CESSNA et al v. REA ENERGY COOPERATIVE, INC.

Filing 47

MEMORANDUM OPINION AND ORDER granting 10 Motion to Dismiss for Failure to State a Claim; denying 35 Motion to Strike. Plaintiffs are granted leave to amend their complaint with respect to their claim under Pennsylvania's Unfair Trade Practi ces and Consumer Protection Law and their breach-of-contract claim. Should they choose to do so, Plaintiffs shall file their amended complaint on or before July 12, 2017. If Plaintiffs opt not to amend by that date, the Clerk shall mark this matter closed, and as more fully stated in said Memorandum Opinion and Order. Signed by Judge Kim R. Gibson on 6/27/2017. (dlg)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
LEONARD CESSNA, on behalf of himself
and all others similarly situated, and
GEORGE WORK, on behalf of himself and
all others similarly situated,
Plaintiffs,
v.
REA ENERGY COOPERATIVE, INC.,
Defendant.

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Case No. 3:16-cv-42
JUDGE KIM R. GIBSON

MEMORANDUM OPINION
On December 31, 2015, Leonard Cessna and George Work filed this case in the Court of
Common Pleas of Blair County against REA Energy Cooperative, Inc. REA is an electric
cooperative of which Cessna and Work (“Plaintiffs”) are current and former members,
respectively—meaning REA is and was their electricity supplier. Plaintiffs seek to represent a
class of REA members. They allege that REA is improperly withholding revenues in excess of
its operating costs and that REA is legally obligated to disgorge these excess revenues to its
members. REA removed the case to this Court on February 11, 2016.
Pending before the Court is REA’s motion to dismiss (ECF No. 10) and Plaintiffs’ motion
to strike REA’s motion to dismiss (ECF No. 35). For the reasons that follow, REA’s motion to
dismiss will be granted and Plaintiffs’ motion to strike will be denied.

I.

Background 1
The following facts are alleged in the complaint (ECF No. 1-1). The Court accepts these

factual allegations as true in deciding REA’s motion to dismiss, but “[w]here those allegations
are contradicted by written exhibits that [Plaintiffs] attached to [their] . . . complaint, . . . the
exhibits trump the allegations.” Abcarian v. McDonald, 617 F.3d 931, 933 (7th Cir. 2010).
REA is a domestic non-profit corporation that provides residential and business
electrical service to its 22,000 members in Armstrong, Blair, Cambria, Clearfield, Indiana,
Jefferson, and Westmoreland Counties, Pennsylvania. (ECF No. 1-1 ¶ 3.) REA is a so-called
rural electric cooperative, meaning it is a member-owned entity rather than a publicly traded
corporation with freely alienable stock. (Id. ¶ 6.) Leonard Cessna resides in Indiana County,
Pennsylvania, and has been a member of REA for approximately 30 years. (Id. ¶ 1.) George
Work resides in Jefferson County, Pennsylvania, and was a member of REA for approximately
50 years before he withdrew from membership in 2011. (Id. ¶ 2.) Thus, Cessna has been
purchasing and continues to purchase his electricity from REA and Work used to do so. (Id. ¶¶
1-2.)
Plaintiffs contend that REA is improperly withholding funds that belong to its members.
They contend that REA, as a cooperative, is prohibited from making a profit on business
conducted with its members. (Id. ¶ 9.) Cessna and Work explain that “[c]operative principles
require that members provide capital for the cooperative’s use in proportion to their use of the
cooperative,” and state that this principle is referred to as the “user-owner principle”. (Id. ¶ 15.)

The Court provided a detailed account of this case’s procedural and factual background in its
memorandum opinion dated July 21, 2016 (ECF No. 24). Because familiarity with that opinion is
assumed, the facts relevant to REA’s motion to dismiss only will be outlined here.
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The difference between REA’s revenues and expenses is therefore considered “margin”—not
profit—and this margin belongs to REA’s members in the form of patronage capital. (Id. ¶¶ 910.)
The amount of patronage capital that each member earns annually is based on the
member’s electric usage, and patronage capital is allocated to each member in a separate
account on REA’s books. (Id. ¶ 5.) These accounts reflect a credit or debit for each year the
member was or continues to be a member. (Id. ¶ 17.) The members own an interest in REA
worth over $53,000,000—as of 2014—represented in the form of this patronage capital. (Id. ¶ 6.)
Cessna and Work allege that, because members cannot sell or redeem their interest in REA like
stockholders in a publicly traded corporation can, they are “at the mercy of [REA] when it
comes to receiving a financial distribution of their accumulated Patronage Capital.” (Id.)
According to REA’s bylaws, its articles of incorporation and bylaws constitute a contract
between REA and each member. (Id. ¶ 11.) Cessna and Work allege that REA does not provide
its members with a copy of its articles of incorporation. (Id. ¶ 12.) REA’s bylaws require that it
operate on a cooperative non-profit basis for the mutual benefit of its members. (Id. ¶ 14.)
Article VIII of REA’s bylaws provides that REA is obligated to account on a patronage basis to
its members for all amounts received and receivable from members in connection with REA’s
services. (Id. ¶ 13.) Article VIII provides further that REA receives all amounts in excess of
operating costs and expenses “with the understanding that they are furnished by the [members]
as capital.”

(Id. ¶¶ 13, 16 (capitalized in original).)

Patronage-capital accounts are non-

transferrable, cannot appreciate in value, and do not accrue interest. (Id. ¶ 24.) REA’s bylaws
also provide a mechanism for the return of patronage capital:

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In the event of the dissolution or liquidation of the Cooperative,
after all outstanding indebtedness of the Cooperative shall have
been paid, outstanding capital credits shall be returned without
priority on a prorata basis before any payments are made on
account or property rights of patrons. If, at any time prior to
dissolution or liquidation, the Board of Directors shall determine
that the financial condition of the Cooperative shall not be
impaired thereby, the capital then credited to patrons’ accounts
may be returned in full or in part.
(Id. ¶ 13 (quoting REA’s bylaws, Article VIII).)
Plaintiffs assert that, as a result of inflation and the time value of money, the value of
patronage capital decreases the longer REA retains it before returning it to its members. (Id.
¶ 24.) And Plaintiffs believe that REA is earning interest on its members’ patronage capital and
not allocating that interest back to them. (Id. ¶ 25.) In 2011, REA retired patronage capital for
the first time since its inception in 1937, though this refund applied only to members who
obtained electricity from REA before 1961. (Id. ¶ 26.) Plaintiffs assert that REA’s retention of
the patronage capital increases the likelihood that it will be unable to locate the members, and
that this will result in the eventual escheat of the unclaimed capital to REA. (Id. ¶ 27.)
Plaintiffs believe and allege the following: (1) that the patronage capital is worth
approximately $56,000,000 today; (2) that in 2011 REA retired approximately $700,000 of
patronage capital for the years prior to 1961; (3) that REA has not made an appropriate
patronage-capital distribution prior to or since 2011; (4) that REA has not made an appropriate
attempt to locate the approximately 6,000 members who failed to redeem their patronagecapital retirement checks in 2011; (5) that REA is poised to retain a large percentage of the
patronage capital for the years prior to 1961; (6) that REA has acted unethically and breached its
fiduciary duties by failing to locate the members to whom it wrongly denied patronage-capital

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retirement checks for the past fifty years or longer; (7) that REA should not be permitted to
claim that the members are unreachable because it has improperly withheld the patronagecapital retirement checks for over fifty years and has failed to take reasonable steps to locate
members; and (8) that REA’s failure to adopt a reasonable, workable, and equitable system for
returning patronage capital to its members is an abdication of its duty to the members, an abuse
of discretion, and a breach of its fiduciary duties. (Id. ¶¶ 28-36.)
Plaintiffs therefore seek to represent a class of current and former members in this suit
against REA.

Plaintiffs assert six claims.

In Count I, Plaintiffs assert a claim under

Pennsylvania’s Unfair Trade Practices and Consumer Protection Law. (Id. ¶¶ 44-58.) In Counts
II and III, Plaintiffs assert claims for breach of the covenant of good faith and fair dealing and
for breach of contract. (Id. ¶¶ 57-70.) 2 In Count IV, Plaintiffs assert, in the alternative, a claim
for unjust enrichment. (Id. ¶¶ 71-78.) In Count V, Plaintiffs seek declaratory and injunctive
relief. (Id. ¶¶ 79-87.) And in Count VI, Plaintiffs assert a claim for breach of fiduciary duty of
an agent or trustee. (Id. ¶¶ 88-92.) Plaintiffs also point to § 7330 of Pennsylvania’s Electric
Cooperative Law of 1990 (15 Pa. Cons. Stat. § 7330), and argue that if REA’s bylaws give its
board of directors absolute discretion over the disbursement of patronage capital, then such
discretion would violate § 7330. (ECF No. 1-1 ¶ 19-20.)
On February 18, 2016, REA filed a motion to dismiss Plaintiffs’ claims pursuant to
Federal Rule of Civil Procedure 12(b)(6) (ECF No. 10). REA’s motion to dismiss prompted both
a motion to stay (ECF No. 12) and a motion to remand (ECF No. 14) by Plaintiffs. Only once

Count II of Plaintiffs’ complaint, which should begin as paragraph 59, begins as paragraph 57. (See id.
¶¶ 58-64.)

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those motions were resolved—and denied—did Plaintiffs file a response to REA’s motion to
dismiss. In their response, Plaintiffs also moved to strike—rather than simply oppose—REA’s
motion to dismiss. And Plaintiffs and REA thereafter both moved and were granted leave to
file multiple supplemental briefs. REA’s motion to dismiss and Plaintiffs’ related motion to
strike are now ripe for adjudication.
II.

Standard of Review
In determining the sufficiency of a complaint challenged under Rule 12(b)(6), a district

court must conduct a two-part analysis. First, the court should separate the factual and legal
elements of the claims. Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009). Second, the
court must determine whether the factual matters alleged are sufficient to establish that the
plaintiff has a “plausible claim for relief.” Id. at 211 (quoting Ashcroft v. Iqbal, 556 U.S. 662, 679
(2009)). The complaint, however, need not include “detailed factual allegations.” Phillips v.
County of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008) (quoting Bell Atlantic Corp. v. Twombly, 550
U.S. 544, 555 (2007)).
The court must also accept as true all factual allegations in the complaint and draw all
inferences from the facts alleged in the light most favorable to the nonmoving party. See id. at
228 (citing Worldcom, Inc. v. Graphnet, Inc., 343 F.3d 651, 653 (3d Cir. 2003)).

But “legal

conclusions” and “[t]hreadbare recitals of the elements of a cause of action . . . do not suffice.”
Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 555). Rather, the complaint must present
sufficient “factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Sheridan v. NGK Metals Corp., 609 F.3d 239, 262
n.27 (3d Cir .2010) (quoting Iqbal, 556 U.S. at 678).

