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.
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. 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. 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.”
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.” 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.