Courts in South Carolina and South Dakota have recently recognized the validity of term provisions in wholesale power contracts between generation and transmission cooperatives and their member distribution cooperatives.
In late 2020, two distribution cooperatives—Dakota Energy Cooperative, Inc. and Marlboro Electric Cooperative, Inc.—each sued their generation and transmission cooperatives (G&Ts)—East River Electric Power Cooperative, Inc. and Central Electric Power Cooperative, Inc., respectively—seeking to terminate and buy out of their wholesale power contracts (WPCs) prior to the end of the term. East River and Central removed the lawsuits to federal court pursuant to the federal officer removal statute, 28 U.S.C. § 1442(a)(1). (Following removal, Basin Electric Power Cooperative was permitted to intervene in the Dakota lawsuit. Basin is a “super G&T” that sells power to East River and other member G&Ts.)
Dakota’s WPC with East River had been amended in 2015 to extend the term of the agreement to December 31, 2075. Marlboro’s WPC with Central provides that the agreement shall not be terminated before December 31, 2058, “except by mutual agreement of the parties.” Nevertheless, Dakota and Marlboro each contended that the respective G&Ts’ bylaws allowed for early withdrawal. The bylaws of both East River and Central provide that a member “may withdraw from membership upon compliance with such equitable terms and conditions as the [G&T’s board] may prescribe, provided, however, that no member shall be permitted to withdraw until [the member] has met all contractual obligations to the [G&T].”
Central, East River, and Basin all moved for summary judgment as to the member distribution cooperatives’ right to withdraw and terminate their WPCs prior to the end of the stated term.
The South Carolina decision
Marlboro’s complaint asserted three claims: a request for a declaration that Central materially breached the WPC and bylaws by refusing to provide equitable terms and conditions for its withdrawal from membership, and so it was excused from further performance under those contracts; a request for a declaration that the bylaws required Central to provide it with equitable terms and conditions for withdrawal, and that it had a legal right to withdraw from Central pursuant to the South Carolina Nonprofit Corporation Act; and a breach of contract claim.
The US District Court for the District of South Carolina issued its order on Central’s motion for summary judgment on March 28, 2022. Marlboro Elec. Coop., Inc. v. Cent. Elect. Power Coop., Inc., No. 4:20-cv-04386-SAL (D.S.C. Mar. 28, 2022). The court found the relevant facts to be undisputed and the key documents to be the WPC and Central’s bylaws. The court’s analysis “starts and ends” with the question of whether these contracts were ambiguous.
The court first found that the WPC’s termination provision, which stated that the contract “shall continue in effect through December 31, 2058, and shall not be terminated before December 31, 2058, except by mutual agreement of the Parties,” was unambiguous. The contract could not be terminated before December 31, 2058 unless the parties mutually agreed to early termination—which they did not. The court rejected arguments that provisions in the contract governing inapplicable factual situations, or the implied duty of good faith and fair dealing, created ambiguity.
The court then turned to the bylaws, which it likewise found to be unambiguous. It rejected Marlboro’s argument that the distribution cooperative could meet its contractual obligations to the G&T through an equitable termination payment. Rather, one of the contractual obligations that Marlboro was required to meet before it could withdraw was to purchase electricity from Central through December 31, 2058.
The court concluded that “nothing in the unambiguous terms of the WPC or the Bylaws requires Central to provide equitable terms and conditions for Marlboro’s withdrawal from membership in the cooperative,” so there was no material breach excusing Marlboro from performance; that the South Carolina Nonprofit Corporation Act does not apply to Central; and that the breach of contract claim failed.
The South Dakota decision
Dakota’s complaint asserted claims for anticipatory breach of contract (based on East River’s refusal to provide equitable terms for withdrawal) and for declaratory judgment as to whether the terms of the East River’s bylaws permitted it to withdraw from East River on equitable terms and conditions. East River and Basin each asserted counterclaims for declaratory judgment. East River sought a declaration that the WPC does not allow for early termination and that its bylaws do not permit Dakota to withdraw before fulfilling its obligations under the WPC. Basin sought a declaration that, among other things, the WPC between East River and Dakota does not allow for Dakota to terminate or withdraw prior to December 31, 2075, and Basin has no obligation to provide a buy-out number to East River to provide to Dakota to allow an early termination of Dakota’s WPC with East River.
The US District Court for the District of South Dakota issued its order on East River’s and Basin’s motions for summary judgment on April 11, 2022. Dakota Energy Coop., Inc. v. E. River Elec. Power Coop., Inc., et al., No. 4:20-cv-04192-LLP (D.S.D. Apr. 11, 2022).
The court first addressed whether there was any ambiguity with respect to whether Dakota is entitled to early termination of the WPC. It carefully analyzed various provisions of the WPC and the bylaws, and concluded that Dakota’s interpretation of these “well-drafted” agreements was “untenable.” It declined to “rewrite the term provision in the WPC,” which stated in plain and understandable language that the WPC would remain in effect until December 31, 2075. It also found that there was no separate provision in the bylaws providing for the early withdrawal demanded by Dakota.
The court then turned to Dakota’s argument that the Uniform Commercial Code applies to the WPC, which would permit consideration of certain extrinsic evidence to explain or supplement a written contract. This was a novel question under South Dakota law, and the court acknowledged a split of authority in other jurisdictions. The court analyzed analogous case law from South Dakota and other jurisdictions, and concluded that “a contract for the provision of wholesale high voltage electricity between suppliers of electric energy is not subject to the UCC under South Dakota law.” The court then turned to the extrinsic evidence offered by Dakota. Although it found that the UCC did not apply to the WPC or the bylaws, it found that there was no ambiguity in the WPC or the bylaws that would require a court to look at trade usage to interpret the agreements.
The court concluded that “there is no ambiguity” in the WPC or the bylaws. “The WPC obligates Dakota Energy to purchase all its power from East River through December 31, 2075. The WPC and the Bylaws do not allow Dakota Energy to buy out of and terminate the WPC prior to the end of that term.” It therefore granted summary judgment to East River on its claims for declaratory judgment, and to Basin on its claims for declaratory judgment.
Central is represented by James Orr and Tracey Ledbetter of Eversheds Sutherland and Robert Stepp, Frank Ellerbe, and Kevin Bell of Robinson Gray. East River is represented by James Orr, Stacey Mohr, and Tracey Ledbetter of Eversheds Sutherland and Michael Luce and Dana Van Beek Palmer of Lynn, Jackson, Shultz & Lebrun.
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