John McCARTHY et al., Plaintiffs-Appellants, v. MIDDLE TENNESSEE ELECTRIC MEMBERSHIP CORPORATION et al., Defendants-Appellees.
No. 05-6477.
United States Court of Appeals, Sixth Circuit.
Argued: July 26, 2006. Decided and Filed: Oct. 17, 2006.
466 F.3d 399
Before MOORE, CLAY, and GRIFFIN, Circuit Judges.
OPINION
KAREN NELSON MOORE, Circuit Judge.
Plaintiffs-Appellants appeal from the district court‘s dismissal of claims brought against electric cooperatives and the Tennessee Valley Authority (together, “defendants“). Members of the electric cooperatives (“plaintiffs“) brought an action against the defendants, claiming that the cooperatives (“Cooperatives“) refused to distribute refunds or to reduce electricity rates as required when electric cooperatives have excess revenue. The Cooperatives were prohibited from distributing the refunds on the basis of their contracts with the Tennessee Valley Authority (“TVA“), which supplies the Cooperatives with electricity. The plaintiffs also asserted that the Cooperatives failed to keep adequate records. The district court dismissed the plaintiffs’ state-law claims without prejudice because these claims should have been filed as a derivative suit, and it dismissed the plaintiffs’ federal-law claims with prejudice. For the reasons discussed below, we AFFIRM the judgment of the district court.
I. BACKGROUND
The Tennessee General Assembly has stated “that rural electric cooperatives . . . have proved to be ideal business organizations in providing adequate and reliable electric services at reasonable rates throughout the rural communities of Tennessee.”
If electric cooperatives accrue excess revenue beyond what is necessary to cover specified expenses, these funds must be distributed in one of the following three ways: “(A) As patronage refunds prorated in accordance with the patronage of the cooperative by the respective patrons paid for during or with respect to such fiscal year;3 (B) By way of general reductions of
(b) With respect to the supplying or furnishing of services in pursuance of one (1) or more secondary purposes, the revenues of a cooperative shall, as separately accounted for and determined for each such service, be first applied as provided in subdivisions (a)(1)-(6) and then distributed to the patrons of each such service in the manner provided for in the bylaws, either:
(1) As patronage refunds prorated in accordance with the patronage of the cooperative by the respective patrons paid for during or with respect to such fiscal year;
(2) By way of general reductions of rates or other charges;
(3) By crediting patrons with having furnished the cooperative capital in amounts equal to the amounts of their patronage not refunded pursuant to subdivision (b)(1) and not used for general reduction of rates or other changes pursuant to subdivision (b)(2), all or any portion of such capital to be redeemable and be retired at such later time as the board in its sole discretion determines that such will not impair the cooperative‘s financial condition and will be in the cooperative‘s best interests; or
(4) By any combination of methods in subdivisions (b)(1)-(3).
However, “[n]othing contained in subsection (a) or (b) shall be construed to prohibit the payment by a cooperative of all or any part of its indebtedness prior to the date when the same shall become due.”
On April 12, 2004, the plaintiffs filed a complaint against the Cooperatives and the TVA in federal district court. The plaintiffs’ complaint included the following claims: violation of the Sherman Act,
The district court issued an order on August 4, 2004, staying discovery and seeking a response from the plaintiffs as to the following issues raised in the Cooperatives’ motion to dismiss: “(1) Whether Plaintiffs’ claims are derivative claims; (2) if Plaintiffs’ claims are deemed derivative claims, whether the Plaintiffs complied with State law to assert these claims; and (3) whether the Plaintiffs have standing to
On December 3, 2004, the district court granted the defendants’ motions to dismiss;6 it dismissed the plaintiffs’ state-law claims without prejudice, and it dismissed the plaintiffs’ federal-law claims with prejudice. The plaintiffs filed a motion to alter or amend the district court‘s judgment, claiming that there was no basis for dismissing their constitutional claims or for finding that their state-law claims were derivative in nature. The district court denied the plaintiffs’ motion on July 29, 2005; in addressing the plaintiffs’ constitutional claims, the district court concluded that there was no state action and that the plaintiffs had an adequate remedy under state law. The plaintiffs timely appealed from the district court‘s December 3, 2004 and July 29, 2005 orders.
