Articles Posted in Electric Cooperative Law

On February 8, 2021, the Fifth Circuit Court of Appeals affirmed the Southern District of Mississippi’s dismissal of a plaintiffs’ complaint for failure to state a claim. Harper v. So. Pine Electric Cooperative, 987 F.3d 417 (5th Cir. 2021). The complaint was brought by a member-ratepayer of the Cooperative alleging that Mississippi law requires electric cooperatives like Southern Pine to distribute expenses over and above what is needed for operating expenses, payments of principal and interest, improvements, new construction, etc., back to its members. The members claimed that Southern Pine should be required to distribute all funds over an asset-to-equity ratio of 30%. For Southern Pine, it would have required them to distribute $112.5 million of a retained $248 million in accumulated income in 2016. The Southern District of Mississippi held that “the modern version of the statute, § 77-5-235(5) applied retroactively, and, in any event, plaintiffs failed to state a claim under either version.”

The Fifth Circuit found both of the plaintiffs’ arguments lacking regarding which of two Mississippi versions of a statute applied. First, the plaintiffs could not “point to any case indicating that the Stone exception applies only in the limited circumstances for which they advocate.” The court surmised that if they accepted the plaintiffs’ contentions, both the Supreme Court of Mississippi and courts within the circuit have applied the Stone exception erroneously. Instead, the court used the Supreme Court of Mississippi’s characterization: “[E]very right or remedy created solely by the repealed or modified statute disappears or falls with the repealed or modified statute . . . save that no such repeal or modification shall be permitted to impair the obligation of a contract or to abrogate a vested right.” With no contract at issue, the court then turned to whether a vested right had been abrogated.

In Mississippi, a vested right is one that must have “become a completed, consummated right for present or future enjoyment; not contingent; unconditional; absolute.” Here, the court looked at the previous statute to determine whether it conferred a vested right to the plaintiffs or not. Importantly, the court found that the relevant question is not whether the board must return excess revenues, but “[w]ho gets to determine when the revenues become ‘not needed’ for the defined purposes such that they must ‘be returned to the members?’” Unambiguously, the statute leaves that discretion to “the board” as it “may from time to time prescribe.” Only when the board makes that determination does the statute require the funds be returned to the members, which makes the right contingent to the members and not vested.

Members of Delta Electric Power Association (“Delta”) filed a lawsuit alleging Delta was retaining excess revenues that it did not need to fund operations. Delta filed a motion to compel arbitration pursuant to an arbitration clause included in its bylaws. The trial court denied Delta’s motion to compel and held the arbitration provision was unenforceable for the following reasons:

• Plaintiffs did not agree to arbitrate the dispute;

• Bylaws contained two separate arbitration provisions: mandatory and nonmandatory;

The United States Court of Appeals for the Fifth Circuit recently allowed a “patronage capital” lawsuit to continue in federal court after deciding federal loan conditions and requirements may preempt state laws.[1]

One of the agencies within the United States Department of Agriculture is the Rural Utilities Service (RUS). Among its other responsibilities, a primary role of the RUS is to provide loans to electric power cooperatives needing financial assistance.[2]  Like all loans, RUS’s loans contain significant restrictions and approval requirements that bind the actions of electric cooperatives. One such restriction controls the disbursement of “patronage capital,” or excess revenue not used by the electric cooperatives that is distributed to its members.[3]  The loans require electric cooperatives to obtain written approval from the agency before distributing patronage capital; however, the loans grant automatic approval of distribution if “[a]fter giving effect to the Distribution, the Equity of the Borrower shall be greater than or equal to 30% of its Total Assets.”[4]

The present case arose when members of three rural power cooperatives in Mississippi alleged the cooperatives violated state law in refusing to refund excess patronage capital to their members. The members cited to relevant Mississippi law, which requires cooperatives to return excess revenues to its members, beyond what is needed for “operating and maintenance expenses and to the payment of such principal and interest and . . . to such reserves for improvement, new construction, depreciation and contingencies as the board may . . . prescribe.”[5]  Once filed, the cooperatives removed the cases to federal court, asserting federal officer removal jurisdiction under 28 U.S.C. § 1442. After the district court remanded the cases back to state court, the cooperatives appealed to the United States Court of Appeals for the Fifth Circuit, who consolidated the three cases.

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