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Cooperative Litigation Update: N.C. Court Rules on Coop’s Discounting Program

In another lawsuit concerning cooperatives’ capital credit practices, a North Carolina trial court ruled in favor of a cooperative that we previously wrote about in another blog post.

The court ruled, based on the facts at issue, that the cooperative had no fiduciary duty to the plaintiffs, which were a group of deceased members’ estates.  In addition, it declared that the cooperative had authority to adopt a procedure for retiring deceased members’ capital credits on an accelerated and discounted basis.  However, it expressly did not rule on whether the cooperative, in practice, properly discounted the capital credits.   In other words, the court reserved judgment on the specific manner of discounting the particular capital credits at issue in this case. 

Case Background

For more information about the North Carolina case, view a prior blog post here.   In short, the case was filed as a class-action lawsuit by estates of deceased members.  The estates argue that the cooperative’s practice of discounting capital credits amounts to a conversion of the estates’ capital credits.

In 2001, the cooperative amended its bylaws to allow early retirement of capital credits.  The amended bylaws required discounting based upon the Wall Street Prime Rate, and allowed the discount (full value less discounted value) to be transferred to the cooperative’s permanent equity.   To qualify to receive early retirement, the estates’ administrators previously signed a standard application form.  Eventually, they sued the cooperative alleging that the program was improper, in form and in practice.

No Fiduciary Duty

A key issue in the case is whether the cooperative owed a fiduciary duty to its members and, specifically, the deceased members’ estates.  The court first noted that there are two types of fiduciary duties to consider: (1) de jure — where the duty arises as a matter of law from the legal nature of the relationship — and (2) de facto — where the duty arises from the particular circumstances of the relationship of the parties.

Without much discussion, the court ruled that the first type of fiduciary duty was not present.  In other words, the cooperative did not stand in a de jure fiduciary relationship with the estates.

After reviewing the specific details of the relationship between the cooperative and the estates, the court ruled that there was no de facto fiduciary duty.  There was “no reasoned basis in light of the disclosures on the form to assert that a special relationship of trust and confidence arose because [the cooperative] had historically retired deceased credits at full value.”  Thus, the cooperative owed neither type of fiduciary duty to the estates.

Authority to Discount Capital Credits

Without passing on the specific discounted retirements at issue, the court ruled generally that the cooperative had authority to adopt its discounting program.  The estates conceded that the board has discretion to adopt a discounting program and that the Internal Revenue Service has recognized the practice of discounting capital credits.  (See a prior post concerning one of these rulings.)

The estates argued that even if the board had authority to adopt such a bylaw provision, it did not follow the proper steps to adopt it.  Specifically, they argue that the board did not provide advance notice to its members.  The court rejected this argument because, at the time the estates submitted their application for early retirement, they were aware that the cooperative would implement a discounting program.  In other words, the estates were aware of the likelihood that the cooperative would discount capital credits.  Accordingly, the board properly adopted the bylaw provision.

Stay Informed

We will continue to monitor lawsuits involving cooperatives, including the lawsuit addressed in this post.  Please visit our blog frequently to stay updated.  Please subscribe to this blog and receive email updates by signing up in “Subscribe to the Blog via Email.”

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  1. Pingback: Updated Capital Credits Litigation Summary – Construction and Utility Law | Atlanta | AHC Law

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