• Patronage Capital Case Successfully Removed to Federal Court
  • August 3, 2016 | Authors: Matthew J. Bowness; Tracey K. Ledbetter; James A. Orr
  • Law Firm: Eversheds Sutherland (US) LLP - Atlanta Office
  • In December 2015, two plaintiffs filed a class action complaint against Pennsylvania’s REA Energy Cooperative, Inc. The complaint, which was filed on behalf of current and former cooperative members, asserted that REA must retire approximately $53 million in allocated patronage capital.

    In February 2016, REA removed the case to the U.S. District Court for the Western District of Pennsylvania pursuant to the “federal officer removal” statute, 28 U.S.C. § 1442(a), arguing that it was acting under the direction of RUS—the Rural Utilities Service—with respect to its allocation and maintenance of patronage capital. The plaintiffs promptly filed a motion to remand the case back to state court, arguing that the requirements of the federal officer removal statute had not been satisfied. The Western District disagreed, however, and recently denied the plaintiffs’ motion.

    The federal officer removal statute requires the removing defendant to establish that: (1) the plaintiff’s claims are based upon the defendant’s conduct “acting under” a federal office; (2) it raises a colorable federal defense; and (3) there is a causal nexus between the claims and the conduct performed under color of a federal office.

    The court found that REA had satisfied each of these elements. With respect to the “acting under” requirement, the court found that “[i]n light of the unusually close and detailed regulatory and contractual relationship between Defendant and RUS,” REA was “acting under” RUS with respect to the patronage capital determinations at issue. In reaching this conclusion, the court relied on two Alabama federal cases addressing federal officer removal on similar facts: Caver v. Central Alabama Electric Cooperative, No. 15-CV-129, 2015 U.S. Dist. LEXIS 104899, at *5 (S.D. Ala. Aug. 11, 2015) and Davis v. Central Alabama Electric Cooperative, No. 15-CV-131, 2015 U.S. Dist. LEXIS 105056, at *11 (S.D. Ala. Aug. 11, 2015).

    With respect to the “colorable federal defense” requirement, the court found that REA’s federal preemption defense was plausible, and that REA had shown that the acts forming the basis of plaintiffs’ claims were performed pursuant to RUS regulations. Accordingly, the court held that REA had satisfied the “colorable federal defense” requirement.

    Finally, the court found that the “causal nexus” requirement had been satisfied because RUS restrictions precluded REA from distributing the patronage capital that plaintiffs were seeking in their complaint. For these reasons, the court denied plaintiffs’ motion to remand the case to state court. As a result, the case will be litigated in the Western District of Pennsylvania.

    Given these recent decisions in Pennsylvania and Alabama, cooperatives faced with state court actions seeking patronage capital distributions may want to consider whether removal is appropriate for their cases.

    REA is represented by James Orr and Tracey Ledbetter of Sutherland and Jesse Daniel of The Daniel Law Group PLLC.