f

In a West Virginia case 16 the court construed a statutory provision similar in effect to the one quoted above and said:

On the record before us it would seem that the plaintiff's prima facie status of being a non-profit association is probably overcome by the facts, in this, that through the processing of dairy products and the marketing of commodities produced therefrom, the association operates primarily for the purpose of deriving for its members a greater return than they could obtain from the raw products.

No basis is perceived for the view that an association ceases to be a nonprofit association because it obtains greater returns for its members than they could obtain from their raw products. Insofar as it has any bearing on the matter, benefits received by the members of a cooperative in the form of increased returns on their products are evidence of its nonprofit character. The principal objective of a cooperative is to increase returns to its members. The situation insofar as an association formed and operating on an ideal basis is concerned is analogous to one in which an indivdual might act on a cost basis as the agent for farmers in disposing of their products or acquiring supplies for them. The agent would be acting on a nonprofit basis and financial benefits which he might be able to obtain for the farmers would not operate to change his status. Such an association, it has been held, is not in any commercial sense making a profit on the products received from its members.17

Fundamentally, the contractual obligation of a properly organized marketing cooperative is to return everything received for the products delivered by its members, less operating costs and expenses, and other authorized deductions for which, in many instances, the members receive credits. In other words, the making of profits which, in the discretion of management, may be passed on to its stockholders as furnishers of capital, is entirely foreign to the character of a true cooperative.

The fact that an association must have money to operate does not affect its nonprofit character. 18

In a California case 19 it was said:

The plaintiff's existence as a nonprofit association does not in any wise militate against its right to claim the damages recovered. As a corporation considered singly, it designed to make no profit; the advantages, pecuniary and otherwise, resultant upon its operations, descended immediately to the cooperating stockholders. As an agency for the purpose of distributing this benefit in such manner, the corporation existed as such, and by its corporate name it was entitled to prosecute this action. As to whether it might, upon collecting the money, sequester it in a fund not contemplated by the terms of its articles, and so consummate an act ultra vires, is of no concern here.

Much confusion appears to have arisen with regard to the term "nonprofit." Obviously, as indicated in the foregoing quotation and as aptly

16

20

Sanitary Milk & Ice Cream Co. v. Hickman, 119 W. Va. 351, 193 S. E. 553, 555. See also Storen v. Jasper County Farm Bureau Cooperative Association, 103 Ind. App. 77, 2 N. E. 2d 432.

17 Yakima Fruit Growers' Association v. Henneford, 182 Wash. 437, 47 P. 2d 831,

100 A. L. R. 435.

18 Ex parte Baldwin County Producers' Corporation, 203 Ala. 345, 83 So. 69. See also Tobacco Growers' Cooperative Association v. Jones, 185 N. C. 265, 117 S. E. 174, 33 A. L. R. 231; Kansas Wheat Growers' Association v. Schulte, 113 Kan. 672, 216 P. 311.

19 Anaheim Citrus Fruit Association v. Yeoman, 51 Cal. App. 759, 197 P. 959, 961. Hanna, John, THE LAW OF COOPERATIVE MARKETING ASSOCIATIONS.

20

509 pp. New York, 1931. See p. 50. See also: Cerini, Floyd B. UTAH PIONEERS IN ADOPTING THE UNIFORM COOPERATIVE ASSOCIATION STATUTES. Cooperative Journal 41-49.

1938.

pointed out both by text writers 21 and by the courts,22 cooperatives are business organizations and are intended to increase the returns to farmer members for their products. A cooperative is truly "nonprofit" when by reason of its prior contract with patrons it is required to distribute to such patrons on a patronage basis all "profits" derived from transactions with them.

