Caver et al v. Central Alabama Electric Cooperative

Filing 34

ORDER ADOPTING the 28 REPORT AND RECOMMENDATIONS. Plaintiffs' 31 Objection is overruled and the 13 MOTION to Remand is denied. Signed by Chief Judge William H. Steele on 8/11/2015. (tgw)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ALABAMA
NORTHERN DIVISION
PAMELA CAVER, et al.,
Plaintiffs,
v.
CENTRAL ALABAMA ELECTRIC
COOPERATIVE,
Defendant.

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CIVIL ACTION 15-0129-WS-C

ORDER
This matter comes before the Court on plaintiffs’ Motion to Remand (doc. 13), the
Magistrate Judge’s Report and Recommendation (doc. 28) recommending denial of said Motion,
and plaintiffs’ Objection (doc. 31) to same.
I.

Background.
On July 10, 2015, Magistrate Judge Cassady entered a Report and Recommendation in

which he recommended that plaintiffs’ request to remand this action to the Circuit Court of
Dallas County, Alabama, be denied. The Report and Recommendation concluded that federal
subject matter jurisdiction properly lies pursuant to the so-called federal officer removal statute,
which authorizes removal of any civil action against “any officer (or any person acting under that
officer) of the United States or of any agency thereof, … for or relating to any act under color of
such office.” 28 U.S.C. § 1442(a)(1).
Plaintiffs timely filed an Objection (doc. 31) and an accompanying Brief (doc. 32), both
of which have been taken under submission. By statute, the undersigned “shall make a de novo
determination of those portions of the report or specified proposed findings or recommendations
to which objection is made.” 28 U.S.C. § 636(b)(1). The applicable legal standard expressly
authorizes the district court to “accept, reject, or modify, in whole or in part, the findings or
recommendations made by the magistrate judge.” Id. This Order proceeds in recognition of
those principles.

II.

Analysis.
To establish jurisdiction under § 1442(a)(1), a removing defendant must show that “(1) it

is a ‘person’ within the meaning of the statute; (2) the plaintiff’s claims are based upon the
defendant’s conduct ‘acting under’ a federal office; (3) it raises a colorable federal defense; and
(4) there is a causal nexus between the claims and the conduct performed under color of a federal
office.” Morgan v. Bill Vann Co., 2011 WL 6056083, *3 (S.D. Ala. Dec. 6, 2011). The Report
and Recommendation concluded that defendant, Central Alabama Electric Cooperative
(“CAEC”), had satisfied each of these elements. In their Objection, plaintiffs take issue with
those determinations as they relate to the second, third and fourth factors. Each will be
considered in turn.
A.

The ‘Acting Under’ Requirement.

To satisfy the “acting under” requirement, a removing defendant must show something
more than its status as a regulated firm or its obligation to comply with federal law. See, e.g.,
Watson v. Philip Morris Companies, Inc., 551 U.S. 142, 153, 127 S.Ct. 2301, 168 L.Ed.2d 42
(2007) (“a highly regulated firm cannot find a statutory basis for removal in the fact of federal
regulation alone,” and “[a] private firm’s compliance (or noncompliance) with federal laws,
rules, and regulations does not by itself fall within the scope of the statutory phrase ‘acting
under’ a federal ‘official’”). Rather, this “acting under” element “must involve an effort to
assist, or to help carry out, the duties or tasks of the federal superior.” Id. at 152. Also,
“[c]ritical under the statute is to what extent defendants acted under federal direction at the time
they were engaged in the conduct now being sued upon.” In re Methyl Tertiary Butyl Ether
(“MTBE”) Products Liability Litigation, 488 F.3d 112, 124-25 (2nd Cir. 2007) (citation
omitted).1 Courts also look to whether the defendant “provides a service the federal government
would itself otherwise have to provide.” In re Commonwealth’s Motion to Appoint Counsel
Against or Directed to Defender Ass’n of Philadelphia, --- F.3d ----, 2015 WL 3634888, *8 (3rd
1

See also Gordon v. Air & Liquid Systems Corp., 990 F. Supp.2d 311, 317
(E.D.N.Y. 2014) (“An entity acts under a federal officer when it helps with or carries out that
officer’s duty, often under close supervision.”); Morgan, 2011 WL 6056083, at *3 n.3 (“[t]he
‘acting under’ element is satisfied if a defendant’s actions that led to the lawsuit were based on a
federal officer’s direct orders or comprehensive and detailed regulations”) (citation and internal
quotation marks omitted).

