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Butler v. Coast Electric Power Association

United States Court of Appeals, Fifth Circuit

June 7, 2019

LAKESHA BUTLER, Plaintiff - Appellee
v.
COAST ELECTRIC POWER ASSOCIATION, Defendant-Appellant WILLIAM WILLIS, III, Plaintiff - Appellee
v.
DIXIE ELECTRIC POWER ASSOCIATION, Defendant-Appellant KIMBERLY HARPER, Plaintiff - Appellee
v.
SOUTHERN PINE ELECTRIC COOPERATIVE, Defendant-Appellant

          Appeals from the United States District Court for the Southern District of Mississippi

          Before HIGGINBOTHAM, ELROD, and HO, Circuit Judges.

          PATRICK E. HIGGINBOTHAM, Circuit Judge:

         Members of three rural power cooperatives allege that the cooperatives have failed to refund excess "patronage capital" to their members as required by state law. They request a refund of capital above a specific ratio of equity to assets established in the cooperatives' agreements with the federal Rural Utilities Service, and the appointment of a trustee or receiver to oversee the repayment process. The cooperatives believe such relief would conflict with the cooperatives' federal loan agreements. As they have a colorable federal preemption defense, the cooperatives were entitled to remove under 28 U.S.C. § 1442's provision for federal officer removal. We therefore reverse the district court's decision to remand these consolidated cases to state court.

         I

         A

         The New Deal Congress confronted serious problems affecting rural residents' ability to access electricity. For-profit utilities providers concentrated their service in densely populated urban areas, due in part to the heightened cost of providing service to geographically dispersed rural customers and in part to the more stable base of demand provided by their affluent urban counterparts.[1] Just when for-profit providers began to expand into rural areas, the Great Depression struck-"dampening . . . potential demand for rural electricity [and making] expansion again unprofitable."[2]

         In response to this dilemma, Congress passed the Federal Rural Electrification Act in 1936, which established the Rural Electrification Administration as an independent agency and authorized it to provide direct, below-market loans to rural utilities providers.[3] The REA has since been absorbed by the Department of Agriculture and renamed as the Rural Utilities Service.[4]

         From the beginning, REA loans came hand-in-hand with authority to "exercise[ ] extensive supervision over the planning, construction and operation of the facilities it finance[d]."[5] To this day, federal regulations establish extensive policies for RUS loans, including that borrowers must- with certain exceptions-obtain RUS approval for certain construction and contracts; meet applicable RUS design and construction standards; and follow RUS requirements regarding contract bidding.[6] Several regulations provide that if the terms of a loan agreement require RUS approval for specific actions, approval is automatically granted if certain conditions are met.[7] Chiefly relevant here, 7 C.F.R. § 1717.617 provides that if the terms of a loan agreement require RUS approval for member distributions, approval is automatically granted if the borrower meets four specified conditions, including that "[a]fter giving effect to the distribution, the borrower's equity will be greater than or equal to 30 percent of its total assets."[8]

         The loans' rigorous conditions had consequences: from the REA's "early months," "it became apparent that because of the demanding terms imposed on REA borrowers[, ] the private utilities would not take advantage of the availability of REA loans to extend their operations into rural areas."[9] So, the REA began to encourage the formation of electric power cooperatives- nonprofit, member-owned, state-law entities that provide services, invest revenues in operations, and then return remaining revenue to members in the form of "patronage capital."[10] Together, favorable loans and the development of customer-owned cooperatives helped "bring electric power to parts of the country not adequately served by commercial companies."[11]

         B

         The defendants-appellants are three Mississippi power cooperatives that have entered into financial assistance contracts with the REA and RUS since the late 1930s. As with all RUS borrowers, the cooperatives' loan agreements with RUS impose significant restrictions and approval requirements. Central to this case, the agreements require prior written approval from RUS before the cooperatives engage in member distributions of patronage capital. In keeping with 7 C.F.R. § 1717.617, however, the agreements grant automatic approval of member distributions if "[a]fter giving effect to the Distribution, the Equity of the Borrower shall be greater than or equal to 30% of its Total Assets." The agreements also list several "events of default," including where "[a] court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Borrower in an involuntary case under any applicable bankruptcy, insolvency, or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official . . . and such decree or order shall remain unstayed and in effect for a period of ninety (90) consecutive days."

