US v. Southwestern Elec. Coop., Inc.

• Decision Date: 12 June 1987
• Docket Number: Cause No. 86-3419.
• Parties: UNITED STATES of America, National Rural Utilities Cooperative Finance Corporation and Soyland Power Cooperative, Inc., Plaintiffs, v. SOUTHWESTERN ELECTRIC COOPERATIVE, INC., Defendant/Counter-plaintiff, v. SOYLAND POWER COOPERATIVE, INC., Counter-defendant.
• Court: U.S. District Court — Southern District of Illinois

663 F. Supp. 538

UNITED STATES of America, National Rural Utilities Cooperative Finance Corporation and Soyland Power Cooperative, Inc., Plaintiffs, v. SOUTHWESTERN ELECTRIC COOPERATIVE, INC., Defendant/Counter-plaintiff, v. SOYLAND POWER COOPERATIVE, INC., Counter-defendant.

Cause No. 86-3419.

United States District Court, S.D. Illinois.

June 12, 1987.

Diane M. Ennist, Civ. Div. Dept. of Justice, Washington, D.C., for U.S.

Adlai S. Hardin, Jr., Milbank, Tweek, Hadley & McCloy, New York City, for National Rural Utilities Coop. Finance Corp.

Stephen M. Murry, Lord, Bissell and Brook, Chicago, Ill., for Soyland Power Coop., Inc.

James J. Stamos, James Cari, Jr., Coffield, Ungaretti, Harris & Slavin, Chicago, Ill., for Southwestern Electrical Coop., Inc.

MEMORANDUM AND ORDER

STIEHL, District Judge:

Before the Court is Southwestern Electric Cooperative, Inc.'s (Southwestern) Motion to Dismiss pursuant to Fed.R.Civ.P. 12(b)(6).

This cause was filed by the United States of America on behalf of the Rural Electrification Administration (REA), the National Rural Utilities Cooperative Finance Corporation (CFC), and Soyland Power Cooperative, Inc. (Soyland), as a declaratory judgment action seeking to have the Wholesale Power Contract between Soyland and Southwestern declared binding. This Court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 1337 and 1345.

The declaratory judgment suit was filed in this Court after the filing of a state court action by Southwestern against Soyland alone seeking a declaration that the Wholesale Power Contract between Soyland and Southwestern, entered into on May 26, 1976, was void under the doctrines of mutual mistake of fact and frustration of purpose. The state court action was voluntarily dismissed by Southwestern in response to the filing of the declaratory judgment action by the United States, et al., in this Court. The parties agree that Count II of the complaint for injunctive relief is now moot. Accordingly, the Motion to Dismiss Count II of the complaint is GRANTED.

To sustain dismissal of a complaint under Fed.R.Civ.P. 12(b)(6), the Court must take all well-pleaded allegations as true and construe the complaint in the light most favorable to the plaintiffs to determine whether they are entitled to relief. Conley v. Gibson, 355 U.S. 41, 45-56, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1975). "The issue is not whether plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support his claims." Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974).

I — FACTS

Southwestern is an Illinois not-for-profit corporation formed in 1939 to distribute electrical power to its members in the rural service area. Soyland is an Illinois not-for-profit corporation which serves as a regional generation and transmission cooperative (G & T) engaged in the wholesale production and supply of electricity to its members. Soyland's members consist of fifteen (15) rural Illinois power cooperatives. The REA is a United States Government lending agency which, pursuant to the Rural Electrification Act of 1936 (Act), 7 U.S.C. § 901 et seq., makes or guarantees loans to rural electrical facilities. CFC is a private, not-for-profit cooperative association which serves as a source of financing for its members to supplement REA loans. CFC's membership consists primarily of rural electrification cooperatives. Southwestern is a member of both Soyland and CFC.

Due to the nature of the rural electrification system, numerous contracts and loan agreements have been entered into among the four parties. REA and Southwestern, pursuant to the Act, entered into a loan agreement for the financing of the rural electrification distribution system. The original loan has been amended numerous times. As of March, 1986, REA had loaned $23,815,000 to Southwestern for the construction of its electrical distribution system. Of that amount, $17,024,097 is outstanding. CFC is also a substantial creditor of Southwestern. As of March, 1986, CFC had loaned $5,838,000 to Southwestern for construction of its electrical distribution system, of which $5,694,959 remains outstanding. To secure these loans, REA and CFC entered into a Supplemental Mortgage and Security Agreement with Southwestern, dated September 13, 1972.

REA and CFC are also substantial creditors of Soyland, of which Southwestern is a member. REA has guaranteed the repayment of loans to Soyland for construction of an electrical generation and transmission system in the amount of $425,580,000 and an additional, unadvanced, amount of $56,802,000 as of March 1986. As of the same date, $425,497,423 remains outstanding. CFC has advanced $63,000,000 to Soyland, of which $58,707,606 was outstanding as of March, 1987. REA and CFC both have mortgages with Soyland to secure the guaranteed loans.

