Leonard Cessna v. REA Energy Cooperative Inc

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 18-1397
LEONARD CESSNA,
on behalf of himself and all others
similarly situated; GEORGE WORK,
on behalf of himself and all others
similarly situated,
Appellants
v.
REA ENERGY COOPERATIVE, INC.
________________
Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. Civil Action No. 3-16-cv-00042)
District Judge: Honorable Kim R. Gibson
Submitted Under Third Circuit L.A.R. 34.1(a)
September 24, 2018
Before: AMBRO, CHAGARES, and GREENAWAY, JR., Circuit Judges
(Opinion filed: October 15, 2018)
________________
OPINION *
________________
AMBRO, Circuit Judge
*
This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not
constitute binding precedent.
Leonard Cessna and George Work brought a class action in Pennsylvania state
court against their non-profit electrical utility, REA Energy Cooperative, Inc. It provides
private electrical service to its approximately 22,000 members in rural western
Pennsylvania. Under REA’s bylaws—part of the contract that governs the relationship
between it and its members—its members each own an interest in the cooperative called
“Patronage Capital” (also called “capital credits”). The amount they own is determined
by their electrical usage. The bylaws provide that member payments to REA for
electrical usage are “furnished . . . as capital,” which are credited to each member account
and “shall have the same status as though they had been paid to the [member] in cash in
pursuance of a legal obligation to do so and the [member] had then furnished the
Cooperative corresponding amounts for capital.” (JAV. II at 103 & 147.) The bylaws
also provide that “[i]f” REA’s Board of Directors “shall determine that the financial
condition of the Cooperative shall not be impaired thereby, the capital then credited to
[members’] accounts may be returned in full or in part.” (JAV. II at 103–04 & 148.)
According to Cessna and Work’s complaint, from REA’s founding in 1937
through 2011, it retained all of its members’ Patronage Capital, which today is worth $56
million. In 2011, it retired $700,000 for members who used the cooperative in the years
preceding 1961, though it could not locate 6000 of those members to complete their
payment. It has never retired Patronage Capital for any year following 1961, and it has
made no payments to its members either before or since 2011.
Cessna has been a member of REA since 1981, and Work was a member from
1961 to 2011. They claim that, by retaining all the members’ Patronage Capital for years
2
at a time and failing to pay its members with any regularity, REA has violated its bylaws,
which incorporate 15 Pa.C.S. § 7330. The statute requires Pennsylvania electrical
cooperatives to “return[], from time to time, to the members” revenues not required for
operating expenses, loan payments, new projects, or other contingencies. Id. § 7330(b)-
(c).
REA removed the case to federal court on the basis of the federal officer removal
statute, 28 U.S.C. § 1442(a)(1). Cessna and Work moved the District Court to remand,
but it denied their motion. REA then moved to dismiss the suit, which the Court granted.
It held, among other things, that the complaint failed to state a breach-of-contract claim. 1
The Court granted leave to amend the complaint. After the deadline for amendment had
passed, Cessna and Work moved for either an extension or for reconsideration of the
dismissal. The Court denied their motion. They now appeal the Court’s interpretation of
the federal officer removal statute and its dismissal of their contract claims. We review
both questions de novo. See Papp v. Fore-Kast Sales Co., 842 F.3d 805, 810 (3d Cir.
2016) (removal); Phillips v. Cty. of Allegheny, 515 F.3d 224, 230 (3d Cir. 2008) (motion
to dismiss). Because we find no error in the District Court’s reasoning, we affirm.
I. The Motion to Remand
The District Court had jurisdiction over this action under the federal officer
removal statute, 28 U.S.C. § 1442(a)(1). It provides that a defendant may remove a civil
suit brought in state court “to the district court of the United States for the district and
1
Cessna and Work brought several other claims against REA that were also dismissed,
but they do not appeal those rulings.
3
division embracing the place wherein it is pending” if the defendant is “[t]he United
States or any agency thereof or any officer (or any person acting under that officer) of the
United States or of any agency thereof, in an official or individual capacity, for or
relating to any act under color of such office . . . .”
It is well established that this language is to be liberally construed in favor of the
federal forum. Watson v. Philip Morris Companies, Inc., 551 U.S. 142, 147 (2007); In re
Commonwealth’s Motion to Appoint Counsel Against or Directed to Def. Ass’n of Phila.,
790 F.3d 457, 466-67 (3d Cir. 2015).
We have held that to properly remove, a defendant must show:
(1) [it] is a “person” within the meaning of the statute; (2) the [plaintiff’s]
claims are based upon the [defendant’s] conduct “acting under” the United
States, its agencies, or its officers; (3) the [plaintiff’s] claims against [the
defendant] are “for, or relating to[,]” an act under color of federal office;
and (4) [the defendant] raises a colorable federal defense to the [plaintiff's]
claims.
Papp, 842 F.3d at 812 (quoting In re Commonwealth’s Motion, 790 F.3d at 467). Cessna
and Work concede that REA is a “person” but challenge whether it has met its burden as
to the other three elements.
First, we agree with the District Court’s conclusion that REA was “acting under”
federal office. “‘[A]cting under’ must involve an effort to assist, or to help carry out, the
duties or tasks of [a] federal superior.” In re Commonwealth’s Motion, 790 F.3d at 468
(quoting Watson, 551 U.S. at 152 (emphasis in original)). Although REA’s mere
compliance with a complex regulatory scheme would not suffice, Watson, 551 U.S. at
153, the relationship between REA and the federal Government is more significant.
REA’s existence and continued operation implement a long-running federal program.
