In a case where a cooperative handled fertilizer on a consignment basis, the consignor of the fertilizer was held entitled to sue a director for the purchase price of fertilizer when the director attempted to offset a debt the association owed him against a debt he owed the association for fertilizer.22 A milk marketing association filed a claim as agent of its members for amounts due from a dairy company for milk in a proceeding arising from the company's assignment for the benefit of creditors. The members had assigned their claims to the association. It was held that no rights were lost by including all the members' claims in one claim even though the sum exceeded the maximum amount allowable on each claim under a preference statute.23 Although a corporation may have branch offices and various offices and various departments, at least insofar as third persons are concerned, all the assets of the corporation are usually available for the satisfaction of all of the debts of the corporation. "We think it needs no argument," said a Minnesota court, "to demonstrate that a corporation cannot divide itself into several parts so that each segment will constitute a separate entity when dealing with the public. Possibly such an arrangement would be permissible where only the rights of consenting stockholders were involved."24 Nonprofit Associations Some of the State cooperative acts contain a provision reading substantially as follows: Associations organized hereunder shall be deemed "nonprofit," inasmuch as they are not organized to make profit for themselves, as such, or for their members, as such, but only for their members as producers.' 22 Darling & Company v. Petri, 138 Kan. 666, 27 P. 2d 255 (1933). 23 In re Merrick Dairy Co. of Beloit, 249 Wis. 295, 24 N. W. 2d 679 (1946). 24 Lebens, as Receiver of the LeSueur County Cooperative Company v. Nelson, 148 Minn. 240,181 N. W. 350, 352 (1921). See Minn. Stats. Ann. § 308.52; Kan. Stat. Ann. § 17-1602. See also Claassen v. Farmers Grain Cooperative, 208 Kan. 129, 490 P. 2d 376 (1971). This statement probably would not in and of itself cause an association to be classified as a nonprofit association.2 But if an association is formed and operated on a nonprofit, cost basis, the statutory declaration should confirm its character.3 A cooperative brought suit to recover the balance alleged to be due for a carload of oranges. The defendant contended that the association was not entitled to maintain the suit because it was a foreign corporation that had no license to do business in Missouri. Under the Missouri statute, however, only corporations organized for pecuniary gain were required to obtain licenses to do business in the State. The court, after pointing out that the association was incorporated as a nonprofit cooperative corporation under the laws of California, referred to a Missouri statute relating to cooperatives identical with that quoted above and held that the association was not "a corporation for pecuniary profit" within the meaning of the statute relative to foreign corporations.4 Another court in construing a statutory provision also similar in effect to the one quoted above said: On the record before us it would seem that the plaintiff's Of course, an association does not cease to be a nonprofit association because it obtains greater returns for its members than they could obtain from their products. To the extent that it has any 328. 2Reis, Cooperative Legislation, American Cooperation-1925, v. 1, pp. 325, 3See "Cost Basis Principle," supra, p. 5 and discussion in this section at footnotes 8 and 9, infra. 4 Mutual Orange Distributors v. Black, 221 Mo. App. 493, 287 S.W. 846 (1926). See also Georgia Milk Producers Confederation v. City of Atlanta, 185 Ga. 192, 194 S.E. 181 (1937); American Cotton Co-op Association v. Union Compress & Warehouse Co., 193 Miss. 43, 7 So. 2d 537 (1942); Claassen v. Farmers Grain Cooperative, 208 Kan. 129, 490 P. 2d 376 (1971). "Sanitary Milk & Ice Cream Co. v. Hickman, 119 W.Va. 351, 193 S.E. 553, 555 (1937). See also Storen v. Jasper County Farm Bureau Cooperative Association, 103 Ind. App. 77, 2 N.E. 2d 432 (1936). bearing on the matter, benefits received by the members of a cooperative in the form of increased returns for their products are evidence of the cooperative's nonprofit character. The principal objective of a cooperative is to increase benefits or returns to its members. The situation insofar as an association formed and operated on an ideal basis is concerned is analogous to one in which an individual farmer might act on a cost basis as the agent for farmer neighbors in disposing of their products or acquiring supplies for them. The agent would be acting on a nonprofit basis for his neighbors and any financial benefits he might be able to obtain for them would not operate to change his individual status. An association so operating would not in any commercial sense be making a profit on the business done with or for its members. Thus, a court, in stating that electric cooperatives "are non-profit," noted the fact that "Most of them have developed a 'capital credits' plan by which all money over and above that required for operating costs is credited back to the member-owners who paid it in. Consequently neither the cooperative nor any individual can profit from the sale of electricity by the cooperative to its members."7 Raymond Mischler, in an informative article in the Rocky Mountain Law Review,8 has described best the three important organizational aspects to establishing a cooperative that will provide nonprofit, "service at cost." He points out: "First. Dividends on capital stock or interest on other capital investments must be limited to a reasonable return for the use of the money. This is usually required by state law. • Yakima Fruit Growers' Association v. Henneford, 182 Wash. 437, 47 P. 2d 831, 100 A.L.R. 435 (1935). See also School Dis't of Philadelphia v. Frankford Grocery Co., 376 Pa. 542, 103 A. 2d 738 (1954). 