McCarthy v. Middle Tennessee Elec. Membership

• Decision Date: 17 October 2006
• Docket Number: No. 05-6477.,05-6477.
• Citation: 466 F.3d 399
• Parties: John McCARTHY et al., Plaintiffs-Appellants, v. MIDDLE TENNESSEE ELECTRIC MEMBERSHIP CORPORATION et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

466 F.3d 399

John McCARTHY et al., Plaintiffs-Appellants, v. MIDDLE TENNESSEE ELECTRIC MEMBERSHIP CORPORATION et al., Defendants-Appellees.

No. 05-6477.

United States Court of Appeals, Sixth Circuit.

Argued: July 26, 2006.

Decided and Filed: October 17, 2006.

ARGUED:

Gerald E. Martin, Barrett, Johnston & Parsley, Nashville, Tennessee, for Appellants. J. Richard Lodge, Jr., Bass, Berry & Sims, Nashville, Tennessee, Harriet A. Cooper, Tennessee Valley Authority, Knoxville, Tennessee, for Appellees.

ON BRIEF:

Gerald E. Martin, George E. Barrett, Edmund L. Carey, Jr., Timothy L. Miles, Barrett, Johnston & Parsley, Nashville, Tennessee, for Appellants. J. Richard Lodge, Jr., Russell S. Baldwin, Bass, Berry & Sims, Nashville, Tennessee, Harriet A. Cooper, Frank H. Lancaster, Maria V. Gillen, Tennessee Valley Authority, Knoxville, Tennessee, for Appellees.

Before MOORE, CLAY, and GRIFFIN, Circuit Judges.

OPINION

KAREN NELSON MOORE, Circuit Judge.

Plaintiffs-Appellants appeal from the district court's dismissal of claims brought against electric cooperatives and the Tennessee Valley Authority (together, "defendants"). Members of the electric cooperatives ("plaintiffs") brought an action against the defendants, claiming that the cooperatives ("Cooperatives") refused to distribute refunds or to reduce electricity rates as required when electric cooperatives have excess revenue. The Cooperatives were prohibited from distributing the refunds on the basis of their contracts with the Tennessee Valley Authority ("TVA"), which supplies the Cooperatives with electricity. The plaintiffs also asserted that the Cooperatives failed to keep adequate records. The district court dismissed the plaintiffs' state-law claims without prejudice because these claims should have been filed as a derivative suit, and it dismissed the plaintiffs' federal-law claims with prejudice. For the reasons discussed below, we AFFIRM the judgment of the district court.

I. BACKGROUND

The Tennessee General Assembly has stated "that rural electric cooperatives ... have proved to be ideal business organizations in providing adequate and reliable electric services at reasonable rates throughout the rural communities of Tennessee." TENN.CODE ANN. § 65-25-201(b)(1). The defendants include 22 electric cooperatives that supply electricity to over 700,000 cooperative members in Tennessee. The Cooperatives are nonprofit corporations organized pursuant to Tennessee's Rural Electric and Community Services Cooperative Act ("RECSCA"). TENN.CODE ANN. § 65-25-203.¹ The Cooperatives purchase electricity from the Tennessee Valley Authority, which is "the nation's largest public power producer."² Joint Appendix ("J.A.") at 83 (TVA 2002 Annual Report at 2).

If electric cooperatives accrue excess revenue beyond what is necessary to cover specified expenses, these funds must be distributed in one of the following three ways: "(A) As patronage refunds prorated in accordance with the patronage of the cooperative by the respective patrons paid for during or with respect to such fiscal year;³ (B) By way of general reductions of rates or other charges; or (C) By any combination of methods in (b)(1)-(3)." TENN.CODE ANN. § 65-25-212(a). Section 65-25-212(b) provides as follows:

(b) With respect to the supplying or furnishing of services in pursuance of one (1) or more secondary purposes, the revenues of a cooperative shall, as separately accounted for and determined for each such service, be first applied as provided in subdivisions (a)(1)-(6) and then distributed to the patrons of each such service in the manner provided for in the bylaws, either:

(1) As patronage refunds prorated in accordance with the patronage of the cooperative by the respective patrons paid for during or with respect to such fiscal year;

(2) By way of general reductions of rates or other charges;

(3) By crediting patrons with having furnished the cooperative capital in amounts equal to the amounts of their patronage not refunded pursuant to subdivision (b)(1) and not used for general reduction of rates or other changes pursuant to subdivision (b)(2), all or any portion of such capital to be redeemable and be retired at such later time as the board in its sole discretion determines that such will not impair the cooperative's financial condition and will be in the cooperative's best interests; or

(4) By any combination of methods in subdivisions (b)(1)-(3).

