• Recent Pro-Cooperative Decisions in Class Action Patronage Capital Cases
  • March 14, 2017 | Authors: Matthew J. Bowness; Thomas M. Byrne; Eleanor Keith Emanuel; Tracey K. Ledbetter; James A. Orr
  • Law Firm: Eversheds Sutherland (US) LLP - Atlanta Office
  • Cooperatives facing patronage capital lawsuits have recently enjoyed a series of favorable court opinions. Over the past few months, the Eleventh Circuit and state and federal courts in Florida have all dismissed claims for patronage capital refunds, while another action in Alabama was recently dismissed by plaintiffs.

    Eleventh Circuit Rules on Removal and Merits of Claims

    In a published opinion in Caver v. Central Alabama Electric Cooperative (Jan. 12, 2017), the Eleventh Circuit held that the federal government’s lending of capital to, and regulation of, the defendant electric cooperative’s operations brought the cooperative under the federal officer removal statute. The appellate court therefore concluded the case was properly brought before a federal court. It further held that distributions of excess revenues to the cooperative’s members by making credits to their capital accounts instead of cash payments satisfied Alabama law, and affirmed dismissal of the cooperative’s motion to dismiss for failure to state a claim.

    Central Alabama Electric Cooperative (CAEC) is a rural electric cooperative that receives substantial loans from the federal government through the United States Department of Agriculture Rural Utilities Service (RUS). The plaintiffs alleged that CAEC’s manner of distributing “excess revenues” to its members violated an Alabama statute governing electric cooperatives’ refunds of patronage capital. Plaintiffs filed suit on their own behalf and on behalf of a putative class.

    CAEC removed the case to federal court under the federal officer removal statute, 28 U.S.C. § 1442(a)(1). That statute allows for removal when a suit is brought against “any officer (or any person acting under that officer) of the United States ... for or relating to any act under color of such office.” Because CAEC was not itself a federal officer or agency, the court examined whether it had met a three-pronged test for application of the statute. CAEC was required to show: (1) that it acted under a federal officer; (2) that it performed the actions for which it was being sued under color of federal office; and (3) that it raised a colorable federal defense. After reviewing each prong, the court concluded that CAEC had properly removed the lawsuit.

    In addition to the removal ruling, the Eleventh Circuit went on to address the merits of CAEC’s motion to dismiss. The plaintiffs had contended that CAEC must annually distribute patronage refunds in the form of cash payments to its members because Ala. Code § 37-6-20 provides that excess revenues “shall be distributed by the cooperative to its members as, and in the manner, provided in the bylaws, either as patronage refunds ... or by way of general rate reductions, or by combination of such methods.” Plaintiffs argued that this language constituted a plain statutory requirement that excess revenues be distributed through refund rather than a credit to their capital accounts.

    The court, however, noted that the statute nowhere required either a cash or an annual payment; indeed, instead of defining the term “patronage refund,” the statute plainly stated that distributions were to be made in the manner provided in the bylaws. And CAEC’s bylaws provided for distribution of excess revenues through a system of credits to each member’s capital account. For further support, the Eleventh Circuit cited two Alabama appellate tax decisions that had thoroughly examined the use of capital account credits under section 37-6-20 and allowed them. The court therefore affirmed the district court’s grant of the CAEC’s motion to dismiss for failure to state a claim.

    Patronage Capital Claims in State Courts and District Courts

    Florida state and federal courts have also recently dismissed claims based on failure to distribute patronage capital as desired by plaintiffs.

    In Brunson v. Gulf Coast Electric Cooperative, Inc. (Oct. 10, 2016), a Florida circuit court rejected claims based on a cooperative’s failure to refund patronage capital in cash to its members. Under Section 425.21 of the Florida Statutes, certain excess revenues of a cooperative must be distributed by the cooperative to its members as patronage refunds. The bylaws of Gulf Coast Electric Cooperative (Gulf Coast) provided that all amounts in excess of operating costs and expenses were furnished by the cooperative’s patrons as capital and would be credited to a capital account for each patron. Upon dissolution or liquidation of the cooperative, outstanding capital credits would be retired. The plaintiff asserted that Gulf Coast had failed for decades to refund such excess revenues to the cooperative’s members. She therefore brought claims for breach of contract, unjust enrichment, violation of the state’s deceptive and unfair trade practices act, and declaratory and injunctive relief.

    The court dismissed the plaintiff’s claims for unjust enrichment and unfair trade practices with prejudice. As to the claim for unjust enrichment, the court found it to be undisputed that Gulf Coast’s bylaws were a written, express contract between the cooperative and its members. Because the validity of the contract was undisputed, the plaintiff could not bring a claim for unjust enrichment, even in the alternative. As to the deceptive and unfair trade practices act claims, the court found that they were flawed for three reasons. First, the state trade practices statute exempts conduct permitted or required by law, such as calculating and refunding to members excess revenues pursuant to Fla. Stat. § 425.21. Second, the court concluded that a cooperative’s distribution or allocation of excess revenues to its shareholders did not constitute “trade or commerce.” Finally, the court noted that the facts underlying the trade practices claim were the same as those underlying the breach of contract claim, and a plaintiff “cannot transform a mere breach of contract claim into a claim of unfair or deceptive conduct.”

    Following a hearing at which the court orally ruled on these claims, the plaintiff voluntarily dismissed her remaining claims for breach of contract and declaratory relief and filed a notice of appeal. Recently, however, the plaintiff voluntarily dismissed the entire action with prejudice.

    In another case, Simmons v. West Florida Electric Cooperative Association, Inc. (Mar. 7, 2017), the United States District Court for the Northern District of Florida also dismissed an action seeking refunds of patronage capital. In that case, the court had previously denied a motion to remand, finding that West Florida Electric Cooperative Association (WFECA) had properly removed the action under the federal officer removal statute. As in the case discussed above, plaintiffs alleged that the cooperative had failed to distribute excess revenues as required under Fla. Stat. § 425.21, because WFECA allocated accumulated earnings to each member’s capital account.

    The court noted that the case turned on “a single, straightforward question”: whether the facts alleged in the complaint, if true, would violate the patronage capital statute. It analyzed the text of the statute’s requirement to “distribute” excess revenues as a “refund” and acknowledged the Eleventh Circuit’s analysis in the Caver case, discussed above. But ultimately, the court noted that the members had voted to adopt a bylaw authorizing the allocation of patronage capital to members’ capital accounts. Because the statute only required distribution of excess revenues “unless otherwise determined by a vote of the members,” the vote to adopt the bylaws eliminated any requirement to make a cash distribution—even assuming a cash distribution was otherwise required under the statute. Further, plaintiffs did not allege that WFECA made any untrue or deceptive statements about the cooperative’s prices or patronage capital policy. The court therefore granted the cooperative’s motion to dismiss.

    Finally, in another patronage capital claim filed in Alabama state court, plaintiffs recently voluntarily dismissed their claims against Tombigbee Cooperative, Inc.