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Court of Appeals upholds dismissal of lawsuit against REA

The U.S. 3rd Circuit Court of Appeals in Philadelphia has upheld a decision by U.S. District Judge Kim R. Gibson in Johnstown dismissing a lawsuit that sought millions of dollars in payments to customers of a rural electric cooperative.

Initially filed in Blair County, the lawsuit was against REA Energy Cooperative, which has offices in Indiana and Ebensburg and which provides electricity to 22,000 customers in Blair, Cambria, Clear­field, Armstrong, Indiana, Jefferson and Westmoreland counties.

The cooperative dates back to the late 1930s when it was determined that economic progress in rural areas of the nation was slow in recovering from the Great Depression because of a lack of electrical service.

President Franklin D. Roosevelt issued an executive order in 1935 creating the Rural Electrification Administration within the U.S. Department of Agriculture that allowed residents of rural areas to create nonprofit cooperatives and construct electrical systems with money borrowed from the newly created REA.

The local cooperative was incorporated in 1937, and while it is a nonprofit operation, it does accrue income that exceeds its expenses.

This income is not referred to as “profit” but as “margin” and each year members or clients of the cooperative are assigned a portion of the margin called “patronage capital.”

According to a class-action lawsuit filed in 2015 by attorney Troy M. Frederick of the Frederick Law Group in Indiana, “The amount of Patronage Capital a defendant REA member earns each year is determined based on each member’s electric usage. The more electricity a member uses the more Patronage Capital that member will earn each year.”

Frederick, representing a former member of the cooperative, George Work, and a present member, Leonard Cessna, both of Punxsutawney, contends the cooperative’s Patronage Capital is now worth between $56 million and $60 million and that cooperative has only once, in 2011, issued a distribution to its clients.

That involved $700,000 for customers prior to 1961, and about 6,000 of those customers could not be located.

Operating according to certain “principles,” the net surplus should periodically be distributed, and by not doing so, the civil action contends that REA violated Pennsylvania’s Unfair Trade Practices and Consumer Protec­tion Law and is in violation of several other state statutes, including breach of contract.

REA in February 2016 removed the lawsuit from the Blair County Court of Common Pleas to the U.S. District Court in Johnstown.

Gibson then dismissed the lawsuit because it did not assert a viable federal claim, and Frederick appealed to the 3rd Circuit.

A three-judge panel including Circuit Judges Thomas L. Ambro, Michael A. Chagares and Joseph A. Greenaway Jr. ruled in REA’s favor.

Frederick said Thursday that he will not appeal the ruling to the U.S. Supreme Court, but he indicated his disappointment with the ruling and advised customers to become active in their cooperative.

One of the issues in the appeal was Gibson’s decision allowing the transfer of the lawsuit to the federal court, but as the judge pointed out, there is a strong relationship between the local cooperative and the federal government.

The 3rd Circuit judges explained the loans used to develop the cooperative came from the Rural Utilities Services of the Agriculture Department, and in addition to being heavily regulated by federal law, “its activity is circumscribed by the terms of its loan agreement with Rural Utilities Service.”

Other circuit courts have described cooperatives as “instrumentalities of the United States,” the 3rd Circuit opinion pointed out.

REA asserted that its obligation to pay Patronage Capital under Pennsylvania law is pre-empted by its duty to adhere to federal regulations and its loan agreement with Rural Utilities Services.

The appeals court ruled Gibson “did not err in denying (the) motion to remand this action to the Pennsyl­vania state court.”

The judges also pointed out there is no claim for breach of contract between REA and its consumers, noting REA’s bylaws state that the Patronage Capital “may” be returned in full or part to members.

“Because this provision is plainly permissive, there is no claim for breach of contract,” according to the 3rd Circuit.

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