Court Opinion

ID: 2977426
Source: CourtListenerOpinion
Date Created: 2015-09-22 18:08:19.366527+00
Date Added: 2024-06-11T11:41:04.040998
License: Public Domain

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                           File Name: 09a0128n.06
                           Filed: February 12, 2009

                                           No. 07-6419

                            UNITED STATES COURT OF APPEALS
                                 FOR THE SIXTH CIRCUIT

LARRY C. LAY; ROGER DALE PHILPOTT,                  )
et al.,                                             )
                                                    )
       Plaintiffs-Appellants,                       )     ON APPEAL FROM THE UNITED
                                                    )     STATES DISTRICT COURT FOR THE
v.                                                  )     EASTERN DISTRICT OF TENNESSEE.
                                                    )
BURLEY STABILIZATION CORPORATION,                   )
                                                    )
       Defendant-Appellee.                          )

Before: MOORE, GRIFFIN, and BRIGHT,* Circuit Judges.

       PER CURIAM. Plaintiffs and appellants Larry C. Lay, et al., fifty-five members of appellee

Burley Stabilization Corporation (“BSC”) (“members”), are tobacco producers who sold burley

tobacco through the federal price support program in one or more of the 1982 through 2004 crop

years. They appeal the district court’s1 dismissal of their case without prejudice, seeking funds

allegedly wrongfully being withheld from them by BSC. The members contest the district court’s

subject matter jurisdiction, contend that collateral estoppel does not bar the action, and argue that

their claims do not implicate state statutory requirements for derivative actions. We determine that

       *
        The Honorable Myron H. Bright, United States Circuit Judge for the Eighth Circuit, sitting
by designation.
       1
       The Honorable Thomas W. Phillips, United States District Court for the Eastern District of
Tennessee.
No. 07-6419
Lay v. Burley Stabilization Corp.

the necessary federal jurisdiction exists and affirm, ruling that collateral estoppel applies and that

Tennessee law classifies the members’ claims as derivative.

                                       I.   BACKGROUND

       Appellee BSC, a non-profit agricultural cooperative association organized in 1953 under

Tennessee law, delivered federal price support payments to growers of burley tobacco within

portions of Tennessee, North Carolina, and Virginia. Appellants, fifty-five members of BSC and

tobacco producers, received federal price support on burley tobacco sold through the federal price

support program in one or more of the 1982 through 2004 crop years. Members assert class claims

on behalf of approximately 140,000 additional tobacco growers and BSC members, seeking

disgorgement of funds that BSC allegedly owes them.

       BSC worked through the Commodity Credit Corporation (“CCC”) and the United States

Department of Agriculture (“USDA”) to administer the federal tobacco price support program within

the congressional framework first created by the Agricultural Adjustment Act of 1938, which

established a program of federal tobacco quotas and price supports aimed at stabilizing and

increasing the prices paid to America’s tobacco growers. 7 U.S.C. §§ 1281 et seq.

       In brief, the USDA annually set a support price level for various types of eligible tobacco.

CCC then made loans to grower associations such as BSC, who used the loans to purchase eligible

tobacco through various tobacco auctions at the support price when a grower could not obtain a

higher price on the open market. CCC would take a security interest in the tobacco. BSC then

processed and stored the tobacco, later attempting to resell it at a price sufficient to repay CCC and

recover the processing and storage costs. If BSC realized more from the sale of a particular tobacco

                                                 -2-
No. 07-6419
Lay v. Burley Stabilization Corp.

crop than necessary to repay CCC and recover its costs, the tobacco growers who produced that

particular crop received the surplus, called “Net Gain.” If the proceeds from the sale of a particular

crop were insufficient to repay the loans, however, CCC absorbed the loss at taxpayers’ expense and

without recourse against either BSC or its individual grower-members. See Leaf Tobacco Exps.

Ass’n, Inc. v. Block, 749 F.2d 1106, 1108-09 (4th Cir. 1984) (describing the price support program);

Strickland v. Flue-Cured Tobacco Coop. Stabilization Corp., 643 F. Supp. 310, 313 (D.S.C. 1986)

(same).

