mally does not exist in other business corporations in which the dividend rate is, from a legal standpoint, unlimited. In one case, the payment of a fair rate of interest by a cooperative on its preferred stock was regarded as an operating expense, like interest paid on borrowed money. 19 The payment of a fair return on capital tends to produce equality among the shareholders or members because it eliminates the differences caused when some members utilize the association less than others or have furnished more capital than others to its establishment. Usually, the question of whether an organization is a cooperative arises with respect to a particular statute. From a Federal standpoint, there is no all-inclusive statutory definition of an agricultural cooperative. For instance, an organization may meet the conditions of the Capper-Volstead Act20 and not qualify for tax treatment as a cooperative under the Internal Revenue Code. 21 Again, an association may be eligible for loans from a bank for cooperatives 22 and not meet the conditions of the CapperVolstead Act. In some statutes, the words "cooperative association" are employed without being defined. In such cases, those concerned must ascertain the conditions and qualifications necessary for an organization to be regarded, from the standpoint of that statute, as a cooperative. Usually, under such a statute, all the basic requirements discussed herein must be met for an organization to be classified as a cooperative. Sometimes, the status of an association may not be determined simply by an examination of its organization papers. Despite the formal provisions of such papers, actual control of an alleged agricultural cooperative may be possessed by persons who are not producers or members and the financial benefits may largely accrue to such persons. In other words, an organization may have the characteristics but not the fundamentals of a cooperative; the form but not the substance. If an association 19 Garden Homes Co., 26 B.T.A. 441 (1932), reversed on other grounds, 64 F.2d 593 (7th Cir. 1933). Apparently, the court regarded the capital, although in the form of preferred stock, as being in reality "borrowed" funds. Ordinarily, amounts invested in capital in that form would not be so regarded. See Sabine Royalty Corporation, 17 T.C. 1071 (1951), for a discussion of some of the tests as to whether a security is a form of stock or evidence of debt. 20See "Capper-Volstead Act," infra, p. 293. 21 See "Federal Income Taxes," infra, p. 356. 22See "Statutes Providing Credit Facilities," infra, p. 523. formed as a nonprofit corporation engages in profitmaking activities, it may be prohibited through quo warranto proceedings from engaging in such activities.23 Membership The persons with whom the general business corporation deals usually are not members of the organization. In a farmer cooperative, however, the members are the patrons; that is, they deliver their products to the association for marketing or acquire supplies and services from or through it. In a cooperative, the benefits to members accrue primarily because they are patrons of the association. Patronage of, and not money invested in, the enterprise determines the benefits obtained.24 Accordingly, the progress and benefits that may be attained by a cooperative for its member-patrons are directly and inevitably affected by the extent and the consistency of their patronage. Membership in a cooperative confers certain legal rights, which are discussed more fully hereafter. At the same time, membership imposes definite responsibilities. Ideally, members of an association should provide adequate financing, support the business through full patronage, elect competent directors, keep themselves informed on association affairs, and cooperate in carrying out their agreements and the commitments of the association. Experience has shown that an association with this type of support is more likely to succeed in accomplishing its objectives. Clearly, the relationship between the members and the association is much more intimate and personal than that 23 People ex rel. Hughes v. Universal Service Association, 365 III. 542, 7 N.E. 2d 310 (1937). See also Rockingham Cooperative Farm Bureau, Inc. v. City of Harrisonburg, 171 Va. 339, 198 S.E. 908 (1938). Cf. State ex rel. Arn v. Consumers Coop. Association, 163 Kan. 324, 183 P. 2d 423 (1947). 24 For example, in Mississippi Valley Portland Cement Co. v. United States, 408 F. 2d 827 (5th Cir. 1969), the court characterized a certain arrangement as a "cooperative camouflage" where the shareholders were not patrons of the organization. The shareholders, said the court, were investors in a corporation selling cement to the general public and distributions to the shareholders were dividends on shares of stock and not patronage refunds under the Internal Revenue Code. See also Etter Grain Company v. United States, 331 F. Supp. 283 (N.D. Tex. 1971), affirmed, 462 F. 2d 259 (5th Cir. 1972), denying cooperative status to the company because "fruits from the organization accrued and were paid on the basis of financial investment rather than because of the members' patronage." between other corporations and their stockholders. The courts have recognized this special relationship.25 It has been said: Even though title may have passed, still the arrange- There was a fiduciary relationship here; defendant was Membership in a stock cooperative is obtained through the purchase of at least one share of its stock and the meeting by the purchaser of any other requirements of the association. Membership in a nonstock cooperative is obtained through application for membership and acceptance of the applicant by the association and the meeting of any other requirements. A common requirement for both stock and nonstock associations is an agreement to take service or obtain supplies from the cooperative, and in marketing associations the signing of a marketing contract is sometimes required. It should not be assumed that the members or stockholders of a cooperative, except in a technical legal sense, are separate 25 California Canning Peach Growers v. Downey, 76 Cal. App. 1, 243 P. 679 (1925). 