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
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
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
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
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.