ciation had breached its contract with him, but inasmuch as the member continued to make deliveries of milk for a month thereafter, it was held that any alleged previous irregularities did not justify the member in refusing to deliver milk under his contract.57

was said

the rendition of statements each fiscal year to plaintiff and "the purchasers" and plaintiff's failure to object to or protest against such statements of account within a reasonable time thereafter constitute an account stated as to the transactions therein involved.

If a member of an association breaches his marketing contract during a given season, he cannot successfully defend a suit brought by the association on account of such breaches by showing that subsequent thereto the association breached the contract.59 The assertion by a producer that he received less for his products through the association than he would have received by selling to others is no defense to a suit for breach of the contract.60

Under the laws of many States corporations are required to file reports. It is sometimes provided by statute that failure to file a report on or before a given date makes invalid contracts entered into while the corporation is in default.61

WHAT

Deductions

The

HAT deductions may an association make from the returns received for the products of its members? The answer is, Only those deductions authorized under the contract or bylaws of the association.62 fact that deductions, in addition to those specifically authorized, appear necessary or highly advisable does not justify such deductions.

In considering the matter of deductions, a sharp distinction should be drawn between amounts in the hands of an association, arising from the sale of commodities delivered by its members and for which it may be said that the association is indebted 63 to the members, and amounts which the association is authorized to retain out of such sale proceeds.

Money deducted from the returns from the sale of members' products may be used by the association only for the specific purposes for which deducted. In other words, if the marketing contract or a bylaw of an

Parker v. Dairymen's League Cooperative Association, Inc., 226 N. Y. S. 226, 222 App. Div. 341. See also Lennox v. Texas Farm Bureau Cotton Association, 16 S. W. 2d 413 (Tex. Civ. App.); California Prune & Apricot Growers, Inc., v. Baker, 77 Cal. App. 393, 246 P. 1081; Beaulaurier v. Washington State Hop Producers, Inc., 8 Wash. 2d 79, 111 P. 2d 559.

58 Davidson v. Apple Growers' Association, 159 Ore. 473, 79 P. 2d 991, 998. See also Boyle v. Pasco Growers' Association, Inc., 170 Wash. 516, 17 P. 2d 6.

59

Nebraska Wheat Growers' Association v. Smith, 115 Neb. 177, 212 N. W. 39; California Bean Growers' Association v. Rindge Land & Nav. Co., 199 Cal. 168, 248 P. 658, 47 A. L. R. 904; California Prune & Apricot Growers, Inc. v. Baker, 77 Cal. App. 393, 246 P. 1081.

60

Nebraska Wheat Growers' Association v. Smith, 115 Neb. 177, 212 N. W. 39; Arkansas Cotton Growers' Coop. Association v. Brown, 179 Ark 338, 16 S. W. 2d 177. 61 Detroit United Fruit Auction Company v. Kroger Grocery & Baking Company, 227 Mich. 412, 198 N. W. 947.

62 Silveira v. Associated Milk Producers, 63 Cal. App. 572, 219 P. 461; Fietz v. Central Milk Producers Coop. Association, Inc., 32 N. Y. S. 2d 574. See also Davidson v. Apple Growers' Association, 159 Ore. 473, 79 P. 2d 991.

63 Hood River Orchard Co. v. Stone, 97 Ore. 158, 191 P. 662; Ozona Citrus Growers' Association v. McLean, 122 Fla. 188, 165 So. 625; Bogardus v. Santa Ana Walnut Growers' Association, 41 Cal. App. 2d 939, 108 P. 2d 52; Buford v. Florin Fruit Growers' Association, 210 Cal. 84, 291 P. 170; Loomis Fruit Growers' Association v. California Fruit Exchange, 128 Cal. App. 265, 16 P. 2d 1040.

association specifies that deductions shall be made for certain itemized purposes, the deductions made can lawfully be employed for no other purposes.

