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Legal Phases of
Cooperative Associations

Introduction

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GRICULTURAL cooperation is a method of doing business. An

a agricultural cooperative association is a business organization, usually incorporated, owned and controlled by member agricultural producers, which operates for the mutual benefit of its members or stockholders, as producers or patrons, on a cost basis after allowing for the expenses of operation and maintenance and any other authorized deductions for expansion and necessary reserves. This definition is intended only as an approximation. It should be kept in mind that a cooperative association is a capitalistic institution. In fact a cooperative marketing or purchasing association of farmers is a capitalistic business organization for the financial advantage of its member-patrons. Few, if any, associations would be formed if it were not believed that they would operate to the financial advantage of their members. Associations are formed for the same reasons as other business enterprises. In a cooperative, however, the financial benefits accrue to the patrons, while in a commercial enterprise they accrue to those who have invested their money in the business.

It should not be assumed that it is unnecessary for a cooperative association to have money, although the amount of money necessary for a given association depends upon the character of its business and

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Evans, Frank, and Stokdyk, E. A. THE LAW OF AGRICULTURAL COOPERATIVE MARKETING. 648 pp. Rochester, N. Y. 1937. See p. 3; Packel, Israel. LAW OF THE ORGANIZATION AND OPERATION OF COOPERATIVES. 307 pp. Albany, N. Y. 1940. See p. 3.

NOTE.-Acknowledgment is made to Elias Marks, attorney, Farm Credit Administration, for comprehensive and valuable assistance in the revision of this publication. Appreciation is also due Mrs. Altha Wheatley, formerly Junior attorney, for assistance in assembling material; Wilmer H. Balderson, law librarian, who compiled the bibliography; and Miss Florence C. Bell, associate investigator, who indexed the publication.

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the scope of its plans. Working capital and adequate financial resources are as essential for a cooperative association as they are for a commercial concern.?

In respect to cooperative associations, producers may be members, creditors, debtors, and patrons.

Cooperative associations in this country, formed for the marketing of farm products or for the purchase of farm supplies, or both, constitute one of the most important groups of farmers' organizations. Their purpose is to engage in business activities incident to the marketing of the products of members or the acquisition of farm supplies for them. The foundation and framework of a farmers' cooperative association and all its methods and plans are for the purpose of aiding those producers who have united or who may unite in the enterprise to conduct it along sound, successful business lines. That agricultural producers have the right to market their own products through their own agencies is obvious.

The opposition which those concerned with the formation of agricultural cooperative associations have encountered has been judicially recognized. In one case, it was said:

The successful establishment of these associations has been attended with many obstacles. Those with whom such associations come in competition have been resourceful and active. They have appealed to the guilelessness and cupidity of the members, with a view of breeding dissatisfaction on their part with the association and inducing them to breach their contracts.

Forms of organization vary, but a few well-recognized principles distinguish the cooperative from the commercial organization.

The cooperative character of an association does not depend on whether it is formed with or without capital stock. Either type of association may be thoroughly cooperative if properly organized and operated. Likewise, the presence or absence of capital stock is

ot controlling on the question of whether a corporation is formed for profit. This depends upon how it functions.*

An association does not cease to be cooperative because interest is earned on its reserves, or because its money is prudently invested when not required for the normal operations of the cooperative. To hold otherwise would penalize thrift and good business management. In a case involving a mutual insurance company, the court

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Roche's Beach, Inc. v. Commissioner of Internal Revenue, 96 F. 2d 776. 8 Watertown Milk Producers' Co-op. Ass'n. v. Van Camp Packing Co., 199 Wis. 379, 225 N. W. 209, 212, 226 N. W. 378, 77 A. L. R. 391.

* Celina & Mercer County Telephone Company v. Union-Center Mutual Telephone Association, 102 Ohio St. 487, 133 N. E. 540; Read v. Tidewater Coal Exchange, Inc., 13 Del. Ch. 195, 116 A. 898.

Niles v. Central Manufacturers' Mutual Insurance Company, 252 F. 564, 586. held that “A mere incidental profit earned by way of interest on its invested safety funds, or on its bank balances, does not change the purely mutual character of the company or indicate that its business, though thus earning a profit, is 'carried on for profit."

The character of a corporation is determined by its functions and how they are performed. And a corporation may be entirely cooperative, although incorporated under a business corporation statute.6

Although neither the members nor the stockholders of a cooperative association are ordinarily liable for its debts, they may enter into contracts to furnish the association with money or other property for its use.?

Substantial equality among the producer-members of a cooperative association, with respect to its affairs, is fundamental. The one-man, one-vote principle is generally accepted by cooperatives, but is not indispensable. Sometimes equality among members in the capitalstock form of association is furthered by limiting the number of shares which a producer may own. This is in contrast with the situation in commercial corporations in which, from a legal standpoint, a shareholder may own any available number of shares. Frequently, even in capital-stock cooperatives, the shareholders are restricted to one vote each, regardless of the number of shares of stock owned. The dividend rate on the stock or membership capital of cooperative associations is restricted to what is considered a fair rate of interest. This again is in contrast with the situation in commercial corporations, in which the dividend rate is, from a legal standpoint, unlimited. The payment of a fair rate of interest by cooperatives on their stock or membership capital should be regarded as an operating expense, like interest paid on borrowed money.da It tends to produce equality among the shareholders or members because it eliminates the differences caused by the fact that some members utilize the association less than others or have contributed more than others to its establishment,

Generally speaking, the question whether an organization is a cooperative arises with respect to a particular statute or statutes. 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 Acts and not be eligible for exemption from the payment of Federal income taxes.