It has been said that:

Obviously, the cooperative marketing association is organized for profit in the sense of financial benefit to its members. The element of departure from ordinary corporate economic practice is found in the fact that the financial gain is enjoyed by the members in proportion to the production, by each, of the products handled, rather than in proportion to the capital otherwise contributed by each to the conduct of the business; but this difference of economic principle governing the distribution of wealth cannot alter the fact that the sole incentive to membership in such an association is the financial benefit to be derived therefrom in the marketing of the farm products which the member is producing. There is nothing broadly eleemosynary in cooperative associations. They simply represent a banding together of producers for their common good, and the motive of each is pecuniary gain.23

A person engaged in a normal commercial merchandising business buys goods from sellers and then resells them at higher prices but he is under no obligation to account to the seller for the profits made on such transactions; in other words, a person engaged in such a merchandising business is operating for entrepreneur profit. This is in sharp contrast with the situation of a marketing cooperative which is required to account to its members for the full net amount it receives for commodities delivered by them. Likewise, a farm supply association which is required to account to its members for any net margins realized on goods supplied by the association, is not in business for the purpose of producing an entrepreneur profit.

The nonprofit or mutual character of cooperatives is also recognized in the cases in which associations are permitted to recover from members and others overadvances that have been made on commodities.2 Obviously, if some patrons receive excess payments, other patrons must necessarily receive less than their fair share, because the association usually has no "profits" to absorb the operating loss created by the overpayments.

Savings effected by a cooperative, even though they "belong" to members and not to the association itself, are subject to the claims of the creditors of the association,25 and the mere fact that a cooperative is a nonprofit organization is not sufficient to exempt it, under certain statutes, from license taxes.2 26

The term "nonprofit" is also applicable to associations organized under statutes which do not contain a provision like the one under discussion if, in fact, they are operating on such a basis.27

21 Evans, Frank, and Stokdyk, E. A. THE LAW OF AGRICULTURAL COOPERATIVE MARKETING. 648 pp. Rochester, N. Y. 1937. See p. 303.

22 Schuster v. Ohio Farmers' Cooperative Milk Association, 61 F. 2d 337.

23 Schuster v. Ohio Farmers' Cooperative Milk Association, 61 F. 2d 337, 338. See also In re Wisconsin Cooperative Milk Pool, 35 F. Supp. 787 reversed in 119 F. 2d 999.

24 Baird v. Gleason, 53 F. 2d 785. See also p. 115.

25 Associated Fruit Co. v. Idaho-Oregon Fruit Growers' Association, 44 Idaho 200, 256 P. 99.

26 Appeal of Beaver County Coop. Association, 118 Pa. Super. 305, 180 A. 98. See also Maryland & Virginia Milk Producers' Association v. District of Columbia, 119 F. 2d 787, cert. den. 314 U. S. 646, 62 S. Ct. 87, 86 L. Ed. 518.

27

Uniform Printing and Supply Co. v. Commissioner, 88 F. 2d 75.

Equality of Treatment

B situated should receive similar treatment. There may be differentials

ROADLY speaking, all members of a cooperative who are similarly

В

based on time, distance, grade and quality of products and other factors; but, at least in the absence of definite provisions to the contrary, where the conditions are identical the treatment should be identical. In a case involving a mutual insurance company it was said:

28

* * * we think it must be conceded that in a mutual company, where the members are not divided into classes except as to age, the company would have no authority, for the same premium, to issue policies promising special benefits to different members of the same class.

Although in an agricultural marketing or farm supply association the foregoing statement would not appear to be strictly applicable, it is indicative of a principle which should be kept in mind.

In California, on account of a statute which was construed to permit the unequal treatment of members, a marketing contract which favored a particular type of member was upheld; 29 but the court pointed out that before the amendment of the statute "it was believed that such associations should deal only with the products of its members, and that all members should be treated equally." Sometimes an association will provide in its marketing contract that if in the future it offers a different form of marketing contract to other producers it will give those producers who signed the original marketing contract an opportunity to sign the new form.

30

In a Maryland case the court said that it found nothing in the Maryland statutes, in a milk marketing association's charter, or in its marketing contract, which required that the association's "duty of equality in treatment of its members limited it to one uniform contract with all its members for a single activity." Also, in a case 31 involving a creamery association operating in California, the court held that there was nothing in the bylaws, articles, or any contract of the creamery which bound the association to take, or any member of the association to deliver, milk. Accordingly, the court said, the association was free to deal with its members on any reasonable basis, and, in doing so, it could apply different conditions of purchase as to members, if, in the interest of the association, there existed reasonable and natural grounds for such varying conditions. The court said, "it could not unfairly discriminate but it could discriminate." Aside from the rather complicated details of these particular cases, some doubts would surely arise as to whether equity is properly served where a cooperative actually pays two rates of return simultaneously for identical products, unless some specific justification for the difference is involved.