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Ultimately, whether a plaintiff has stated a “plausible claim for relief” is a contextspecific inquiry that requires the district court to “draw on its judicial experience and common
sense.”

Iqbal, 556 U.S. at 679 (citation omitted).

The record to consider in making this

determination includes the complaint and any “document integral or explicitly relied on in the
complaint.” U.S. Express Lines, Ltd. v. Higgins, 281 F.3d 383, 388 (3d Cir. 2002) (emphasis and
citation omitted).
III.

Analysis
REA has moved to dismiss Plaintiffs’ complaint on several grounds. The Court will first

address REA’s threshold argument, which is that Plaintiffs’ claims are preempted by the
Supremacy Clause of the United States Constitution.

Next, because the Court holds that

Plaintiffs’ claims are not barred by the Supremacy Clause, it will address REA’s arguments with
respect to each of Plaintiffs’ claims.
Federal courts, when presented with state-law claims, “are required to apply the
substantive law of the state whose laws govern the action.” Robertson v. Allied Signal, Inc., 914
F.2d 360, 378 (3d Cir. 1990) (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938)). Because all of
Plaintiffs’ claims arise under state law, the Court applies Pennsylvania law in evaluating
whether they are actionable.
A.

Supremacy Clause

REA asserts that Plaintiffs’ claims fail because they are preempted by the Supremacy
Clause of the United States Constitution. (ECF No. 11 at 6.) Specifically, REA argues that
Plaintiffs’ claims are preempted to the extent they would force REA to refund patronage capital
to a point where its equity would fall below 30%. Such an application of state law is preempted,

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REA posits, because it would conflict with the federal Rural Electrification Act and related
regulations, and would force REA to violate its contract with the United States. In support of
this argument, REA points to its loan contract with the Rural Utilities Service—the federal
agency tasked with administering the Act—and 7 C.F.R. § 1717.617. 3
The Supremacy Clause of the United States Constitution provides that the laws of the
United States “shall be the supreme Law of the Land . . . any Thing in the Constitution or Laws
of any State to the Contrary notwithstanding.” U.S. Const. art. VI, cl. 2. Stated simply, the
result of the Supremacy Clause is that “[w]here state and federal laws conflict, the state law is
‘without effect.’” Delaware County, Pa. v. Fed. Hous. Fin. Agency, 747 F.3d 215, 225 (3d Cir. 2014)
(citing Mut. Pharm. Co., Inc. v. Bartlett, ___ U.S. ___, 133 S. Ct. 2466, 2472-73 (2013)). The
question is thus whether a given state law and a given federal law actually conflict; if they do,
the state law is preempted by the federal law.
Federal preemption of state law can occur in three ways: (1) express preemption, (2)
field preemption, and (3) conflict preemption. See, e.g., Gade v. Nat’l Solid Wastes Mgmt. Ass’n,
505 U.S. 88, 98 (1992). Express preemption occurs when Congress explicitly, through statutory
language, states its intent to displace state law. Id. Field preemption occurs when “Congress
has legislated comprehensively to occupy an entire field of regulation, leaving no room for the
States to supplement federal law.” Hughes v. Talen Energy Mktg., LLC, ___ U.S. ___, 136 S. Ct.

In making its preemption argument, REA refers to its loan contract with the Service and incorporates its
notice of removal, to which REA attached four pages of that loan contract (ECF No. 1-2). But in deciding
a Rule 12(b)(6) motion, a court may generally consider only the complaint, attached exhibits, and matters
of public record. Sands v. McCormick, 502 F.3d 263, 268 (3d Cir. 2008). The Court is without sufficient
information to conclude that REA’s loan contract is a public record or otherwise a valid document to
consider in deciding REA’s motion to dismiss, and REA has stated no basis that would justify the Court
relying on an extraneous document.
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1288, 1297 (2016) (internal quotation marks and citation omitted). As for conflict preemption,
that occurs in two ways: if “it is impossible for a private party to comply with both state and
federal law, [or if] under the circumstances of a particular case, the challenged state law stands
as an obstacle to the accomplishment and execution of the full purposes and objectives of
Congress.” Crosby v. Nat’l Foreign Trade Council, 530 U.S. 363, 372-73 (2000) (brackets, citations,
and internal quotation marks omitted). And it is not only federal legislation that preempts state
law; “[f]ederal regulations preempt state laws in the same fashion as congressional statutes.”
Farina v. Nokia Inc., 625 F.3d 97, 115 (3d Cir. 2010) (citations omitted).
In their complaint, Plaintiffs allege that § 7330 of Pennsylvania’s Electric Cooperative
Law of 1990 (15 Pa. Cons. Stat. § 7330) obligates REA to return patronage capital to its members.
(ECF No. 1-1 ¶ 19.) Section 7330, titled nonprofit operation, governs the financial operation of
Pennsylvania electric cooperatives. 4

Section 7330(a) mandates that electric cooperatives be

operated without profit to their members, and § 7330(b) restricts how electric cooperatives can
use their revenues. These must be used to first pay “operating and maintenance expenses and
the principal and interest on outstanding obligations and, thereafter, to such reserves for
improvement, new construction, depreciation and contingencies as the board may, from time to
time, prescribe.” 15 Pa. Cons. Stat. § 7330. Revenues not required for these purposes “shall be
returned, from time to time, to the members on a pro rata basis, according to the amount of
business done with each during the period”—though the cooperative retains discretion on the
manner by which to return revenues. § 7330(c).
Pennsylvania’s Electric Cooperative Law of 1990 applies to corporations incorporated under specific
provisions of Pennsylvania law. See 15 Pa. Cons. Stat. § 7302(a). Although Plaintiffs do not explicitly
assert that REA is incorporated under those provisions, REA’s bylaws provide that it is governed by
Pennsylvania’s Electric Cooperative Law of 1990 (ECF No. 1-1 at 36) and REA does not contest this here.

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Rural electric corporations are also regulated under federal law. REA asserts that it is
subject to the federal Rural Electrification Act and its related regulations, and points to 7 C.F.R.
§ 1717.617 specifically. Section 1717.617 sets forth the criteria under which the Rural Utilities
Service will automatically approve a cooperative’s patronage-capital refund request if that
cooperative has a loan from the Service and is required by its loan documents to obtain
approval from the Service before issuing such a refund. REA asserts that it has a loan from the
Service and is thus subject to § 1717.617. One of § 1717.617’s criteria for automatic approval is
that the cooperative’s equity, after any refund, must be equal to or greater than 30 percent of its
total assets. 7 C.F.R. § 1717.617.
The Court notes that Plaintiffs do not allege sufficient facts in their complaint to
establish that § 1717.617 applies to REA, as REA asserts, and that Plaintiffs make no allegations
in their complaint regarding the terms of REA’s loan contract with the Service. But even if the
Court assumes without deciding that REA is subject to 7 C.F.R. § 1717.617, any possible conflict
between that regulation and 15 Pa. Cons. Stat. § 7330 would only limit Plaintiffs’ possible relief
rather than preempt their claims entirely.
As an initial matter, this case does not implicate express or field preemption. As noted
by the Supreme Court, “[n]othing in the Rural Electrification Act expressly pre-empts state rate
regulation of power cooperatives financed by the [Rural Utilities Service].“ Ark. Elec. Coop.
Corp. v. Ark. Pub. Serv. Comm’n, 461 U.S. 375, 385 (1983). Although this case does not concern
state rate regulation of power cooperatives, that is a distinction without a difference; nothing in

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the Act expressly preempts any state regulation of power cooperatives. 5 Nor does the Act
implicate field preemption. Congress has not legislated so comprehensively in the field of rural
electric cooperatives that there is no room for state regulation. The Act does not establish a
comprehensive regulatory scheme for rural electric cooperatives; it establishes a framework for
providing loans “for the purpose of furnishing and improving electric . . . service in rural areas .
. . and for the purpose of assisting electric borrowers to implement demand side management,
energy efficiency and conservation programs, and on-grid and off-grid renewable energy
systems.” 7 U.S.C. § 902(a). And its provisions leave ample room for state regulation, meaning
field preemption is inapplicable here. See Wabash Valley Power Ass’n, Inc. v. Rural Electrification
Admin., 988 F.2d 1480, 1486 (7th Cir. 1993) (“More than fifty years of state regulation of
cooperative utility rates (in those states that have continued to regulate these rates) since the
enactment of the RE Act certainly reflects the fact that Congress has not occupied the field.”).
This leaves conflict preemption. REA states that “Plaintiffs’ claims create an obstacle to
and frustrate the purpose of the Rural Electrification Act” (ECF No. 11 at 6), but does not
elaborate on this point or explain what purpose would be frustrated—or how. As discussed,
the Act is primarily a vehicle for providing federal loans for the purpose of establishing and
improving electric service in rural areas. It is conceivable that a hypothetical state law “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 [Act].” Ark. Elec., 461 U.S. at 388 (citations

This is not to say that the Act’s regulatory scheme is devoid of express preemption. After Arkansas
Electric, the Service established detailed regulations preempting state rate regulations of rural electric
cooperatives in certain circumstances. See 7 C.F.R. § 1717.300 et seq. Those regulations, however, are not
implicated here.

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omitted). But § 7330 is not that hypothetical law. Its provisions leave cooperatives with ample
room for the prudent operation of their business. Section 7330(a)(1) instructs cooperatives to set
their rates so that the cooperative is able to “pay all operating and maintenance expenses
necessary or desirable for the prudent conduct of its business and the principal of and interest
on the obligations issued or assumed by the corporation in the performance of the purpose for
which it was organized.” And § 7330(b) gives cooperatives broad discretion to designate what
revenues are required for improvements, new construction, depreciation, and contingencies—
and which revenues are therefore exempt from § 7330(c)’s refund requirement. See § 7330(b)
(“such reserves for . . . contingencies as the board may, from time to time, prescribe”).
REA’s strongest conflict-preemption argument is that if § 7330(c) requires REA to reduce
its equity below 30% then it would be impossible for REA to comply with both § 7330(c) and
§ 1717.617 and REA would have to violate its loan contract with the Service. There are two
problems with that argument. First, § 1717.617 does not actually impose any legal obligations
on REA; it merely provides criteria under which the Service automatically approves a
cooperative’s patronage-capital refund if the Service’s approval is required by the cooperative’s
loan documents. Thus, § 1717.617 itself does not mandate that REA’s equity has to stay above
30%. REA is just not granted automatic approval through § 1717.617 to issue a patronage
refund if its equity would fall below 30% as a result. 6
Because § 1717.617 does not impose any legal obligations on REA, the source for any
such obligations that would give rise to a conflict must be found elsewhere—such as in REA’s
It is also worth noting that § 1717.617 does not establish exclusive conditions. That is, § 1717.617
provides criteria under which the Service automatically approves a patronage refund if approval is
required by the borrower’s loan documents, but this does not mean the Service will disapprove requests
from cooperatives to make patronage refunds in other circumstances.

