Credit Union and Cooperative Patronage Refunds - Filene ...

When rural electric cooperatives are dissolved, and after payment of
all creditors and equity credits, the remaining proceeds are distributed
on the basis of historical patronage in keeping with the co-op
principles of subordination of capital, service at cost, and the co-op
agency theory of earnings.
The NRECA is and has been proactive in encouraging rural electric
cooperatives to ratchet up the priority of redeeming capital credits.
In 2005, the NRECA reassembled a task force and updated its guide,
“Capital Credits Task Force Report, a Distribution Cooperative’s
Guide to Making Capital Credits Decisions.” This guide supports
the idea that rural electric cooperatives must manage their equity
capital more proactively and redeem equity credits on a systematic
basis.
Rural electric cooperatives are being challenged in lawsuits 23 to live
up to the idea that they are not capital hogs. At least six lawsuits have
been initiated against rural electric cooperatives to redeem equity to
members. The lawsuits are not evidence that rural electric cooperatives
are hoarding capital, but that is what is at issue in this litigation.
In each case, the board of directors is alleged to have failed to redeem
equity credits according to its fiduciary obligations. These boards of
directors may be ordered to redeem equity credits if the plaintiffs can
prove these rural electric cooperatives have surplus working capital
that is not required for present or future capital requirements. The
oddity is that most boards of directors of cooperatives—including
rural electric cooperatives—are driven by a strong moral compulsion
to redeem allocated equity sooner rather than later. As we said
earlier, co-ops are not driven to hoard capital. Hence, we would not
be surprised that these rural electric cooperatives simply do not have
sufficient surplus working capital to redeem lots of allocated equity.
In addition, these plaintiffs may also need to overcome the presumption
that equity credits do not vest or confer ownership in members
until the board of directors affirmatively resolves to redeem the
equities. This, parenthetically, is a point of contrast with Sub-T
cooperatives, where, under the consent provisions discussed above,
ownership of the equities vests immediately in members upon allocation
of patronage income to members.
Federal Land Bank Associations
(501(c)(1) and 12 U.S.C. 2098)
Federal Land Bank Associations (“Land Banks”) are tax exempt (as
are federal credit unions under 501(c)(1)) because they exist under
an act of Congress. Land Banks may, but are not required to, allocate
or apportion income (patronage or nonpatronage and unrelated
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