II. ANALYSIS
A. Standard of Review
We review de novo the district court‘s grant of the defendants’ motions to dismiss pursuant to
B. Judicial Review
The TVA characterizes the case as “a judicial challenge to the level of rates set by the TVA Board of Directors for the sale of TVA power at retail and to the terms and conditions for the sale of that power.” TVA Br. at 22. As a result of this, the TVA argues that we should affirm the district court‘s dismissal of the plaintiffs’ claims because these claims are not subject to judicial review. The plaintiffs expressly state in their reply brief that “this lawsuit is not about rate making.” Appellants Reply Br. at 23. Instead, they argue that they are seeking an accounting of the patronage accounts. Id. However, because the plaintiffs also argue that they were improperly denied patronage capital, Appellants Br. at 14, we believe it is necessary to address the question of judicial review.
“A long line of precedent exists establishing that TVA rates are not judicially reviewable.” Matthews v. Town of Greeneville, No. 90-5772, 1991 WL 71414, at *2 (6th Cir. May 2, 1991) (unpublished opinion), cert. denied, 502 U.S. 938 (1991); see also 4-County Elec. Power Ass‘n v. TVA, 930 F. Supp. 1132, 1137 (S.D. Miss. 1996) (“Plaintiff acknowledges that by virtue of TVA‘s having been granted by Congress full discretionary authority with respect to setting rates, TVA‘s rate-making decisions are beyond the scope of judicial review under the APA.“); Carborundum Co. v. TVA, 521 F. Supp. 590, 593 (E.D. Tenn. 1981) (noting the “well established legal princip[le] that the setting of power rates under the Tennessee Valley Authority Act is not subject
The plaintiffs’ claims “against the TVA must be evaluated under the provisions of the Administrative Procedure Act (APA).” Matthews, 1991 WL 71414, at *2. Parties may seek judicial review of agency action7 unless the relevant statute precludes such review,
Our decision not to review the TVA‘s contract also extends to the Cooperatives’ enforcement of that contract. See Allen v. Elec. Power Bd., 422 F. Supp. 4, 6 (M.D. Tenn. 1976) (“By parity of reasoning, the imposition of the rate adjustment schedules by TVA‘s distributors pursuant to their contracts with TVA are likewise not reviewable.“). Federal law preempts Tennessee law on this point as well. See Millsaps, 259 F.3d at 538 (stating that federal law preempts state law “when a state law ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress‘” (quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941))). If we were to review the Cooperatives’ actions in enforcing the contract, we would still be reviewing the TVA‘s actions and thus ignoring the APA‘s prohibition on judicial review.
This does not end our inquiry. The plaintiffs’ claims under the Tennessee Consumer Protection Act,
C. Derivative Nature of Plaintiffs’ State-Law Claims
“A derivative action is an extraordinary, equitable remedy available to shareholders when a corporate cause of action is, for some reason, not pursued by the corporation itself.” Lewis v. Boyd, 838 S.W.2d 215, 221 (Tenn. Ct. App. 1992). Tennessee “requires the shareholder to first make a written demand on the corporation‘s directors requesting them to prosecute the suit or to take other suitable corrective action. This precondition is commonly known as the demand requirement.” Id. (internal quotation marks omitted). The demand requirement serves several purposes: “to allow the directors to occupy their normal status as the conductors of the corporation‘s affairs, to encourage informal resolution of intracorpo-
The district court held that the plaintiffs’ state-law claims10 were derivative rather than direct11 and that the plaintiffs’ failure to make a pre-suit demand to the Cooperatives could not be excused on the basis of futility.12 The plaintiffs challenge both the precedent upon which the district court relied as well as the district court‘s application of that precedent to the facts of this case.13
1. Tennessee standards for determining whether a suit is derivative or direct
The district court cited the following rule from Cato v. Mid-America Distribution Centers, Inc., No. 02A01-9406-CH-00149, 1996 WL 502500, at *5 (Tenn. Ct. App. Sept. 6, 1996) (unpublished opinion): “Stockholders may bring an individual action to recover for an injury done directly to them that is separate and distinct from any injury incurred by the corporation or other shareholders.” Cato, 1996 WL 502500, at *5, cited Hadden v. City of Gatlinburg, 746 S.W.2d 687, 689 (Tenn. 1988), which in turn stated that “[s]tockholders may bring an action individually to recover for an injury done directly to them distinct from that incurred by the corporation and arising out of a special duty owed to the shareholders by the wrongdoer.” The district court also discussed Davis v. Appalachian Electric Co-op, Inc., 213 Tenn. 215, 373 S.W.2d 450 (1963), a 1963 case involving an analogous effort by plaintiffs to obtain patronage refunds from an electric cooperative. In Davis, the Tennessee Supreme Court held that the plaintiffs were required to “show that [their] remedies permitted within the corporate structure have been exhausted, or that such an attempt to exhaust said remedies would be a useless gesture.” Davis, 373 S.W.2d at 452.
