- Patronage Capital Case Dismissed
- March 8, 2018 | Authors: James A. Orr; Tracey K. Ledbetter
- Law Firm: Eversheds Sutherland (US) LLP - Atlanta Office
Pennsylvania’s REA Energy Cooperative, Inc. obtained dismissal of a putative class action lawsuit last year, a decision that was recently confirmed by the US District Court for the Western District of Pennsylvania. The plaintiffs sought to bring a suit on behalf of current and former cooperative members, alleging that REA must retire approximately $53 million in allocated patronage capital. The plaintiffs asserted claims for unfair trade practices, breach of contract and breach of fiduciary duty, among other things. The court dismissed all of the claims.
The court first found that the plaintiffs’ claims were not preempted by federal law under the Supremacy Clause. It determined that even if federal and state law conflicted, the effect would be to limit rather than eliminate the plaintiffs’ claims.
The court then turned to the plaintiffs’ unfair trade practices claim, and found that the plaintiffs had failed to state a claim for violation of the statute. The Pennsylvania Unfair Trade Practices and Consumer Protection Law prohibits unfair or deceptive acts or practices in the conduct of any trade or commerce. It provides a cause of action for violation of a written guaranty or warranty or other fraudulent or deceptive conduct. The court determined that REA’s bylaws did not contain any written guaranty or warranty regarding patronage capital that had been violated. Plaintiffs also claimed that a customer newsletter contained a misrepresentation regarding patronage capital refunds. The newsletter stated, “When the cooperative is strong enough financially and the member equity levels are high enough, the board directs staff to refund some portion of past years’ capital credits.” But the court found that plaintiffs failed to allege they justifiably relied on this statement in becoming members of REA or in taking other detrimental activity. The court therefore dismissed the unfair trade practices claim.
The court also dismissed the plaintiffs’ claim for breach of contract and a related claim for breach of the covenant of good faith and fair dealing. It analyzed 15 Pa. Stat. § 7330(c), which the plaintiffs claimed obligated REA to return patronage capital to its members. The court concluded otherwise. It stated, “Although § 7330(c) requires that excess revenues be returned from time to time, the cooperative’s board gets to decide what form those returns take. . . . REA’s board has determined that excess revenues are to be refunded as capital-account credits,” which was permissible under the statute. (In addition, pursuant to REA’s bylaws, the plaintiffs and other members of the cooperative had agreed that capital credits were deemed to be funds that had been returned to them and then paid back to REA.) The court also rejected the plaintiffs’ attempt to read into the contract terms that would constrain the REA board’s discretion. Having found that REA’s bylaws constituted a valid contract, the court also dismissed a claim for unjust enrichment.
The plaintiffs also brought claims for breach of fiduciary duty and declaratory and injunctive relief. The court dismissed the fiduciary duty claim on state-law grounds, finding that the fiduciary duty claim was predicated on contractual duties, and that the claim was therefore barred by Pennsylvania’s “gist of the action doctrine.” The claims for declaratory and injunctive relief were likewise derivative of causes of action that had been dismissed for failure to state a claim and were also dismissed.
Although the court found that amending most of the claims would be futile, it did grant leave to amend the unfair trade practices and breach of contract claims on limited grounds. Plaintiffs moved to reconsider the order of dismissal, but the court recently denied the motion for reconsideration. Plaintiffs have filed a notice of appeal to the Third Circuit Court of Appeals.REA is represented by James Orr and Tracey Ledbetter of Eversheds Sutherland and Jesse Daniel of The Daniel Law Group PLLC.