258 F. Supp. 3d 566
W.D. Pa.2017Background
- Plaintiffs Leonard Cessna and George Work (current and former members) sued REA Energy Cooperative alleging REA has withheld patronage capital (member margins) that must be returned to members under cooperative principles, REA’s bylaws, and 15 Pa. Cons. Stat. § 7330. Plaintiffs seek class treatment and multiple remedies (refunds, interest, declaratory/injunctive relief).
- REA is a nonprofit rural electric cooperative serving ~22,000 members; its bylaws treat excess revenues as patronage capital credited to member accounts and permit board discretion to return capital “if the financial condition ... shall not be impaired.” REA’s Penn Lines newsletter (Oct. 2011) contains Q&A language about refunds.
- REA removed the case to federal court and moved to dismiss under Rule 12(b)(6). Plaintiffs moved to strike the motion to dismiss for alleged discovery refusal; the court denied that motion as premature.
- Key legal disputes: (1) whether federal law/regulations or REA’s loan terms preempt state-law claims; (2) whether Plaintiffs adequately pleaded UTPCPL, breach of contract, breach of implied covenant of good faith, unjust enrichment, breach of fiduciary duty, and declaratory/injunctive relief.
- The district court accepted Plaintiffs’ factual allegations but relied on the bylaws and Penn Lines exhibit where integral; it dismissed all claims for failure to state a claim, but granted limited leave to amend UTPCPL and breach-of-contract claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Preemption by federal law/loan terms | State-law claims would not conflict; § 7330 requires return of excess revenues | Federal Rural Electrification Act/regulations and loan covenants (and 7 C.F.R. § 1717.617) limit refunds (e.g., equity floor) and would conflict | No preemption on pleadings; any regulatory/loan limits would only cap relief and do not defeat claims entirely at this stage |
| UTPCPL (73 Pa. C.S.) claim | REA made written guarantees (bylaws, Penn Lines) and deceptive acts; members suffered ascertainable loss | UTPCPL inapplicable/insufficiently pleaded; lack of specific written warranty and no justifiable reliance by plaintiffs | Dismissed: plaintiffs failed to plead justifiable reliance or identify an actionable written warranty; Penn Lines possibly a written representation but no reliance alleged; leave to amend allowed for UTPCPL only |
| Breach of covenant of good faith and fair dealing | Bylaws’ discretion must be exercised reasonably; REA abused discretion in not returning capital | Contract grants board discretionary authority; covenant cannot override express terms; claim duplicates breach-of-contract | Dismissed: covenant cannot supplant express contractual discretion and is subsumed by contract claim; amendment futile |
| Breach of contract (including implied term to return capital “from time to time”) | § 7330 and cooperative principles imply a contractual duty to timely return patronage capital | Bylaws + § 7330 permit board discretion and treat excess as capital credited; no breach plausibly alleged | Dismissed for failure to plead breach; limited leave to amend (articles of incorporation might supply additional terms) |
| Unjust enrichment (alternative) | If contract provisions conflict with law, unjust enrichment claim is preserved | Express contract governs; unjust enrichment unavailable where valid written contract exists | Dismissed: contract governs; alternative pleading not salvageable here |
| Breach of fiduciary duty | REA acted as agent/trustee and breached fiduciary duties by retaining capital and not paying interest | Claims arise from contractual duties (bylaws) so tort recasting not allowed; gist-of-the-action/economic-loss doctrines bar tort recovery | Dismissed: barred by gist-of-the-action doctrine because duties alleged derive from contract |
| Declaratory/injunctive relief | Seeks declarations (trust, fiduciary breach) and injunction to force return of capital or appointment of receiver | Remedies derivative of deficient substantive claims; injunction requires success on merits | Dismissed: derivative of failed claims; injunctive relief not warranted |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading standard for plausible claims)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (Twombly pleading framework)
- Fowler v. UPMC Shadyside, 578 F.3d 203 (two-step Iqbal/Twombly analysis in Third Circuit)
- Northview Motors, Inc. v. Chrysler Motors Corp., 227 F.3d 78 (implied covenant cannot override express contractual terms)
- Ark. Elec. Coop. Corp. v. Ark. Pub. Serv. Comm’n, 461 U.S. 375 (Rural Electrification Act does not expressly preempt state regulation)
- Weinberg v. Sun Co., 777 A.2d 442 (UTPCPL reliance requirement explained under Pennsylvania law)
- eToll, Inc. v. Elias/Savion Advert., Inc., 811 A.2d 10 (gist-of-the-action doctrine precludes tort claims grounded in contract)
- Phillips v. County of Allegheny, 515 F.3d 224 (court must accept factual allegations and construe in plaintiff’s favor in pleading-stage review)