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loan agreement with the Service. That brings us to the second problem with REA’s preemption
argument.

Even if REA’s loan agreement imposed obligations that interfered with REA

complying with state law, it is not clear that this would make a difference here. It is “federal law
which preempts contrary state law; nothing short of federal law can have that effect.” Fellner v.
Tri-Union Seafoods, L.L.C., 539 F.3d 237, 244 (3d Cir. 2008). A provision in a loan agreement is
not federal law, even if one party is a federal agency. Although actions by federal agencies can
preempt state law, federal law capable of preempting state law is not created every time an
agency makes a statement or takes an action within the agency’s jurisdiction. Id. at 245. In
determining whether agency action should be afforded preemptive effect, the Third Circuit has
“decline[d] to afford preemptive effect to less formal measures lacking the ‘fairness and
deliberation’ which would suggest that Congress intended the agency’s action to be a binding
and exclusive application of federal law.” Id.
The Court cannot at this stage and on this limited record determine whether provisions
in REA’s loan contract with the Service should be afforded preemptive weight. It thus reserves
that question, and for now resolves it on a simpler ground. Assuming for the sake of argument
that REA’s loan agreement with the Service requires REA to maintain equity greater than or
equal to 30% of its assets, and that this provision should have preemptive effect, REA’s equity
would have to actually fall below 30% of its assets before a conflict would arise. Based on
REA’s 2014 financial report, this leaves REA with approximately $21,000,000 to disgorge before

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any purported conflict would arise. 7 (See ECF No. 1-1 at 63.) Thus, any possible preemption
would only limit Plaintiffs’ relief. It would not preempt their claims entirely. The Court
therefore turns to the substance of Plaintiffs’ claims.
B.

Count I—Pennsylvania’s Unfair Trade Practices and Consumer Protection Law

In Count I, Plaintiffs assert a claim for violations of Pennsylvania’s Unfair Trade
Practices and Consumer Protection Law, or UTPCPL for short. The UTPCPL is a Pennsylvania
consumer-protection law and its “underlying foundation is fraud prevention.” Weinberg v. Sun
Co., 777 A.2d 442, 446 (Pa. 2001) (internal quotation marks and citation omitted). It prohibits
“[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any
trade or commerce.” 73 Pa. Cons. Stat. § 201-3. Section 201-2(4) defines the prohibited unfair
methods of competition and unfair or deceptive acts or practices, and includes a catchall
provision (subsection xii) that prohibits “any other fraudulent or deceptive conduct which
creates a likelihood of confusion or of misunderstanding.” The UTPCPL also creates a private
right of action for persons who suffer an ascertainable loss as a result of violations of the
UTPCPL. 73 Pa. Cons. Stat. § 201-9.2.
Plaintiffs assert two grounds for recovery under the UTPCPL. First, they allege that
REA has failed to comply with a written guarantee or warranty, violating § 201-2(4)(xiv).
Second, they allege that REA has engaged in other fraudulent or deceptive conduct, violating
§ 201-2(4)(xxi).
The Court notes also that—as REA itself points out—§ 7330(c) calls only for revenues not required for
the purposes set forth in § 7330(b) to be returned. And § 7330(b) gives REA broad discretion to designate
what revenues are “required.” See § 7330(b) (“such reserves for . . . contingencies as the board may, from
time to time, prescribe”). Thus, REA could avoid any potential conflict between a minimum-asset
requirement and a refund requirement by designating an appropriate reserve in case a refund must be
made.

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REA offers multiple arguments for why Plaintiffs’ UTPCPL claim should be dismissed.
It argues that the UTPCPL is inapplicable here because Plaintiffs make only conclusory
allegations about “unfair or deceptive acts or practices” and because the UTPCPL should not
apply to non-profit entities. REA argues further that Plaintiffs’ allegation that REA failed to
comply with a written guarantee or warranty is insufficient as a matter of law because Plaintiffs
fail to actually identify any written guarantee or warranty. And REA argues that Plaintiffs have
not sufficiently alleged that REA engaged in fraudulent or deceptive conduct and that Plaintiffs
have failed to plead justifiable reliance on REA’s supposedly deceptive acts.
As a preliminary matter, the Court finds unconvincing REA’s argument that the
UTPCPL should not apply to non-profits. In support of this argument, REA cites only to the
concurring opinion in a Pennsylvania Supreme Court case that addressed whether politicalsubdivision agencies are “persons” under the UTPCPL, Meyer v. Cmty. Coll. of Beaver Cty., 93
A.3d 806, 816 (Pa. 2014) (Castille, C.J., concurring). In that concurrence, the author noted that
the UTPCPL by its terms applies only to entities engaged in “the conduct of any trade or
commerce” and opined that the defendant in that case—a county community college—was not
engaged in trade or commerce because its focus was education rather than private gain. See
Meyer, 93 A.3d at 816 (Castille, C.J., concurring).
This Court disagrees with that rationale and therefore declines to adopt it. The UTPCPL
defines “trade or commerce”; § 201-2(3) provides that these terms “mean the advertising,
offering for sale, sale or distribution of any services and any property, tangible or intangible,
real, personal or mixed, and any other article, commodity, or thing of value wherever situate,
and includes any trade or commerce directly or indirectly affecting the people of this

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Commonwealth.” That definition does not carve out an exception for trade or commerce that is
motivated by a particular goal; as long as the activity involves the “advertising, offering for sale,
sale or distribution of any services and any property, tangible or intangible, real, personal or
mixed, and any other article, commodity, or thing of value,” then it qualifies as trade and
commerce. REA might be a non-profit, but it is still engaged in the “sale or distribution of [a]
service[]”—namely electrical service—and is thus engaged in trade and commerce as defined by
the UTPCPL. 8 Its provisions therefore apply to REA.
Nevertheless, REA is correct that Plaintiffs have failed to state a claim for a violation of
the UTPCPL.

To review, Plaintiffs base their UTPCPL claim on REA’s alleged failure to

“comply with the terms of any written guarantee or warranty given to [Plaintiffs] at, prior to or
after a contract for the purchase of goods or services is made” (violating § 201-2(4)(xiv)) and
REA engaging in “other fraudulent or deceptive conduct which creates a likelihood of
confusion or of misunderstanding” (violating § 201-2(4)(xxi)). Yet their factual allegations fall
short of stating an actionable UTPCPL claim.
To state a claim under § 201-2(4)(xiv), a plaintiff must as a threshold matter identify a
written guarantee or warranty and its terms. See Seldon v. Home Loan Servs., 647 F. Supp. 2d 451,
466 (E.D. Pa. 2009). To state a claim under the UTPCPL’s catchall provision, § 201-2(4)(xxi), a
plaintiff must allege a deceptive act that is likely to deceive a consumer acting reasonably under
similar circumstances. See Slapikas v. First Am. Title Ins. Co., 298 F.R.D. 285, 292 (W.D. Pa. 2014)
(citing Seldon, 647 F. Supp. 2dat 470). And for both types of claims a plaintiff must allege (1)
In addition, Pennsylvania state courts have overruled preliminary objections seeking demurrer as to
UTPCPL claims against non-profits. See, e.g., Kern v. Lehigh Valley Hosp., Inc., No. 2012-C-3438, 2013 WL
1845838 (Pa. C.P. Feb. 21, 2013) (overruling non-profit defendant’s preliminary objection to plaintiff’s
UTPCPL claim).
8

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justifiable reliance, and (2) that the plaintiff suffered ascertainable loss as a result of that
reliance. Yocca v. Pittsburgh Steelers Sports, Inc., 854 A.2d 425, 438 (Pa. 2004) (“To bring a private
cause of action under the UTPCPL, a plaintiff must show that he justifiably relied on the
defendant’s wrongful conduct or representation and that he suffered harm as a result of that
reliance.” (citing Weinburg v. Sun Co., 777 A.2d 442, 446 (Pa. 2001)); see also Santana Prods., Inc. v.
Bobrick Washroom Equip., Inc., 401 F.3d 123, 136 (3d Cir. 2005) (“a plaintiff bringing an action
under the UTPCPL must prove . . . reliance and causation with respect to all subsections of the
UTPCPL” upon which that plaintiff brings a claim (citation omitted)). Justifiable reliance in this
context means more than a mere causal connection between the wrongful conduct and the
harm; the plaintiff “must show that he justifiably bought the product in the first place (or
engaged in some other detrimental activity) because of the misrepresentation.” Hunt v. U.S.
Tobacco Co., 538 F.3d 217, 222 n.4 (3d Cir. 2008) (citing Weinberg, 777 A.2d at 446). Plaintiff’s
UTPCPL claim falters primarily on the justifiable-reliance element.
In Count I of their complaint, Plaintiffs state that REA ”failed to comply with the written
warranties, guarantees and representations regarding the return of Patronage Capital” and that
REA “knew or should have known that its actions regarding its failure to properly return
Patronage Capital were not as warranted, guaranteed and/or represented.”

(ECF No. 1-1

¶¶ 47.a, 48.) Nowhere in that Count, however, do Plaintiffs identify specific language from a
specific document, explain what document they contend is a written guarantee or warranty, or
explain specifically what guarantee or warranty was violated or how. In their response to
REA’s motion to dismiss, Plaintiffs state that they incorporated the rest of the complaint into
Count I by reference and that “[t]he written Guarantee or Warranty would be in the Penn Lines,

-17-

Bylaws and Articles of Incorporation.” 9 Plaintiffs go on to argue that “[t]o the extent that [REA]
claims that it will return patronage capital when it is financially feasible to but, aside from one
time in the last 50 plus years, has failed to do so, this is a failure to comply with a written
warranty or guarantee.” (ECF No. 35 at 44.)
Although Plaintiffs fail to reference a specific document in Count I of their complaint,
they do indeed refer to REA’s Penn Lines publication, bylaws, and articles of incorporation in
other parts of the complaint. Yet Plaintiffs do not allege to have ever seen or relied on the
articles of incorporation, nor do they explain what warranties or guarantees it contains or were
supposedly violated. 10 That leaves the bylaws and Penn Lines publication.
Plaintiffs are correct that REA’s bylaws contain certain warranties and guarantees
regarding the legal status of members’ patronage capital. But the relevant provisions contradict
Plaintiffs’ allegation that these warranties and guarantees were violated. Article VIII provides
in part:
In order to induce patronage and to assure that the Cooperative
will operate on a non[-]profit basis the Cooperative is obligated to
account on a patronage basis to all its patrons for all amounts
received and receivable from the furnishing of electric energy and
service. ALL SUCH AMOUNTS IN EXCESS OF OPERATING
Penn Lines is a monthly publication by REA, akin to a newsletter, which REA appears to send to its
members. (See ECF No. 1-1 ¶ 26 n.3.) Plaintiffs attached the October 2011 Penn Lines issue to their
complaint as Exhibit 2 (ECF No. 1-1 at 58).