         Members of each cooperative sued them in state chancery court under Mississippi Code § 77-5-235(5), which requires cooperatives to return excess revenues to members-beyond that needed to pay operating and maintenance expenses and debt obligations and maintain reserves for improvement, construction, depreciation, and contingencies-"by such means as the board may decide, including through the reimbursement of membership fees, the implementation of general rate reductions, [or] the limitation or avoidance of future rate increases."[12] In addition to alleging violations of this refund requirement, the members alleged other state-law claims including fraudulent concealment, breach of fiduciary duty, unjust enrichment, and conversion.

         Each complaint acknowledged that it was "recommended" that the cooperatives retain equity equal to 30% of their assets and that cooperatives would receive automatic RUS approval for distributions satisfying the 30% equity requirement. The plaintiffs argued that the cooperatives were required to return excess equity "not necessary to pay for expenses, debt service or reasonable reserves." They sought the return of excess equity and other relief, including the appointment of an independent trustee or receiver to oversee the repayment process.

         The cooperatives attempted to remove the cases to federal district court, asserting federal officer removal jurisdiction under 28 U.S.C. § 1442. On motion by the plaintiffs, the district court remanded each case to state court. The cooperatives appealed, and we consolidated the three cases.

         II

         While we ordinarily do not have jurisdiction to review a district court's decision to remand a case to state court, we may do so where a defendant removed the case under federal officer removal jurisdiction.[13] We review the district court's decision to remand de novo.[14]

         The federal officer removal statute, 28 U.S.C. § 1442, authorizes removal to federal court by persons acting under an officer or agency of the United States who are sued for acts "for or relating to any act under color of such office."[15] We have interpreted this to allow removal where a defendant can show "(1) that it is a person within the meaning of the statute, (2) that it has a colorable federal defense, (3) that it acted pursuant to a federal officer's directions, and (4) that a causal nexus exists between [its] actions under color of federal office and the plaintiff's claims."[16]

         While the defendant seeking removal has the burden to establish federal jurisdiction, federal officer removal is "not narrow or limited."[17] Instead, in contrast to most questions of federal jurisdiction, federal officer removal must be "liberally construed."[18]

         III

         A colorable federal defense "does not need to be 'clearly sustainable,' as § 1442 does not require a . . . person acting under [a federal official] to 'win his case before he can have it removed.'"[19] Rather, the defense need only be colorable: it must not be "immaterial and made solely for the purpose of obtaining jurisdiction" or "wholly insubstantial and frivolous."[20] This reflects the goal of federal officer jurisdiction, which is to give federal officers and those acting under them a federal forum in which to assert federal defenses.[21]

         The cooperatives assert a federal preemption defense. Preemption doctrine reflects the basic concept, grounded in the Supremacy Clause, that federal law can trump contrary state law.[22] Federal law preempts state law in three different ways: when Congress does so expressly; when federal law occupies the entire field of regulation; and when state law conflicts with federal law.[23] This last category, "conflict preemption," occurs either where "compliance with both federal and state regulations is a physical impossibility" or where the state law "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress."[24]

         The cooperatives argue that Mississippi Code § 77-5-235(5)'s refund requirement conflicts with Congress's purposes and objectives as expressed in the Rural Electrification Act, federal regulations, and the cooperatives' loan agreements with RUS.[25] They also argue that the plaintiffs' request for appointment of a trustee or receiver conflicts with federal interests and the provision in their loan agreements that appointment of a receiver constitutes an event of default.

         A

         The relationship between federal law and regulations and the defendants' RUS loan agreements raises an important threshold issue. As we have explained, preemption doctrine stems from the Supremacy Clause, which establishes that "the Constitution, and the Laws of the United States . . . shall be the supreme Law of the Land."[26] In effect, only federal law can preempt state law. The Supreme Court has firmly held that agency regulations constitute federal law for preemption purposes.[27] But our caselaw on preemption does not provide significant guidance on whether the terms of federal loan agreements can themselves preempt state law. The plaintiffs cite only one case, from outside our circuit-Fellner v. Tri-Union Seafoods, L.L.C.[28]-for their argument that it is "well-settled" that loan agreements cannot bear preemptive weight. Even Fellner does not directly address the preemptive effect of federal loan agreements, and courts in that circuit have not treated the issue as fully settled.[29]