In the mid-1970's, Soyland engaged in a series of negotiations to purchase an ownership interest in the Clinton, Dewitt County, Illinois nuclear power facility which the Illinois Power Company proposed to build.

Southwestern entered into a contract with Soyland on May 26, 1976. This contract is the heart of the litigation before this Court. Pursuant to the contract, Southwestern agreed to purchase all of its electricity requirements from Soyland for a term extending at least until the year 2015 (all-requirements contract).

As stated above, it is this contract which is the subject of the dispute. The plaintiffs have filed for declaratory judgment that the contract is valid and enforceable. The defendant has moved for dismissal and filed a counterclaim against Soyland.

II — THE ALL-REQUIREMENTS CONTRACT

The first determination by this Court must be whether the REA and CFC have standing to bring this action, with Soyland, against Southwestern. REA and CFC assert that they have a joint interest in the all-requirements contract between Southwestern and Soyland as mortgagees of both Southwestern and Soyland. They assert that the contract serves as the "primary security" for REA's and CFC's loans to both. That is, as a condition of their loans, Southwestern and Soyland were obligated to enter into this federally-approved, power supply contract.

In 1936, Congress, pursuant to the Rural Electrification Act, 7 U.S.C. §§ 901-950b, established the Rural Electrification Administration (REA) to make loans available to rural communities to facilitate their obtaining electrical power. Tri-State Generation v. Shoshone River Power, Inc., 805 F.2d 351, 352 (10th Cir.1986).

REA and CFC provide virtually all the financing for the generation and transmission facilities for wholesale cooperatives and distribution cooperatives nationwide. Congress authorized the REA to make loans to carry out the purpose of the Rural Electrification Act, but required the REA to first ensure that "the security therefor is reasonably adequate." 7 U.S.C. § 904; Tri-State, 805 F.2d at 353. The all-requirements contract serves as the security required by Section 904 of the Act. This requirement has been recognized as well within the powers of the Administrator of the Act. Tri-State, 805 F.2d at 353.

The need for the all requirements contract has been explained as follows:

It has been the practice for many years of REA Administrators, including the affiant, to require as a condition of making operating and transmission loans pursuant to section 4 of the Act to cooperatives ... that the borrower shall obtain 35 year contracts with its members (hereinafter called "thirty-five year all-requirements contracts") obligating them to purchase all of their electrical requirements to the extent that the borrower shall have the power and energy available. The purpose of this requirement is to assure that the borrower will have a market for the power generated and transmitted by the R.E.A. financed facilities and thus be able to repay the loan.

Alabama Power Co. v. Alabama Electric Cooperative, Inc., 394 F.2d 672, 675 (5th Cir.1968), (quoting affidavit of REA Administrator) (emphasis added), cert. denied, 393 U.S. 1000, 89 S.Ct. 488, 21 L.Ed.2d 465 (1968). Similarly:

The all-requirements provisions of the wholesale power sales contracts not only ensure that the cooperatives will have an adequate market for their power among their local utility members during the period of the loan but also assure the REA that the utilities making up the federated cooperative seriously desire the loan to be made and intend to use its share of the power capacity which the loan would create. This customary and long established practice of the REA has been made known to, and acquiesced in, by Congress.

Greensboro Lumber Co. v. Georgia Power Co., 643 F.Supp. 1345, 1364 (N.D.Ga.1986) (emphasis added). See also, Public Utility District No. 1 of Franklin County v. Big Bend Electric Coop. Inc., 618 F.2d 601, 603 (9th Cir.1980) (in which the court recognized the wide latitude given to the REA to "determine the appropriate course of conduct to accomplish the legislative purpose."); Upper Missouri G & T Electric Coop. Inc. v. McCone Electric Coop. Inc., 160 Mont. 498, 503 P.2d 1001 (Mont.S.C. 1972) (in which the validity of an all-requirements contract was upheld and found not to be against public policy).

This Court is persuaded that the long term all-requirements contract which the REA and CFC required Southwestern and Soyland to enter into served as the primary security to ensure the repayment of the massive loans which the REA and CFC made to Soyland as well as to Southwestern. The defendant makes no attempt to assert that this contract is against public policy, and the Court finds that it is not. Moreover, requiring Southwestern and Soyland to enter into the contract, as a method of securing their loans, was well within the power of the Administrator of the REA. 7 U.S.C. § 904.

III — STANDING TO SUE

The Supreme Court in Allen v. Wright, 468 U.S. 737, 104 S.Ct. 3315, 82 L.Ed.2d 556...