9

Plaintiffs dwell extensively on REA’s articles of incorporation and its refusal to produce them (see ECF
No. 35 at 8, 17, 18, 19, 21 & n.6, 26 & n.8, 29 n.9, 32 n.12, 34, 44 n.17), and request that the Court “impose a
negative inference on [REA] in every regard where the Articles of Incorporation are at issue” based on
REA’s refusal. (ECF No. 35 at 44 n.17.) Plaintiffs also state that “[REA] is in sole custody and control of
its Articles of Incorporation.” (Id. at 21 n.6.) The Court notes that REA’s articles of incorporation, like
those
of
all
Pennsylvania
corporations,
are
public
records
available
from
the
Pennsylvania Department of State. They can be accessed by visiting https://www.corporations.pa.gov/se
arch/corpsearch (last accessed June 8, 2017) and paying a fee of $3.00. But Plaintiffs cannot base their
UTPCPL claim on a document they do not possess and do not allege to have ever seen or relied on.
10

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COSTS AND EXPENSES AT THE MOMENT OF RECEIPT BY
THE
COOPERATIVE
ARE
RECEIVED
WITH
THE
UNDERSTANDING THAT THEY ARE FURNISHED BY THE
PATRONS AS CAPITAL.
The books and records of the
Cooperative shall be set up and kept in such a manner that at the
end of each fiscal year the amount of capital, if any, so furnished
by each patron is clearly reflected and credited in an appropriate
record to the capital account of each patron. All such amounts
credited to the capital account of any patron shall have the same status as
though they had been paid to the patron in cash in pursuance of a legal
obligation to do so and the patron had then furnished the Cooperative
corresponding amounts for capital.
(ECF No. 1-1 at 53 (emphasis in the form of italics added).) The capitalized sentence stresses
that all amounts paid by members in excess of REA’s costs and expenses are provided by
members as capital. And the last quoted sentence is key; it clearly spells out that those excess
amounts are deemed to have already been paid back to the members “in cash in pursuance of a
legal obligation to do so,” but then returned by the members to REA as capital.
The bylaws also explain under what circumstances patronage-capital refunds may be
issued:
If, at any time prior to dissolution or liquidation, the Board of
Directors shall determine that the financial condition of the
Cooperative shall not be impaired thereby, the capital then
credited to patrons’ accounts may be returned in full or in part.
(Id. (emphasis added).) Such refunds are thus both discretionary and conditional; “if” is a
conditional term, and “may” is a discretionary one. REA therefore makes no warranty or
guarantee that patronage capital will definitively be returned. And nothing Plaintiffs have
alleged appears to conflict with REA’s representations in the bylaws regarding its treatment of
patronage capital.

The bylaws simply do not contain the guarantees and warranties that

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Plaintiffs seem to read into them. Plaintiffs therefore cannot plausibly assert a violation of a
written warranty or guarantee based on REA’s bylaws.
Plaintiffs fare slightly better by relying on the October 2011 issue of REA’s Penn Lines
publication.

The October 2011 Penn Lines issue contains a question and answer section

regarding patronage-capital refunds, which includes in relevant part the following:
Are capital credits refunded every year?
Each year, the REA Energy Board of Directors makes a
decision on whether to refund capital credits based on the
financial health of the cooperative. . . .
***
How often do members receive capital credits?
The REA Energy Board of Directors makes a decision each
year whether or not to refund capital credits. When the
cooperative is strong enough financially and the member equity
levels are high enough, the board directs staff to refund some
portion of past years’ capital credits.
(ECF No. 1-1 at 58, 60.) These answers could be construed to contradict part of the discretionary
nature of the refunds because they imply that the refunds are purely conditional rather than
also discretionary; the answers omit the “may” portion that is included in the relevant section of
REA’s bylaws. Stated differently, the bylaws provide that a refund may be issued upon a
finding by REA’s board that REA’s finances would not thereby be impaired, yet the Penn Lines
answers could be read to suggest that a refund will be issued upon a finding by REA’s Board
that REA’s finances would not be impaired.
Such a reading is tenuous because it overlooks that the answers provide that REA’s
board is still the relevant decisionmaker. (Id. at 58 (“the REA Energy Board of Directors makes
a decision on whether to refund capital credits”), 60 (”The REA Energy Board of Directors
makes a decision each year whether or not to refund capital credits.”).) Nevertheless, the Court

-20-

holds that—at this stage—Plaintiffs have plausibly identified a written warranty or guarantee in
the form of the answers in REA’s October 2011 Penn Lines publication. 11
Even so, their § 201-2(4)(xiv) claim fails because Plaintiffs have not alleged justifiable
reliance on the answers in the October 2011 Penn Lines issue. To state a UTPCPL claim,
Plaintiffs must allege that they “justifiably bought the product in the first place (or engaged in
some other detrimental activity) because of the misrepresentation.” Hunt, 538 F.3d at 222 n.4
(citing Weinberg, 777 A.2d at 446). Although Plaintiffs in their complaint repeatedly state that
REA’s conduct misled them and caused them to believe that REA would refund patronage
capital when it was feasible to do so, they do not allege that they became members of REA—or
took any other detrimental activity—based on the October 2011 Penn Lines answers. (See ECF
No. 1-1 ¶¶ 44-58.)
Plaintiffs respond that this is “simply nonsensical because Plaintiffs have no other choice
for their electricity service in their areas. In reality, Plaintiffs and the Proposed Class are/were
[REA’s] captive customers.” (ECF No. 35 at 44.) It may very well be true that Plaintiffs have no
other choice regarding where they obtain their electrical service. But that has no bearing on the
UTPCPL’s requirement that a plaintiff must allege justifiable reliance. To bring a private cause
of action under the UTPCPL, the plaintiff personally has to have been deceived and influenced by
the misrepresentation. See Weinberg, 777 A.2d at 444-46 (purchasers of Sunoco Ultra® gasoline
who sued Sunoco under the theory that its advertisements were misleading had to allege that
they “purchased Ultra® because [they] heard and believed Sunoco’s false advertising.” (emphasis
But the Court makes no determination regarding whether the answers actually qualify as a warranty or
guarantee. See Tesauro v. Quigley Corp., No. 1011 Aug. Term 2000, 2001 WL 1807782, at *4 (Pa. C.P Apr. 9,
2001) (“Whether an [sic] statement creates an express warranty is an issue for the factfinder” (citing
Babcock Poultry Farm, Inc. v. Shook, 203 A.2d 399, 401 (Pa. Super. Ct. 1964)).
11

-21-

added)). The private-plaintiff standing requirement of justifiable reliance stands in contrast to
the standing provision applicable to the Attorney General, § 201-4, which contains no such
requirement. Private plaintiffs, however, may pursue UTPCPL claims only when the alleged
deceptive act prompted them to act to their detriment. Here, Plaintiffs have not alleged that the
October 2011 Penn Lines answers led them to become members of REA or take any other
detrimental activity. Their § 201-2(4)(xiv) claim therefore fails.
Plaintiffs have also not adequately pleaded a claim under the UTPCPL’s catchall
provision, § 201-2(4)(xxi). To state a claim under the catchall provision, a plaintiff must allege:
(1) a deceptive act that is likely to deceive a consumer acting reasonably under similar
circumstances; (2) justifiable reliance; and (3) that the plaintiff’s justifiable reliance caused
ascertainable loss. See Slapikas, 298 F.R.D. at 292 (citing Seldon, 647 F. Supp. 2d at 470). For the
reasons discussed above, even if the Court assumes that the first element—a deceptive act that
is likely to deceive a consumer acting reasonably under similar circumstances—is satisfied
based on the Penn Lines answers, Plaintiffs have failed to allege justifiable reliance—and by
extension have failed to allege ascertainable loss resulting from justifiable reliance. Plaintiffs’
UTPCPL claim will therefore be dismissed.
C.

Count II—Breach of the Covenant of Good Faith and Fair Dealing

In Count II of their complaint, Plaintiffs allege a breach of the covenant of good faith and
fair dealing. Plaintiffs state that they have a valid contract with REA, that every contract
inherently contains an implied covenant of good faith and fair dealing, and that this covenant
obligates REA to “make the decision of whether to return Patronage Capital reasonably and in
good faith.” (ECF No 1-1 ¶ 59.) Plaintiffs contend that REA’s decision not to refund capital

-22-

credits is unrelated to REA’s financial condition and argue that REA has therefore violated the
covenant of good faith and fair dealing.
REA offers three arguments for why this claim should be dismissed. First, REA argues
that the covenant of good faith and fair dealing is applicable only in situations involving some
special relationship between the parties, such as a confidential or fiduciary relationship, and
that such a relationship does not exist here. Second, REA argues that under Pennsylvania law a
claim for breach of the covenant of good faith and fair dealing is not an independent cause of
action separate from a breach-of-contract claim. REA reasons that the claim for breach of the
covenant of good faith and fair dealing cannot be maintained because Plaintiffs allege a claim
for breach of contract. And third, REA argues that the covenant of good faith and fair dealing
cannot override an express contractual term or defeat a party’s express contractual rights—and
that this is precisely what Plaintiffs seek to do, making dismissal of this claim proper.
The covenant of good faith and fair dealing, sometimes called the duty of good faith and
fair dealing, finds its origins in American common law and was codified by the American Law
Institute as § 205 of the Restatement (Second) of Contracts.

See Restatement (Second) of

Contracts § 205 (“Every contract imposes upon each party a duty of good faith and fair dealing
in its performance and its enforcement.”). Under Pennsylvania law, the covenant “attaches to
existing contractual obligations; it does not add new contractual duties.” Hanaway v. Parkesburg
Grp., LP, 132 A.3d 461, 471 (Pa. Super. Ct. 2015). The covenant in essence “infuses the parties’
performance of their express contractual obligations.” Id. at 472. Although a complete list of
what qualifies as bad faith conduct is impossible, it includes “evasion of the spirit of the
bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of

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a power to specify terms, and interference with or failure to cooperate in the other party’s
performance.” Somers v. Somers, 613 A.2d 1211, 1213 (Pa. Super. Ct. 1992) (citing Restatement
(Second) of Contracts § 205(d))
As one Pennsylvania court has noted, “[t]he implied contractual covenant, or duty, of
good faith is a legal concept shrouded in mystery and confusion in Pennsylvania.” JHE, Inc. v.
Se. Pa. Transp. Auth., No. 1790 Nov. Term 2001, 2002 WL 1018941, at *5 (Pa. C.P. May 17, 2002).
One reason for this confusion is that Pennsylvania courts have been less than clear on whether
the covenant applies to all contracts or only certain types of contracts.

