Co-op discusses suit
The Socorro Electric Cooperative held a special meeting on Tuesday evening at a judge’s request in order to facilitate open discussion regarding a pending cross-claim filed against the co-op on behalf of its members.
Judge Albert Mitchell, Jr., who represents the 10th Judicial District, signed a court order at the parties’ request that the two sides meet to discuss the parameters of the suit in “a productive, professional atmosphere.”
Originally, in June 2010, Socorro Electric filed a suit against every one of its approximately 10,000 member-owners in an effort to block bylaws, newly adopted at the time, which would have required the co-op to operate with increased levels of transparency and abide by Open Meetings Act guidelines. The cross-claim in question was filed in response to that suit in August 2010, charging the co-op was in breach of its fiduciary duties. co-op Trustee Charlie Wagner had originally been the sole plaintiff listed in the suit, but Quemado resident Carol Auffrey and Socorro’s Herbert Myers have since replaced Wagner as plaintiffs.
The meeting took place in a “limited session” of sorts, but the court document allowed the proceedings to be broadcast via electronic audio to members outside of the co-op building.
Attorney for the plaintiffs, William Ikard of Ikard Wynne LLP out of Austin, Texas, referred to the meeting as “procedural,” and said it was intended to outline for the defense certain issues or complaints that could conceivably be addressed in a possible eventual court case.
Other present legal council included Darren Foster, representing the co-op, Kimmie Selinger, also of Ikard Wynne LLP, and Socorro attorney Lee Deschamps, also representing the plaintiffs.
Foster began the meeting by pointing out that Wagner was sitting as a complainant and not as an SEC trustee, and that his statements should not be imputed as a board member.
Ikard then reiterated the history of the entire legal battle, saying the original June 2010 filing had been partially resolved to disposition by virtue of the court having determined that the resolutions voted for by members regarding co-op transparency were lawful, and should thus be in affect.
The attorneys then, in an attempt to try and streamline the case, removed Wagner, as his status as both a plaintiff and a trustee had become conflicting, and amended the complaint to include Auffrey and Myers. Mitchell decided at the last full hearing that he would not make them, as plaintiffs, go in and file a new lawsuit and dismiss the original suit brought as a cross action by Wagner. He thought it would be a waste of judicial resources and not economically responsible, according to Ikard.
According to Ikard, Mitchell had basically said they were going to “sort of start them over again,” and the complaint was amended.
One of the requirements of not having to re-file the claim was to comply with statute 62-15-9 of the New Mexico Rural Elective Cooperative Act, Subsection H. The statute requires the aggrieved party with a complaint against a trustee or the co-op itself must go to the board, submit their complaints and give the Co-op opportunity to hear the complaint. The individual or board can presumably make a decision as to whether or not it was well-taken. If it was well-taken, they are granted the chance to go about the business of correcting the complaint. If the complaint isn’t corrected, the aggrieved party can then file suit, but he or she has to plead in the suit that they have taken that specific step and it has to be verified.
Ikard said that when they began the legal process two years ago, the big items listed in the suit were transparency and democracy in regard to OMA, openness of reviewing books and records of the company, and redistricting. Since that time, the members passed resolutions amending the bylaws that were put into place by Mitchell’s original ruling.
“The good news is three of our biggest complaints have been resolved. It’s possible to do that,” Ikard said.
What’s left are two other main points that haven’t yet been resolved. First, Ikard said the filers of the suit have a serious problem with the way capital patronage retirement is being handled by the Co-op.
Patronage capital is annual revenue received by a cooperative that is above the cost of operations. This capital is retired, or basically refunded back to the members of that co-op. Ikard said that the co-op currently has $16 or $17 million in patronage capital, and in light of the fact that the company currently has “a considerable amount of cash on hand and short term investments that could be liquid,” they didn’t need to have that much capital on hand.