          The No Net Cost Tobacco Program Act (“1982 Tobacco Act”) significantly amended the

price support program. 7 U.S.C. §§ 1445-1, 1445-2, repealed by American Jobs Creation Act of

2004, Pub. L. 108-357, 118 Stat. 1523, codified at 6 U.S.C. § 612(a). The 1982 Tobacco Act

intended to relieve taxpayers of the cost of the price support program by limiting federal tobacco

expenditures to administrative costs. See Strickland, 643 F. Supp. at 313. The 1982 Act therefore

required cooperative grower associations such as BSC to establish a “No Net Cost Account” with

the CCC. CCC maintained and controlled these accounts, which provided recourse for CCC to

ensure repayment of its loans. Therefore, if a cooperative grower association such as BSC realized

more revenue from the sale of price support tobacco than necessary to satisfy the CCC loans related

to the crop, then the CCC would retain the Net Gains to offset losses incurred on the 1982 and

subsequent tobacco crops, thereby reducing the balance on other outstanding loans so that taxpayers

would not need to fund the program. See 7 U.S.C. §§ 1445-1, 1445-2, repealed by American Jobs

Creation Act of 2004, Pub. L. 108-357, 118 Stat. 1523, codified at 6 U.S.C. § 612(a).

                                                 -3-
No. 07-6419
Lay v. Burley Stabilization Corp.

       With the Fair and Equitable Tobacco Reform Act of 2004 (“FETRA”), Congress effectively

terminated the tobacco price support program. Under FETRA, CCC can dispose of certain collateral

tobacco in a manner determined by the Secretary of Agriculture. See 7 U.S.C. § 519 (b)-(c). FETRA

directs CCC to apply receipts from any such tobacco sales, together with the funds in a cooperative

association’s No Net Cost Account, toward any outstanding CCC loans. See id. Pursuant to

FETRA, any funds remaining in the No Net Cost Account after CCC received full repayment were

to be transferred to the cooperative for distribution to the “producers of quota tobacco in accordance

with a plan approved by the Secretary.” See id. § 519(d).

       Members filed this action on May 25, 2007 in the Knox County, Tennessee Chancery Court,

laying claim to three specific pools of money: the proceeds BSC received when it sold the 1982 Pool

Crop of tobacco, the proceeds BSC received when it sold tobacco from the 1983-2004 Pool Crops,

and the proceeds BSC received or will receive when it sells the tobacco CCC released to it under

FETRA. BSC removed the action to the district court.

       On March 14, 2007, the district court entered an order dismissing members’ complaint

against BSC without prejudice, classifying their claims as derivative and not in conformity with

Tennessee statutory requirements for derivative actions. The district court also granted BSC’s

motion to dismiss based on collateral estoppel, determining that the same class of people as members

filed a similar suit against BSC and its directors and officers in the Knox County, Tennessee Circuit

Court in February of 2005. Members timely appealed the present case, arguing that the district court

lacked federal jurisdiction, improperly determined that collateral estoppel barred the action, and

erred in dismissing the claims without prejudice.

                                                 -4-
No. 07-6419
Lay v. Burley Stabilization Corp.

                                          II.   ANALYSIS

        This court reviews de novo subject matter jurisdiction, the district court’s dismissal of a

complaint under Rule 12(b)(6), and collateral estoppel claims. Smith v. Nationwide Property and

Cas. Ins. Co., 505 F.3d 401, 404 (6th Cir. 2007); Southeast Texas Inns, Inc. v. Prime Hospitality

Corp., 462 F.3d 666, 671 (6th Cir. 2006); Wolfe v. Perry, 412 F.3d 707, 716 (6th Cir. 2005).

        Members argue that the federal courts lack jurisdiction on the basis that their claims do not

rest on federal law. However, one of their claims expressly raises a federal question: members

asserted in the pleadings that they were entitled to the proceeds from the sale of the loan pool

tobacco “pursuant to FETRA.” Even if members had cast their claims as state law causes of action,

however, federal jurisdiction exists where the cause presents a substantial question of federal law.

See City of Chicago v. Int’l Coll. of Surgeons, 522 U.S. 156, 164 (1997). As the district court noted,

the 1982 Tobacco Act and FETRA created members’ claims, which require resolution of substantial

issues under federal law. Members’ claims also charge that BSC served as an agent of a federal

agency and that federal law governed its conduct in helping to administer the federal price support

program. We therefore determine that federal subject matter jurisdiction exists in this case.

        We consider next whether collateral estoppel prevents members from bringing this lawsuit.

Members cannot relitigate an issue when 1) the issue in subsequent litigation is identical to that

resolved in the earlier litigation, 2) the issue was actually litigated and decided in the prior action,

3) the issue was necessary and essential to a judgment on the merits in the prior litigation, and 4) the

party to be estopped was a party to the prior action or in privity with the party. See Hickman v.

Comm’r of Internal Revenue, 183 F.3d 535, 537 (6th Cir. 1999).

                                                  -5-
No. 07-6419
Lay v. Burley Stabilization Corp.

       Members argue that the first two elements preclude the application of collateral estoppel in

this case. Specifically, they argue that the Knox County Circuit Court decided only that the “totality”

of the case makes it derivative, without making any specific findings as to the individual claims.