In a Wisconsin case involving a milk bargaining association the court said: 32

28 Durland v. Elkhorn Life & Accident Insurance Company, 112 Neb. 105, 198 N. W. 564, 566.

29 California Canning Peach Growers v. Harkey, 11 Cal. 2d 188, 78 P. 2d 1137. See also California Canning Peach Growers v. Williams, 11 Cal. 2d 221, 78 P. 2d 1154, 11 Cal. 2d 233, 78 P. 2d 1161; Stafford v. California Canning Peach Growers, 11 Cal. 2d 212, 78 P. 2d 1150.

30 Cooperative Milk Service, Inc. v. Hepner, 198 Md. 104, 81 A. 2d 219.

32

31 Bertram v. Danish Creamery Association, 120 Cal. App. 2d 458, 261 P. 2d 349. Wheelwright v. Pure Milk Association, 208 Wis. 40, 240 N. W. 769, 242 N. W. 486, 487.

It does not follow, if the extrinsic evidence should establish this as the sense in which the language should be taken, that the association can deliberately or intentionally eliminate from the market a portion of the producers who are members in order that the remaining members may enjoy more favorable prices. The contract is not open to such a construction. Even though the sense or meaning contended for should be established, the association is obligated to exercise the same diligence and good faith to market the milk of one member that it exercises to market the milk of the other members. This is the cooperative principle as applied to this type of organization. It is violated when and if the association discriminates in the exercise of its sales efforts between members or groups of members, each of whom has an equal right to the exercise of these efforts. It is not violated if the association has exercised reasonable diligence in good faith and without discrimination.

It has been held that where a cooperative orally modified its marketing agreement with a member to guarantee him a minimum price for his product, the association was obligated to comply with its agreement.

33

In a case decided by the Board of Tax Appeals it appeared that a group of patrons was given a marked preference in that the supplies which they purchased were apparently purchased at cost.34 In this connection the court said:

Not only did this preferred group contribute nothing to petitioner's profits or to defray its necessary expenses, but the three shareholders in that group received stock dividends out of petitioner's profits from sales to other patrons at regular retail prices. The evidence negatives the fact that petitioner was operated on a cooperative basis, either as among its members alone, or as between its members and nonmembers.

In a case 35 involving a mutual insurance company it appeared that the company decided to dissolve and to distribute the money which it had on hand. A question arose as to who was entitled to share in the distribution. In holding that all policyholders who had contributed to the amount then on hand were entitled to share in the distribution, the court said:

Clearly, if the court allows the present policyholders to take all the surplus, it will be permitting the contributions of many to benefit the few. What was the contract? It was a mutual obligation to share losses by fire; and, to make the contract as absolutely certain as possible, the amount supposed to be necessary for that purpose was required to be paid in advance. But a mutual obligation to share losses was not all. This mutuality extended to an equal distribution of any surplus. The cash paid or advanced was not paid to protect some future policyholder against loss, or to enable him to draw out of the treasury more than all his premiums, but simply to insure the existing policyholders against loss. That is the venture; that is the contract. The members for the time being bind themselves each to the other only; not to any third persons; not to those who may become members afterwards, and when their policy shall have expired. The money paid by the members for the time being is a trust fund, held for themselves only, and to divert it to the profit of others is a plain breach of trust.

W

Nonmember Business

HILE the various Federal statutes applicable to agricultural cooperatives evince a uniform public policy with respect to the subject of nonmember business this is not true of the State cooperative acts. Some of these acts are silent with respect to nonmember business and if an association is incorporated under such a statute it would appear that it may freely transact business with members and nonmembers without restriction,36 insofar as State law is concerned. Generally, however, State statutes either prohibit an association from doing business with nonmembers, or

33 Yakima Fruit Growers' Association v. Hall, 180 Wash. 365, 40 P. 2d 123. 34 Farmers Union Cooperative Oil Company, 38 B. T. A. 64.