Membership fees, dues, or money received from the sale of stock, or any other money (unless received with the understanding that it is to be used for a specific object), may be used for any purpose or object covered by the charter of the association; and, if the charter is sufficiently broad, such money may be used (as was done in a California case,64 for instance) for advocating a higher tariff on the products handled by the association. Unless expressly authorized to do so, an association may not use money derived from the sale of the crop of one season, to which its growers are entitled, for financing the handling of the crop of a succeeding season. Under marketing contracts of the usual type the courts regard each year as a unit, so that those who were members during a given year are entitled to the money arising from that year's operations after subtracting expenses and other authorized deductions even though, it has been held, a part of the money received consisted of commissions paid by nonmembers of the association for selling their products, although the association was not authorized to handle nonmember business. 6

66

65

64

An association may, in good faith, when its contract provides therefor, pay off a mortgage on a member's crop so as to permit the marketing of the crop through the association. If a loss arises from paying off such a mortgage, it is chargeable against and should be borne by the member in question; 67 and the fact that an association suffers a loss by paying off a mortgage on a member's crop, if the payment was made in good faith, does not relieve other members from their contracts.68

69

If the bylaws or marketing agreement authorizes deductions for permanent reserves, that is for money that may be retained and used by the association in the year or years following that in which deducted, such a provision is valid. The question arises, Is an association required to account to a member for deductions made for permanent reserves other than by showing the amount of them? If the deductions were made pursuant to provisions that showed that the member was merely making a loan to the association which was to be paid on the dissolution of the association or on some future date or occasion, then obviously the member becomes a creditor of the association subject to the terms of the loan, and such is the case when certificates of indebtedness are employed.

If, on the other hand, there is nothing to show that the deductions for reserves are loans, then the member has no legal claim of any character upon the association in the absence of a stipulation providing therefor. Under such circumstances neither stockholder nor member could success

64

California Bean Growers' Association v. Rindge Land & Nav. Co., 199 Cal. 168, 248 P. 658, 47 A. L. R. 904.

65

McCauley v. Arkansas Rice Growers Coop. Association, 171 Ark. 1155, 287 S. W. 419.

Cunningham v. Long (Maine Potato Growers Exchange), 125 Me. 494, 135

A. 198.

87 McCauley v. Arkansas Rice Growers' Coop. Association, 171 Ark. 1155, 287 S. W. 419.

68 Cunningham v. Long (Maine Potato Growers Exchange), 125 Me. 494, 135 A. 198.

69

McCauley v. Arkansas Rice Growers' Coop. Association, 171 Ark. 1155, 287 S. W. 419; Burley Tobacco Growers' Coop. Association v. Tipton, 227 Ky. 297, 11 S. W. 2d 119; Burley Tobacco Growers' Coop. Association v. Brown, 229 Ky. 696, 17 S. W. 2d 1002.

412528-58

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121

fully sue an association to recover the amount of deductions for reserves made from the proceeds received for his products.70

In one case 71 the question involved was whether a tobacco cooperative had the right to retain certain net margins realized from the sale of members' tobacco as revolving capital reserves. The tobacco in question had been pledged as security for price support loans, the association, acting as agent for Commodity Credit Corporation to administer the program. The tobacco, having failed to bring the support price, was held by the association after payment to the grower of the support price. It was later sold by the association for more than the loans for which it was pledged, thus creating an equity for the growers. The association's agreement with Commodity Credit Corporation required these excess amounts to be “distributed" to the growers. The association's marketing contract provided for retaining reasonable reserves, so it contended that it had "distributed" the amounts when it allocated the "reserves" to the growers. The plaintiffs contended that the "distribution" had to be by payment in cash.

The lower court avoided a construction of the contracts involved and held, in effect, that the patrons should be given the option of having the net proceeds either paid to them in cash or invested in the capital of the association.

On appeal, the Court said that the right of the association to use equities as revolving capital "must be resolved in the light of the intent of the Congress in creating Commodity Credit Corporation and providing it with funds to support the price of certain selected commodities, including tobacco." It said further:

Any right of the association to infringe upon the rights of growers must derive either from the Federal Government which made possible the realization of a profit or from the grower whose crop the association has sold. In our opinion it has not been able to trace its claim to either source. We think any grower reading the contract in advance of the sale of his crop would have concluded that “distribution” meant distribution in cash upon the liquidation of the crop for the year rather than allocation according to cooperative usage and custom upon the books of the association. As to such grower's crop under its contract with Commodity Credit Corporation, the association was to act as an agent of the Federal Government and not in its capacity as a cooperative benefiting the industry as a whole.