Furthermore, members point to the differences between the previous suit and this one as follows: 1)

the prior action lacked a claim for declaratory relief with respect to the tobacco released to BSC

under FETRA, and 2) BSC’s individual officers and directors no longer serve as defendants and no

claim for breach of fiduciary duty exists.

       These arguments lack merit. The Knox County Circuit Court already decided, and the district

court agreed, that Tennessee law classifies members’ claims as derivative. Members could have

appealed this result instead of collaterally attacking it. Furthermore, the issues in both rounds of

litigation are identical and members’ added request for declaratory judgment relies on the same

allegations underlying the other claims. Finally, members named BSC as a defendant in both suits,

making the absence of BSC’s individual officers and directors in the subsequent litigation irrelevant.

Even though members named individual officers in the original suit, however, they did not cast the

original suit in the form of a derivative action so it could only have been against BSC. Thus,

collateral estoppel applies.

       But even if collateral estoppel did not apply, members’ pleadings of their claims failed to

meet the statutory requirements for derivative suits. Tennessee state law determines whether

plaintiffs’ claims are derivative or direct. McCarthy v. Middle Tenn. Elec. Membership Corp., 466
F.3d 399, 407-10 (6th Cir. 2006). Here, members essentially claim that BSC mismanaged its assets

and call for an accounting of the funds. Tennessee law has classified such claims as derivative in

                                                 -6-
No. 07-6419
Lay v. Burley Stabilization Corp.

nature. See, e.g., id. at 407-410 (viewing proposed class claims for accounting and distribution of

electric cooperative revenues as derivative); Davis v. Appalachian Elec. Co-op., Inc., 373 S.W.2d
450, 453-54 (Tenn. 1963) (classifying members’ claims to recover electric cooperative funds as

derivative); Range v. Tenn. Burley Tobacco Growers Ass’n, 298 S.W.2d 545, 549 (Tenn. Ct. App.

1955) (noting that “stockholders [grower-members of defendant tobacco cooperative] have their

remedy within the corporation”).

       Members’ derivative claims must be brought pursuant to T.C.A. § 48-56-401, which in part

provides: “A complaint in a proceeding brought in the right of a corporation must be verified and

allege with particularity the demand made, if any, to obtain action by the directors and either why

the plaintiffs could not obtain the action or why they did not make the demand.” Id. at § 48-56-

401(c). Members have failed to comply with statutory requirements and therefore the district court

properly dismissed their action without prejudice.

                                      III.   CONCLUSION

       For the foregoing reasons, we AFFIRM the district court’s judgment dismissing members’

action against BSC.

                                                -7-
No. 07-6419
Lay v. Burley Stabilization Corp.

        KAREN NELSON MOORE, Circuit Judge, concurring in the judgment. I concur in

the majority’s conclusions that (1) removal of this action to federal court was proper, (2) issue

preclusion bars the instant suit because the identical issue of whether plaintiffs’ claims are derivative

or direct was litigated and decided in a previous suit between the parties, and (3) even if issue

preclusion did not apply, the plaintiffs’ claims are derivative under Tennessee law and the plaintiffs

have failed to comply with the demand requirement for derivative suits. I write separately to explain

my disagreement with the majority on the proper basis for removal of this action to federal court and

to explain my reasoning on the other issues in detail.

                          I. FEDERAL-QUESTION JURISDICTION

        The majority concludes that there is federal-question jurisdiction over the plaintiffs’ claims

on two alternate grounds: (1) the plaintiffs have actually pleaded a federal cause of action, or (2) the

plaintiffs’ claims present a substantial question of federal law. I respectfully disagree. First, the

majority suggests that the plaintiffs have actually pleaded a federal cause of action based on the fact

that the complaint uses the language “pursuant to FETRA.” See, e.g., Joint Appendix (“J.A.”) at 58

(Compl. ¶¶ 73-75). However, under the well-pleaded-complaint rule, “[t]o determine whether the

claim arises under federal law, we examine the ‘well pleaded’ allegations of the complaint and

ignore potential defenses.” Beneficial Nat’l Bank v. Anderson, 539 U.S. 1, 6 (2003). Here, each of

the plaintiffs’ seven claims are explicitly pleaded as state-law claims. One exception to the well-

pleaded-complaint rule is the artful-pleading doctrine, which provides that plaintiffs may not avoid

removal by artfully pleading essentially federal-law claims as state-law claims. Federated Dep’t

                                                  -8-
No. 07-6419
Lay v. Burley Stabilization Corp.