For example, the

Pennsylvania Superior Court has adopted § 205 of the Restatement (Second) of Contracts).
Kaplan v. Cablevision of PA, Inc., 671 A.2d 716, 721-72 (Pa. Super. Ct. 1996) (reaffirming that the
Pennsylvania Superior Court has adopted § 205 and citing cases).

And the Pennsylvania

Superior Court has stated and suggested that the covenant does indeed apply to all contracts.
See, e.g., Hanaway, 132 A.3d at 469-70 (noting that Pennsylvania’s intermediate-appellate courts
have applied § 205 and mentioning the “general duty of contracting parties to perform their
contractual obligations in good faith as set forth in” § 205); Donahue v. Fed. Express Corp., 753
A.2d 238, 242 (Pa. Super. Ct. 2000) (“Every contract in Pennsylvania imposes on each party a
duty of good faith and fair dealing in its performance and its enforcement.” (citing Kaplan v.
Cablevision of Pa., Inc., 671 A.2d 716, 722 (Pa. Super. Ct. 1996))); Liazis v. Kosta, Inc., 618 A.2d 450,
454 (Pa. Super. Ct. 1992) (“Fundamentally, every contract imposes upon the parties a duty of
good faith and fair dealing in the performance and enforcement of the contract.” (citing
Germantown Mfg. Co. v. Rawlinson, 491 A.2d 138, 148 (Pa. Super. Ct. 1985))).

But the

Pennsylvania Superior Court has at other times used less sweeping language. See, e.g., Heritage

-24-

Surveyors & Eng’rs, Inc. v. Nat’l Penn Bank, 801 A.2d 1248, 1253 (Pa. Super. Ct. 2002) (“In
Pennsylvania, the duty of good faith has been recognized in limited situations.”); Creeger Brick
& Bldg. Supply Inc. v. Mid-State Bank & Trust Co., 560 A.2d 151, 153 (Pa. Super. Ct. 1989) (“In this
Commonwealth the duty of good faith has been recognized in limited situations.”). Similarly,
the Commonwealth Court of Pennsylvania has also stated that the covenant applies only in
limited circumstances. See, e.g., Agrecycle, Inc. v. City of Pittsburgh, 783 A.2d 863, 867 (Pa.
Commw. Ct. 2001) (“In Pennsylvania, the courts have recognized the duty of good faith only in
limited situations.” (citing cases)); Dep’t of Transp. v. E-Z Parks, Inc., 620 A.2d 712, 717 (Pa.
Commw. Ct. 1993) (“[The] duty of good faith is limited to situations where there is some special
relationship between the parties, such as a confidential or fiduciary relationship.))
The Pennsylvania Supreme Court is aware of the tension between these cases but has
not resolved the conflict. In Ash v. Continental Insurance Co., 932 A.2d 877 (Pa. 2007), the
Pennsylvania Supreme Court remarked on the “considerable disagreement over the
applicability of the implied duty of good faith” and noted that some Pennsylvania courts—as
well as certain members of the Pennsylvania Supreme Court—have opined that Pennsylvania
has adopted § 205. 932 A.2d at 883 n.2. In the same discussion, the Ash court cited a federal
district-court decision from the Eastern District of Pennsylvania, Fraser v. Nationwide Mutual
Insurance Co., 135 F. Supp. 2d 623 (E.D. Pa. 2001), which “reconciled the conflicting case law,
determining [that], ‘[u]nder Pennsylvania [l]aw, a covenant of good faith and fair dealing is
implied in every contract. However, it does not create a cause of action in every case.’” Id.
(citing Fraser, 135 F. Supp. 2d at 643). Despite describing Fraser’s view on the conflict, the
Pennsylvania Supreme Court went on to note that it had not yet in a precedential opinion

-25-

addressed the conflicting cases or adopted § 205, and that it declined to do so in Ash because the
issue was not before the court. Id.
The Fraser court, in drawing its conclusion on the state of Pennsylvania law as it relates
to the covenant of good faith and fair dealing, relied on precedent from the United States Court
of Appeals for the Third Circuit, including Northview Motors, Inc. v. Chrysler Motors Corp., 227
F.3d 78 (3d Cir. 2000). 135 F. Supp. 2d at 643-44. In Northview Motors, the Third Circuit likewise
noted that Pennsylvania courts have cited § 205 for the proposition that every contract
implicitly contains the covenant, but acknowledged that “[i]n practice . . . the courts have
recognized an independent cause of action for breach of a duty of good faith and fair dealing
only in very limited circumstances.” 227 F.3d at 91 (citing cases). In the Third Circuit’s view,
“[c]ourts have utilized the good faith duty as an interpretive tool to determine the parties’
justifiable expectations in the context of a breach of contract action, but that duty is not divorced
from the specific clauses of the contract and cannot be used to override an express contractual
term.” Id. at 91 (citing cases). Thus, the Third Circuit held that “a party is not entitled to
maintain an implied duty of good faith claim where the allegations of bad faith are ‘identical to’
a claim for ‘relief under an established cause of action.’” Id. at 91-92 (quoting Parkway Garage,
Inc. v. City of Philadelphia, 5 F.3d at 701-02).
Based on a review of these cases, the Court finds that the views expressed in Northview
Motors and Fraser accurately describe the state of Pennsylvania law regarding the covenant of
good faith and fair dealing. It appears that most of the confusion surrounding the applicability
of the covenant stems from the conflation of two distinct questions, namely (1) whether the
covenant applies to a contract, and (2) whether the covenant supports a claim (be it as an

-26-

independent claim or as a breach-of-contract claim). Cf. Phila. Plaza-Phase II v. Bank of Am. Nat.
Trust & Sav. Ass’n, No. 3745 April Term 2002, 2002 WL 1472337, at *6 (Pa. C.P. June 21, 2002)
(“Those decisions relying on Creeger Brick to avoid the covenant of good faith and to narrow its
application appear to confuse the existence of the covenant with the alleged breach of the
covenant and to expand Creeger Brick into unintended areas.”). This conflation is apparent in
some of the decisions which stress the limited applicability of the covenant. See, e.g., Heritage
Surveyors, 801 A.2d at 1253-54 (stating that covenant did not apply to promissory note but
relying on precedent which held that similar conduct did not violate covenant); E-Z Parks, 620
A.2d at 717 (holding that covenant did not apply but rejecting breach-of-covenant claim based
in part on unambiguous contractual terms and lack of any bad faith); see also Creeger Brick, 560
A.2d at 153-54 (stating that Pennsylvania recognizes covenant in limited situations but holding
that conduct did not support breach-of-covenant claim).
In this case, the Court will avoid conflating those questions by answering the second
question—whether the covenant supports a claim—only. The Court need not decide whether
the covenant applies because, regardless of the answer, it does not support any claim here. As
noted above, although “[c]ourts have utilized the good faith duty as an interpretive tool to
determine the parties’ justifiable expectations in the context of a breach of contract action, . . .
that duty is not divorced from the specific clauses of the contract and cannot be used to override
an express contractual term.” Northview, 227 F.3d at 91. And here, express contractual terms
govern the relief Plaintiffs seek:
If, at any time prior to dissolution or liquidation, the Board of
Directors shall determine that the financial condition of the

-27-

Cooperative shall not be impaired thereby, the capital then
credited to patrons’ accounts may be returned in full or in part.
(ECF No. 1-1 at 53 (emphasis added).) Under these express terms, REA—and not Plaintiffs—
decides when and whether to retire capital credits.
Plaintiffs seek to read a good-faith duty into this provision that would “operate[] to limit
[REA]’s self-professed unfettered discretion” regarding when to refund capital. (ECF No. 35 at
38.) But such a duty would contradict the express terms of the contract, which provide that
REA is the relevant decisionmaker. And these terms impose no constraint on REA’s discretion.
A different conclusion might follow if the bylaws provided something like “the board of
directors shall, from time to time, determine whether the cooperative’s financial condition
would be impaired by refunding patronage capital, and the board shall refund patronage
capital upon a finding that the Cooperative’s financial condition would not thereby be
impaired.” But that is not what the bylaws say, and Plaintiffs have no right to unilaterally
rewrite them.
Furthermore, a plaintiff cannot maintain an action for breach of the implied covenant of
good faith and fair dealing where an “adequate remedy exists under . . . [a] claim for breach of
contract.”

Geesey v. CitiMortgage, Inc., 135 F. Supp. 3d 332, 346 (W.D. Pa. 2015) (citation

omitted); see also Hudgins v. Travelers Home and Marine Ins. Co., No. 11-cv-882, 2013 WL 3949208,
at *5 (E.D. Pa. July 31, 2013) (“[T]he claim for breach of the implied covenant of good faith and
fair dealing is subsumed by the breach of contract claim”); Cummings v. Allstate Ins. Co., 832 F.
Supp. 2d 469, 473 (E.D. Pa. 2011) (“under Pennsylvamia law, there is no separate cause of action
for breach of the duty of good faith and fair dealing and . . . such a claim is subsumed within a

-28-

breach of contract claim”); McHale v. NuEnergy Group, No. 01-cv-4111, 2002 WL 321797, at *8
(E.D. Pa. Feb. 27, 2002) (dismissing breach-of-covenant claim because “the actions forming the
basis of the breach of contract claim are essentially the same as the actions forming the basis of
the [breach-of-covenant] claim” (citation omitted)). Here, Plaintiffs have alleged both a breachof-contract and breach-of-covenant claim, and the allegations in support of both claims are
essentially the same. Plaintiffs, however, cannot maintain both claims.
Plaintiffs’ arguments to the contrary are unpersuasive.

They argue that they are

permitted to plead in the alternative, that their breach-of-covenant claim is not based on
contractual provisions, and cite Kamco Indus. Sales, Inc. v. Lovejoy, Inc., 779 F. Supp. 2d 416, 42729 (E.D. Pa. 2011), for the proposition that the covenant properly limits contractual discretion.
(See ECF No. 35 at 37-39.)
First, although Plaintiffs are allowed to plead in the alternative, that fact has no bearing
on the outcome here. Even if Plaintiffs were pleading only one of these claims, the Court’s
substantive analysis—regardless of what it called the claim—would be identical. See McAllister
v. Royal Caribbean Cruises, Ltd., No. 02-cv-2393, 2003 WL 23192102, at *4 (E.D. Pa. Sept. 30, 2003)
(concluding that a breach-of-covenant claim is simply a breach-of-contract claim). And the
Court will address Plaintiffs’ breach-of-contract claim below. That Plaintiffs are pleading their
breach-of-covenant claim in the alternative is thus of no consequence.
Second, Plaintiffs’ assertion that their breach-of-covenant claim is “not based on
provisions in the contract” (ECF No. 35 at 38) is not credible. The bylaws directly address the
subject matter of this claim, namely the refunding of patronage capital, and Plaintiffs—through
their breach-of-covenant claim—seek to read terms into the bylaws. The claim is thus based on

-29-

a contractual provision.