The Court held that under that contract the association could not use the equities for capital unless authorized by Commodity Credit Corporation to do so. It found that such consent had not been obtained.

The provisions in marketing agreements and bylaws with respect to deductions, especially deductions for reserves, and with respect to what action the board of directors may take in the event of losses should be clear and explicit and should leave no doubt as to the rights of the association with respect thereto.72 Broadly speaking, deductions for reserves are deductions for capital and should be clearly recognized as such.

Sometimes a question arises between an association and a member as to whether the association was authorized to make certain deductions. In general, in a case of this character, if the association has rendered a statement of account to the member showing the deductions and he does not

70

Burley Tobacco Growers' Coop. Association v. Brown, 229 Ky. 696, 17 S. W. 2d 1002. Tenn. 298

"Range v. Tennessee Burley Tobacco Growers Association, S. W. 2d 545.

72 Burley Tobacco Growers' Coop. Association v. Tipton, 227 Ky. 297, 11 S. W. 2d 119; Burley Tobacco Growers' Coop. Association v. Brown, 229 Ky. 696, 17 S. W. 2d 1002; Ózona Citrus Growers' Association v. McLean, 122 Fla. 188, 165 So. 625.

object to the statement within a reasonable period of time, this is held to constitute an "account stated" and the member loses his right to question such deductions.73 However, if objections are registered within a reasonable time the right to question the deductions is preserved.74

It has been held that when an association adopts a bylaw that affects existing and future financial rights of members, a member may be bound thereby although he did not vote in favor thereof, if he did not object to deductions made in accordance with the bylaws but apparently acquiesced therein.75

Many of the cooperative statutes provide for appraisal of the interest of a member of a nonstock association on the termination of his membership and for payment to him, on stated terms, of the amount thus ascertained. But this does not mean that a withdrawing member would be entitled to receive the amount deducted for reserves for the proceeds derived from the sale of his products. Appraisal of the interest of a member of a nonstock association on the termination of his membership, when the statutes provide for this procedure, is equivalent to the price received by a stockholder in a stock association on the transfer of his stock.

On the dissolution of an association, at common law, whether stock or nonstock, the money remaining in the treasury after payment of the debts of the association goes to the persons who are at that time stockholders or members.76 Those who had previously contributed to the organization, but were not stockholders or members at the time of dissolution, would be entitled to nothing. This rule is applicable to all associations except as it has been modified by statute, charter, bylaws," or contract.

Reserves of an association may be used for the payment of its debts and until the debts of an association have been paid 78 the reserves cannot be distributed among its members or stockholders.

ONE

Assessments

NE of the means by which the cooperative aim of serving members on a cost basis may be achieved is by the levying of assessments on the members and patrons, for services rendered or to make good deficits in operations. The assessment method is particularly adapted to cooperative service organizations, such as telephone, electric, insurance and irrigation associations. Thus, many farmers' mutual insurance companies are maintained by assessing the members at the end of each year for their

73 California Bean Growers' Association v. Williams, 82 Cal. App. 434, 255 P. 751; California Bean Growers' Association v. Rindge Land & Nav. Co., 199 Cal. 168, 248 P. 658, 47 A. L. R. 904; Davidson v. Apple Growers' Association, 159 Ore. 473, 79 P. 2d 991; Mountain View Walnut Growers Association v. California Walnut Growers Association, 19 Cal. App. 2d 227, 65 P. 2d 80. See also May & Ellis Company v. Farmers' Union Mercantile Company, 120 Ark. 316, 179 S. W. 490; Huxtable v. Berg, 98 Wash. 616, 168 P. 187.

74

Dryden Local Growers v. Dormaier, 163 Wash. 648, 2 P. 2d 274. See also Three Rivers Growers' Association v. Pacific Fruit and Produce Company, 159 Wash. 572, 294 P. 233.