         Arkansas Electric Cooperative Corp. v. Arkansas Public Service Commission sheds some light.[30] While the Supreme Court acknowledged that the REA's status as a lending agency rather than a classic regulatory body might "present the interesting question of how [the Court] should in general define the proper relationship between the requirements established by federal lending agencies and the more direct regulatory activities of state authorities," it concluded that the question was not implicated by the specific issue of whether REA rate supervision facially preempted state rate-setting jurisdiction.[31] Despite not addressing the issue outright, the Court offered some guidance on how preemption doctrine might operate in the context of REA-now, RUS-lending. It observed that Congress generally expected agency regulation to govern fledgling rural power cooperatives "within the constraints of existing state regulatory schemes."[32] This did not foreclose the possibility, however, that future REA policymaking could preempt state regulation-or that "even without an explicit statement from the REA, [a particular state regulation] may so seriously compromise important federal interests, including the ability of [the cooperative] to repay its loans, as to be implicitly pre-empted by the Rural Electrification Act."[33]

         We have twice had occasion to consider Arkansas Electric Cooperative's suggestion that preemption is possible under the Rural Electrification Act and corresponding loan agreements and regulations. First, City of Morgan City v. South Louisiana Electric Cooperative Ass'n held that the Rural Electrification Act preempted state-law expropriation of electrical equipment and the right to provide electricity to consumers in a certain area.[34] We concluded that the state expropriation law would frustrate the purposes and objectives of the Rural Electrification Act by hindering "the repayment of federal loans, . . . the financial viability of federally financed electricity cooperatives, and ultimately . . . the maintenance of electricity service to rural areas."[35] Upon denying rehearing, we explained that while Arkansas Electric Cooperative rejected an argument for far-reaching, facial preemption of state regulation by federal law, it "confirm[ed]" that the Rural Electrification Act could preempt state action that seriously compromised important federal interests.[36] City of Morgan City thus recognized that at least in certain contexts, the significant federal interest in recouping federal loans and ensuring the viability of rural power cooperatives may preempt conflicting state regulation.

         Later, we rejected a preemption challenge to a state rate order in In re Cajun Electric Power Cooperative, Inc.[37] RUS asserted that its regulations preempted any state efforts to set rates that were too low to allow the borrower to repay its secured RUS loans.[38] We concluded that the Secretary of Agriculture had lacked authority to promulgate the relevant regulations, so the regulations standing alone could not preempt state law.[39] Further, while we acknowledged that Arkansas Electric suggested in dicta that preemption was conceivably possible where state regulation seriously compromised important federal interests, we found no threat to such interests that would warrant preemption.[40] Instead, "the federal interest of primary importance under the [Rural Electrification] Act-affordable electric energy for rural consumers-would be seriously compromised by the increased consumer rates that would be required by the Secretary's pre-emption and rate escalation regulations."[41]

         To be sure, Congress intended agency regulation of rural power cooperatives to operate "within the constraints of existing state regulatory schemes."[42] But taken together, Arkansas Electric, Morgan City, and Cajun Electric suggest a path for an RUS borrower to demonstrate preemption. First, RUS policymaking-and perhaps the terms of RUS loan agreements, though we have not yet addressed that issue-may potentially preempt conflicting state regulation. Second, state regulation may be preempted when it seriously conflicts with important federal interests, especially the Rural Electrification Act's primary purpose of ensuring affordable rural electricity.

         B

         With this framework in mind, we turn first to the cooperatives' argument that federal law preempts the plaintiffs' demand for the return of excess capital under Mississippi Code § 77-5-235(5). As we have explained, 7 C.F.R. § 1717.617 provides that "[i]f a distribution or power supply borrower is required by its loan documents to obtain prior approval from RUS before declaring or paying any dividends, paying or determining to pay any patronage refunds, or retiring any patronage capital, or making any other cash distributions, such approval is hereby given if[, among other conditions, ]. . . [a]fter giving effect to the distribution, the borrower's equity will be greater than or equal to 30 percent of its total assets." The relevant loan agreements require such prior ...


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