And even if the breach-of-covenant claim was not “based” on a

contractual provision, it would nevertheless be barred because Plaintiffs seek to “override an
express contractual term.” Northview, 227 F.3d at 91.
Third, Plaintiffs’ reliance on Kamco, 779 F. Supp. 2d at 427-29, as an example of how the
covenant properly limits contractual discretion is misplaced. A brief recitation of the facts of
that case is needed to illustrate why it does not support Plaintiffs’ argument. In Kamco, Kamco
Industrial Sales, Inc., had a sales agreement with a manufacturer, Lovejoy, Inc. Under that
agreement, Kamco was to receive commissions on all Lovejoy products it sold, with the
exception of products sold to specified House Accounts.

Lovejoy, however, contractually

reserved the right to redefine the House Accounts. After Lovejoy experienced financial woes, it
sought to terminate the contract with Kamco’s consent and threatened to convert all of Kamco’s
customers to House Accounts if Kamco refused. Kamco refused, after which Lovejoy mostly
followed through on its threat and converted 90% of Kamco’s customers to House Accounts.
Kamco sued, alleging among other things a breach-of-contract claim predicated on a breach of
the covenant of good faith and fair dealing. On summary judgment, Lovejoy argued that the
sales agreement gave it unfettered discretion to redefine Kamco’s customers to House Accounts.
The court disagreed and, relying on the covenant, held that “Kamco possessed a
justifiable expectation that, at a minimum, Lovejoy would not use its discretion under the
House Accounts provision to deprive Kamco of its benefits under the Agreement by redefining
all or substantially all of Kamco’s accounts as House Accounts.” Kamco, 779 F. Supp. 2d at 429.
But the court applied the covenant only after it determined that the contractual provision was
ambiguous, and did so because Lovejoy’s interpretation of the account-conversion provision

-30-

would render superfluous significant portions of the sales agreement, including the termination
provision. See id. at 427-29. The court noted that the carve-out for sales to House Accounts was
defined as an exception to the general rule that Lovejoy would pay commission on sales and
therefore found that it was questionable whether Lovejoy could redefine almost all accounts to
fit under this exception.
Here, even under Kamco’s reasoning, Plaintiffs’ claim fails because no comparable
contractual conflict or ambiguity exists. REA’s discretion to refund patronage capital does not
nullify or infringe on any other contractual provisions and the relevant provision
unambiguously provides that REA decides when and whether to retire capital credits. Kamco
thus lends no support to Plaintiffs’ claim.
Plaintiffs’ claim for breach of the covenant of good faith and fair dealing will therefore
be dismissed.
D.

Count III—Breach of Contract

In Count III, Plaintiffs assert a claim for breach of contract. To state a breach-of-contract
claim, a plaintiff must plead three elements: (1) the existence of a contract, including its essential
terms; (2) a breach of that contract; and (3) damages. Omicron Sys., Inc. v. Weiner, 860 A.2d 554,
564 (Pa. Super. Ct. 2004). Here, the first element is satisfied because Plaintiffs have alleged the
existence of a contract (REA’s bylaws), as well as its essential terms by attaching the bylaws to
their complaint. 12 (See ECF No. 1-1 ¶¶ 11-12.) Similarly, the third element—damages—is
satisfied because Plaintiffs allege that REA’s purported breach deprives Plaintiffs of money that
Plaintiffs also assert that REA’s articles of incorporation are a contract between Plaintiffs and REA. (See
ECF No. 1-1 ¶ 11.) As noted in footnote 10, however, Plaintiffs do not possess REA’s articles of
incorporation and do not allege any of the articles’ essential terms. The Court will therefore consider
only REA’s bylaws.
12

-31-

they are entitled to. (See id. ¶ 28.) But Plaintiffs’ breach-of-contract claim falters on the second
element; they have not alleged a plausible breach.
As to breach, Plaintiffs contend that
[w]here the relevant agreement[ ] between Defendant REA and its
members do not specify how often Defendant REA will return
Patronage Capital, to prevent the contract from being too
indefinite or from placing Plaintiffs and the class at Defendant’s
mercy, the agreement[] should be deemed to contain an implied
contractual term mandating that Patronage Capital shall be
returned “from time to time” in accordance with Pennsylvania
Law and the Principles of Cooperative Enterprises.
(ECF No. 1-1 ¶ 69.) They reason that “Defendant REA breached this implied contractual term
by failing to appropriately and timely return Patronage Capital to Plaintiffs and the Class
Members.”

(Id. ¶ 70.)

The Court will also construe Plaintiffs’ allegations regarding the

covenant of good faith and fair dealing as a basis for their breach-of-contract claim. These
allegations differ slightly from the breach-of-contract allegations; rather than assert that an
implied term should be read into the contract, Plaintiffs in these allegations contend that REA
has an obligation to “make the decision of whether to return Patronage Capital reasonably and
in good faith.” (Id. ¶ 59.)
The Court turns first to Plaintiffs’ reliance on Pennsylvania statutory law. As the Court
explained in its preemption discussion above, Plaintiffs allege that 15 Pa. Cons. Stat. § 7330
obligates REA to return patronage capital to its members. (ECF No. 1-1 ¶ 19.) To review,
§ 7330(a) requires that electric cooperatives be operated without profit to their members.
Furthermore, § 7330(b) mandates that revenues be used to first pay “operating and maintenance
expenses and the principal and interest on outstanding obligations and, thereafter, to such

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reserves for improvement, new construction, depreciation and contingencies as the board may,
from time to time, prescribe.” Revenues not required for these purposes
shall be returned, from time to time, to the members on a pro rata
basis, according to the amount of business done with each during
the period, either in cash, in abatement of current charges for
electric energy or otherwise, as the board determines, but the
return may be made by way of general rate reduction to members
if the board so elects.
§ 7330(c).

Plaintiffs rely primarily on § 7330(c)’s language that excess revenues “shall be

returned, from time to time” to argue that REA is in breach.
As Plaintiffs point out, the bylaws provide that REA “is a cooperative corporation
governed by the Pennsylvania Electric Cooperative Law of 1990 (15 Pa.C.S.§ 7301 et. seq.).”
(ECF No. 1-1 at 36.) And—subject to some exceptions not applicable here—“the terms of a
contract often include the state law relating to the contract.” Am. Exp. Travel Related Servs., Inc.
v. Sidamon-Eristoff, 669 F.3d 359, 370 (3d Cir. 2012) (citing Farmers’ & Merchs.’ Bank of Monroe v.
Fed. Reserve Bank of Richmond, 262 U.S. 649, 660 (1923)); see also Willisch v. Nationwide Ins. Co. of
Am., 852 F. Supp. 2d 582, 607 (E.D. Pa. 2012) (“Statutes that pertain to the subject matter of a
contract ‘form a part of the contractual obligation as if actually incorporated into the contract.’”
(citation omitted)).

Thus, through both explicit reference in the bylaws and background

principles of law, § 7330 is effectively part of the contract between REA and Plaintiffs.
Nevertheless, there is no violation of § 7330 here, and thus no breach of contract on that
basis. Plaintiffs argue that “[t]o the extent . . . Defendant REA’s By-Laws grant the Board of
Directors absolute discretion over whether Current and/or Former Member's Patronage Capital
is ever retired and returned to them, the By-Laws clearly conflict with the ‘time to time’

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requirement set forth in 15 Pa.C.S. § 7330.” (ECF No. 1-1 ¶ 20.) But § 7330 explicitly relies on
the discretion of cooperatives’ boards of directors, and REA’s use of that discretion here does
not run afoul of § 7330. 13
Plaintiffs appear to contend that § 7330(c) obligates REA to refund patronage capital
through a cash refund, abatement, or rate reduction. But that is not what § 7330(c) says.
Although § 7330(c) requires that excess revenues be returned from time to time, the
cooperative’s board gets to decide what form those returns take. In this case, Article VIII of
REA’s bylaws reflects the board’s decision on the form of returns:
In order to induce patronage and to assure that the Cooperative
will operate on a non profit basis the Cooperative is obligated to
account on a patronage basis to all its patrons for all amounts
received and receivable from the furnishing of electric energy and
service. ALL SUCH AMOUNTS IN EXCESS OF OPERATING
COSTS AND EXPENSES AT THE MOMENT OF RECEIPT BY
THE
COOPERATIVE
ARE
RECEIVED
WITH
THE
UNDERSTANDING THAT THEY ARE FURNISHED BY THE
PATRONS AS CAPITAL.
The books and records of the
Cooperative shall be set up and kept in such a manner that at the
end of each fiscal year the amount of capital, if any, so furnished
by each patron is clearly reflected and credited in an appropriate
record to the capital account of each patron. All such amounts
credited to the capital account of any patron shall have the same
status as though they had been paid to the patron in cash in
pursuance of a legal obligation to do so and the patron had then
furnished the Cooperative corresponding amounts for capital.

Although §§ 7330(a) and (b) impose restrictions on the use of revenues, § 7330(b) authorizes boards to
designate “reserves for improvement, new construction, depreciation and contingencies.” Section 7330(c)
goes on to exempt those reserves from the mandated refunds by providing that “[r]evenues not required
for the purposes set forth in subsection (b) shall be returned” (emphasis added). Even if a board does not set
aside reserves, however, it still retains discretion regarding the manner in which excess revenues are to be
refunded. See § 7330(c) (refunds shall be made “either in cash, in abatement of current charges for electric
energy or otherwise, as the board determines” (emphasis added)).
13

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(ECF No. 1-1 at 53.) Thus, REA’s board has determined that excess revenues are to be refunded
as capital-account credits. This method falls within § 7330(c)’s language that refunds may be
made in a form determined by the board. See Caver v. Cent. Ala. Elec. Coop., 845 F.3d 1135, 1147
(11th Cir. 2017) (holding that capital-account credits, as provided for in a cooperative’s bylaws,
are a permissible refund method under an Alabama statute similar to § 7330(c)).
Additionally, it matters that Plaintiffs and REA have contractually agreed that capital
credits are deemed funds that have already been returned to Plaintiffs and then paid back to
REA. Article VIII provides that
[a]ll . . . amounts credited to the capital account of any patron shall
have the same status as though they had been paid to the patron in cash
in pursuance of a legal obligation to do so and the patron had then
furnished the Cooperative corresponding amounts for capital.
(ECF No. 1-1 at 53 (emphasis added).) This further undermines Plaintiffs’ argument of breach;
they have already agreed that excess funds are deemed to have been returned. Cf. Caver v. Cent.
Ala. Elec. Coop., No. 15-cv-0129, 2015 WL 5286501, at *7 (S.D. Ala. Sept. 8, 2015) (holding that this
same language in another cooperative’s bylaws eliminated “the distinction between cash
payouts and capital account credits”). For these reasons, § 7330(c) offers no basis for Plaintiffs’
breach-of-contract claim.
Similarly, the Principles of Cooperative Enterprises also offer no basis for Plaintiffs’
breach-of-contract claim. Plaintiffs have not explained what the legal significance of these
Principles is in relation to their breach-of-contract claim, or how they would give rise to
contractual obligations. It may be that REA’s adherence to some of these Principles bears on its
tax liabilities. See Buckeye Power, Inc. v. United States, 38 Fed. Cl. 154, 159-61 (1997) (discussing

