The federal courts of appeals have generally recognized that electric cooperatives can retire patronage capital to their members through means other than annual cash payments. For example, the US Court of Appeals for the Third Circuit recently affirmed the dismissal of a putative class action against an electric cooperative in Pennsylvania. But recent state court decisions have provided mixed results for cooperatives facing patronage capital litigation.

Third Circuit

In an opinion issued earlier this week, the Third Circuit affirmed two orders from the Western District of Pennsylvania, one of which found that jurisdiction was appropriate in the federal court, and the other of which dismissed patronage capital claims against the cooperative. Cessna v. REA Electric Cooperative, No. 18-1397 (3d Cir. Oct. 15, 2018).

Plaintiffs brought a putative class action against REA Electric Cooperative in state court in Pennsylvania, and REA removed the case to federal court under the federal officer removal statute. The Third Circuit found that the district court properly denied plaintiffs’ motion to remand the case back to state court. It held that an electric cooperative, like REA, was created with federal funding, is heavily regulated by federal law, is circumscribed in its permissible activities by the terms of its loan agreement with the federal government, and is an instrumentality of the United States, and therefore “acted under federal office” as required by the federal officer removal statute. The court also held that plaintiffs’ claims related to an act of the cooperative under color of federal office and that the cooperative had stated a colorable federal defense.

On the merits, the parties agreed that the cooperative’s bylaws established a contract. The Third Circuit held that REA had not breached the bylaws contract with its members because the cooperative acted in accordance with its bylaws. The bylaws stated that under certain circumstances, patronage capital “may be returned in full or in part.” The court held, “Because this provision is plainly permissive, there is no claim for breach of contract.” The court also stated in a footnote that the district court correctly analyzed plaintiffs’ claim for breach under the state cooperative statute.

Montana

Flathead Electric Cooperative has obtained a series of favorable rulings over retirement of patronage capital. Wolfe v. Flathead Elec. Coop., Inc., No. DV-16-755(A) (Mont. Dist. Ct. Dec. 21, 2017). Former customers filed a putative class action in which they sought to recover patronage capital. They asserted that the cooperative’s practice of allocating capital credits to a member’s capital account, but not retiring patronage capital each year, violated the state’s Rural Electric and Telephone Cooperative Act. That statute provides that “[r]evenue of a cooperative for any fiscal year must, unless otherwise determined by a vote of the members, be distributed by the cooperative to its members as patronage refunds prorated in accordance with the patronage of the cooperative by the respective members paid for during the fiscal year” when the revenue of the cooperative is greater than necessary to cover certain expenses. Mont. Code Ann. § 35-18-316.

Flathead moved for summary judgment, arguing that its practice and its bylaws comply with state law, and the court agreed. Relying in part on the federal court’s opinion in Simmons v. West Florida Electric Cooperative Association, the court analyzed the plain meaning of the statute. First, it found that the term “distribute” as used in the patronage capital statute could refer to allocation to a capital account, and that the term “patronage refund,” as distinct from the word “refund” alone, was a term of art that included capital allocations. Second, it held that the caveat “unless otherwise determined by a vote of the members” included a vote to adopt bylaws establishing a process of allocating patronage refunds to a capital account. Based on these holdings, it concluded that Flathead’s capital credit retention policy followed the state statute.

In separate orders, the court also ruled that the cooperative did not owe a fiduciary duty to plaintiffs, as it had not created a special relationship by advising any member of his or her rights. Since Flathead’s policy on patronage capital did not violate state law, and there was no fiduciary relationship with plaintiffs, the court held that the statute of limitations was not tolled and plaintiffs’ claims were untimely. And because the statute of limitations had run, plaintiffs could not demonstrate that their claims were typical of those of the class, and the court therefore also denied class certification.

South Carolina

Black River Electric Cooperative received a less-favorable ruling on a motion to dismiss a similar case. In Council v. Black River Electric Cooperative, Inc., No. 2016-CP-43-01683 (Ct. C.P. Sumter Co. Dec. 7, 2017), the court denied Black River’s motion to dismiss an action seeking recovery of patronage capital. In that case, a former customer claimed that the cooperative should have, but did not, return patronage capital. The relevant statute provided that certain excess revenues of the cooperative “[s]hall unless otherwise determined by a vote of the members be distributed by the cooperative to its members as patronage refunds prorated in accordance with the patronage of the cooperative by the respective members paid for during such fiscal year.” S.C. Code Ann. § 33-49-460 (2010). 

The trial court first interpreted the word “refund.” Under the guidance of prior state law precedent, it concluded that to “refund” means to pay back or pay out, and does not include a credit to an account that will be paid out in the future. It distinguished the South Carolina statute from the Alabama statute at issue in Caver v. Central Alabama Electric Cooperative and did not consider whether a “patronage refund” might differ from a “refund” by itself. The court then concluded that a single membership vote on the bylaws could not establish a different method of refunding patronage capital once and for all. Rather, it found that the statute and a drafter’s annotation to the statute required that excess patronage capital be returned to the members annually, unless the membership voted specifically for a different disposition of patronage capital during that fiscal year. It also found that the bylaws could not delegate this decision to the cooperative’s board. The court therefore denied Black River’s motion to dismiss. The cooperative has since moved for summary judgment on other grounds.

The Black River case was based on a prior version of South Carolina’s patronage capital statute. South Carolina amended its patronage capital statute in 2011. The statute now specifically provides that patronage capital will be allocated to members’ capital accounts each year; the board can then use its business judgment to determine, in its discretion, when patronage capital will be paid out to members. S.C. Code Ann. § 33-49-460 (2018). Going forward, cases in South Carolina will probably be governed by the new statute.

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