75 Reinert v. California Almond Growers Exchange, 9 Cal. 2d 181, 63 P. 2d 1114, 70 P. 2d 190.

76 Clearwater Citrus Growers' Association v. Andrews, 81 Fla. 299, 87 So. 903; Union Benev. Soc. No. 8 v. Martin, 113 Ky. 25, 67 S. W. 38; Dade Coal Co. v. Penitentiary Co., 119 Ga. 824, 47 S. E. 338; Henry v. Cox, 25 Ohio App. 487, 159 N. E. 101; Missouri Bottlers' Association v. Fennerty, 81 Mo. App. 525; 5 C. J. 1360. "Adams v. Sanford Growers' Credit Corporation, 135 Fla. 513, 186, So. 239. 78 Texas Farm Bureau Cotton Association v. Lennox, 117 Tex. 94, 297 S. W. 743; Associated Fruit Co. v. Idaho-Oregon Fruit Growers' Association, 44 Idaho 200, 256 P. 99; Van Dyke v. Mid-South Cotton Growers' Association, 12 F. Supp. 138.

pro rata shares of the losses sustained and the expenses incurred. Similarly, an irrigation company may assess its members at the end of the year for the expense of supplying water during that year. The assessment method is

not used by service organizations exclusively. Marketing and farm supply associations sometimes have occasion to levy assessments to meet particular needs and many of the agricultural cooperative acts specifically authorize

assessments.

When the statute under which an association is incorporated authorizes an association to adopt bylaws providing for assessments, the right of the association to make them is clear, and reasonable bylaws adopted by the association in pursuance of such authority are binding on the members.79 Bylaws providing for assessments have been held valid although, apparently, there was no specific statutory authority therefor.80

When the statute under which an association was incorporated conferred the power to levy assessments and a bylaw adopted under the statute vested authority in the board of directors to do so, a member was held liable for an assessment of $500, even though the charter, in apparent pursuance of the statute, limited the liability of each member to $1.81

It is clear that when neither the statute nor the articles of incorporation, nor the bylaws authorize a majority of the stockholders to obligate all the stockholders to pay additional amounts, or to give notes therefor, additional liability may not be imposed on stockholders who do not authorize or consent thereto.82

Stockholders may be liable for assessments even though there is no statutory warrant or authority therefor, by assenting to an agreement to be liable for assessment through purchasing stock evidenced by certificates which on their face refer to such an obligation.83

When the statute under which a nonstock association was incorporated did not confer authority to make assessments, it was held that provisions in the articles of incorporation and bylaws, providing for assessments, would not be upheld on the basis of a contract because "the exactions will result in unjust discrimination between its members.” 84

85

Even though the authority to levy an assessment exists, it may not be levied for carrying out a purpose beyond the powers of the corporation. Where an association has the statutory power to levy assessments to pay losses and "necessary expenses," it had the power to levy an assessment to pay a claim arising in tort.86

79 Connecticut Milk Producers' Association v. Brock-Hall Dairy Co., Inc., 122 Conn. 482, 191 A. 326; Ex parte Baldwin County Producers' Corporation, 203 Ala. 345, 83 So. 69. See also Lewis v. Monmouth County Farmers' Cooperative Association, 105 N. J. Eq. 257, 147 A. 550.

80

Pennsylvania Milk Producers' Association v. The First National Bank of Honeybrook, 20 Pennsylvania County Court Reports 540.

81

Lockport Cooperative Dairy Association v. Buchner, 221 N. Y. S. 433, 129 Misc. Rep. 73, affirmed in 217 App. Div. 784, 216 N. Y. S. 865, affirmed in 244 N. Y. 585, 155 N. E. 907. See also Lewis v. Monmouth County Farmers' Cooperative Association, 105 N. J. Eq. 257, 147 A. 550.

82 Farmers' Coop. Union v. Alderman, 126 Kan. 299, 267 P. 1110.

83

Simons v. Groesbeck, 268 Mich. 495, 256 N. W. 496.

84

85

Alfalfa Growers of California v. Icardo, 82 Cal. App. 641, 256 P. 287.

Seeley v. Huntington Canal & Agricultural Association, 27 Utah 179, 75 P. 367; Ehlers v. Farmers Mutual Insurance Company of Thayer County, 130 Neb. 368, 264 N. W. 894.

86

Mortimer v. Farmers' Mutual Fire & Lightning Insurance Association, 217 Iowa 1246, 249 N. W. 405. But see Arkansas Valley Cooperative Rural Electric Company v. Elkins, 200 Ark. 883, 141 S. W. 2d 538, in which the association was held not responsible for a claim arising in tort.