans Commercialpresident/CEO John C. O'Shea, former senior vice president/CFO PaulJ. Valdez, and former executive vice president/COO Joel B. Fox,have claims against $1.9 billion Texans CU and the CUSO fordefamation, fraud and breach of contract. According to the petitionobtained by Credit Union Times, the three executives were fired inAugust 2006 for what Addison describes as a violation of “honesty,integrity, loyalty and common sense,” the petition reads.

Going back, O'Shea was hired in 2003 to start Texans CU's firstcommercial lending department from the ground up. O'Shea helpedgrow the department from zero to $745 million in loan commitmentsand $580 million in loans outstanding, while also managing thecredit union's retail and mortgage lending operations, according tothe petition. In approximately late 2004, because Texans was aboutto hit its limitation on the percentage of assets committed tocommercial loans, the credit union obtained a waiver to increaseits allowable percentage of commercial loans from 12.25% to 20%through the removal of loan participations of nonmember loans intoa separate category.

According to the petition, in order to fit within the commerciallending limitation, Texans decided to establish a participationnetwork through which it could originate loans and then sell themto other credit unions. That marked the launch of Texans CommercialCapital in May 2004. O'Shea was named president/CEO of the CUSO andremained executive vice president of Texans CU. Fox and Valdez,serving as chief credit officer and controller at the credit unionrespectively, were both promoted to their previously namedpositions at the CUSO.

Between April 2003 and August 2006, Texans Capital's success wassignificant. Credit Union Times profiled the CUSO in its February2, 2005 issue. In 2005, one half of the $12.7 million profit earnedby Texans CU came directly from the CUSO, according to thepetition. Another 40% came from commercial loans purchased by thecredit union from Texans Capital.

The conflict seemed to arise when on “several occasions,”Addison told O'Shea that he expected O'Shea to inform him if he wasever contacted by a competitor about leaving Texans Capital,according to the suit. Secondly, if O'Shea was ever offered anopportunity to leave, “Addison wanted the chance to make the lastbid.”

While the temporary participation network was a temporary fix toavoiding the cap of commercial loans for Texans CU, the management,board of directors of both Texans CU and Texans Capital “knew thatthe remedy was temporary and that a more long term solution neededto be found.” One option discussed was selling the CUSO to a largercredit union with greater assets and a higher commercial lendingcap. In 2005, the credit union's board approved the sale of up to20% of Texans Capital with 5% to a “much larger credit union in NewYork.”

Texans CU apparently considered converting the financialinstitution to a mutual savings bank or some other form of bankinginstitution in discussions that begin as early as 2005, thepetition reads. Addison, O'Shea and two other executives were in onthe discussions.

In an Aug. 31 e-mailed statement to Credit Union Times, MatthewDavis, executive vice president at Texans CU, wrote, “Texans CreditUnion can not comment on pending litigation.” Davis did respond toa question about the bank conversion claim.

“Regarding the industry sensitive topic of conversion, Texanshas no plans in the foreseeable future to convert to a bank,” Daviswrote.

Stuart B. Johnston, the attorney representing Texans CU, theCUSO and Addison, said, he too, “can't comment on pendinglegislation” and “the defendants have denied the allegations.”

Hal Gillespie, president of Gillespie, Rozen, Watsky, &Jones, P.C., the Dallas law firm representing the three formerexecutives, told Credit Union Times the defamation cause of actionis “based on what was said about the guys after they were cutlose.”

“The breach of contract [says] you should still be paid forservices rendered,” Gillespie said. “This is an important matterinvolving serious allegations.”

Meanwhile, as discussions on the possibility of changing TexansCommercial's existing business model continued and the possibilityof the credit union converting to a bank, O'Shea also begandiscussions about “golden handcuffs” for himself and his managementteam. According to the suit, in November 2005, Addison “committedto O'Shea that he and his management team would receive goldenhandcuffs.” At a March 2006 strategic planning meeting, Addison,O'Shea, Fox, Valdez along with six other executives met to reviewfunding options, corporate culture and a potential conversion to abank charter. The “number one strategic threat” to Texans Capital'ssuccess was short and long term funding, the petition reads.

During another strategic planning retreat held in June 2006 inSan Francisco, the “primary focus” was how to convert Texans from acredit union to a bank. According to the petition, an investmentbanker from Sandler O'Neil was in attendance expressly to “discussbank conversion economics and the probable credit unionobsolescence regarding traditional credit union charters.” Thepossibility of selling Texans Capital was “specificallydiscussed.”

One month later, in July 2006, O'Shea was approached byrepresentatives of Dallas-based NexBank and discussions began onpossibly selling Texans Capital to the financial institution.Originally founded in 1922, the bank was purchased in 2004 by agroup of Dallas-based investors. Calls to NexBank were not returnedby press time. O'Shea spoke to Addison and another credit unionexecutive about his conversation with NexBank. According to thesuit, Addison said he would sell Texans Capital for $75 million,“which would have represented an absurd 12 times multiple.”

In addition to a possible sale, O'Shea said NexBank indicatedpossibly speaking further about opportunities with the bank for theexecutive, but no positions were offered or accepted, the petitionreads. O'Shea met with Addison on July 31, 2006 and told him thathe had been approached and “made clear that the talks were verypreliminary, no offer had been made, and none was imminent.” Duringthis same conversation, O'Shea also asked about the status of thecharter conversion. Addison said it was “at least one year now morethan likely two years away.”

“Texans had money to fund commercial loans for the next twomonths and that, after that, he didn't know,” according to thepetition. In an Aug. 31 Dallas Business Journal article, JayChampion, president of Texans Capital, said, through Texans' publicrelations director Shalissa Clary, that the credit union cannotcomment on pending litigation. “But Champion also offeredassurances about Texans' commercial lending abilities throughClary,” the article read. “Texans Credit Union and TexansCommercial Capital do have ample liquidity to meet currentcommitments and future funding needs,” [Clary] said. “She addedthat the credit union continues to take applications for commercialbusiness loans,” according to the article.

According to the petition, Addison said he demanded four thingsfrom his employees: “honesty, integrity, loyalty, and common sense”and that the three former staffers “violated those expectations.”At a later meeting with a corporate credit union, Addisonreportedly told employees that O'Shea, Valdez and Fox were nolonger employed because they had presented him with “an ultimatumfor an amount of money to be paid to them or they would leave.”

At the time of his termination, O'Shea said his compensationpackage included a base salary plus a bonus of up to 4% of TexansCapital's earnings plus accrual add-backs, the suit indicates.Valdez' and Fox's compensation packages included a base salary plusquarterly bonuses of up to 1% of the CUSO's earnings plus accrualadd-backs, plus an annual bonus of up to 18% of their base salariesif Texans Capital met its projected net income.

O'Shea was owed a bonus of no less than $150,000 and Valdez andFox no less than $15,000 each. Despite demand having been for thepayments, the amounts remain unpaid, according to the suit.

Gillespie, the attorney with the firm representing the threeformer executives, said they are in the process of takingdispositions from all parties involved and that the earliestpossible trial date would be in March 2008.

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