Stores, Inc. v. Moitie, 452 U.S. 394, 397 n.2 (1981). That exception, however, does not apply here.

The Fair and Equitable Tobacco Reform Act of 2004 (“FETRA”) does not include a civil-suit

provision, nor do the parties suggest that it implies a private right of action. Given that there is no

federal claim that might have been asserted by the plaintiffs, it is clear that the plaintiffs did not

artfully draft their complaint to avoid invoking a federal statute as the basis for their claims.

        I also cannot agree with the majority’s conclusion that there is federal “arising under”

jurisdiction over the plaintiffs’ state-law claims under the substantial-federal-question doctrine.

“Under the substantial-federal-question doctrine, a state law cause of action may actually arise under

federal law, even though Congress has not created a private right of action, if the vindication of a

right under state law depends on the validity, construction, or effect of federal law.” Mikulski v.

Centerior Energy Corp., 501 F.3d 555, 565 (6th Cir. 2007) (en banc), cert. denied, — U.S. —, 128
S. Ct. 2426 (2008). The Supreme Court has explained that federal-question jurisdiction exists over

a state-law claim only if that claim “necessarily raise[s] a stated federal issue, actually disputed and

substantial, which a federal forum may entertain without disturbing any congressionally approved

balance of federal and state judicial responsibilities.” Grable & Sons Metal Prods., Inc., v. Darue

Eng’g & Mfg., 545 U.S. 308, 314 (2005); see also Empire HealthChoice Assurance, Inc. v. McVeigh,

547 U.S. 677 (2006) (applying Grable). We have summarized the requirements for federal-question

jurisdiction under Grable as follows: “(1) the state-law claim must necessarily raise a disputed

federal issue; (2) the federal interest in the issue must be substantial; (3) the exercise of jurisdiction

                                                   -9-
No. 07-6419
Lay v. Burley Stabilization Corp.

must not disturb any congressionally approved balance of federal and state judicial responsibilities.”

Mikulski, 501 F.3d at 568 (citing Grable, 545 U.S. at 314).

       None of the plaintiffs’ claims appear to raise necessarily a disputed federal issue. Defendant

Burley Stabilization Corporation (“BSC”) primarily points to language in the plaintiffs’ complaint

stating that “[p]ursuant to the FETRA, the producer/members of the BSC are entitled to a

distribution of the net proceeds from the sale of the loan pool tobacco.” J.A. at 58 (Compl. ¶ 75)

(emphasis added). At first glance this appears to present a federal issue. However, a closer look at

FETRA and the plaintiffs’ complaint indicates that FETRA does not speak to this issue and that the

cited language was probably an unintended drafting error by the plaintiffs. It is undisputed that

pursuant to FETRA the Commodity Credit Corporation (“CCC”) released some 16.1 million pounds

of tobacco to BSC in 2005. The plaintiffs contend that BSC now must distribute the net proceeds

from the sale of that tobacco (the “FETRA tobacco”) to its members (i.e., the putative plaintiff

class). Although the language cited above suggests that the plaintiffs assert their interest in the

FETRA tobacco based on FETRA, this is not the case. The plaintiffs have repeatedly maintained

that their right to a distribution of these proceeds rests solely on state-law grounds. Moreover,

nothing in FETRA speaks to the issue of whether a grower association must distribute to its members

the proceeds it receives when it sells the tobacco released to it by the CCC pursuant to FETRA. As

part of the winding-up of the federal-tobacco-support program, FETRA directs the CCC to transfer

certain loan-pool tobacco to associations for their disposal. See 7 U.S.C. § 519(b). However,

FETRA is simply silent on what an association must do with the proceeds from the sale of that

                                                -10-
No. 07-6419
Lay v. Burley Stabilization Corp.

tobacco, and, not surprisingly, BSC points to no specific provision of FETRA that speaks to this

issue. Because FETRA does not control the disputed question of whether BSC must distribute

proceeds from the FETRA tobacco to the plaintiffs, I believe that the majority errs in premising

federal-question jurisdiction on FETRA.