According to a document apparently provided Ikard by Foster, he also claimed the co-op booked $300,000 of patronage capital in 2010, but none was actually ever retired, and 2011 appeared to have bookings, but only $7,506 was provided as retirement.
Ikard said there is no formal retirement policy in place, and that the suit requests at the very least $10 million be retired to members over the next five years at a rate of $2 million per year, through something like cash rebates or credit to a bill.
“This is the members’ money, at least by legal theory,” Ikard said.
“It wouldn’t surprise me in the slightest if there was a court ordered settlement or court judgment ordering the SEC to pay $2 million a year.”
Deschamps restated and further clarified the overall nature of the first listed complaint by stating that the issue wasn’t so much a request for a specific amount of money, but a request that “The co-op realistically examine the capital account and come up with some equitable manner of repaying the capital account to its members when appropriate, based on the guidelines of every other co-op that we’ve looked at, and this co-op isn’t doing that,” he said.
“It’s a specific request that the co-op deal with the capital account the way that it’s supposed to.”
The second issue was in relation to a 2010 forensic audit commissioned by the board.
The suit’s plaintiffs claim the audit gave a limited scope.
“In my view,” Ikard said, “there are some very important ideas that were raised in that report that I would like to see.
“One of the ways in which our claims could be satisfied is if this company (the auditor BKD), that if someone either like them, or they, could update this report and provide us with a little bigger scope, particularly focused on key employees’ and board members’ compensation, reporting reimbursable expenses and accounting for expenses.”
Ikard said the 2010 audit probably wasn’t a very good one and was open for abuse, although no abuse has been found. He requested the new audit include a generalized review of all non-operational expenses of the company.
“It is of great concern to us that we have no idea what the itemized expenses are.”
Another issue with the audit is that IRS Form 990s appeared inconsistent, he said.
According to www.Guidestar.org, Form 990 is an annual reporting return that certain federally tax-exempt organizations must file with the IRS. It provides information on the filing organization’s mission, programs and finances.
In addition to those inconsistent forms, Ikard said the party was “also concerned that the advances for expenses policy versus the reimbursement for expenses policy might trigger the IRS to determine that those advances are ordinary income to the recipient, in which case they would have to pay taxes on as an ordinary business expense.”
That could put the co-op’s status as a tax-free, non-profit company in jeopardy.
Wagner then addressed the meeting’s attendees, saying his “concern is primarily with the democratic principle, especially democratic control by members. In order for that to happen, the bylaws have to be obeyed.”
Wagner said that the board is still not in alignment with OMA or the Inspection of Public Record’s Act, and that the co-op is failing to abide by certain bylaws.
At the conclusion of his statement, Foster attempted to inform the meeting that what Wagner had just said was not involved in the complaint. Ikard responded by saying that he wouldn’t be bound to say that anything Wagner had just said wouldn’t be included in the amended suit.
“I’m not going to sit here and tell anyone what the amended complaint is going to look like.”
He added that the purpose of the meeting was to provide in good faith to the board and attendees, the party’s complaints as in general fashion, and give the co-op an opportunity to discuss them and possibly take action to cure them.
After breaking to retire into executive session to discuss the meeting, no action was taken and Foster made the following announcements.
One, the board given suitable time (30 to 45 days), would redraft Policy 108 concerning the issue of receipts, reimbursements, advances, etc. He also said the co-op would like to price out an audit for this purpose, as BKD had cost the co-op $32,000 originally. BKD had been specifically requested by Wagner, Foster said.
Next, they would explore what steps would be necessary and what procedures they’d have to go through to get RUS, the company’s lender, to agree changing equity parameters, if necessary, in order to address the patronage capital issue. The board wished for exact numbers through an audit by Bollinger firm, a company the Co-op has used for more than 12 years.
In addition, Foster suggested the two parties would together request a stay of 60 days in order to complete these tasks. Ikard had no objections.
The Aug. 22 regular monthly meeting has been rescheduled for Wednesday, Aug. 29.