The plaintiffs argue that the Tennessee courts no longer apply the test set forth in Cato for determining whether an action is direct or derivative; rather, they argue,
The trial court‘s premise was as follows: In order to bring a direct claim, a plaintiff must have experienced some “special injury.” A special injury is a wrong that “is separate and distinct from that suffered by other shareholders, . . . or a wrong involving a contractual right of a shareholder, such as the right to vote, or to assert majority control, which exists independently of any right of the corporation. In our view, the concept of “special injury” that appears in some . . . cases is not helpful to a proper analytical distinction between direct and derivative actions. We now disapprove the use of the concept of “special injury” as a tool in that analysis.
Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031, 1035 (Del. 2004) (citations and footnote omitted). Tooley held that “[t]he analysis must be based solely on the following questions: Who suffered the alleged harm—the corporation or the suing stockholder individually—and who would receive the benefit of the recovery or other remedy?” Id. The plaintiffs argue that “[c]ourts in Tennessee follow Delaware law in determining whether an action is derivative or direct,” citing Denver Area Meat Cutters & Employers Pension Plan v. Clayton, 120 S.W.3d 841, 859-60 (Tenn. Ct. App. 2003). Appellants Br. at 19. However, the defendants respond that Clayton involved two Delaware corporations and any citation to Delaware law is indicative only of the rule that Tennessee courts apply the law of the state of incorporation to internal corporate disputes. Clayton, 120 S.W.3d at 849.
We agree with the plaintiffs that if presented with this issue, the Tennessee Supreme Court would likely adopt the rule articulated in Tooley, rather than adhering to its 1988 decision in Hadden. The Tennessee Court of Appeals explained that “Delaware has become the most popular state in which to incorporate businesses, and Delaware‘s judiciary are recognized as specialists in the field of corporate law. Courts of other states consider the decisions of Delaware courts on corporate matters to be instructive.” Bayberry Assocs. v. Jones, No. 87-261-II, 1988 WL 137181, at *5 n. 8 (Tenn. Ct. App. Nov. 9, 1988) (unpublished opinion). The appellate court decision in Bayberry was vacated, but the Tennessee Supreme Court did not dispute the lower court‘s use of Delaware law. Bayberry Assocs. v. Jones, 783 S.W.2d 553, 560 (Tenn. 1990). Rather, the supreme court merely provided its own analysis of the applicability of Delaware precedent. Id. We believe that the supreme court
2. Application of the rules
In their brief, the plaintiffs argue that the Cooperatives have failed to account for each member‘s patronage capital and “have improperly spent their surplus revenue on items unrelated to their statutory purpose such as beauty pageants, all expense trips for board members around the country, and unnecessary capital improvements.” Appellants Br. at 8-9. We believe that the plaintiffs’ claims are essentially claims of “mismanagement, self-dealing, and breach of fiduciary duty.” Cato, 1996 WL 502500, at *6. If the Cooperatives failed to maintain records and spent their money on non-necessary expenses, it is clear that they were not acting in accordance with their statutory purpose of providing their members with electricity “at the lowest cost consistent with sound business principles.”
3. Demand requirement
Finally, the plaintiffs contend that even if their state-law claims are derivative, a pre-suit demand would have been futile. Tennessee law recognizes “demand excused cases” on the basis of futility if the shareholders demonstrate “(1) that the board is interested and not independent and (2) that the challenged transaction is not protected by the business judgment rule.” Lewis, 838 S.W.2d at 222. The plaintiffs contend that demand would have been futile in this case due to the contractual prohibition against distributing patronage refunds as well as the asserted fact that “the Cooperatives have not kept adequate records for the determination of each member‘s patronage capital.”16 Appellants Br. at 23.
The district court correctly concluded that “the Plaintiffs have failed to plead
D. Federal Constitutional Claims
1. State action
The plaintiffs filed their constitutional claims pursuant to
The plaintiffs first respond that the Cooperatives operate according to state legislative mandate and in conjunction with the state government. It is true that the Cooperatives are subject to a number of state regulations and are instructed to act to fulfill state objectives; however, “[t]he mere fact that a business is subject to state regulation does not by itself convert its action into that of the State for purposes of the Fourteenth Amendment.” Jackson v. Metro. Edison Co., 419 U.S. 345, 350 (1974).