        BSC also contends that there is a substantial federal question involving the interpretation of

a provision of the federal No Net Cost Tobacco Program Act, 7 U.S.C. §§ 1445-1 to -2 (repealed

2004) (“1982 Tobacco Act”). The plaintiffs’ complaint alleges that pursuant to the Tennessee

Cooperative Marketing Law and Tennessee common law, BSC must distribute to its members (i.e.,

the putative plaintiff class) the net profits that BSC realized from the sale of certain tobacco from

the 1983–2004 pool crops. The plaintiffs allege that “the CCC released its interest in certain tobacco

pledged as security for the 1983–2004 crop year loans and any proceeds received by the BSC from

the sale of the tobacco collateral.” J.A. at 61 (Compl. ¶ 90). Consequently, according to the

plaintiffs, the BSC realized profits on the sale of that tobacco “free and clear of any claim or interest

of the CCC” and should have distributed those profits to its members. Id. BSC counters that “this

claim is completely erroneous because, at all times relevant, the 1982 Tobacco Act mandated that

CCC ‘shall retain the net gains from each of the 1982 and subsequent crops’ to offset past and future

tobacco program losses.” BSC Br. at 32-33 n.18 (quoting 7 U.S.C. § 1445-1(d)(5)). According to

BSC, this presents a federal issue sufficient to confer jurisdiction under the substantial-federal-

question doctrine. However, BSC’s invocation of this provision is properly characterized as a

federal defense to the plaintiffs’ state-law claims. Under the well-pleaded complaint rule, “[t]o

                                                  -11-
No. 07-6419
Lay v. Burley Stabilization Corp.

determine whether the claim arises under federal law, we examine the ‘well pleaded’ allegations of

the complaint and ignore potential defenses.” Anderson, 539 U.S. at 6. “‘[A] suit arises under the

Constitution and laws of the United States only when the plaintiff’s statement of his own cause of

action shows that it is based upon those laws or that Constitution.’” Id. (quoting Louisville &

Nashville R. Co. v. Mottley, 211 U.S. 149, 152 (1908) (alteration in Anderson)). Here, the plaintiffs

base their claims entirely on Tennessee law and do not assert claims based on the 1982 Tobacco

Act.2 Instead, it is BSC that asserts the 1982 Tobacco Act as a federal defense to the plaintiffs’ state-

law claims. Only in limited circumstances and under specialized jurisdictional statutes may removal

be based on a federal defense. I now turn to one of those specialized statutes: the federal officer

removal statute, 28 U.S.C. § 1442.

                       II. FEDERAL OFFICER REMOVAL STATUTE

        As an alternative ground for removal, BSC asserts that it was entitled to remove the action

to federal court pursuant to the federal officer removal statute.3 I would affirm the district court’s

        2
         The plaintiffs do refer the 1982 Tobacco Act in their complaint. See, e.g., J.A. at 58 (Compl.
¶¶ 71-73). However, these references simply provide background and do not form the basis for any
of the plaintiffs’ claims.
        3
         The federal officer removal statute provides in relevant part:
        A civil action or criminal prosecution commenced in a State court against any of the
        following may be removed by them to the district court of the United States for the
        district and division embracing the place wherein it is pending . . . [t]he United States
        or any agency thereof or any officer (or any person acting under that officer) of the
        United States or of any agency thereof, sued in an official or individual capacity for
        any act under color of such office or on account of any right, title or authority
        claimed under any Act of Congress for the apprehension or punishment of criminals
        or the collection of the revenue.

                                                  -12-
No. 07-6419
Lay v. Burley Stabilization Corp.

determination that removal was proper on this alternative ground. The statute “permits removal only

if [BSC], in carrying out the ‘act[s]’ that are the subject of the [plaintiffs’] complaint, was ‘acting

under’ any ‘agency’ or ‘officer’ of ‘the United States.’” Watson v. Philip Morris Cos., 551 U.S. 142,

127 S. Ct. 2301, 2304 (2007) (quoting 28 U.S.C. § 1442(a)(1) (second alteration in original)).

Further, a defendant seeking removal under the statute must allege a “colorable federal defense.”

Mesa v. California, 489 U.S. 121, 129 (1989). Because BSC (like other grower associations) played

a special role in the administration of the federal government’s tobacco-price-support program, the

acts complained of by plaintiffs relate to the administration of that program, and BSC asserts a

colorable federal defense, I believe that the action is removable under § 1442.

       First, I believe that BSC meets the requirement that it was “acting under” a federal “officer”

or “agency.” The Supreme Court recently clarified the circumstances under which a private firm

may fall within the scope of statutory requirement of “acting under” a federal official or agency. See

Watson, 128 S. Ct. 2301. In Watson, the Court rejected the cigarette manufacturer Philip Morris’s

contention that it was “acting under” federal officers based upon the high level of federal regulation

of the company’s operations and the fact that it conducted laboratory testing of cigarettes under the

close supervision of the Federal Trade Commission, a federal agency. The Court began by

explaining that “acting under” implies a relationship that “typically involves ‘subjection, guidance,

or control.’” Id. at 2307 (quoting Webster’s New International Dictionary 2765 (2d ed. 1953)). It

further noted that “the private person’s ‘acting under’ must involve an effort to assist, or to help

