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Cooperative Litigation Update: Texas Cooperative Lawsuit Considered on Appeal

Earlier this past July, the Texas Court of Appeals ruled on important aspects of the cooperative lawsuit concerning Denton County Electric Cooperative, Inc., d/b/a CoServ Electric (“CoServ”).  The court ruled, among other things, that (i) the cooperative was not subject to certain statutory rules governing non-profit corporations, and (ii) the electric cooperative statute did not impose a fiduciary duty on the cooperative itself. 

Lawsuit Background

CoServ and its members and directors have been engaged in litigation in both state and federal courts since early 2009.  The dispute grew out of alleged election impropriety, alleged withholding of cooperative records, and alleged release of confidential member information.  For instance, a director candidate filed a class-action lawsuit against the cooperative for breach of fiduciary duty, alleging that the cooperative improperly undermined the democratic process in favor of incumbent directors. 

The cooperative filed a separate suit against a director who allegedly released confidential contact information of members in connection with a robo-call campaign.  That director filed a class-action counterclaim alleging that the cooperative failed to provide open meetings, open records, and fair voting for board elections.  Ultimately the trial court certified the class to move forward with the lawsuit, which the cooperative appealed.

Court of Appeals Ruling

CoServ contends that the trial court based the class certification on a misunderstanding of Texas law of electric cooperatives.  As part of the class certification, the trial court applied (by analogy) certain provisions of Texas’s non-profit corporation code.  Specifically, the court of appeals ruled on CoServ’s argument that (i) it owed no statutory duty to its members based on the non-profit corporations code, (ii) the members, therefore, had no standing based on such duties, and (iii) the cooperative owed no fiduciary duty to its members.

Applicability of Texas’s Non-Profit Corporation’s Code to Electric Cooperatives

A key issue in the case was whether certain provisions in Texas’s non-profit corporations code applied to electric cooperatives.  Like many states, Texas has enacted a code specifically for electric cooperatives (commonly called an enabling act).  Yet the code did not clearly address, or it specifically excluded, certain guidance concerning member-cooperative relations.  Thus, the class-action plaintiffs relied on provisions in the non-profit corporation code by analogy.  Among other things, these provisions related to:

  • Member access to records of the organization; and
  • Member recourse against the organization for statutory violations.

The court first reviewed the nature of electric cooperatives under Texas law, and the enactment of Texas’s electric cooperative enabling act.   It concluded that cooperatives were sufficiently dissimilar to corporations for the non-profit corporations code to generally apply to electric cooperatives.  And, except where the electric cooperative enabling act specifically incorporated provisions from the non-profit code, it did not incorporate the non-profit code generally. 

Based on the nature of the electric cooperative and the specific differences set out in the [enabling act] as compared to the provisions of the [non-profit corporations code], as well as the fact that the legislature deliberately chose to incorporate only two specific provisions of [such code] into the [enabling act], we conclude that the legislature did not intend to provide electric cooperative members with the same rights set out in [non-profit corporations code].

Accordingly, the provisions of the non-profit corporations code relied upon by the class-action plaintiffs did not apply to electric cooperative members.

Standing of the Members

The court then considered whether the enabling act allowed members to sue the cooperative based on violations of statutory rights.  It noted that the enabling act does not set forth with any specificity the details and procedures the cooperative should follow when members request access to cooperative books and records.  Instead it allowed the bylaws to establish those details and procedures.  Therefore, any remedy for breach of the bylaw provisions should be asserted through a breach-of-contract action, not based on violations of purported statutory rights.

Fiduciary Duties to Cooperative Members

Finally, the court held that nothing in the electric cooperative enabling act provided for a fiduciary duty from the cooperative to its members.  “We conclude that whether the cooperative itself owes a fiduciary duty to its members is another claim best suited for a legislative determination.”  In other words, if the Texas legislature wanted to allow members to sue their cooperative based on violations of purported statutory rights, it would have said so in the statute, or it could amend the statute.  As an aside, the court noted that while the directors may owe fiduciary duties to the members, the directors were not parties to the lawsuit. 

Conclusion

This particular case has important implications for rights of electric cooperative members in Texas.  In addition, to the extent courts in other states rely on its reasoning, it could have an impact elsewhere.  But as we always suggest, to determine a case’s relevance to your cooperative, you should always check your state’s electric cooperative enabling act (or other relevant legislation) and related case law in your state. 

AHC’s cooperative law attorneys have been closely monitoring lawsuits against cooperatives around the country in an effort to properly advise our cooperative clients.  We will likely have additional analysis of this opinion. 

Read more of AHC’s coverage of cooperative litigation here.

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