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Cir. June 12, 2015); see also Ruppel v. CBS Corp., 701 F.3d 1176, 1181 (7th Cir. 2012) (“Cases
in which the Supreme Court has approved removal involve defendants working hand-in-hand
with the federal government to achieve a task that furthers an end of the federal government.”).
In evaluating a § 1442(a)(1) removal, courts must remain cognizant that, in contrast to other
removal provisions, “[t]he words ‘acting under’ are broad, and this Court has made clear that the
statute must be ‘liberally construed.’” Watson, 551 U.S. at 147.
In their Objection, plaintiffs maintain that the “acting under” requirement of § 1442(a)(1)
is not satisfied here because CAEC simply borrowed money and entered into a loan agreement
with a federal agency, the Rural Utilities Service (“RUS”).2 This characterization does not fairly
capture the nature of the relationship and interaction between RUS and CAEC, as portrayed by
defendant. As the Report and Recommendation explains, review of the history of RUS and its
predecessor, the Rural Electrification Administration (“REA”), reveals that CAEC and other
rural electric cooperatives exist to provide a necessary public function conceived and directed by
the United States. (See doc. 28, at 14-17.)3 In this regard, CAEC and other rural electric
cooperatives assist the federal government by carrying out the rural electrification program,
providing electric power supply and distribution services that RUS would otherwise have to
undertake to provide itself. (Id.)4
2

“RUS makes loans and loan guarantees to finance the construction of electric
distribution, transmission and generation facilities, including system improvements and
replacements required to furnish and improve electric service in rural areas, and for demand side
management, efficiency and energy conservation programs, and on grid and off grid renewable
energy systems.” 7 C.F.R. § 1710.100.
3

One appellate court summarized the federal government’s conception and
direction of this public function in the following terms: “In 1936 Congress, concerned with the
fact that those then engaged in the business of generating electrical energy had failed to extend
electric service to the farms of America, created the [REA]. … Congress determined that the
national interest would be served by subsidizing the rural user of electricity. … True, the United
States, when the loan is paid, no longer has the same direct interest in the borrowing distributor,
but so long as the United States is interested in keeping the electric lamps lit on the farms, it is of
necessity interested in the vehicles distributing the electricity which will light those lamps.”
Public Utility Dist. No. 1 of Pend Oreille County v. United States, 417 F.2d 200, 201 (9th Cir.
1969) (footnotes omitted).
4

The Court will not reiterate all of the authorities identified by the Magistrate
Judge in support of this proposition. Federal courts have long recognized, however, that the
(Continued)
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As an instrumentality of the United States furthering the federal government’s objective
of providing economical electric power to farms that investor-owned utilities had forsaken,
CAEC is much more than merely a borrower from a federal agency. Viewed in this light, CAEC
works hand in hand with RUS to assist that agency in facilitating rural electrification, providing
services that otherwise RUS would have to perform in order to fulfill that objective. Given these
specific considerations concerning the shared goals and interrelationship between CAEC and
federal regulators, the Court rejects plaintiffs’ dire prediction that “if CAEC is ‘acting under’ the
Rural Utilities Service, then anyone who borrows money from and enters a loan agreement with
any regulated federal government agency is arguably ‘acting under’ a federal officer.” (Doc. 32,
at 8.) Far from an ordinary, run-of-the-mill borrower/lender relationship, CAEC effectively
assists and helps RUS in fulfilling its statutory objective.
In addition to helping RUS to carry out its public function, CAEC operates under close
supervision, direction and control of RUS. The Report and Recommendation correctly observed
that RUS exercises considerable control over CAEC’s operations, pursuant to both detailed

objective of the REA “was to provide electricity to those sparsely settled areas which the
investor-owned utilities had not found it profitable to service” through the use of non-profit
cooperatives owned by consumer members “who have been unable to obtain electricity from any
other source.” Salt River Project Agr. Imp. and Power Dist. v. Federal Power Commission, 391
F.2d 470, 473 (D.C. Cir. 1968). The REA was “an attempt, through rural electrification
cooperatives, to bring economical electric power to the nine out of ten farms that were then
without it.” Id. at 475. In the words of the old Fifth Circuit, “rural electric cooperatives are
something more than public utilities; they are instrumentalities of the United States. They were
chosen by Congress for the purpose of bringing abundant, low cost electric energy to rural
America.” Alabama Power Co. v. Alabama Elec. Co-op., Inc., 394 F.2d 672, 677 (5th Cir. 1968)
(emphasis added, and citation and internal quotation marks omitted); see also Fuchs v. Rural
Elec. Convenience Co-op. Inc., 858 F.2d 1210, 1217 (7th Cir. 1988) (“Unlike private actors who
seek to further their own interests and will exploit market factors to reap the highest possible
profits, rural electric cooperatives are in some sense instrumentalities of the United States.”)
(citations and internal quotation marks omitted). Plaintiffs themselves acknowledge that
“[c]ourts have consistently held that the goal of the RE Act is not to protect the government’s
investment, but rather to facilitate rural electrification.” (Doc. 16, at 4 (emphasis added).)
That is precisely the point: RUS and CAEC work hand in hand to make rural electrification a
reality, one which would not exist if the matter were left to traditional investor-owned utilities.