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Allen v. Llano Del Rio Co. of Nevada, 166 La. 77, 116 So. 675. Farmers' Co-operative Union of Lyons v. Reynolds, 127 Kan. 16, 272 P. 108 See Capper-Volstead Act, p. 314. See Income Taxes, p. 250. * Garden Homes Co. v. Commissioner of Internal Revenue, 26 B. T. A., reversed in 64 F. 2d 593.

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Again, an association may be eligible for loans from a bank for cooperatives 10 and not meet the conditions of the Capper-Volstead Act. In some statutes, the words “cooperative association” are employed without being defined. In any such case those concerned must ascertain the conditions that must be met and the 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, the actual control of an alleged agricultural cooperative may be possessed by persons who are not producers or members and the financial advantages may largely accrue to such persons. In other words, an organization may have the features of a cooperative but not the fundamentals; the form but not the substance. If an association formed as a nonprofit corporation engages in profit-making activities, it may be ousted through quo warranto proceedings from engaging in such activities. 11

The persons with whom a commercial corporation deals usually are not members; but in a farmers' cooperative association the members are also patrons; that is, they deliver their products to the association for marketing or acquire supplies from or through it. In a cooperative, the advantages to members accrue primarily because the members are patrons of the association. Patronage of, and not money invested in, the enterprise determines the distribution of benefits. Obviously, the progress that may be made by a cooperative association and the results that may be achieved by it are directly and inevitably affected by the extent and the consistency of its members' patronage.

It is apparent that the relationship between the members and the association is much more intimate and personal than that between an ordinary corporation and its stockholders. The courts have recognized that this is true.1 It has been said : 13

Even though title may have passed, still the arrangement is for cooperative marketing. The status of the parties partakes of a trust or fiduciary character,

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See Federal Statutes Mentioning Cooperatives, p. 307.

People ex rel. Hughes v. Universal Service Association, 365 Ill. 542, 7 N. E. 2d 310. See also Rockingham Co-operative Farm Bureau, Inc. v. City of Harrisonburg, 171 Va. 339, 198 S. E. 908.

13 California Oanning Peach Growers v. Downey, 76 Cal. App. 1, 243 P. 679.

18 Rhodes v. Little Falls Dairy Company, Inc., 230 App. Div. 571, 245 N. Y. S. 432, 434, 435, affirmed in 256 N. Y. 559, 177 N. E. 140. See also Arkansas Cotton Growers' Co-operative Association v. Brown, 168 Ark. 504, 270 S. W. 946; and is not the simple relation of vendor and vendee; the fund derived from the marketing of the product being subject to distribution among the various producers, sales of whose product had gone to make it up.

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There was a fiduciary relationship here; defendant was dealing with plaintiff's property. It was its duty to get the best price possible for it, to make such deduction from the proceeds for expenses and other items mentioned in the contract as were required in necessity and reason, and to return to plaintiff his share of the profits remaining, if such there were, based upon the milk that he furnished.

In a nonlegal sense a cooperative partakes of the nature of a joint enterprise or partnership. Membership in a capital-stock cooperative association is had through the purchase of a share or shares of its stock and the meeting by the purchaser of any other authorized requirements of the association; membership in a nonstock cooperative association is had through application for membership and acceptance by the association and the meeting of any other authorized requirements. A common requirement for both stock and nonstock associations is the signing of a marketing contract.

It should not be assumed that the members or stockholders of a cooperative association, except in a technical legal sense, are separate and apart from the association. The members are the association, and the officers and directors of the association are simply their agents for the conduct of the joint enterprise. The officers and directors of an association 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 the principal or the “employer" and the officers and directors are simply their "employees” or agents to direct the business; and agents are subject to the control of their employers."

Frequently, if not generally, cooperative associations 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.

Pooling is a practice common to cooperative associations.15 It is an averaging proposition. For instance, the expenses incident to

Texas Farm Bureau Cotton Association v. Stovall, 113 Tex. 273, 253 S. W. 1101, reversing Texas Farm Bureau Cotton Ass'n v. Stovall, (Tex. Civ. App.) 248 S. W. 1109; Texas Certified Cottonseed Breeders' Association v. Aldridge, 122 Tex. 464, 61 S. W. 2d 79, reversing (Tex. Civ. App.) 59 S. W. 2d 320; Bogardus v. Santa Ana Walnut Growers' Association, 41 2d Cal. App. 939, 108 P. 2d 52.

Lexington Mill & Elevator Co. v. Browne, 116 Neb. 753, 219 N. W. 12. 16 Christensen, O. L. POOLING AS PRACTICED BY COOPERATIVE MARKETING ASSOCIATIONS. U. S. Dept. Agr. Misc. Pub. 14, 12 pp. 1929.

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