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the defining traits of cooperatives as well as some of the Principles of Cooperative Enterprises
and the relation of both to certain federal tax exemptions). But there is no indication that REA’s
alleged failure to abide by some of them would give rise to a breach-of-contract claim.
Nor does the so-called doctrine of necessary implication, which Pennsylvania
recognizes, justify reading implied terms regarding the refunding of capital into REA’s bylaws.
The doctrine of necessary implication allows courts to imply a contractual term “where it is
clear that an obligation is within the contemplation of the parties at the time of the contracting
or is necessary to carry out their intentions.” Slater v. Pearle Vision Center, Inc., 546 A.2d 676, 679
(Pa. Super. Ct. 1988) (citation omitted). Stated differently, the doctrine of necessary implication
provides that, “[i]n the absence of an express provision, the law will imply an agreement by the
parties to a contract to do and perform those things that according to reason and justice they
should do in order to carry out the purpose for which the contract was made and to refrain
from doing anything that would destroy or injure the other party’s right to receive the fruits of
the contract.” John B. Conomos, Inc. v. Sun Co. (R&M), 831 A.2d 696, 706 (Pa. Super. Ct. 2003)
(quoting Daniel B. Van Campen Corp. v. Bldg. & Constr. Trades Council of Phila., 195 A.2d 134, 13637 (Pa. Super. Ct. 1963)). But any terms implied through the doctrine “cannot trump the express
provisions in the contract.” Id. (citing Kaplan v. Cablevision of PA, Inc., 671 A.2d 716, 720 (Pa.
Super. Ct. 1996)); see also Stewart v. SWEPI, LP, 918 F. Supp. 2d 333, 342 (M.D. Pa. 2013)
(“Implied conditions and rights yield where the terms of a contract dictate otherwise.” (citing
Creeger Brick, 560 A.2d at 154)). And a court “may apply the doctrine . . . in only limited
circumstances; it may imply a missing term in a parties’ contract only when it is necessary to

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prevent injustice and it is abundantly clear that the parties intended to be bound by such term.”
Kaplan, 671 A.2d at 720 (emphasis added and citation omitted).
Here, the doctrine of necessary implication is inapplicable because the implied terms
Plaintiffs seek—terms which would require REA to refund patronage capital in the manner
desired by Plaintiffs—would override express contractual terms.

Moreover, there is no

indication that REA intended to be bound by any such implied terms. The provision actually
indicates the opposite. The doctrine of necessary implication is thus inapplicable.
The covenant of good faith and fair dealing does not support a breach-of-contract claim
for the same reasons. The covenant “is akin to the contract doctrine of necessary implication”
and is likewise “tied specifically to and is not separate from the duties a contract imposes on the
parties.” Murphy v. Duquesne Univ. of the Holy Ghost, 777 A.2d 418, 434 n.11 (Pa. 2001). Because
Plaintiffs’ proposed application of the covenant of good faith and fair dealing would supplant
express contractual terms, it is inapplicable here.

Plaintiffs’ breach-of-contract claim will

therefore be dismissed.
E.

Count IV—Unjust Enrichment

In the alternative, Plaintiffs assert a claim for unjust enrichment.

As REA argues,

however, “the doctrine of quasicontract, or unjust enrichment, is inapplicable where a written
or express contract exists.” Lackner v. Glosser, 892 A.2d 21, 34 (Pa. Super. Ct. 2006); see also
Wilson Area Sch. Dist. v. Skepton, 895 A.2d 1250, 1254 (Pa. 2006) (“it has long been held in this
Commonwealth that the doctrine of unjust enrichment is inapplicable when the relationship
between parties is founded upon a written agreement or express contract”). Plaintiffs point out
that they are entitled to plead in the alternative, and that their unjust-enrichment claim is

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proper because “there are provisions of the contract that directly conflict with Pennsylvania
law, [and that] the contract, or the conflicting provisions, may be stricken.” (ECF No. 35 at 40
(footnote omitted).)
It is true that Pennsylvania adheres to “the general rule that an agreement which
violates a provision of a statute, or which cannot be performed without violation of such a
provision, is illegal and void.” Am. Ass’n of Meat Processors v. Cas. Reciprocal Exch., 588 A.2d 491,
495 (Pa. 1991) (quoting Dippel v. Brunozzi, 74 A.2d 112, 114-15 (Pa. 1950)). But—as discussed
above—there is no conflict between REA’s bylaws and Pennsylvania law, meaning the bylaws
are a valid contract between Plaintiffs and REA. And because there is no doubt about the
validity of the contract, alternative pleading is inapplicable. Plaintiffs’ unjust-enrichment claim
will therefore be dismissed.
F.

Count VI—Breach of Fiduciary Duty by Agent or Trustee

In Count VI of their complaint, Plaintiffs assert a claim for breach of fiduciary duty.
Plaintiffs contend that REA is their agent or trustee, that REA therefore has a fiduciary duty
toward Plaintiffs, and that REA breached this duty by not returning patronage capital to
Plaintiffs and by not paying interest on that capital. REA offers four arguments in support of
dismissal of this claim. Specifically, REA argues that this claim is barred by both the gist-of-theaction doctrine and the economic-loss rule, and that Plaintiffs have failed to plead facts to
support the inference that REA either owed Plaintiffs a fiduciary duty or that REA breached
that duty. Because the Court holds that this claim is barred by the gist-of-the-action doctrine, it
does not address REA’s other arguments.

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Pennsylvania courts “are cautious about permitting tort recovery on contractual
breaches.” Brown & Brown, Inc. v. Cola, 745 F. Supp. 2d 588, 619 (E.D. Pa. 2010) (citing Glazer v.
Chandler, 200 A.2d 416, 418 (Pa. 1964)). The gist-of-the-action doctrine thus exists to maintain
the conceptual distinction between tort and contract claims; the doctrine “precludes plaintiffs
from re-casting ordinary breach of contract claims into tort claims.” eToll, Inc. v. Elias/Savion
Advert., Inc., 811 A.2d 10, 14 (Pa. Super. Ct. 2002) (citation omitted). Although the existence of a
contractual relationship does not in and of itself bar a tort claim, the gist-of-the-action doctrine
“forecloses a party’s pursuit of a tort action for the mere breach of contractual duties, without
any separate or independent event giving rise to the tort.” Brown, 745 F. Supp. 2d at 588
(internal quotation marks and citation omitted). Similar to the gist-of-the action doctrine, the
economic-loss rule “prohibits plaintiffs from recovering in tort economic losses to which their
entitlement flows only from a contract.” Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d
604, 618 (3d Cir. 1995).
A claim for breach of fiduciary duty is thus barred by the gist-of-the-action doctrine if
the fiduciary duty alleged is grounded in contractual obligations. See eToll, 811 A.2d at 19. But
claims for breach of fiduciary duty and breach of contract can coexist if the fiduciary duty
alleged is based on duties imposed as a matter of social policy, rather than based on duties
imposed by contractual agreement. See Bohler-Uddeholm Am., Inc. v. Ellwood Grp., Inc., 247 F.3d
79, 103-04 (3d Cir. 2001).
It is readily apparent that the breach of fiduciary duties alleged by Plaintiffs concern
matters addressed by contractual provisions. Plaintiffs assert that “REA has violated and
continues to violate its fiduciary duties as an agent or trustee by, inter alia, failing to return the

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Patronage Capital of Plaintiffs and the Class Members and by failing to pay interest to them on
the Patronage Capital that could have been returned but, arbitrarily, was not returned.” (ECF
No. 1-1 at 32.) But as discussed above in connection with Plaintiffs’ breach-of-contract claim,
the return of patronage capital is governed by Article VIII of REA’s bylaws—and is thus a
contractual matter.

Article VIII likewise specifically addresses the payment of interest on

patronage capital; it provides that “[n]o interest or dividends shall be paid or payable by the
Cooperative on any capital furnished by its patrons.” (Id. at 53.) Thus, Plaintiffs’ claim for
breach of fiduciary duty is predicated on contractual duties—and is therefore barred by the gistof-the-action doctrine. See Cunningham Lindsey U.S., Inc. v. Bonnani, No. 13-cv-2528, 2014 WL
1612632, at *7 (M.D. Pa. Apr.22, 2014) (dismissing claim for breach of fiduciary duty because the
claim was “governed entirely” by defendants’ contracts and the plaintiff “failed to allege any
conduct underlying its fiduciary duty . . . claim[ ] that [was] not contemplated by the
defendants’ contracts”).
As they did in support of their unjust-enrichment claim, Plaintiffs argue that they are
permitted to plead in the alternative and that their claim for breach of fiduciary duty is proper
because the bylaws may be contrary to law. The Court held above, however, that the contract is
valid; alternative pleading is therefore inapplicable in the context of Plaintiffs’ claim for breach
of fiduciary duty.
Plaintiffs argue also that their claim for breach of fiduciary duty should be permitted to
proceed because it is nevertheless based on a breach of duties imposed by social policy.
Plaintiffs refer back to the Principles of Cooperative Enterprise and assert that REA’s refusal to
return patronage capital “is a matter of social policy and a betrayal of the cooperative

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principles.” (ECF No. 35 at 31.) Yet Plaintiffs cite no authority—and this Court is aware of
none—for the notion that these guiding principles give rise to obligations of social policy. 14
Plaintiffs also reference provisions of Pennsylvania’s Electric Cooperative Law of 1990—
specifically 15 Pa. Cons. Stat. §§ 7322 and 7330—and appear to argue that these provisions give
rise to obligations of social policy. But, as the Court explained above in its discussion regarding
Plaintiffs’ breach-of-contract claim, § 7330 does not impose the obligations Plaintiffs reads into
them. And § 7322 merely vests the authority to formulate bylaws in cooperatives’ boards of
directors and directs that those bylaws may not be inconsistent with law.

It imposes no

additional obligations of social policy.
In this case, the parties’ obligations are defined by contract.

And Plaintiffs have

identified no cognizable social policy upon which their claim for breach of fiduciary duty is
based.

This claim is therefore barred by the gist-of-the-action doctrine and will thus be

dismissed.
G.

