Estate of Steward v. McCay, Civil Action Number No. 5:15–cv–00653–AKK

• Decision Date: 24 March 2016
• Docket Number: Civil Action Number No. 5:15–cv–00653–AKK
• Citation: 173 F.Supp.3d 1238
• Parties: The Estate of George Steward, et al., Plaintiffs, v. Andrew McCay, et al., Defendants.
• Court: U.S. District Court — Northern District of Alabama

173 F.Supp.3d 1238

The Estate of George Steward, et al., Plaintiffs,

v.Andrew McCay, et al., Defendants.

Civil Action Number No. 5:15–cv–00653–AKK

United States District Court, N.D. Alabama, Northeastern Division.

Signed March 24, 2016

Christy W. Graham, Thomas B. Denham, Thomas B. Denham LLC, Moulton, AL, for Plaintiffs.

Cecil B. Caine, Jr., Robert V. Goldsmith, III, Caine Goldsmith, Moulton, AL, C. Crews Townsend, Carlos C. Smith, Kyle J. Wilson, Larry L. Cash, Travis R. Thompson, Miller & Martin PLLC, Chattanooga, TN, for Defendants.

MEMORANDUM OPINION AND ORDER

ABDUL K. KALLON, UNITED STATES DISTRICT JUDGE

The court has for consideration a motion to dismiss, doc. 11, filed by Joe Wheeler Electric Membership Corporation (“JWEMC”) and the members of the JWEMC Board of Trustees¹ (“the Board”) (collectively, “JWEMC”), and supported by intervenor-defendant Tennessee Valley Authority (“TVA”), doc. 33. This motion is now fully briefed and ripe for review. Docs. 11–1; 33; 35; 37; 38. After a review of the motion, briefings, and relevant case law, this court concludes that the motion to dismiss is GRANTED as to the claims based on JWEMC's alleged failure to issue patronage refunds or reduce rates.

I. STANDARD OF REVIEW

Under Federal Rule of Civil Procedure 8(a)(2), a pleading must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” “[T]he pleading standard Rule 8 announces does not require ‘detailed factual allegations,’ but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). Mere “labels and conclusions” or “a formulaic recitation of the elements of a cause of action” are insufficient. Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (citations and internal quotation marks omitted). “Nor does a complaint suffice if it tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’ ” Id. (citing Twombly, 550 U.S. at 557, 127 S.Ct. 1955 ).

Federal Rule of Civil Procedure 12(b)(6) permits dismissal when a complaint fails to state a claim upon which relief can be granted. “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (citations omitted) (internal quotation marks omitted). A complaint states a facially plausible claim for relief “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citation omitted). The complaint must establish “more than a sheer possibility that a defendant has acted unlawfully.” Id. ; see also Twombly , 550 U.S. at 555, 127 S.Ct. 1955 (“Factual allegations must be enough to raise a right to relief above the speculative level.”). Ultimately, this inquiry is a “context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Iqbal , 556 U.S. at 679, 129 S.Ct. 1937.

II. FACTUAL ALLEGATIONS

Plaintiffs in this putative derivative class action are all current or former members of JWEMC, a 501(c)(12) tax-exempt corporation organized under Ala. Code § 37–6–1 et seq. operating as an electric cooperative that purchases electricity from the TVA and sells it to community members in Lawrence and Morgan Counties. Doc. 1–1 at 4–5, 8. Plaintiffs have brought this action alleging that JWEMC has failed to properly refund patronage capital in the form of reduced rates or “patronage credits” under Ala. Code § 37–6–20, to maintain and oversee proper accounting, and to allow for inspection of accounting records. See generally doc. 1–1. As a cooperative, JWEMC is member owned and is managed by a board of trustees. Id. at 10–11. The plaintiffs in this putative class action are current or former members of JWEMC: Christie Oakley, a present JWEMC member; Ted Agee, a former JWEMC member; and The Estate of George Steward, representing George Steward, who at the time of his death was a JWEMC member. Id. at 4–5. Intervenor-defendant TVA contracts with JWEMC to provide power throughout JWEMC's territory. See doc. 11–2. The Tennessee Valley Authority Act of 1933 (“the Act”) created the TVA to harness and distribute power throughout the Tennessee Valley region. 16 U.S.C. § 831 et seq .