However, "[n]othing contained in subsection (a) or (b) shall be construed to prohibit the payment by a cooperative of all or any part of its indebtedness prior to the date when the same shall become due." § 65-25-212(c). The Cooperatives' contracts with the TVA prohibited the distribution of patronage refunds.⁴ The plaintiffs claim that the Cooperatives wrongfully withheld patronage capital and failed to maintain properly records of each member's patronage capital.⁵

On April 12, 2004, the plaintiffs filed a complaint against the Cooperatives and the TVA in federal district court. The plaintiffs' complaint included the following claims: violation of the Sherman Act, 15 U.S.C. § 1; violation of the Tennessee Trade Practices Act, TENN.CODE ANN. § 47-25-101; violation of the Tennessee Consumer Protection Act, TENN.CODE ANN. §§ 47-18-104(b)(27) and 47-18-109; breach of fiduciary duty; and failure to refund patronage capital or to reduce rates as required by Tennessee Code Annotated § 65-25-212(a). The TVA and the Cooperatives each filed motions to dismiss the plaintiffs' claims against them. The plaintiffs filed an amended complaint in July 2004 that included a Fifth Amendment takings claim and a Fifth and Fourteenth Amendment due process claim.

The district court issued an order on August 4, 2004, staying discovery and seeking a response from the plaintiffs as to the following issues raised in the Cooperatives' motion to dismiss: "(1) Whether Plaintiffs' claims are derivative claims; (2) if Plaintiffs' claims are deemed derivative claims, whether the Plaintiffs complied with State law to assert these claims; and (3) whether the Plaintiffs have standing to sue cooperatives of which Plaintiffs are not members." J.A. at 322 (Dist.Ct.Order). The plaintiffs filed a response to this order on August 19, 2004, and they also filed a motion for leave to file a second amended complaint expanding the plaintiff class to include members of additional cooperatives. The district court never ruled on the plaintiffs' motion for leave to file a second amended complaint.

On December 3, 2004, the district court granted the defendants' motions to dismiss;⁶ it dismissed the plaintiffs' state-law claims without prejudice, and it dismissed the plaintiffs' federal-law claims with prejudice. The plaintiffs filed a motion to alter or amend the district court's judgment, claiming that there was no basis for dismissing their constitutional claims or for finding that their state-law claims were derivative in nature. The district court denied the plaintiffs' motion on July 29, 2005; in addressing the plaintiffs' constitutional claims, the district court concluded that there was no state action and that the plaintiffs had an adequate remedy under state law. The plaintiffs timely appealed from the district court's December 2, 2004 and July 29, 2005 orders.

II. ANALYSIS

A. Standard of Review

We review de novo the district court's grant of the defendants' motions to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). Downie v. City of Middleburg Heights, 301 F.3d 688, 693 (6th Cir. 2002). We "treat[] all well-pleaded allegations in the complaint as true, and ... find[] dismissal proper only if it appears beyond doubt that the plaintiff[s] can prove no set of facts in support of the claims that would entitle [them] to relief." Id. (internal quotation marks omitted).

B. Judicial Review

The TVA characterizes the case as "a judicial challenge to the level of rates set by the TVA Board of Directors for the sale of TVA power at retail and to the terms and conditions for the sale of that power." TVA Br. at 22. As a result of this, the TVA argues that we should affirm the district court's dismissal of the plaintiffs' claims because these claims are not subject to judicial review. The plaintiffs expressly state in their reply brief that "this lawsuit is not about rate making." Appellants Reply Br. at 23. Instead, they argue that they are seeking an accounting of the patronage accounts. Id. However, because the plaintiffs also argue that they were improperly denied patronage capital, Appellants Br. at 14, we believe it is necessary to address the question of judicial review.

"A long line of precedent exists establishing that TVA rates are not judicially reviewable." Matthews v. Town of Greeneville, No. 90-5772, 1991 WL 71414, at *2 (6th Cir. May 2, 1991) (unpublished opinion), cert. denied, 502 U.S. 938, 112 S.Ct. 371, 116 L.Ed.2d 323 (1991); see also 4-County Elec. Power Ass'n v. TVA, 930 F.Supp. 1132, 1137 (S.D.Miss.1996) ("Plaintiff acknowledges that by virtue of TVA's having been granted by Congress full discretionary authority with respect to setting rates, TVA's rate-making decisions are beyond the scope of judicial review under the APA."); Carborundum Co. v. TVA, 521 F.Supp. 590, 593 (E.D.Tenn.1981) (noting the "well established legal princip[le] that the setting of power rates under the Tennessee Valley Authority Act is not subject to judicial review"); Mobil Oil Corp. v. TVA, 387 F.Supp. 498, 506-07 (N.D.Ala. 1974) ("[T]he judgment or expertise of the Authority in setting the electric power rates is a matter committed to its discretion by law and is not subject to judicial review.") (citation and footnote omitted); Ferguson v. Elec. Power Bd. of Chattanooga, Tenn., 378 F.Supp. 787, 789 (E.D.Tenn. 1974) ("[T]he matter of rate setting under the Tennessee Valley Authority Act is not subject to judicial review."), aff'd, 511 F.2d 1403 (6th Cir.1975).

The plaintiffs'...