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. 12

Much confusion appears to have arisen with regard to the term "nonprofit."13 Obviously, as indicated previously and as aptly pointed out both by text writers 14 and by the courts, 15 cooperatives are business organizations and are intended to effect operating savings and increase the amount farmer members get for their products. A cooperative is truly “nonprofit" when by reason of its prior contracts with its patrons it returns to them on a patronage basis what, in other circumstances, might be considered "profits" derived from transactions with or for 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 con-
tributed 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

12 Anaheim Citrus Fruit Association v. Yeoman, 51 Cal. App. 759, 197 P. 959, 961 (1921).

13 Hanna, The Law of Cooperative Marketing Associations, Ronald Press, New York (1931), p.50. See also Cerini, Utah Pioneers in Adopting the Uniform Cooperative Association Statutes, 41 Cooperative Journal 49 (1938).

14 Evans and Stokdyk, The Law of Agricultural Cooperative Marketing, Lawyers Co-operative Publishing Co. (1937), p. 303; Packel, The Organization and Operation of Cooperatives, 4th ed., American Law Institute (1970), pp. 34, 57, 212.

15 Schuster v. Ohio Farmers' Cooperative Milk Association, 61 F. 2d 337 (6th Cir. 1932); Claassen v. Farmers Grain Cooperative, 208 Kan. 129, 490 P. 2d 376 (1971). See 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). See also Montana-Dakota Utilities Co. v. Johanneson, 153 N. W. 2d 414 (N. Dak. 1967).

financial benefit to be derived therefrom in the mar-
keting 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.16

A person engaged in a 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 contrasts sharply with the situation where a marketing cooperative is required to account to its patrons on a patronage basis for the full net amount received for commodities marketed for them. Here the cooperative is not operating for entrepreneur profit. It is merely giving the patrons their money. Likewise, where a farm supply association is required to account to its patrons on a patronage basis for net margins on goods or services they obtain from their association, the association is not in business to produce an entrepreneur profit. It is simply returning to the patrons the money they supplied in the first place. 17

The nonprofit or mutual character of cooperatives is also recognized in cases where associations are permitted to recover from patrons overadvances made on commodities. 18 If some patrons receive excess payments, other patrons necessarily receive less than their fair share. 19

Savings effected by a cooperative, even though they belong to members and patrons and not to the association itself, are subject to the claims of the creditors of the association. 20 The mere fact that

16 Schuster v. Ohio Farmers' Cooperative Milk Association, 61 F. 2d 337, 338 (6th Cir. 1932). See also In re Wisconsin Cooperative Milk Pool, 35 F. Supp. 787 (E.D. Wis. 1940), reversed in 119 F. 2d 999 (7th Cir. 1941); Claassen v. Farmers Grain Cooperative, 208 Kan. 129, 490 P. 2d 376 (1971).

17See 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).

18 Baird v. Gleason, 53 F. 2d 785 (8th Cir. 1931). See also “Excess Advances or Payments," supra, p. 194.

1971).

19 Cf. Weise v. Land O'Lakes Creameries, Inc., 191 N. W. 2d 619, 624 (lowa,

20 Associated Fruit Co. v. Idaho-Oregon Fruit Growers' Association, 44 Idaho 200, 256 P. 99 (1927).

a cooperative is a nonprofit organization is not sufficient to exempt it, under certain statutes, from license taxes.21

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, through appropriate prior obligations they are operating on such a basis.22

Equality of Treatment

Broadly speaking, all members of a cooperative who are similarly situated should receive similar treatment. There may be differentials based on time, distance, grade and quality of products, and other factors justifying separate classification; but at least in the absence of such differentials or 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:

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.'

21 Appeal of Beaver County Co-op Association, 118 Pa. Super. 305, 180A.98 (1935). See also Maryland & Virginia Milk Producers' Association, Inc. v. District of Columbia, 119 F. 2d 787 (D.C. Cir. 1941), certiorari denied, 314 U.S. 646 (1941).

22 Uniform Printing and Supply Co. v. Commissioner, 88 F. 2d 75 (7th Cir. 1937). See also Appeal of Paducah & Illinois Railroad Co., 2 B.T.A. 1001 (1925); United Cooperatives, Inc., 4 T.C. 93 (1944); United Grocers, Ltd. v. United States, 308 F.2d 634 (9th Cir. 1962), affirming 186 F. Supp. 724 (N.D. Calif. 1960); Certified Grocers of Florida, Inc. v. United States, 18 AFTR 2d, 5012 (M.D. Fla. 1966); Greene County Rural Electric Co-operative v. Nelson, 234 Iowa 362, 12 N. W. 2d 886 (1944); 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); Montana-Dakota Utilities Co. v. Johanneson, 153 N.W. 2d 414 (N. Dak. 1967); and discussion in this section at footnotes 8 and 9, supra. Cf. Etter Grain Company v. United States, 462 F. 2d 259 (5th Cir. 1972), affirming 331 F. Supp. 283 (N. D. Tex. 1971); Iberia Sugar Cooperative, Inc. V. United States. 480 F. 2d 548 (5th Cir. 1973). 'Durland v. Elkhorn Life & Accident Insurance Company, 112 Neb. 105, 198 N. W. 564, 566 (1924).

Although the foregoing statement would not appear to be strictly applicable to an agricultural marketing or farm supply association, it is indicative of a principle which should be kept in mind. In addition, "equality of treatment between member and nonmembers" is a requirement under the tax laws discussed at page 415 of "Federal Income Taxes."

In California, because a statute had been construed to permit the unequal treatment of members, a marketing contract that favored a particular type of member was upheld.2 The court pointed out, however, that before the amendement 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." An association may sometimes provide in its marketing contract that, if in the future it offers a different form of marketing contract to other producers, it will give producers who signed the original marketing contract an opportunity to sign the new form.

The court in a Maryland case said that it found nothing in the State statutes, in a milk marketing association's charter, or in its marketing contract requiring 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." 993

Also, in a case involving a California creamery association, the court held that there was nothing in the bylaws, articles, or any contract of the creamery that bound the association to take, or any member of the association to deliver, milk.4 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 simultaneously for identical products, unless some specific justification for the difference is involved.

2California Canning Peach Growers v. Harkey, 11 Cal. 2d 188, 78 P. 2d 1137 (1938). See also California Canning Peach Growers v. Williams, 11 Cal. 2d 221, 78 P. 2d 1154, 11 Cal. 2d 233, 78 P. 2d 1161 (1938); Stafford v. California Canning Peach Growers, 11 Cal. 2d 212, 78 P. 2d 1150 (1938).

'Cooperative Milk Service, Inc. v. Hepner, 198 Md. 104, 81 A. 2d 219 (1951). *Bertram v. Danish Creamery Association, 120 Cal. App. 2d 458, 261 P.2d 349 (1953).

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

*** 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 dili-
gence and good faith to market the milk of one member
that it exercises to market the milk of the other mem-
bers. 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 rea-
sonable diligence in good faith and without discrim-
ination. 5

Where a cooperative orally modified its marketing contract with a member to guarantee him a minimum price for his product, the association was held obligated to comply with its agreement."

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 they purchased were apparently purchased at cost. In this connection, the Board said:

Not only did this preferred group contribute nothing to
petitioner's profits or to defray its nec ry 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

Wheelwright v. Pure Milk Association, 208 Wis. 40, 240 N. W. 769, 242 N. W. 486, 487 (1932).

6 Yakima Fruit Growers' Association v. Hall, 180 Wash. 365, 40 P. 2d 123 (1935).