Opinion ID: 710247
Heading Depth: 2
Heading Rank: 1

Heading: Patronage Capital

Text: 40 The cooperative Members are classified under the Wabash Plan as holding claims for the reimbursement of patronage capital. Wabash Plan at Secs. 3.11 and 3.12. Because of the difficulty of anticipating exactly what the costs of producing power will be, utilities sometimes collect excess revenues. State law requires that customers be reimbursed for these overcharges. Ind.Code Sec. 8-1-13-17(d) (1995). Patronage capital is a somewhat misleading term which refers to a portion of this excess revenue which the Wabash Bylaws allow it to retain in order to cover fluctuations in production costs and to make capital expenditures without having first to raise rates and accumulate the necessary funds. Because the Members must eventually be reimbursed for overcharges, however, the patronage capital funds are credited to individual cooperative Members in amounts proportional to their purchases of electricity. Wabash Bylaws, Art. VII, Sec. 2. The timing of repayment of these overcharges is left to the discretion of the Wabash Board. Transcript of Confirmation Hearing, Jan. 3, 1990, Testimony of Edward P. Martin, p. 24. 41 REA argues that these accounts are not claims but rather equity interests junior to REA's unsecured claims, and that the payment of any portion of these amounts, as envisioned in the Wabash Plan, violates the absolute priority rule. The district court, affirming the bankruptcy court, held, however, that these accounts were correctly classified as claims, the proportionate payment of which under the Wabash Plan is not a violation of the rule. Dist.Op. at 7-10. Although this is an extraordinarily elusive question, we agree. 42 The definition of claim under the bankruptcy code is very broad, encompassing any right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. 11 U.S.C. Sec. 101(5)(A). Thus the fact that the patronage capital accounts are not payable at a specified time or under specified conditions does not foreclose their treatment as claims for bankruptcy purposes. 5 43 In reaching this conclusion we have carefully considered the opinion of the bankruptcy court in In re Eastern Maine Electric Coop., Inc., 125 B.R. 329 (Bankr.D.Me.1991) (In re EMEC ), in which a similar issue was presented. The court in that case concluded that patronage capital accounts were not claims under the bankruptcy code because all such claims have one feature in common: there exists or may come to exist a set of facts, capable of proof, that will require the debtor to encounter liability, whether it chooses to do so or not. Id. at 338 n. 42. The bankruptcy court believed that the patronage capital accounts involved in that case lacked this characteristic because repayment was at the discretion of the board of directors. (In fact, the accounts apparently were due upon dissolution or liquidation of the cooperative in that case.) Primarily on that basis, the court concluded that allocated patronage capital the directors have not voted to retire remains an ownership interest. Id. at 339. 44 In re EMEC is distinguishable because it was decided under Maine law and under different corporate articles and bylaws, but, in any event, we question the apparent basis of the decision. First, we are not persuaded that the apparent absence of a specified date or condition for maturity of the obligation to repay is sufficient to require classification of the patronage capital accounts as ownership interests. 6 45 Because patronage capital accounts are unique to the cooperative scheme, they differ from more commonly encountered forms of corporate debt. However, while they may lack a specified maturity, they do not otherwise evince the usual attributes of equity investment. For example, the amount credited to a Member's patronage capital account is proportionate to the amount of electricity the Member purchases rather than being the same for all Members (as would be typical of an ownership interest). The refund is determined by the amount by which Wabash's revenues exceed the approved revenue requirement. The sum credited is therefore essentially a rate adjustment. 46 Second, the characterization of patronage capital accounts in different jurisdictions does not admit of a uniform resolution; instead it is determined by state law and the relevant articles and bylaws as applied to particular cooperative organizations. 68 B.R. at 915; 125 B.R. at 336. See also 50 A.L.R.3d 435 (citing state non-utility cases holding both for and against the proposition that patronage capital accounts constitute a debt owed to the Members and cases reaching various results as to the priority of member claims to patronage capital in bankruptcy). In addition, relevant decisions of the state courts involving Wabash and the particulars of the Wabash bylaws both distinguish this case from In re EMEC. 47 The Indiana statutes governing electric cooperatives do not permit the members to receive or retain ownership interests in the assets of the cooperative. Instead, if a cooperative is dissolved, any assets remaining after all liabilities or obligations of the corporation have been satisfied or discharged shall pass to and become the property of the state. Ind.Code Sec. 8-1-13-21 (1995). Neither is the cooperative itself allowed to retain revenues which have been collected in excess of the cost of service. Ind.Code Sec. 8-1-13-17(d) (1995). The seeming inconsistency between the ban on member ownership of cooperative assets and the existence of the patronage capital accounts is most easily resolved if these accounts are viewed as loans or advances by the member to the cooperative to fulfill various corporate needs. Such loans or advances are specifically authorized by Indiana law. Ind.Code Sec. 23-17-7-9 (1995) (similar provisions formerly at Sec. 23-7-1.1-7 (1990)). The reference to patronage capital in the Wabash Bylaws containing the assertion that the accounts are the property of the members ... furnished by the members as contributions to capital, is entirely consistent with this analysis. Wabash Bylaws, Art. VII, Sec. 2. This language (property of the members) strongly suggests an advance of a determinate amount of money from the Member to the cooperative with a fixed obligation to repay. 48 Our own analysis of Indiana law aside, the issue whether Wabash's Members are investors having ownership interests has been decided by the Indiana Supreme Court. In its decision denying a rate increase for the purpose of repaying Marble Hill debt, the Court discussed the status of Wabash's Members with respect to monies paid for electric service in excess of the cost of production. National Rural Utils. Coop. Finance Corp., 552 N.E.2d at 26-27. The Supreme Court found that the cooperative's Members are not investors because ... the terms of Wabash's articles of incorporation provide that patrons or owners are not to furnish capital to finance utility plants nor are they to recover profits from utility operations, thus precluding meaningful participation in the utility as investors. Id. at 27. If Wabash Members are not investors, it is difficult to conclude that they have equity interests. 49 Under Indiana law, the patronage capital accounts are not equity interests but credits for overpayments for electric service. The district court was therefore correct in concluding that the patronage capital accounts are properly classified as unsecured claims on behalf of the Members and that the partial and proportionate payment of these claims under the Wabash Plan does not violate the absolute priority rule.