Rest. Supply, LLC v. Pride Mktg. & Procurement, Inc., CIVIL ACTION NO. 17-8793 SECTION "F"
| Decision Date | 27 June 2018 |
| Docket Number | CIVIL ACTION NO. 17-8793 SECTION "F" |
| Parties | RESTAURANT SUPPLY, LLC v. PRIDE MARKETING AND PROCUREMENT, INC. |
| Court | U.S. District Court — Eastern District of Louisiana |
Before the Court is the plaintiff's motion for partial summary judgment. For the following reasons, the motion is DENIED.
A buying group gathered together suppliers and dealers so it could make bulk purchases from vendors on behalf of those suppliers and dealers. The bulk purchasing allowed the buying group to gain advantageous pricing from the vendors, resulting in substantial discounts and rebates, which were paid to the suppliers and dealers in exchange for joining the buying group. The buying group is organized as a cooperative for tax purposes, and can receive favorable tax treatment for revenue that is passed on to its members as patronage dividends. In 2015 and 2016, the buying group refused to remit the rebates to its members. Now, a member and the buying group dispute whether the buying group's status as a cooperative, and the relevant provisions of the corporate governance agreement, obligate the buying group to remit the withheld rebates.
Pride Marketing and Procurement, Inc. is a food service and equipment buying group that makes bulk purchases from vendors on behalf of suppliers and dealers. Each supplier and dealer owns one share in the buying group. The Shareholders receive rebates that are determined by the purchases each Shareholder makes. Restaurant Supply was a Shareholder of Pride from 2006 until May 2016. In March 2016, Pride representatives unexpectedly informed Restaurant Supply, among others, that Pride would not and could not pay its rebates for 2015 and 2016, which exceed $2 million dollars.1 Restaurant Supply sued Pride on June 28, 2016, seeking to recover the $2 million in rebates Pride refused to remit.
Restaurant Supply initially sued Pride in Connecticut state court on June 28, 2016, seeking to recover the $2 million inrebates Pride refused to remit. It was removed to the United State District Court for the District of Connecticut, then transferred to this Court on August 31, 2017. Restaurant Supply alleged several causes of action, including breach of contract. On May 15, 2018, Restaurant Supply moved for partial summary judgment on its breach of contract claim. Pride opposed the motion on May 22, 2018.
Federal Rule of Civil Procedure 56 instructs that summary judgment is proper if the record discloses no genuine dispute as to any material fact such that the moving party is entitled to judgment as a matter of law. No genuine dispute of fact exists if the record taken as a whole could not lead a rational trier of fact to find for the non-moving party. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). A genuine dispute of fact exists only "if the evidence is such that a reasonable jury could return a verdict for the non-moving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
The mere argued existence of a factual dispute does not defeat an otherwise properly supported motion. See id. In this regard, the non-moving party must do more than simply deny the allegations raised by the moving party. See Donaghey v. Ocean Drilling & Exploration Co., 974 F.2d 646, 649 (5th Cir. 1992). Rather, he must come forward with competent evidence, such as affidavits ordepositions, to buttress his claims. Id. Hearsay evidence and unsworn documents that cannot be presented in a form that would be admissible in evidence at trial do not qualify as competent opposing evidence. Martin v. John W. Stone Oil Distrib., Inc., 819 F.2d 547, 549 (5th Cir. 1987); Fed. R. Civ. P. 56(c)(2). "[T]he nonmoving party cannot defeat summary judgment with conclusory allegations, unsubstantiated assertions, or only a scintilla of evidence." Hathaway v. Bazany, 507 F.3d 312, 319 (5th Cir. 2007)(internal quotation marks and citation omitted). Ultimately, "[i]f the evidence is merely colorable . . . or is not significantly probative," summary judgment is appropriate. Id. at 249 (citations omitted); King v. Dogan, 31 F.3d 344, 346 (5th Cir. 1994) ().
Summary judgment is also proper if the party opposing the motion fails to establish an essential element of his case. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). In deciding whether a fact issue exists, courts must view the facts and draw reasonable inferences in the light most favorable to the non-moving party. Scott v. Harris, 550 U.S. 372, 378 (2007). Although the Court must "resolve factual controversies in favor of the nonmoving party," it must do so "only where there is an actual controversy, that is, when both parties have submitted evidence of contradictory facts." Antoine v. First Student, Inc., 713 F.3d824, 830 (5th Cir. 2013)(internal quotation marks and citation omitted).