28 U.S.C. § 1442(a)(1).

                                                 -13-
No. 07-6419
Lay v. Burley Stabilization Corp.

carry out, the duties or tasks of the federal superior.” Id. Turning to Philip Morris’s contention that

the detailed federal regulation and supervision it received brought the company within the statutory

requirement that it be “acting under” a federal “official,” the Court concluded that “[a] private firm’s

compliance or (noncompliance) with federal laws, rules, and regulations does not by itself fall within

the scope of the statutory phrase ‘acting under’ a federal ‘official.’” Id. at 2308. The Court noted

that “[a] contrary determination would expand the scope of the statute considerably, potentially

bringing within its scope state-court actions filed against private firms in many highly regulated

industries.” Id.

       In rejecting Philip Morris’s invocation of the statute, the Court distinguished the case from

lower court cases holding that “Government contractors fall within the terms of the federal officer

removal statute, at least when the relationship between the contractor and the Government is an

unusually close one involving detailed regulation, monitoring, or supervision.” Id. (citing Winters

v. Diamond Shamrock Chem. Co., 149 F.3d 387 (5th Cir. 1998), cert. denied, 526 U.S. 1034 (1999)).

The Court explained that, unlike Philip Morris, the government contractors in those cases provided

assistance that went “beyond simple compliance with the law and help[ed] officers fulfill other basic

governmental tasks.” Id. For instance, in Winters the government contractor, Dow Chemical,

“fulfilled the terms of a contractual agreement by providing the Government with a product that it

used to help conduct a war.” Id. Thus, the government contractors in those cases “performed a job

that, in the absence of a contract with a private firm, the Government itself would have had to

perform.” Id.

                                                 -14-
No. 07-6419
Lay v. Burley Stabilization Corp.

       I believe that the special role played by grower associations such as BSC in helping to

administer the federal tobacco-price-support program brings BSC within the scope of the statutory

requirement that it was “acting under” a federal “officer.” The 1982 Tobacco Act was intended “to

limit federal tobacco expenditures to administrative costs.” Leaf Tobacco Exporters Ass’n, Inc. v.

Block, 749 F.2d 1106, 1109 (4th Cir. 1984). In other words, it aimed to relieve taxpayers of the

burden of supporting the program. To accomplish this goal, the Act required BSC and other grower

associations to establish either a No Net Cost Tobacco Fund, 7 U.S.C. § 1445-1 (repealed 2004), or

a No Net Cost Tobacco Account within the CCC, 7 U.S.C. § 1445-2 (repealed 2004), the latter of

which was evidently established by BSC. The purpose of a No Net Cost Tobacco Account

(“Account”) was to ensure that the CCC—and therefore the taxpayers—suffered no net losses on the

loans that the CCC made to associations on the 1982 tobacco crop and all later crops. Id. § 1445-

2(e). Generally speaking, an Account had two different sources of funding. First, producers and

purchasers of loan-pool tobacco were required to pay assessments into the Account on each pound

of tobacco sold or purchased at rates set by the Secretary of Agriculture. Id. § 1445-2(d). When a

producer delivered tobacco to an association, the association was required to collect the assessment

from the producer and pay it into the association’s Account at the CCC. 7 C.F.R. § 1464.10(i)(1)(iii)

(removed 2005). Second, if an association such as BSC realized more revenue from the sale of a

particular year’s crop than necessary to repay the CCC on loans related to that crop, those profits,

or “Net Gains,” were also transferred to the Account. 7 U.S.C. §§ 1445-1(d)(5), 1445-2(h) (both

repealed 2004). Consistent with this requirement, BSC asserts that the Net Gains on the sales of the

1983-2004 crops “were transferred to BSC’s no Net Cost Account as they accrued.” BSC Br. at 19

                                                -15-
No. 07-6419
Lay v. Burley Stabilization Corp.

n.9. By collecting assessments from producers and by transferring the profits on the sales of each

crop to an Account at the CCC, the BSC and other grower associations played an integral role in

administering the tobacco-price-support program and ensuring, after 1982, that taxpayers would be

relieved of the costs of the program.

       Department of Agriculture regulations implementing the 1982 Tobacco Act further illustrate

that grower associations such as BSC were charged with helping to administer the revised tobacco-

price-support program under the guidance and supervision of the CCC, a federal agency. The

regulations provided that the program would be “carried out by cooperative marketing associations

. . . acting on behalf of their producer members,” but would be “under the general direction and

supervision of the . . . CCC.” 7 C.F.R. § 1464.1(a) (removed 2005). Thus, grower associations such

as BSC generally carried out this government program, but the CCC directed and supervised how

they did so. For instance, the CCC exercised detailed supervision and control over the contracts that

associations such as BSC made to sell loan-pool tobacco. When an association contracted with a

tobacco-auction warehouse to sell loan-pool tobacco, the contract was required to be “on a form of

agreement approved by CCC.” Id. § 1464.2(b)(1)(i). Further, when the CCC believed that a

particular tobacco-auction warehouse would not honor its obligations under a contract with an

association, the “CCC reserve[d] the right to direct the association to withhold a contract under the

price support program” from that warehouse. Id. § 1464.2(b)(1)(iii).