'Salt River Project Agricultural Improvement and Power Dist. v. Federal Power Commission, 391 F. 2d 470 (D.C. Cir. 1968), certiorari denied, 393 U.S. 857 (1968); and see "Sample Legal Documents," infra, p. 578, for a bylaw providing for a plan of the "capital credits" type. See also Montana-Dakota Utilities Co. v. Johanneson, 153 N.W. 2d 414 (N. Dak. 1967). 830 Rocky Mt. L. Rev. 381 (1958). "On this subject generally, see Gardner, Operation-at-Cost Principle, American Cooperation—1951, 79. "If there is a single, dominant, underlying principle in cooperative organization and operation, it is operation-at-cost. This observation assumes additional force when the principle of operation-at-cost is jointly considered with its corollary or companion principle of distribution of savings or net margins above operation costs to patrons on a basis proportional to their individual use of the services of an association. These two concepts are so "Second. Net operating margins (or savings) should be subject to a prior mandatory obligation which precludes the cooperative from ultimately diverting them to its stockholders or members as such. Ideally, this obligation (the patronage contract) should be such that during an accounting period all the cooperative's operating receipts less expenses and provision for a reasonable, limited return on capital are vested in the patrons-members and nonmembers without distinction. Some cooperatives have that kind of contract. Others are required by state law to divert, or voluntarily divert, some part of the receipts to a reserve for contingencies or some other kind of reserve which in an investor corporation would be a surplus reserve. In such case, the mandatory obligation should be supplemented by a proper 'dissolution' provision in the state statute or bylaws. Such provision should make it clear that net margins not currently paid to patrons (whether in cash or by offset against the patron's obligation to invest in capital), or not so paid prior to dissolution, are distributable on dissolution only on a patronage basis, after payment of all debts and retirement of capital contributions at par. Finally, some cooperatives, in addition to reserves, also (either because the state law requires it, as in Iowa, or by design) provide for patronage refunds to members only. If these cooperatives do business with members only, there is no doubt about the 'service at cost' character of the operation. If they do some business with nonmembers and derive a net margin on that business, it should be provided that such net margin, after payment of federal income taxes, cannot be used to increase investment returns but only to augment incidentally the total amount available for distribution to patrons either currently or on dissolution under a provision such as interrelated that it is difficult to think of one without the other. By virtue of its very nature, operation-at-cost implies that any savings or net margins effected by an organization will be distributed or allocated to participants on a patronage basis. Recognition of the principle that savings are to be reflected to the patron is a fundamental element in all farmers' business organizations. **** it makes little difference whether a cooperative's methods of operations result in the actual determination of patronage refunds as separate amounts, or whether refunds are submerged as savings in net returns to producers after deduction of authorized expenses in marketing cooperatives. Differences in techniques are present but the principles of operation-at-cost and return of savings to the member are nevertheless employed under both circumstances." See also Gardner, Matching Cooperative Principles with Today's Operating Practices, American Cooperation-1971, 160; and Gardner and Volkin, What are Patronage Refunds?, Information 34, Farmer Cooperative Service, U.S. Dept. Agr. (Revised 1972). discussed above. To the extent the nonmember business helps the cooperative achieve a more effective economic level of operation, such business merely helps reduce the costs of the member patrons in obtaining the services they have established the cooperative to supply. Thus, the primary objective and primary benefit is still the securing of needed services at reasonable cost, not the making of a profit for owner-investors. "Third. Any nonoperating receipts, including capital gains, either should be prorated to patrons in accordance with patronage on as equitable a basis as is possible or, if not currently allocated, should be subject to a dissolution provision such as discussed above." Thus, the contractual obligation of a properly organized cooperative is to return to patrons everything received for supplies or services provided, or for products delivered by its patrons, less operating costs and expenses and other authorized deductions such as "per-unit" or "capital retains." And any nonoperating receipts or capital gains should be handled as indicated in the above quotation. In other words, the making of profits which, in the discretion of management might otherwise be passed on to stockholders as furnishers of capital, is entirely foreign to the character of a nonprofit cooperative. The fact that an association must have money to operate does not affect its nonprofit character.11 In a California case, it was said: The plaintiff's existence as a nonprofit association does 10See "Capital Retains," infra, p. 443; also "Sample Legal Documents," infra, p. 578, for a bylaw provision containing this kind of contractual obligation. See also Salt River Project Agricultural Improvement and Power Dist. v. Federal Power Commission, 391 F. 2d 470 (D.C. Cir. 1968), certiorari denied, 393 U.S. 857 (1968). "Ex parte Baldwin County Producers' Corporation, 203 Ala. 345, 83 So. 69 (1919). See also Tobacco Growers' Co-op Association v. Jones, 185 N.C. 265, 117 S.E. 174, 33 A.L.R. 231 (1923); Kansas Wheat Growers' Association v. Schulte, 113 Kan. 672, 216 P. 311 (1923); Texas Mobile Home Association v. Commissioner, 324 F. 2d 691 (5th Cir. 1963). |