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governing regulations and extensive contract provisions. (Doc. 28, at 6-8.)5 This level of control
is significant to the “acting under” analysis. See, e.g., Carter v. Monsanto Co., 635 F. Supp.2d
479, 488 (S.D. W.Va. 2009) (“a defendant acts under the control of a federal officer if the federal
officer has ‘direct and detailed control’ over the activity”); Swanstrom v. Teledyne Continental
Motors, Inc., 531 F. Supp.2d 1325, 1331 (S.D. Ala. 2008) (“To determine whether a defendant is
acting under the direction of a federal officer depends on the detail and specificity of the federal
direction of the defendant’s activities and whether the government exercises control over the
defendant.”) (citations and internal quotation marks omitted). The Report and Recommendation
properly relied on the unusually close and detailed regulatory and contractual relationship
between CAEC and RUS and determining that this case is distinguishable from the ordinary
situation where a defendant in a highly regulated industry or in a contractual relationship with
the government does not thereby satisfy the “acting under” requirement of § 1442(a)(1).

5

Review of the pertinent regulations readily reveals the extensive direction and
close supervision that CAEC receives from RUS in performing its operations. See, e.g., 7 C.F.R.
§ 1710.117 (requiring borrowers to comply with NEPA and “any other applicable Federal or
state environmental laws and regulations”); 7 C.F.R. § 1710.120 (“Borrowers shall follow all
RUS requirements regarding construction work plans, energy efficiency and conservation
program work plans, construction standards, approved materials, construction and related
contracts, inspection procedures, and bidding procedures.”); 7 C.F.R. § 1710.121 (“Borrowers
are required to comply with certain requirements with respect to insurance and fidelity coverage
….”); 7 C.F.R. § 1710.122 (“Borrowers are required to comply with certain regulations on
nondiscrimination in program services and benefits and on equal employment opportunity ….”);
7 C.F.R. § 1710.123 (“Borrowers are required to comply with certain requirements on debarment
and suspension ….”); 7 C.F.R. § 1710.251 (“All distribution borrowers must maintain a current
CWP approved by their board of directors covering all new construction, improvements,
replacements, and retirements of distribution and transmission plant, and improvements
replacements, and retirements of any generation plant.”); 7 C.F.R. § 1710.301 (requiring
distribution borrowers to prepare and maintain financial forecasts covering at least ten years); 7
C.F.R. § 1717.603(a) (“Prior written approval by RUS is required for a distribution borrower to
extend or add to its electric system if the extension or addition will be financed by RUS.”); 7
C.F.R. § 1717.605 (“All borrowers … are required to comply with applicable RUS requirements
with respect to system design, construction standards, and the use of RUS accepted materials.”);
7 C.F.R. § 1717.608 (enumerating circumstances in which RUS approval is necessary for
borrower’s contracts for construction, architecture, engineering, power supply, system
management and maintenance); 7 C.F.R. § 1717.611(a) (“the selection of a certified public
accountant by the borrower to prepare audited reports required by RUS remains subject to RUS
approval”).

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In light of the foregoing considerations, and with due regard for the liberal construction
that § 1442(a)(1) must be afforded and the breadth of its “acting under” language, the Court
makes a de novo determination that plaintiffs’ claims in this action are based upon CAEC’s
conduct “acting under” a federal officer. Plaintiffs’ objections to that aspect of the Report and
Recommendation are overruled.
B.

The “Causal Nexus” Requirement.