       Like the government contractors that have invoked successfully the federal officer removal

statute in other courts, e.g., Winters, 149 F.3d 387, I believe that grower associations such as BSC

                                                -16-
No. 07-6419
Lay v. Burley Stabilization Corp.

provided assistance to the government that went “beyond simple compliance with the law and

help[ed] officers fulfill other basic governmental tasks.” Watson, 127 S. Ct. at 2308. Under the

general direction and supervision of the CCC, BSC and other associations played a crucial role in

administering the program under the 1982 Tobacco Act by, among other things, collecting

assessments from producers and remitting Net Gains from the sale of loan-pool tobacco to accounts

maintained at the CCC, furthering the statute’s goal that the program would have no net cost for

taxpayers. In so doing, BSC and other associations “performed a job that,” in their absence, “the

Government itself would have had to perform.” Id. Accordingly, I believe that BSC falls within the

ambit of the statutory phrase “acting under” a federal “officer.” 28 U.S.C. § 1442(a)(1).

       To come within the scope of the statute, BSC must also have carried out the acts that are the

subject of the plaintiffs’ complaint while acting under a federal officer. See Watson, 127 S. Ct. at

2304. Further, BSC must allege a “colorable federal defense.” Mesa, 489 U.S. at 129. I believe that

these additional requirements are satisfied. As discussed above, the plaintiffs allege that BSC

improperly retained the net profits from the sale of the 1983–2004 loan-pool tobacco instead of

distributing those profits to its members. The plaintiffs contend that because the CCC released to

BSC any interest in certain tobacco for those crop years, the BSC realized profits on the sale of that

tobacco “free and clear of any claim or interest of the CCC” and should have distributed those profits

to its members. J.A. at 61 (Compl. ¶ 90). BSC’s defense is that it was required to remit those profits

to its No Net Cost Tobacco Account at CCC because “the 1982 Tobacco Act mandated that CCC

‘shall retain the net gains from each of the 1982 and subsequent crops’ to offset past and future

                                                -17-
No. 07-6419
Lay v. Burley Stabilization Corp.

tobacco program losses.” BSC Br. at 32-33 n.18 (quoting 7 U.S.C. § 1445-1(d)(5)). At least on

BSC’s theory of the case, BSC performed the acts complained of by the plaintiffs pursuant to its

administrative obligations under the 1982 Tobacco Act and in accord with its agreements with the

CCC. Similarly, BSC raises a “colorable federal defense” because it asserts that it was required by

the 1982 Tobacco Act to remit the Net Gains on the sale of the 1983–2004 loan-pool tobacco to its

Account at CCC and could not have distributed the Net Gains to its members. The plaintiffs

apparently contend that the loan-pool tobacco at issue was not subject to the Act’s requirement that

Net Gains be remitted to the CCC Account. But that merely raises a fact question, and at this point

BSC “need not prove the asserted defense, but need only articulate its ‘colorable’ applicability to the

plaintiff[s’] claims.” Winters, 149 F.3d at 400; see also Willingham v. Morgan, 395 U.S. 402, 407

(1969) (“The officer need not win his case before he can have it removed.”).

        Because I believe that BSC is within the scope of the federal officer removal statute, I would

affirm the district court’s ruling that removal was proper on this alternative ground.

                                     III. ISSUE PRECLUSION

        I agree with the majority that issue preclusion (collateral estoppel) bars relitigation of the

issue of whether plaintiffs’ claims are derivative. As the majority explains, this issue was actually

litigated and decided by the district court in a virtually identical prior action brought by the

plaintiffs.4 In the first suit, filed in state court and later removed to federal court, the district court

        4
       In the first suit, the CCC as well as various officers and directors of the BSC were also
named as defendants, whereas in the instant suit the plaintiffs name only BSC as a defendant.
However, the allegations and claims against BSC in the two suits are virtually identical.