Pride is organized as a cooperative under the Internal Revenue Code. 26 U.S.C. § 1381, et seq. Restaurant Supply contends that Pride's status as a cooperative, and the relevant provisions of the By-Laws organizing it as such, imposes a contractual obligation on Pride to pay the rebates for 2015 and 2016.2 Because it failed to pay the rebates, the plaintiff asserts, Pride has breached its contractual obligations. Before fully addressing Restaurant Supply's contentions, and Pride's response, a review of the relevant federal tax laws and regulations, state law, and the pertinent corporate governance documents is needed.
An organization operating as a cooperative may qualify for tax treatment under Subsection T of the Internal Revenue Code. 26 U.S.C. § 1381. The benefit of organizing as a cooperative is that the organization can exclude amounts paid as patronage dividends from its taxable income. 26 U.S.C. § 1382(b). A patronage dividendis "an amount paid to a patron by an organization . . . (1) on the basis of quantity or value of business done with or for such patron, (2) under an obligation of such organization to pay such amount, which obligation existed before the organization received the amount so paid, and (3) which is determined by reference to the net earnings of the organization from business done with or for its patrons." 26 U.S.C. § 1388(a). Said another way, the United States Tax Court has defined patronage dividends as "an amount that is allocated or paid to a patron out of the net earnings of the cooperative from business done with or for its patrons and that is based upon the quantity or value of business done with or for the patron, under a preexisting obligation to pay such amount." Buckeye Countrymark, Inc. v. C.I.R., 103 T.C. 547, 555 (1994). Net earnings, from which the patronage dividends are paid, are revenues minus expenses.3 26 C.F.R. § 1.1388-1(a). Additionally, provisions in the cooperative's bylaws or articles of incorporation may constitute a preexisting obligation. 26 C.F.R. § 1.1388-1(a). Finally, the patronage dividend must bedistributed no later than eight and a half months following the taxable year that the patronage dividends were generated. 26 U.S.C. § 1382(d).
Although Subchapter T creates obligations for a cooperative that involve certain treatment to its patrons, such as distributing dividends pursuant to a preexisting obligation, it does not control their contractual obligations towards each other. See United States v. Nat'l Bank of Commerce, 472 U.S. 713, 722 (1985) (quoting Aquilino v. United States, 363 U.S. 509, 513 (1960)("In the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property."). "This follows from the fact that the federal statute 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law.'" United States v. Nat'l Bank of Commerce, 472 U.S. 713, 722 (1985) (quoting United States v. Bess, 357 U.S. 51, 55 (1958)). Accordingly, Louisiana law still controls the contractual obligations between Restaurant Supply and Pride, but Subchapter T may be useful in informing the context of their contractual provisions relating to patronage dividends.
Restaurant Supply contends, and Pride does not dispute, that Pride held itself out and elected to be taxed as a cooperative under the Internal Revenue Code. Restaurant Supply asserts that tobe a cooperative, Pride must have been bound by a legal obligation to pay patronage dividends. Both parties agree that Section 10.2 of Pride's Amended and Restated By-Laws is the relevant and controlling provision. Section 10.2 of Article X provides:
There shall be distributed, on a patronage basis to such Shareholders of the Corporation in a manner taking into account the amount of business done by the Corporation with each of them, all the net savings and overcharges effected by or resulting from the operations conducted and carried on by the corporation in connection with the sale of equipment and supplies made by the corporation to such Shareholders for resale by them which remain after paying all operating and administrative expenses of the corporation and all interest on its indebtedness and after the setting aside by the Directors of such reasonable reserves as they shall determine from time-to-time to be appropriate for the purpose of providing for the expectancy of PRIDE and for the purpose of providing for the expectancy of any losses or contingencies. Said distributions shall be made no later than eight and one half (8 1/2) months following the close of the year of the Corporation during which the patronage occurred with respect to which each such distribution is made. . . ."
(Emphasis added). Restaurant Supply contends that the Section 10.2 requirement that Pride pays Shareholders "all net savings" encompasses rebates, and therefore obligates Pride to remit all rebates. Section 9.1 of the By-laws provides that "[t]hese by-laws . . ....
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