To satisfy § 1442(a)(1), CAEC must also show a causal nexus between the acts that form
the basis of the lawsuit and the defendant’s acts performed pursuant to the federal officer’s direct
orders or to comprehensive regulations. See, e.g., Citrano v. John Crane-Houdaille, Inc., 1 F.
Supp.3d 459, 469 (D. Md. 2014) (“To establish a causal connection, GE must show that the acts
that form the basis for the state civil suit were performed pursuant to an officer’s direct orders or
to comprehensive and detailed regulations.”) (citations, internal marks and footnote omitted);
Cabalce v. VSE Corp., 922 F. Supp.2d 1113, 1122 (D. Haw. 2013) (“The ‘causal nexus’ between
a federal officer’s directions and the private actor must be predicated on a showing that the acts
forming the basis of the state suit were performed pursuant to an officer’s direct orders or
comprehensive and detailed regulations.”) (citations and internal quotation marks omitted). “The
causal nexus requirement does not establish a stringent standard …. The defendants in this case
need only show that the federal direction created the circumstances underlying the liability.”
Carter, 635 F. Supp.2d at 489; see also Morgan, 2011 WL 6056083, at *8 (similar).
The Report and Recommendation correctly found that the low hurdle of the “causal
nexus” requirement has been overcome. (Doc. 28, at 17-18.) The gravamen of the Complaint is
that CAEC violated Alabama law and contractual provisions by repeatedly and consistently
failing to refund excess revenue to its members in the form of patronage refunds. Meanwhile,
CAEC’s filings identify federal direction by which RUS purportedly forbade CAEC (in its role
as an instrumentality of the United States performing rural electrification services hand-in-hand
with RUS) from distributing the very patronage capital refunds that plaintiffs demand in this
lawsuit.6 Defendant’s position is that it “cannot make yearly cash refunds of all patronage
6

The pertinent regulation reads as follows: “If a distribution or power supply
borrower is required by its loan documents to obtain prior approval from RUS before … paying
or determining to pay any patronage refunds, … such approval is hereby given if … [a]fter
giving effect to the distribution, the borrower’s equity will be greater than or equal to 30 percent
(Continued)
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capital because of this detailed regulation and the loan contract.” (Doc. 15, at 12.) Such an
allegation, if proven, readily establishes the requisite causal connection between the federal
direction of CAEC (i.e., RUS’s purported restriction preventing CAEC from making the subject
patronage capital refunds) and the acts forming the basis of this lawsuit (i.e., CAEC’s failure to
make such refunds to plaintiffs). The Court concurs with the Report and Recommendation on
this point, and overrules plaintiffs’ redundant objection to same.7
C.

The “Colorable Federal Defense” Requirement.

Finally, plaintiffs challenge the portion of the Report and Recommendation determining
that CAEC has raised a colorable federal defense for purposes of § 1442(a). The Magistrate
Judge concluded that CAEC had presented a colorable defense of conflict preemption, based on
the apparent collision between Alabama Code § 37-6-20 (which provides that electrical
cooperatives must distribute all excess revenues to members as patronage refunds or general rate
reductions) and 7 C.F.R. § 1717.617(a) (which forbids borrowers such as CAEC from making
patronage refunds that result in the borrowers’ equity dropping below 30% of total assets). In
their Objection, plaintiffs insist that this clash between federal and state provisions cannot give
rise to a colorable preemption defense for CAEC in this action because “it is well established that
the Rural Electrification Act does not preempt state regulation of electrical cooperatives.” (Doc.
32, at 11.)
From the outset, it bears emphasis that CAEC need not prove its preemption defense in
order for removal to be proper under § 1442(a)(1); rather, defendant’s burden is merely to show
that such a federal defense is not without foundation and is made in good faith. “Because a core

of its total assets.” 7 C.F.R. § 1717.617(a). And the contract between RUS and CAEC barred
CAEC from making distributions to its members, without prior written approval of RUS, unless
“after giving effect to any such Distribution, the Equity of [CAEC] shall be greater than or equal
to 30% of its Total Assets.” (Doc. 1, Exh. B, at § 6.8.)
7

Plaintiffs’ objection as to the “causal nexus” requirement is that there can be no
causal connection because CAEC “does not perform any official federal duties at all” (doc. 32, at
9). This argument essentially rehashes plaintiffs’ “acting under” argument, which has already
been considered and rejected in part A of this Order, supra. In other words, the Court having
already determined that CAEC was acting under a federal officer in performing the challenged
conduct, plaintiffs’ sole objection to the “causal nexus” element (i.e., that CAEC engaged in no
federal duties) cannot carry the day.