4
President Franklin D. Roosevelt sought to promote rural electrification as early as
1935, and in the following year Congress enacted legislation permitting federal loans to
non-profit electrical cooperatives in rural or sparsely populated areas. See Caver v. Cent.
Ala. Elec. Coop., 845 F.3d 1135, 1138 (11th Cir. 2017) (describing the Rural
Electrification Act of 1936, 7 U.S.C. § 901, et seq.). Those loans are now overseen by
the Rural Utilities Services of the United States Department of Agriculture (“RUS”). Id.
at 1139. REA was created with funding under the Rural Electrification Act. In addition
to being heavily regulated by federal law, its activity is circumscribed by the terms of its
loan agreement with RUS. As our sister circuits have observed, “rural electric
cooperatives [like REA] are something more than public utilities; they are
instrumentalities of the United States.” Ala. Power Co. v. Ala. Elec. Coop., Inc., 394
F.2d 672, 677 (5th Cir. 1968); accord Fuchs v. Rural Elec. Convenience Coop. Inc., 858
F.2d 1210, 1217 (7th Cir. 1988) (“[R]ural electric cooperatives are in some sense
‘instrumentalities of the United States.’” (quoting Ala. Power Co., 394 F.2d at 677)); see
also Caver, 845 F.3d at 1143 (holding a rural cooperative similar to REA “assist[s] RUS
with accomplishing its duties or tasks”). Therefore REA acted under federal office.
Second, we agree with the District Court that Cessna and Work’s claims “relate
to” an act of REA under color of federal office. In other words, there is some
“‘connection’ or ‘association’ between the act in question and the federal office,” as our
precedent requires. In re Commonwealth’s Motion, 790 F.3d at 471. Cessna and Work
challenge REA’s withholding of Patronage Capital. In response, the utility points to
terms in its loan agreement with RUS and 7 C.F.R. § 1717.617, both of which limit its
5
authority to distribute Patronage Capital to its members without prior RUS approval.
REA claims it withheld Patronage Capital to comply with these limitations.
In response, Cessna and Work argue nothing outright prohibits Patronage Capital
distributions and REA could have paid at least some amount to its members without
violating any legal obligation. Thus they contend REA’s particular manner of
withholding member funds is not related to any act under color of federal office. But
“[t]o choose between” these competing interpretations of the loan agreement and the law
“is to decide the merits of this case,” which “would defeat the purpose of the removal
statute.” Jefferson Cty. v. Acker, 527 U.S. 423, 432 (1999) (interpreting an earlier and
narrower version of the removal statute). 2 REA does not need to prove its understanding
of its legal obligations is correct; it needs only to show the acts for which it is being sued
share a connection to acts under color of federal office. That it has done.
Third, and for similar reasons, REA also has a colorable federal defense that
warrants review in a federal forum. It maintains that any asserted obligation to pay out
Patronage Capital under 15 Pa.C.S. § 7330 is preempted because this conflicts with
federal regulations and REA’s loan agreement with RUS. Again, Cessna and Work
respond that the state law does not conflict—or if it does to some degree, it would not
fully preclude REA from retiring any Patronage Capital. But regardless whether it
ultimately prevails on the merits, REA’s preemption argument is colorable. “[O]ne of the
2
Cessna and Work assert that, because they are bringing a factual rather than facial
challenge to federal jurisdiction, the District Court should have determined which
interpretation of REA’s Patronage Capital obligations is correct. However, as we have
made clear in other federal officer removal cases, “[t]o the extent that [a factual]
challenge bleeds into the merits of the case, the District Court ought not address it in
terms of jurisdiction.” Papp, 842 F.3d at 811 n.4.
6
most important reasons for removal is to have the validity of the defense of official
immunity tried in a federal court;” for this reason “we have rejected a narrow, grudging”
approach when analyzing whether a defendant had raised a colorable federal defense.
Jefferson Cty., 527 U.S. at 431 (internal quotation marks omitted).
REA established all the elements necessary for removal under 28 U.S.C.
§ 1442(a)(1). Thus the District Court did not err in denying Cessna and Work’s motion
to remand this action to Pennsylvania state court.
II. The Motion to Dismiss
The District Court also correctly granted REA’s motion to dismiss for Cessna and
Work’s failure to state a claim for breach of contract. Such a claim requires a plaintiff to
plead (1) the existence of a contract (including its essential terms), (2) a breach of the
contract, and (3) damages. Omicron Sys., Inc. v. Weiner, 860 A.2d 554, 564 (Pa. Super.
Ct. 2004). Both parties agree that the bylaws establish the existence of a contract and that
Cessna and Work allege money damages. As for element two, we are not persuaded of
any breach. They argue REA breached the contract by failing to distribute Patronage
Capital. However, the bylaws read in pertinent part: “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 [members’]
accounts may be returned in full or in part.” (JAV. II at 147) (emphasis added). Because
this provision is plainly permissive, there is no claim for breach of contract.
Cessna and Work further argue that the District Court erred when it failed to read
the covenants of good faith and fair dealing into REA’s bylaws. Although good faith and
7
fair dealing may be used as a tool to interpret a contract, it “cannot be used to override an
express contractual term.” Northview Motors, Inc. v. Chrysler Motors Corp., 227 F.3d
78, 91 (3d Cir. 2000). Here, the plain language of the bylaws addressed both Patronage
Capital and the relief sought by Cessna and Work. Thus the District Court did not err in
granting REA’s motion to dismiss. 3
Thus we affirm.
3
Cessna and Work also argue breach of contract under 15 Pa. Cons. Stat. Ann. § 7330(c).
We agree for the same reasons articulated by the District Court that there is no breach on
that basis.
8