JWEMC Structure and Relevant Bylaws

JWEMC is managed by a board of trustees responsible for the “activities and affairs” of the cooperative and for “exercising all of [its] powers,” except actions prohibited by law or reserved for its members.² See doc. 11–3 at 10. Specifically, the board of trustees “shall have the power to make, adopt, amend, abolish and promulgate such policies, ... rate classifications, [and] rate schedules, ... not inconsistent with law or the Articles of Incorporation or [JWEMC's] Bylaws.” Id. at 13. Relevant here, the JWEMC bylaws state that excess revenues “shall be distributed by [JWEMC] to its members either as patronage refunds ... or by way of general rate reductions, or by a combination of such methods.” Id. at 17. However, notwithstanding the requirement for patronage refunds or rate reductions, at the time of Plaintiffs' filing of this lawsuit, JWEMC had “amassed in excess of $83 million ... in excess margins.” See doc. 1–1 at 11.

TVA's Structure and Powers

Created under the Act, the TVA is a “constitutionally authorized corporate agency and instrumentality of the United States.” Bobo v. AGCO Corp., 981 F.Supp.2d 1130, 1137 (N.D.Ala.2013) ; see also Springer v. Bryant, 897 F.2d 1085, 1089 (11th Cir.1990) (“The TVA is a federally owned corporation that acts as an agency or instrumentality of the United States.”). Congress, through the Act, has vested the TVA with the power to produce, distribute, and sell electric power. See 16 U.S.C. § 831 et. seq. The law is well settled that the power produced by the TVA is property of the federal government,³ which has vested the TVA with the power of distribution. See Mobil Oil Corp. v. TVA, 387 F.Supp. 498, 507 n. 22 (N.D.Ala.1974) (“TVA in marketing electricity is disposing of property of the United States under policies laid down by Congress.”) (citing Ashwander v. Tenn. Valley Auth., 297 U.S. 288, 336, 56 S.Ct. 466, 80 L.Ed. 688 (1936) ) (additional citations omitted). Specifically, the Act authorizes the TVA Board of Directors to sell “surplus power not used in its operations ... to States, counties, municipalities, corporations, partnerships, or individuals ....” § 831i. Pursuant to this authority, the Act empowers the TVA to enter into distribution contracts and “to include in any contract for the sale of power such terms and conditions, including resale rate schedules, and to provide for such rules and regulations as in its judgment may be necessary or desirable for carrying out the purposes of this [Act].” Id.

JWEMC–TVA Contract⁴

To provide electricity to its members, JWEMC purchases power for sale to customers from the TVA subject to the terms and conditions outlined in the JWEMC–TVA contract. See generally doc. 11–2. This contract, which the parties initially entered in 1977, specifies that JWEMC's rates for sale to customers must be set in accordance with TVA rate schedules. Id. at 1, 6–7. In relevant part, the contract states:

(b) [JWEMC] agrees to serve consumers, including all municipal and governmental customers and departments, at and in accordance with the rates, charges, and provisions set forth [in the TVA rate schedules] and not to depart therefrom except as the parties hereto may agree upon surcharges, special minimum bills, or additional resale schedules for special classes of consumers or special uses of electric energy, and except as provided in subsection (c) next following.

Id. at 6 (emphasis added). Additionally, this contract outlines JWEMC's use of revenues and excess rates and requires:

(a) [JWEMC] agrees to use the gross revenues from electric operations for the following purposes:

(1) Current electric system operating expenses, including salaries, wages, cost of materials and supplies, taxes, power at wholesale, and insurance;

(2) Current payments of interest on System Indebtedness, and the payment of principal amounts, including sinking fund payments, when due; and

(3) From any remaining revenues, reasonable reserves for renewals, replacements, and contingencies; and cash working capital adequate to cover operating expenses for a reasonable number of weeks.

(b) All revenues remaining over and above the requirements described in subsection (a) of this section shall be considered surplus revenues and may be used for new electric system construction or the retirement of System Indebtedness ... provided, however, that resale rates and charges shall be reduced from time to time to the lowest practicable levels....

Id. at 6–7. Moreover, the JWEMC–TVA contract requires that “no discriminatory rate, rebate, or other special concession will be made or given to any customer, directly or indirectly.” Id. at 6.

Plaintiffs' Demand on the Board

On February 4, 2015, Plaintiffs submitted a demand on the Board seeking to notify the members that, in Plaintiffs' view, the Board “makes no effort to account for, re[s]olve[,] or otherwise manage patronage capital in accordance with state law and applicable federal tax regulations.” Doc. 1–1 at 12–13, 33–36. Plaintiffs also alleged that the Board had failed to: provide proper accounting, manage and account for patronage capital in violation of JWEMC bylaws, and maintain open and accurate records of patronage capital. Id. at 34. In this letter, Plaintiffs notified the Board of its alleged violation of Internal Revenue Service protocols, specifically that the organization must “keep adequate records of each member's rights and interest in the organization's assets” and “distribute any savings...