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purpose of the statute is to let the validity of the federal defense be tried in federal court, a
defendant seeking removal need not virtually win his case, nor must his defense even be clearly
sustainable on the facts.” Cuomo v. Crane Co., 771 F.3d 113, 115-16 (2nd Cir. 2014) (citations
and internal marks omitted); see also Bell v. Thornburg, 743 F.3d 84, 89 (5th Cir. 2014) (“the
officer seeking removal need not win his case by proving his federal defense before he can have
it removed”) (citation and internal marks omitted); Magnin v. Teledyne Continental Motors, 91
F.3d 1424, 1427 (11th Cir. 1996) (“That defense need only be plausible; its ultimate validity is
not to be determined at the time of removal.”). “The inquiry on the motion to remand is purely
jurisdictional, and neither the parties nor the district courts should be required to engage in factintensive motion practice, pre-discovery, to determine the threshold jurisdictional issue. A
merely ‘colorable’ defense is sufficient ….” Cuomo, 771 F.3d at 116 (citation and internal
quotation marks omitted).
The crux of plaintiffs’ objection to the Report and Recommendation’s “colorable federal
defense” finding is their citation to three cases purportedly establishing that “the Rural
Electrification Act does not preempt state regulation of electrical cooperatives, whether expressly
or impliedly.” (Doc. 32, at 10.) The trouble with this argument is that the cited cases are neither
as broad nor as on-point as plaintiffs would have them be. By plaintiffs’ own reckoning, the
issue in their cited cases concerned Rural Electrification Act preemption of the states’
ratemaking authority. (Id.) But this is not a ratemaking case. The Complaint does not allege
that CAEC unfairly or improperly raised rates (at the behest of RUS or otherwise). Moreover,
plaintiffs identify no authorities and present no arguments that the non-preemption findings of
these ratemaking cases would or should apply equally to the issue of patronage refunds. See
Arkansas Elec. Co-op. Corp. v. Arkansas Public Service Com’n, 461 U.S. 375, 386, 103 S.Ct.
1905, 76 L.Ed.2d 1 (1983) (“although the REA was expected to play a role in assisting the
fledgling rural power cooperatives in setting their rate structures, it would do so within the
constraints of existing state regulatory schemes”) (emphasis added); In re Cajun Elec. Power Coop., Inc., 109 F.3d 248, 255 (5th Cir. 1997) (“There are reasons to doubt that the Secretary is
authorized to pre-empt state ratemaking power or to fix borrowers’ rates for any purpose.”)
(emphasis added); Wabash Valley Power v. Rural Electrification Admin., 988 F.2d 1480, 1489
(7th Cir. 1993) (“To argue that Congress did not intend for states to frustrate the goals of the RE
Act falls short of establishing a statutory basis for the REA’s sweeping assumption of regulatory

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authority over ratemaking for cooperatives.”) (emphasis added). Perhaps the analysis is the
same in both the patronage refund context and the ratemaking context. Perhaps it is not. Either
way, the Court has no information before it at this time that would categorically negate the
availability of any plausible preemption defense to CAEC on the question of patronage refunds,
as a matter of law.
Additionally, the Supreme Court has expressly acknowledged, albeit in dicta, that a state
agency “can make no regulation affecting rural power cooperatives which conflicts with
particular regulations promulgated by the REA.” Arkansas Elec., 461 U.S. at 388. Is that not
what we have here? Alabama Code § 37-6-20 appears to be in conflict with many applications
of § 1717.617(a). Plaintiffs’ Objection does not address this point, which was central to the
Magistrate Judge’s plausibility finding. (Doc. 28, at 21-22.) The Supreme Court also observed
in dicta that, even in the rate-setting context, a state agency might set a rate that “may so
seriously compromise important federal interests, including the ability of the [cooperative] to
repay its loans, as to be implicitly pre-empted by the Rural Electrification Act.” Arkansas Elec.,
461 U.S. at 388. It is at least plausible that the forced patronage refunds mandated by the
Alabama statute might so seriously compromise important federal interests as to be implicitly
preempted by the Rural Electrification Act. Once again, plaintiffs’ Objection offers no rejoinder
to this premise, on which the Report and Recommendation relied.
The Objection presented by plaintiffs is that, as a matter of settled federal law, the Rural
Electrification Act does not expressly or implicitly preempt state regulation of electrical
cooperatives. (Doc. 32, at 10-11.) Such a broad, sweeping statement is not supported by the text
of the cases on which plaintiffs rely, nor do plaintiffs adequately address or respond to certain
authorities and propositions lying at the bedrock of the Report and Recommendation on this
point. Whatever merit CAEC’s preemption defense may or may not ultimately have, the Court is
of the opinion that the modest hurdle created by the “colorable federal defense” requirement of §
1442(a)(1) has been satisfied here.
III.

Conclusion.
For all of the foregoing reasons, as well as those set forth in the Report and

Recommendation, plaintiffs’ Objection to Magistrate Judge’s Recommendation (doc. 31) is
overruled. The Report and Recommendation (doc. 28) issued on July 10, 2015 pursuant to 28

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U.S.C. § 636(b)(1)(B) is adopted as the opinion of this Court. Plaintiffs’ Motion to Remand
(doc. 13) is denied.
DONE and ORDERED this 11th day of August, 2015.
s/ WILLIAM H. STEELE
CHIEF UNITED STATES DISTRICT JUDGE

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