2. Property interest
The plaintiffs’ constitutional claims also fail on the merits, against both the TVA and the Cooperatives. Both their due process and takings claims require that the plaintiffs first demonstrate that they have a legally cognizable property interest. “To have a property interest in a benefit, a person clearly must have more than an abstract need or desire for it. He must have more than a unilateral expectation of it. He must, instead, have a legitimate claim of entitlement to it.” Hamby v. Neel, 368 F.3d 549, 557 (6th Cir. 2004) (quoting Bd. of Regents v. Roth, 408 U.S. 564, 577 (1972)). We have explained that such interests “are created and their dimensions are defined by existing rules or understandings that stem from an independent source such as state law—rules or understandings that secure certain benefits and that support claims of entitlement to those benefits.” Id. (quoting Roth, 408 U.S. at 576).
The plaintiffs argue that they have property interests in their patronage capital. However, this claim fails because
E. Antitrust Claim
The plaintiffs “challenge the contractual provision between TVA and the Cooperatives prohibiting patronage refunds as an unreasonable restraint of trade and interstate and intrastate commerce in violation of Section 1 of the Sherman Antitrust Act, 20
In analyzing the plaintiffs’ Sherman Act claim, we first consider whether the TVA is entitled to immunity on the basis of its status as a federal corporation. “The Sherman Act imposes liability on any ‘person.‘” U.S. Postal Serv. v. Flamingo Indus. (USA) Ltd., 540 U.S. 736, 744 (2004). “The word ‘person’ . . . shall be deemed to include corporations and associations existing under or authorized by the laws of either the United States, the laws of any of the Territories, the laws of any State, or the laws of any foreign country.”
Both the TVA and the Cooperatives acted pursuant to federal and state law, which is also relevant to our antitrust analysis. The district court relied on Gordon v. New York Stock Exchange, Inc., 422 U.S. 659, 689 (1975), which held that exchange commission rates approved by the Securities and Exchange Commission (“SEC“) pursuant to the Securities Exchange Act of 1934 are entitled to antitrust immunity. The Gordon Court explained that “[r]epeal of the antitrust laws by implication is not favored and not casually to be allowed. Only where there is a plain repugnancy between the antitrust and regulatory provisions will repeal be implied.” Gordon, 422 U.S. at 682. Gordon was concerned that the exchanges would be exposed to “conflicting standards,” because “the sole aim of antitrust legislation is to protect competition, whereas the SEC must consider, in addition, the economic health of the investors, the exchanges, and the securities industry.” Id. at 689. The Court concluded that “[t]o permit operation of the antitrust laws with respect to commission rates . . . would unduly interfere, in our view, with the operation of the Securities Exchange Act.” Id. at 685-86. The TVA is authorized to enter into contracts for the purpose of “promot[ing] the wider and better use of electric power for agricultural and domestic use, or for small or local industries.”
The defendants also argue that this court should affirm the district court‘s grant of their motions to dismiss because the plaintiffs failed to state a claim for a violation of the RECSCA, the Tennessee Trade Practices Act, the Tennessee Consumer Protection Act, or for breach of a fiduciary duty. For each of these state-law claims, the plaintiffs argue that the Cooperatives improperly refused to issue patronage refunds or reduce rates and failed to maintain its patronage records. The underlying premise of the plaintiffs’ arguments is that the Cooperatives mismanaged their excess revenue, and mismanagement of funds is typically a derivative claim. Cato, 1996 WL 502500, at *6. We need not address the merits of these arguments, because the district court correctly dismissed these claims without prejudice so that the plaintiffs could raise them in a state-law derivative suit.
III. CONCLUSION
For the reasons discussed above, we AFFIRM the judgment of the district court.
Notes
Electric cooperatives heretofore incorporated under the former “Electric Cooperative Law” or hereafter incorporated under this part shall be organized and operated on a nonprofit basis and without pecuniary gain, and shall furnish their services on an area coverage basis at the lowest cost consistent with sound business principles.
The former applies when Congress has expressed an intent to preclude judicial review. The latter applies in different circumstances; even where Congress has not affirmatively precluded review, review is not to be had if the statute is drawn so that a court would have no meaningful standard against which to judge the agency‘s exercise of discretion. In such a case, the statute (“law“) can be taken to have “committed” the decisionmaking to the agency‘s judgment absolutely.
Every person who, under color of any statute, ordinance, regulation, custom, or usage, of any State . . . subjects, or causes to be subjected, any citizen of the United States or other person within the jurisdiction thereof to the deprivation of any rights, privileges, or immunities secured by the Constitution and laws, shall be liable to the party injured in an action at law, suit in equity, or other proper proceeding for redress. . . .