Patronage Capital Class Action Removable; Dismissal Affirmed

An electric cooperative organized under state law is nonetheless entitled to remove a putative class action to federal court under the “federal officer” removal statute, according to the Eleventh Circuit in Caver v. Central Alabama Electric Cooperative, 845 F.3d 1135 (11th Cir. 2017), which also affirmed dismissal of a complaint seeking immediate return of patronage capital.  Specifically, the court held that the federal government’s lending of capital and regulation of the defendant electric cooperative’s operations brought the defendant under the federal officer removal statute and that distributions of excess revenues to its members by making credits to their capital accounts instead of cash payments satisfied Alabama law.  Defendant CAEC is a rural electric cooperative that receives substantial loans from the federal government through the United States Department of Agricultural Rural Utilities Services (“RUS”), which limited CAEC’s discretion in making distributions to its members.  The plaintiff, on behalf of itself and a putative class, alleged that CAEC’s practice violated an Alabama statute governing electric cooperatives’ refunds of patronage capital to their members.

CAEC removed the case to federal court under the federal officer removal statute, 28 U.S.C. § 1442(a)(1), which 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 the defendant electric cooperative was not itself a federal officer or agency, the court examined whether it had met a three-pronged test for application of the statute.  The defendant 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.

In assessing the first prong, the court explained that merely complying with federal law or being regulated by the federal government was insufficient to bring a private entity under the federal officer removal statute. An electric cooperative, however, is sufficiently under the control of a federal agency because Congress and the president designed a system to accomplish the goal of bringing electricity to rural areas by using low-interest loans to provide funding for rural electricity through electric cooperatives such as the defendant.  In other words, CAEC assisted RUS by performing a job that the government itself would otherwise have had to perform.

As to the second prong, the court looked to the plaintiff’s challenge that CAEC did not make cash distributions of patronage capital and concluded that these acts occurred because of CAEC’s performance of its duties and its loan agreement with RUS. CAEC claimed that the accumulation of equity from patronage capital contributions directly resulted from its compliance with express RUS loan requirements.

And in considering the third prong, the court examined CAEC’s stated defense of conflict preemption, in which it claimed to perform the acts forming the basis of the lawsuit in order to comply with federal regulations and the RUS loan agreement. While the Alabama statute requires that equity held in capital accounts be paid out in cash payments annually to an electric cooperative’s members, the federal regulation and loan agreement provisions do not allow distribution of excess revenues if doing so would result in remaining equity being less than 30% of CAEC’s remaining assets.  Because CAEC claimed that such a financial barrier existed under federal law, the court concluded that its preemption defense was plausible, satisfying the lenient colorable federal defense requirement for removal.  With all three prongs satisfied, the court concluded that removal under § 1442(a)(1) was proper and affirmed the denial of the plaintiff’s remand motion.

The court went on to address the merits of CAEC’s motion to dismiss. The plaintiff argued that CAEC must annually distribute patronage refunds in the form of annual 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.”  In response to the plaintiff’s argument that this language constituted a plain statutory mandate that excess revenues be distributed through refund rather than crediting, the court noted that nowhere does the section require either a cash or an annual payment.  Instead of defining the term “patronage refund,” the statute plainly states that the manner of distribution shall be done in the manner provided by the bylaws.  CAEC’s bylaws provide for distributions of excess revenues as credits to each patron’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 CAEC’s motion to dismiss for failure to state a claim.  The decision is likely to have a significant impact on patronage capital class actions pending in courts across the nation.

Posted by Keith Emanuel.

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