                                                   -18-
No. 07-6419
Lay v. Burley Stabilization Corp.

adopted an earlier ruling of the state court that the plaintiffs’ claims against BSC were derivative

under Tennessee law and dismissed those claims without prejudice because the plaintiffs had neither

satisfied the demand requirement under Tennessee law nor shown that a demand would have been

futile. In this second suit, six of the seven claims asserted against BSC are identical to claims

asserted in the first suit. Only Count 1 in the instant suit is nominally different. The plaintiffs styled

Count 1 in the first suit as a breach of fiduciary duty by current and former officers and directors of

the BSC and requested distribution of funds in the BSC’s No Net Cost Tobacco Account and

proceeds from the sale of the FETRA tobacco. Count 1 in this suit is styled as a declaratory

judgment action against BSC seeking a declaration that the members of the BSC are entitled to a

distribution of the proceeds from the sale of the FETRA tobacco. Notwithstanding the change in the

legal label put on Count 1, I agree with the majority’s conclusion that the issue of derivative standing

presented in the two suits is identical and that the district court’s ruling in the first suit that the

plaintiffs’ claims are derivative is entitled to issue preclusive effect.

        In the first suit, the district court dismissed the plaintiffs’ claims without prejudice, so that

the plaintiffs could reassert the same claims against BSC by curing the defects that led to the

dismissal, i.e., by satisfying the demand requirement which is a precondition for derivative actions

under Tennessee law. Because the plaintiffs did not cure this defect and instead simply modestly

repackaged the same claims asserted in the first suit, the district court in the instant (second) suit

again dismissed the plaintiffs’ claims without prejudice, ruling that issue preclusion barred

relitigation of the issue of derivative standing. Issue preclusion is appropriate here because the

                                                  -19-
No. 07-6419
Lay v. Burley Stabilization Corp.

plaintiffs could have appealed the district court’s ruling in the first suit that their claims against BSC

were derivative.5 When a district court “dismiss[es] . . . a complaint, as opposed to an action,

without prejudice” that “is not a final and appealable order.” Robert N. Clemens Trust v. Morgan

Stanley DW, Inc., 485 F.3d 840, 845 (6th Cir. 2007); see Azar v. Conley, 480 F.2d 220, 223 (6th Cir.

1973) (same). However, when “the district court dismisses an action without prejudice, . . . the order

is final and appealable.” Morgan Stanley, 485 F.3d at 845 (internal quotation marks omitted). Here,

in the first suit, the district court issued, along with its memorandum and order of March 14, 2007,

a final judgment dismissing all of the plaintiffs’ claims against BSC “without prejudice” and

dismissing the action in its entirety, not just the plaintiffs’ complaint. This was clearly an appealable

final judgment. The plaintiffs had an opportunity to appeal the district court’s determination that

their claims against BSC are derivative, but they declined to do so.

        Because the issue of derivative standing was actually litigated and decided in the first suit

and necessary to the resolution of the first suit, and because the plaintiffs had an opportunity to

appeal that ruling, I agree with the majority that issue preclusion bars relitigation of this issue.

        5
         By contrast, when an issue is not appealable, issue preclusion does not apply. See Dixon v.
Wallowa County, 336 F.3d 1013, 1020 (9th Cir. 2003) (“Issue preclusion does not apply to an issue
that is not appealable.”); RESTATEMENT (SECOND ) OF JUDGMENTS § 28(1) (1982) (stating that issue
preclusion does not apply when “[t]he party against whom preclusion is sought could not, as a matter
of law, have obtained review of the judgment in the initial action”).

                                                  -20-
No. 07-6419
Lay v. Burley Stabilization Corp.

                          IV. DERIVATIVE NATURE OF CLAIMS

       Finally, I agree with the majority that even if issue preclusion did not apply, the plaintiffs’

claims are derivative under Tennessee law and therefore the district court properly dismissed the

action for failure to comply with the demand requirement. Our opinion in McCarthy v. Middle

Tennessee Electric Membership Corp., 466 F.3d 399, 407-10 (6th Cir. 2006), makes it clear that

Tennessee law governs whether the plaintiffs’ claims are derivative or direct. Like McCarthy, the

instant case essentially involves claims of “mismanagement, self-dealing, and breach of fiduciary

duty.” 466 F.3d at 410 (internal quotation marks omitted). In essence, the plaintiffs maintain that

BSC, a nonprofit agricultural cooperative, improperly failed to distribute to its members proceeds

from sales of certain loan-pool tobacco as required by the Tennessee Cooperative Marketing Law

and various common-law theories. I believe that this case is indistinguishable from McCarthy and

the Tennessee Supreme Court’s decision in Davis v. Appalachian Electric Co-operative, Inc., 373
S.W.2d 450 (Tenn. 1963), where similar claims for accountings and distributions of cooperative

funds were classified as derivative rather than direct.

                                                -21-