35 Smith v. Hunterdon County Mutual Fire Insurance Company, 41 N. J. Eq. 473, 4 A. 652, 653. Cf. Driscoll v. Washington County Fire Insurance Co., 110 F.

2d 485.

3 In re Farmers' Dairy Company's Receivership, 177 Minn. 211, 225 N. W. 22.

permit associations organized under them to transact business with nonmembers but provide that the business done with nonmembers shall not exceed in value the amount of business transacted for members. This limitation on nonmember business appears in the Capper-Volstead Act,37 the Agricultural Marketing Agreements Act,38 as amended, and also Section 521 of the Internal Revenue Code of 1954, which contains the requirements that must be met if a cooperative is to have an “exempt" status for Federal income tax purposes.

39

Likewise, associations that do more business with nonmembers than with members are not regarded as producer cooperatives under marketing agreements entered into under the Agricultural Marketing Agreement Act,40 as the Department of Agriculture gives consideration to the conditions of the Capper-Volstead Act in determining whether an organization is an association of producers.

Serious consequences may result if an association violates a restriction on the amount of business which it may do for nonmembers."

41

If the value of the business transacted by an association with nonmembers exceeds that transacted with members, it is not eligible for loans from a bank for cooperatives, nor could it qualify for the restricted exemption provided for in the Motor Carrier Act. 43′′

42

44

In certain types of cooperatives the necessity for limiting the advantages afforded by the association strictly to its own members is apparent. This point is illustrated by community groups. Similarly mutual insurance companies and irrigation companies usually limit their business to their members. In addition, in the case of mutual water companies, membership in the association and the right to a supply of water are frequently appurtenant to the land.45 However, this is not necessarily the case.46

47

An association which is to act as a public warehouseman must ordinarily, in order to operate as a public warehouse, offer storage facilities to the public generally and may not limit it to its own membership. It has also been held that a mutual telephone company is under a duty to serve the public at large.

48

If an association is to maintain an "exempt" status under the Federal income tax laws, it must treat member and nonmember patrons alike and may not, for instance, limit patronage refunds to members or pay patronage

37 Capper-Volstead Act, p. 166.

38 Federal Statutes Mentioning Cooperatives, p. 247.

39 See Federal Income Taxes, p. 195.

40 Ibid., n. 36.

41 United States v. American Livestock Commission Co., 279 U. S. 435, 49 S. Ct. 425, 73 L. Ed. 787. See also Board of Trade of City of Chicago v. 67 F. 2d 402.

Wallace,

42 Federal Statutes Mentioning Cooperatives, p. 247.

43

Regulatory Statutes, p. 251.

44 Burt v. Oneida Community, Ltd., 137 N. Y. 346, 33 N. E. 307, 19 L. R. A. 297; 138 N. Y. 649, 34 N. E. 288.

45 Comstock v. Olney Springs Drainage District, 97 Colo. 416, 50 P. 2d 531; Woodstone Marble & Tile Co. v. Dunsmore Canyon Water Co., 47 Cal. App. 72, 190 P. 213. 46 Palo Verde Land & Water Company v. Edwards, 82 Cal. 52, 254 P. 922. But see People ex rel. Knowlton v. Orange County Farmers' and Merchants' Association, 56 Cal. App. 205, 204 P. 873.

47 Nash v. Page & Co., 80 Ky. 539, 4 Ky. Law Rep. 477, 44 Am. Rep. 490.

48 Celina & Mercer County Telephone Company v. Union-Center Mutual Telephone Association, 102 Ohio St. 487, 133 N. E. 540, 21 A. L. R. 1145. But see State v. Southern Elkhorn Telephone Co., 106 Neb. 342, 183 N. W. 562; State ex rel. Lohman & Farmers' Mut. Telephone Co. v. Brown, 323 Mo. 818, 19 S. W. 2d 1048; Inland Empire Rural Electrification, Inc. v. Department of Public Service of Washington, 199 Wash. 527, 92 P. 2d 258.