In a Wisconsin case involving a milk bargaining association the court said: 81

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 co-operative 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 association 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.82

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.83 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 84 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 policy-holders to take all the surplus, it will be permitting the contributions of many to benefit the few. What was

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

82 Yakima Fruit Growers' Association v. Hall, 180 Wash. 365, 40 P. 2d 123.

83 Farmers Union Cooperative Oil Company v. Commissioner of Internal Revenue, 38 B. T. A. 64.

84 Smith v. Hunterdon County Mutual Fire Insurance Company, 41 N. J. Eq. 473, 4 A. 652, 653; cf. Driscoll v. Washington County Fire Insurance Company, 110 F.2d 485.

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 policy-holder against loss, or to enable him to draw out of the treasury more than all his premiums, but simply to insure the existing policy-holders 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.

Nonmember Business

WHILE the various Federal statutes applicable to agricultural

cooperative associations 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,85 insofar as State law is concerned. Generally, however, State statutes either prohibit an association from doing business with nonmembers, or 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,86 the Agricultural Marketing Agreements Act, as amended, and also Section 101 of the Internal Revenue Act which contains the requirements that must be met if a cooperative association is to be eligible for exemption from income taxes.88

87

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, 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.

85

87

* In re Farmers' Dairy Company's Receivership, 177 Minn. 211, 225 N. W. 22. 86 Capper-Volstead Act, p. 213.

87

Federal Statutes Mentioning Cooperatives, p. 313, 319.

See Income Taxes, p. 250.

402026° 42- -12

Serious consequences may result if an association violates a restriction on the amount of business which it may do for nonmembers.89

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.o1

90

91

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 communistic societies.92 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 is frequently appurtenant to the land.93 However, this is not necessarily the case.94

On the other hand 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.95 It has also been held that a mutual telephone company is under a duty to serve the public at large. 96

If an association is to be exempt from Federal income tax it must treat member and nonmember patrons alike and may not, for instance, limit patronage dividends to members or pay nonmembers patronage dividends computed at a lower rate. On the other hand some State statutes provide that although associations may do nonmember business, patronage dividends may be paid only to members or that patron

89 United States v. American Live Stock Commission Company, 279 U. S. 435, 49 S. Ct. 425, 73 L. Ed. 787. See also Board of Trade of City of Chicago v. Wallace, 67 F. 2d 402.

90 Federal Statutes Mentioning Cooperatives, p 307.

92 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.

93

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.

94 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.

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

96

"Celina & Mercer County Telephone Company v. Union-Center Mut. Telephone Ass'n, 102 Ohio St. 487, 133 N. E. 540; 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.

See Income Taxes, p. 250.

age dividends to nonmembers must be computed at a lower rate than such dividends paid to members.

While it would seem on principle that an association from a cooperative standpoint should accord the same treatment to all patrons regardless of whether they are members, some associations feel that if nonmember patrons receive the same treatment as member patrons there is no particular incentive for a nonmember to become a member of the association. In order to modify this situation the bylaws of many cooperative associations provide that the patronage dividends which accrue to the credit of an eligible nonmember patron shall be applied first toward the purchase of a membership or a share of stock. In the case of agricultural cooperative associations which limit their membership to producers it may happen that some business may be transacted for persons who are ineligible for membership. This is particularly true in the case of associations performing farm business services. As brought out in the discussion of Federal income taxes, an association may not do more than 15 percent of its purchasing business with patrons who are neither members nor producers, if it is to be eligible for exemption from the payment of such taxes.

Control of Crops by Landlord

THE HE statutes of a number of States contain a provision reading as follows:

In any action upon such marketing agreements, it shall be conclusively presumed that a landowner or landlord or lessor is able to control the delivery of products produced on his land by tenants or others, whose tenancy or possession or work on such land or the terms of whose tenancy or possession or labor thereon were created or changed after execution by the landowner or landlord or lessor, of such a marketing agreement; and in such actions, the foregoing remedies for nondelivery or breach shall lie and be enforceable against such landowner, landlord or lessor.98

Entirely independent of the conclusive-presumption provision just quoted, may an association require that crops grown under the sharelease plan be marketed through it? An association could include a provision in its marketing contract requiring a member, if he leased his farm or any part thereof after signing the marketing contract, to include a provision in the lease stipulating that all crops grown on the farm should be marketed through the association. In addition, a provision could be included requiring the landlord to pay

98. See sec. 18 of Bingham Cooperative Marketing Act of Kentucky, p. 381 of Appendix.

liquidated damages for his failure to have the share of the crops belonging to his tenant marketed through the association." It is clear that if a lease provides for a share tenancy, then, regardless of the time that it is entered into, the association would be entitled to receive at least the landlord's share of the crop for marketing.1

In the cases just cited it appeared that the tenants had the right to sell the landlord's part of the cotton crop, but it was held in each case that this fact was immaterial, as the leases provided that the landlord receive a part of the crop as his rent.

2

In North Carolina it was held that a landlord was not liable for damages to the association because of the failure of his tenant to market his share of the crop through the association. The North Carolina cooperative statute does not contain the conclusive-presumption provision.

In the absence of a provision in the marketing contract requiring a landlord to have the share of the crops belonging to his tenants marketed through an association and in the absence of a conclusivepresumption provision in the cooperative act of the State, it would appear that there is no basis for holding a landlord liable on account of the fact that the share of the crops of his tenants is not marketed through the association, nor would there be a basis for holding the tenants liable under such circumstances.

Crop Mortgages

To obtain a valid lien statutory requirements must be met and, if

3

the statute requires verification under oath, an acknowledgment is insufficient. In taking a crop lien or other mortgage care should be taken to identify clearly the property covered and the indebtedness secured, otherwise the lien may fail.*

Generally speaking, a person who takes a crop mortgage or other lien on commodities occupies a position virtually identical with that of a purchaser of the commodities involved. In other words, in determining the rights of the holder of a crop mortgage to avail himself of the products covered thereby, the rules that would be

"Dark Tobacco Growers' Co-op. Ass'n v. Daniels, 215 Ky. 67, 284 S. W. 399. See Liquidated Damages, p. 179.

1 Long v. Texas Farm Bureau Cotton Ass'n, (Tex. Civ. App.), 270 S. W. 561; Main v. Texas Farm Bureau Cotton Ass'n, (Tex. Civ. App.), 271 S. W. 178.

3

2 Tobacco Growers' Co-op. Ass'n v. Bissett, 187 N. C. 180, 121 S. E. 446.

Reeves v. Kansas Co-operative Wheat Marketing Association, 136 Kan. 306, 15 P. 2d 446.

*Dingfelder v. Georgia Peach Growers Exchange, 184 Ga. 569, 192 S. E. 188.