Count V—Declaratory & Injunctive Relief

In their remaining claim, Plaintiffs request extensive declaratory relief. As a threshold
matter, a question exists under what law Plaintiffs’ declaratory-relief claim arises. This case
began in state court and was later removed by REA to this Court. Thus, although Plaintiffs do
not cite it, they presumably relied on Pennsylvania’s Declaratory Judgment Act, 75 Pa. Cons.
Stat. §§ 7531-41, for their declaratory-judgment claim. In adjudicating state-law claims, “federal
courts are to apply state substantive law and federal procedural law.” Hanna v. Plumer, 380 U.S.
In the context of a claim for breach of fiduciary duty, the phrase “obligation of social policy” refers to
“the larger social policies embodied in the law of torts.” See Bash v. Bell Tel. Co., 601 A.2d 825, 830 (Pa.
Super. Ct. 1992).
14

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460, 465 (1965). Claims for declaratory judgment are “procedural in nature and purpose,”
meaning federal law governs such claims. Munich Welding, Inc. v. Great Am. Ins. Co., 415 F.
Supp. 2d 571, 574 (W.D. Pa. 2006) (quoting Federal Kemper Ins. Co. v. Rauscher, 807 F.2d 345, 352
(3d Cir. 1986) for the proposition that “it is settled law that, as a procedural remedy, the federal
rules respecting declaratory judgment apply in diversity cases”)).

The Court therefore

construes Plaintiffs’ declaratory-judgment claim as arising under the federal Declaratory
Judgment Act, 28 U.S.C. §§ 2201-02. See id. (applying, after removal of case to federal court, 28
U.S.C. § 2201 to claim filed in state court under Pennsylvania’s Declaratory Judgment Act);
Hatchigian v. State Farm Ins. Co., No. 13-cv-2880, 2014 WL 176585, at *6 n.4 (E.D. Pa. Jan. 16, 2014)
(same).
In this claim, Plaintiffs request the following relief:
81.
An order is sought declaring Defendant REA’s
obligation to return the Patronage Capital of Plaintiffs and
Class Members and permanently enjoining it from its practice
of not returning Patronage Capital to Plaintiffs and Class
Members.
82.
An order is sought declaring that an implied trust
arises between Defendant REA as a fiduciary and its Current
and Former Members as beneficiaries with regard to
Patronage Capital.
83.
An order is sought declaring that Defendant REA
has breached its fiduciary duties to Plaintiffs and Class
Members with respect to the retirement and return of
Patronage Capital.
84.
An order is sought declaring that Defendant REA
has breached its fiduciary duties to Plaintiffs and the Class
Members to pay interest on Patronage Capital retained by
Defendant REA.
85.
An order is sought declaring that Defendant REA
has breached its fiduciary duties to Plaintiffs and the Class

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Members and abused its discretion by failing to return
Patronage Capital to Plaintiffs and the Class Members.
86.
An order is sought declaring that Defendant REA
has breached its fiduciary duties to Plaintiffs and the Class
Members by Defendant's lack of meaningful effort in locating
those Current and Former Members who have not accepted
checks for retired Patronage Capital in 2011.
87.
An order is sought declaring that fairness and
equity require the Court to appoint an independent Trustee or
Receiver over Plaintiffs and the Class Members’ Patronage
Capital with appropriate powers to ensure Plaintiffs and the
Class Members are repaid or at a minimum properly
compensated.
(ECF No. 1-1 ¶¶ 81-87.) Yet these requests for relief are all derivative of Plaintiffs’ other claims.
Thus, because Plaintiffs’ other claims fail to state actionable grounds for relief, their claim for
declaratory relief will likewise be dismissed. See Acosta v. Target Corp., No. 05-cv-7068, 2013 WL
3456767, at *19 (N.D. Ill. July 3, 2013) (plaintiffs’ claims for an implied trust and declaratory
relief failed as a matter of law because they were derivative of claims upon which defendant
was entitled to summary judgment), aff’d, 745 F.3d 853 (7th Cir. 2014); Roberts v. McCarthy, No.
11-cv-00080, 2011 WL 1363811, at *4 (D. Nev. Apr. 11, 2011) (“Because Defendants have
demonstrated above that Plaintiff’s other claims fail to state cognizable claims for relief, the
derivative claim for declaratory relief also must be dismissed.”).
Plaintiffs in this claim also request permanent injunctive relief. In determining whether
injunctive relief is appropriate, courts consider whether:
(1) the moving party has shown actual success on the merits; (2)
the moving party will be irreparably injured by the denial of
injunctive relief; (3) the granting of the permanent injunction will
result in even greater harm to the defendant; and (4) the
injunction would be in the public interest.

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Coffelt v. Fawkes, 765 F.3d 197, 201 (3d Cir. 2014) (citing Shields v. Zuccarini, 254 F.3d 476, 482 (3d
Cir. 2001)). For the reasons discussed above, Plaintiffs have failed to state any claim upon
which relief can be granted. Their claim for injunctive relief thus falters on the element of
showing success on the merits and will likewise be dismissed.
H.

Plaintiffs’ Motion to Strike

This leaves Plaintiffs’ motion to strike REA’s motion to dismiss, which is contained in
their brief in opposition to REA’s motion to dismiss (ECF No. 35). Plaintiffs’ sole argument in
support of this motion is that REA has refused to produce its articles of incorporation and that
this qualifies as bad-faith behavior. Notably, Plaintiffs cite no law or other authority in support
of this motion.
Earlier in this case, Plaintiffs filed a motion to compel REA to produce its articles of
incorporation. (See ECF No. 27.) REA responded—correctly—that Plaintiffs’ discovery requests
were premature under Rule 26(d)(1) because the parties had not yet conferred as required by
Rule 26(f). Rule 26(d)(1) provides that, unless an exception applies, “[a] party may not seek
discovery from any source before the parties have conferred as required by Rule 26(f).” Thus,
because the parties had not yet conferred pursuant to Rule 26(f), the Court denied Plaintiffs’
motion to compel as premature and scheduled a Rule 16(b) initial case-management conference.
Puzzlingly, Plaintiffs then (jointly with REA) moved to stay the initial-scheduling
conference as well as all discovery and deadlines—including Rule 26 deadlines. Plaintiffs thus
agreed to put on hold their own right to discovery; had they not sought this stay, the parties
would have been required to hold their Rule 26(f) conference and Plaintiffs would have been
entitled to engage in discovery and would likely have been entitled to discover REA’s articles of

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incorporation.

Yet notwithstanding their own request to stay discovery, Plaintiffs now

complain that REA will not produce a document it is not currently required to produce and
request that the Court strike REA’s motion to dismiss on that basis. The Court declines to do so.
REA has no obligation to produce its articles of incorporation and Plaintiffs have stated no legal
authority for their motion to strike. Moreover, Plaintiffs’ predicament is one of their own
making. Plaintiffs’ motion to strike will thus be denied.
I.

Leave to Amend

As a final matter, Plaintiffs have requested leave to amend their complaint if the Court
grants REA’s motion to dismiss, which it will. 15 Generally, courts should give a plaintiff the
opportunity to amend his complaint unless amendment would be inequitable or futile. Phillips,
515 F.3d at 236 (citation omitted). Amendment is futile “if the amended complaint would not
survive a motion to dismiss for failure to state a claim upon which relief could be granted.”
Alvin v. Suzuki, 227 F. 3d 107, 121 (3d Cir. 2000); see also Centifanti v. Nix, 865 F. 2d 1422, 1431 (3d
Cir. 1989) (district court may “properly deny leave to amend where the amendment would not
withstand a motion to dismiss.”)
For the most part the Court discerns no way in which Plaintiffs could plead viable
versions of the claims they asserted in their complaint. Plaintiffs’ claims for breach of fiduciary
duty and unjust enrichment appear irreparable; these claims are firmly based on matters
addressed by contract and no conceivable amendments get Plaintiffs past that hurdle. As for
Plaintiffs’ claim for breach of covenant of good faith and fair dealing, the Court has explained
The Court notes that the Third Circuit has held that such cursory requests—made at the conclusion of a
brief in opposition to a motion to dismiss—fall short of properly raising a motion for leave to amend.
Ramsgate Court Townhome Ass’n v. W. Chester Borough, 313 F.3d 157, 161 (3d Cir. 2002). The Court will
nevertheless exercise its discretion and address Plaintiffs’ request.
15

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that this claim is subsumed in any breach-of-contract claim. Leave to amend those three claims
is thus denied because amendment would be futile.
Plaintiffs’ claim under the UTPCPL falters primarily on the element of justifiable
reliance, but it is conceivable that they could allege that they took some sort of detrimental
activity based on the October 2011 Penn Lines issue. The Court will therefore allow them to
amend their UTPCPL claim.
Whether Plaintiffs should be permitted to amend their breach-of-contract claim is less
straightforward. As explained, Plaintiffs have no cognizable breach-of-contract claim on the
basis of REA’s bylaws or Pennsylvania statutory law. But, although unlikely, it is possible that
REA’s articles of incorporation—which are allegedly also part of the contract between Plaintiffs
and REA—contain a basis for Plaintiffs’ breach-of-contract claim. And as noted in footnote 10
above, Plaintiffs can obtain those articles from the Pennsylvania Department of State. The
Court will thus grant Plaintiffs leave to amend their breach-of-contract claim.
IV.

Conclusion
REA’s motion to dismiss (ECF No. 10) will be granted and Plaintiffs’ motion to strike

(ECF No. 35) will be denied. Plaintiffs will not be allowed to amend their claims for breach of
fiduciary duty, unjust enrichment, and breach of the covenant of good faith and fair dealing.
Plaintiffs will, however, be allowed to amend their claim under the UTPCPL and their breachof-contract claim.
A corresponding order follows.

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IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
LEONARD CESSNA, on behalf of himself
and all others similarly situated, and
GEORGE WORK, on behalf of himself and
all others similarly situated,

)
)
)
)

Case No. 3:16-cv-42
JUDGE KIM R. GIBSON

)

Plaintiffs,

)
)

v.

)
)

REA ENERGY COOPERATIVE, INC.,

)
)

Defendant.

)
ORDER

NOW, this 27th day of June 2017, upon consideration of REA's motion to dismiss (ECF
No. 10) and Plaintiffs' motion to strike (ECF No. 35), and for the reasons set forth in the
memorandum opinion accompanying this order, it is HEREBY ORDERED as follows:
1.

REA's motion to dismiss is GRANTED.

2. Plaintiffs' motion to strike (ECF No. 35) is DENIED.
3. Plaintiffs are granted leave to amend their complaint with respect to their claim
under Pennsylvania's Unfair Trade Practices and Consumer Protection Law and
their breach-of-contract claim. Should they choose to do so, Plaintiffs shall file
their amended complaint on or before Iuly 12, 2017.
4. If Plaintiffs opt not to amend by that date, the Clerk shall mark this matter
closed.
BY THE COURT:

KIM R. GIBSON
UNITED STATES DISTRICT JUDGE