Cessna v. Rea Energy Coop., Inc.

• Citation: 258 F.Supp.3d 566
• Decision Date: 27 June 2017
• Docket Number: Case No. 3:16-cv-42.
• Parties: Leonard CESSNA, on behalf of himself and all others similarly situated, and George Work, on behalf of himself and all others similarly situated, Plaintiffs, v. REA ENERGY COOPERATIVE, INC., Defendant.
• Court: U.S. District Court — Western District of Pennsylvania

258 F.Supp.3d 566

Leonard CESSNA, on behalf of himself and all others similarly situated, and George Work, on behalf of himself and all others similarly situated, Plaintiffs,

v.REA ENERGY COOPERATIVE, INC., Defendant.

Case No. 3:16-cv-42.

United States District Court, W.D. Pennsylvania.

Filed June 27, 2017

Troy M. Frederick, Marcus & Mack, P.C., Indiana, PA, for Plaintiffs.

James A. Orr, Tracey K. Ledbetter, Eversheds Sutherland (US) LLP, Atlanta, GA, Jesse D. Daniel, The Daniel Law Group PLLC, Indiana, PA, for Defendant.

MEMORANDUM OPINION

KIM R. GIBSON, UNITED STATES DISTRICT JUDGE

On December 31, 2015, Leonard Cessna and George Work filed this case in the Court of Common Pleas of Blair County against REA Energy Cooperative, Inc. REA is an electric cooperative of which Cessna and Work ("Plaintiffs") are current and former members, respectively—meaning REA is and was their electricity supplier. Plaintiffs seek to represent a class of REA members. They allege that REA is improperly withholding revenues in excess of its operating costs and that REA is legally obligated to disgorge these excess revenues to its members. REA removed the case to this Court on February 11, 2016.

Pending before the Court is REA's motion to dismiss (ECF No. 10) and Plaintiffs' motion to strike REA's motion to dismiss (ECF No. 35). For the reasons that follow, REA's motion to dismiss will be granted and Plaintiffs' motion to strike will be denied.

I. Background¹

The following facts are alleged in the complaint (ECF No. 1–1). The Court accepts these factual allegations as true in deciding REA's motion to dismiss, but "[w]here those allegations are contradicted by written exhibits that [Plaintiffs] attached to [their] ... complaint, ... the exhibits trump the allegations." Abcarian v. McDonald, 617 F.3d 931, 933 (7th Cir. 2010).

REA is a domestic non-profit corporation that provides residential and business electrical service to its 22,000 members in Armstrong, Blair, Cambria, Clearfield, Indiana, Jefferson, and Westmoreland Counties, Pennsylvania. (ECF No. 1–1 ¶ 3.) REA is a so-called rural electric cooperative, meaning it is a member-owned entity rather than a publicly traded corporation with freely alienable stock. (Id. ¶ 6.) Leonard Cessna resides in Indiana County, Pennsylvania, and has been a member of REA for approximately 30 years. (Id. ¶ 1.) George Work resides in Jefferson County, Pennsylvania, and was a member of REA for approximately 50 years before he withdrew from membership in 2011.

(Id. ¶ 2.) Thus, Cessna has been purchasing and continues to purchase his electricity from REA and Work used to do so. (Id. ¶¶ 1–2.)

Plaintiffs contend that REA is improperly withholding funds that belong to its members. They contend that REA, as a cooperative, is prohibited from making a profit on business conducted with its members. (Id. ¶ 9.) Cessna and Work explain that "[c]ooperative principles require that members provide capital for the cooperative's use in proportion to their use of the cooperative," and state that this principle is referred to as the "user-owner principle". (Id. ¶ 15.) The difference between REA's revenues and expenses is therefore considered "margin"—not profit—and this margin belongs to REA's members in the form of patronage capital. (Id. ¶¶ 9–10.)

The amount of patronage capital that each member earns annually is based on the member's electric usage, and patronage capital is allocated to each member in a separate account on REA's books. (Id. ¶ 5.) These accounts reflect a credit or debit for each year the member was or continues to be a member. (Id. ¶ 17.) The members own an interest in REA worth over $53,000,000—as of 2014—represented in the form of this patronage capital. (Id. ¶ 6.) Cessna and Work allege that, because members cannot sell or redeem their interest in REA like stockholders in a publicly traded corporation can, they are "at the mercy of [REA] when it comes to receiving a financial distribution of their accumulated Patronage Capital." (Id. )

According to REA's bylaws, its articles of incorporation and bylaws constitute a contract between REA and each member. (Id. ¶ 11.) Cessna and Work allege that REA does not provide its members with a copy of its articles of incorporation. (Id. ¶ 12.) REA's bylaws require that it operate on a cooperative non-profit basis for the mutual benefit of its members. (Id. ¶ 14.) Article VIII of REA's bylaws provides that REA is obligated to account on a patronage basis to its members for all amounts received and receivable from members in connection with REA's services. (Id. ¶ 13.) Article VIII provides further that REA receives all amounts in excess of operating costs and expenses "with the understanding that they are furnished by the [members] as capital." (Id. ¶¶ 13, 16 (capitalized in original).) Patronage-capital accounts are non-transferrable, cannot appreciate in value, and do not accrue interest. (Id. ¶ 24.) REA's bylaws also provide a mechanism for the return of patronage capital:

In the event of the dissolution or liquidation of the Cooperative, after all outstanding indebtedness of the Cooperative shall have been paid, outstanding capital credits shall be returned without priority on a prorata basis before any payments are made on account or property rights of patrons. If, at any time prior to dissolution or liquidation, the Board of Directors shall determine that the financial condition of the Cooperative shall not be impaired thereby, the capital then credited to patrons' accounts may be returned in full or in part.

(Id. ¶ 13 (quoting REA's bylaws, Article VIII).)

Plaintiffs assert that, as a result of inflation and the time value of money, the value of patronage capital decreases the longer REA retains it before returning it to its members. (Id. ¶ 24.) And Plaintiffs believe that REA is earning interest on its members' patronage capital and not allocating that interest back to them. (Id. ¶ 25.) In 2011, REA retired patronage capital for the first time since its inception in 1937, though this refund applied only to members who obtained electricity from REA before 1961. (Id. ¶ 26.) Plaintiffs assert that REA's retention of the patronage capital increases the likelihood that it will be unable to locate the members, and that this will result in the eventual escheat of the unclaimed capital to REA. (Id. ¶ 27.)

Plaintiffs believe and allege the following: (1) that the patronage capital is worth approximately $56,000,000 today; (2) that in 2011 REA retired approximately $700,000 of patronage capital for the years prior to 1961; (3) that REA has not made an appropriate patronage-capital distribution prior to or since 2011; (4) that REA has not made an appropriate attempt to locate the approximately 6,000 members who failed to redeem their patronage-capital retirement checks in 2011; (5) that REA is poised to retain a large percentage of the patronage capital for the years prior to 1961; (6) that REA has acted unethically and breached its fiduciary duties by failing to locate the members to whom it wrongly denied patronage-capital retirement checks for the past fifty years or longer; (7) that REA should not be permitted to claim that the members are unreachable because it has improperly withheld the patronage-capital retirement checks for over fifty years and has failed to take reasonable steps to locate members; and (8) that REA's failure to adopt a reasonable, workable, and equitable system for returning patronage capital to its members is an abdication of its duty to the members, an abuse of discretion, and a breach of its fiduciary duties. (Id. ¶¶ 28–36.)

Plaintiffs therefore seek to represent a class of current and former members in this suit against REA. Plaintiffs assert six claims. In Count I, Plaintiffs assert a claim under Pennsylvania's Unfair Trade Practices and Consumer Protection Law. (Id. ¶¶ 44–58.) In Counts II and III, Plaintiffs assert claims for breach of the covenant of good faith and fair dealing and for breach of contract. (Id. ¶¶ 57–70.)² In Count IV, Plaintiffs assert, in the alternative, a claim for unjust enrichment. (Id. ¶¶ 71–78.) In Count V, Plaintiffs seek declaratory and injunctive relief. (Id. ¶¶ 79–87.) And in Count VI, Plaintiffs assert a claim for breach of fiduciary duty of an agent or trustee. (Id. ¶¶ 88–92.) Plaintiffs also point to § 7330 of Pennsylvania's Electric Cooperative Law of 1990 ( 15 Pa. Cons. Stat. § 7330 ), and argue that if REA's bylaws give its board of directors absolute discretion over the disbursement of patronage capital, then such discretion would violate § 7330. (ECF No. 1–1 ¶ 19–20.)

On February 18, 2016, REA filed a motion to dismiss Plaintiffs' claims pursuant to Federal Rule of Civil Procedure 12(b)(6) (ECF No. 10). REA's motion to dismiss prompted both a motion to stay (ECF No. 12) and a motion to remand (ECF No. 14) by Plaintiffs. Only once those motions were resolved—and denied—did Plaintiffs file a response to REA's motion to dismiss. In their response, Plaintiffs also moved to strike—rather than simply oppose—REA's motion to dismiss. And Plaintiffs and REA thereafter both moved and were granted leave to file multiple supplemental briefs. REA's motion to dismiss and Plaintiffs' related motion to strike are now ripe for adjudication.

II. Standard of Review

In determining the sufficiency of a complaint challenged under Rule 12(b)(6), a district court must conduct a two-part analysis. First, the court should separate the factual and legal elements of the claims. Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009). Second, the court must determine whether the factual matters alleged are sufficient to establish that the plaintiff has a "plausible claim for relief." Id. at 211 (quoting Ashcroft v. Iqbal, 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ). The complaint, however, need not include "detailed factual allegations." Phillips v. County of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008) (quoting Bell...