26 Rhodes v. Little Falls Dairy Company, Inc., 230 App. Div. 571, 245 N.Y.S. 432, 434, 435 (1930), affirmed in 256 N. Y. 559, 177 N.E. 140 (1931). See also Arkansas Cotton Growers' Coop. Association v. Brown, 168 Ark. 504, 270 S.W. 946 (1925); Texas Farm Bureau Cotton Association v. Stovall, 113 Tex. 273, 253 S. W. 1101 (1923), reversing 248 S. W. 1109 (Tex. Civ. App. 1923); Texas Certified Cottonseed Breeders' Association v. Aldridge, 122 Tex. 464, 61 S.W. 2d 79 (1933), reversing 59 S. W. 2d 320 (Tex. Civ. App. 1933); Bogardus v. Santa Ana Walnut Growers' Association, 41 Cal. App. 2d 939, 108 P. 2d 52 (1941). and apart from the association. The members are the association, and the officers and directors of the association are, from a practical point of view, simply their agents for the conduct of the joint enterprise. The officers and directors are placed in office and continue there only through the action or acquiescence of the stockholders or members. In other words, the stockholders or members are essentially the principal or the "employer," and the officers and directors are simply their "employees" or agents to direct the business; the agents are subject to the control of their employers. 27 Frequently, cooperatives on receiving the products of a member make an advance to him which constitutes a "part payment," or more accurately, partial returns. Final returns are made after the sale of the products or at the end of the pooling or marketing period. Cooperative Pooling and Operations Pooling-essentially an averaging proposition—is a practice common to cooperatives.28 For instance, the expenses incident to the operation of an association are pooled and then divided among the members on an equitable basis. Many marketing associations pool the products received from their members; that is, they mingle products of the same grade and quality so that the identity of any particular lot is lost. On the sale of the products in a particular pool, the association renders a final account to each member, based upon the quantity he contributed to the pool. Some associations pool returns without pooling products; that is, the returns from products of the same grade and quality sold during a given period, usually at varying prices, are combined and then divided among the members on a unit basis. Some associations, such as cooperative livestock commission concerns, act simply as agents for members in the sale of their 27 Lexington Mill & Elevator Co. v. Browne, 116 Neb. 753, 219 N.W. 12 (1928). 28 Gardner, Matching Cooperative Principles with Today's Operating Practices, American Cooperation-1971, 160; Markeson, Pooling and Other Grower Payment Methods as Used by Local Fruit, Vegetable, and Tree Nut Cooperatives, FCS General Report 67, Farmer Cooperative Service, U.S. Dept. Agr. (1959); Gardner, Operation-at-Cost Principle, American Cooperation1951, 79 & 81; Christensen, Pooling as Practiced by Cooperative Marketing Asso products. Other associations take title to the products received from their members but otherwise function and account to members as an agent. Marketing associations sometimes enter into contracts with members which require them for specified periods to deliver their products to the association for marketing. These contracts usually are comprehensive and state the undertakings of the association and the member with regard to the delivery and marketing of the products covered.29 All States have statutes peculiarly adapted to the incorporation of farmer cooperatives. And many States, in addition to their general incorporation statutes that are sometimes used to incorporate cooperatives, also have particular laws for the incorporation of other types of cooperatives such as those organized to provide insurance, irrigation, electric, or telephone service. All of these cooperatives function along lines similar to those followed by other business corporations; that is, each of them has a board of directors, officers, and employees through whom the affairs of the association are conducted. Informed and intelligent management is as necessary for success in a cooperative as in any other corporation. Management has been called the vital factor in the success of any cooperative. "Cooperative marketing of farm products appears to be a necessity. Its success, however, depends upon the business sagacity and honesty of those in charge."30 Although this publication is primarily concerned with farmer cooperatives, cooperation is not just confined to agriculture. It exists in every field of business endeavor. The Associated Press "is a cooperative organization, incorporated under the Membership Corporations Law of the State of New York, its members being individuals who are either proprietors or representatives of about 950 daily newspapers published in all parts of the United States." Many life insurance companies are mutual organiza ciations, U.S. Dept. Agr. Misc. Pub. 14(1929); Bakken and Schaars, Economics of Cooperative Marketing, McGraw-Hill Book Co., Inc. (1937), pp. 431-472. See Elliott v. Adeckes, 240 Minn. 113, 59 N. W. 2d 894 (1953). 29See "Sample Legal Documents," infra, p. 554 for forms of marketing contracts. 30 Dark Tobacco Growers' Co-op Association v. Robertson, 84 Ind. App. 51, 150 N.E. 106, 113 (1926). 31 International News Service v. The Associated Press, 248 U.S. 215, 2 A.L.R. 293 (1918). |