PITTSBURGH – A class action lawsuit filed against REA Energy Cooperative Inc. by current and former members seeking the retirement of $53 million in allocated patronage capital will remain in federal court after the U.S. District Court for the Western District of Pennsylvania dismissed a motion by the plaintiffs to send the matter back to state court.

 When it removed the case to the federal court in February under the federal officer removal statute, REA, based in Indiana, Pa., said it was allocating and maintaining its patronage capital in accordance with directions provided by the Rural Utilities Service (RUS).

The plaintiffs said the REA case should be remanded because the cooperative allegedly did not meet the requirements of the statute in removing the case. Under the statute, the defendant that elects to remove the case must prove that the lawsuit claims are based on conduct controlled by a federal office, that a valid federal defense is present and that there is a connection between the plaintiffs’ claims and the conduct overseen by a federal office.

The district court agreed with REA, stating that the cooperative’s “unusually close and detailed regulatory and contractual relationship” with RUS demonstrated that REA was indeed acting under the direction of RUS in connection with the patronage capital issue.

In addition, the court ruled that RUS restrictions prohibited REA from allocating the millions of dollars of patronage capital sought in the lawsuit.

Teresa Castanias, a certified public accountant with a tax consulting and compliance practice, said that electric co-ops are unique in nature compared to other kinds of co-ops.

“The electric co-ops can handle their equities a little bit different,” Castanias told the Pennsylvania Record.

Castanias said a co-op is a business owned by its members, who have the co-op’s products delivered to their homes. She said co-ops are typically found in rural areas or in areas that used to be rural but kept the co-op going when the population began to grow.

“A business is supposed to make money,” Castanias said. As a result, she said, co-ops are required to return money to their members on a patronage basis, based on usage of the co-op’s product.

However, if a co-op doesn’t have money equal to its profit, Castanias said, it will often distribute a written notice of allocation to account for some or all of the cash owed to members. She said the notice of allocation functions as an IOU, but a lot of electric co-ops may never actually intend to pay out the patronage capital. 

Since electric co-ops operate under a different code section than other types of co-ops, they receive tax deductions whether their distributions to members are made in cash or not.

As a result, Castanias said, members are often left wondering what happened to their money.

“There are a lot of these lawsuits (seeking retirement of patronage capital),” Castanias said.

However, Castanias said co-ops, especially electric ones that have to maintain facilities, have a lot of costs, and the cash for distributions is not always readily available.

“They have needs that are not necessarily easily discerned (by the average person),” Castanias said.

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