December 1, 2021 – Native American members of the Blackfeet Tribe have filed a class action lawsuit, on behalf of themselves and all others situated, against 3 Rivers Telephone Cooperative, Inc. to recover capital credits that allegedly belong to the plaintiffs and the class.[1]

The lawsuit concerns 3 Rivers’ sale of its Browning Exchange in Montana to Siyeh Communications,[2] a telecommunications utility chartered and owned by Siyeh Corporation, which is wholly owned by the Blackfeet Nation.

In their Class Action Complaint And Demand For Jury Trial, the plaintiffs claim that upon 3 Rivers sale of its Browning Exchange to Siyeh Communications in December 2020, 3 Rivers failed to retire $8.88 million in capital credits belonging to the Browning Exchange members. The plaintiffs allege that 3 Rivers retained the capital credits “even though the Browning Exchange members are no longer members of 3 Rivers by virtue of the sale.” They claim 3 Rivers had the financial capability to retire the capital credit in full at the time. Plaintiffs further allege 3 Rivers “engaged in a practice that disparately impacts Native American members compared to non-native members and has deprived 3 Rivers’ Native American members of the same treatment as their non-Indian counterparts.”[3]

In addition to the recovery of capital credits, the plaintiffs are seeking “non-economic, compensatory, and punitive damages and costs and reasonable attorney’s fees and costs pursuant to Title VI of the Civil Rights Act.”[4]

Cooperatives & Capital Credits

3 Rivers Telephone Cooperative, Inc. is incorporated as a domestic rural cooperative utility in Montana.[5] It is required to operate on a not-for-profit and cooperative basis for the mutual benefit of all its members. The definition of a cooperative from Puget Sound, the foremost case addressing cooperatives under federal tax law, provides further insight into this concept:

“A cooperative is an organization established by individuals to provide themselves with goods and services or to produce and dispose of the products of their labor. The means of production and distribution are those owned in common and the earnings revert to the members, not on the basis of their investment in the enterprise, but in proportion to their patronage or personal participation in it.”[6]

Customers that purchase services from a cooperative are considered member-owners or patrons. When telephone cooperatives were formed, they only provided plain old telephone service, and that was the basis for which individuals became members. Today, these cooperatives also provide broadband, so the services (telecommunications services, information services, or both) for which an individual purchases to become a new member varies among cooperatives. But, in order to ensure that the cooperative will be operated on a not-for-profit basis, the cooperative is obligated to account on a patronage basis to all its patrons, members, and non-members alike, for all amounts received from the furnishing of services in excess of operating costs and expenses.

Each year, a cooperative will allocate a percentage of its revenues earned above operating expenses to each member-owner on a pro-rata basis according to the total amount paid or produced for services. These allocations are known as capital credits (or patronage dividends or margins). Capital credits represent members’ ownership in their cooperative. Every cooperative keeps detailed financial records of the capital credits that are allocated to each member every year, assuming the company turns a profit. For years when a cooperative spends a considerable amount of money on infrastructure expenses – a deployment cycle – there is not a large amount of revenue above operating expenses, leaving little for capital credit allocation.

While capital credits are considered members’ ownership interests in their cooperative, they are not payable on demand or otherwise legally vested rights. A cooperatives’ bylaws are what determines the basic parameters for capital credits. Some cooperatives also will have a detailed policy in addition to bylaws which sets out when and how capital credits will be retired (distributed), whether fully or partially, to patrons. A cooperative’s board of directors has ultimate discretion to approve the retirement of capital credits at any given time. A cooperative’s bylaws or capital credit policy will provide for general retirements and special retirements, as well as the administrative process that will be used.

For example, a policy will state that for a general retirement, the company will determine the percentage of the cooperative’s margins that will be retired in any given year, using, for example, a first-in, first out, oldest open year, hybrid, or other retirement method. First-in, first-out refers to those patrons that have been members of the cooperative the longest amount of time. A hybrid method would contain accounts of long-time and newer members. However, capital credits are almost never retired in full, rather, they are retired over a lengthy period. Companies typically don’t have the financial capacity to do so, which is why a cooperative’s board of directors has ultimate discretion to approve the retirement of capital credits at any given time, after considering the financial impact.

An example of a special retirement is retirement of capital credits upon the death of a member. When this happens, the deceased member’s capital credits will be retired immediately, in full, with a net present value discount, and provided to the next of kin (upon the submission of a death certificate, probate court order, or other sufficient documentation).

To be clear, this is a high-level overview of capital credits and their retirement process. There are many more requirements that cooperatives must follow, and capital credits bylaws and policies contain much more details (such as debt offsets, payments upon dissolution, tax refunds, ineligible categories of allocation, and minimum account requirements, just to name a few).

The Plaintiffs

The plaintiffs are Native American members of the Blackfeet Tribe who are former patrons of 3 Rivers that subscribed to services within 3 Rivers’ Browning Exchange. They estimate that “the total membership of 3 Rivers’ Browning Exchange is approximately 2,000, most of whom are Native American.”[7] The total amount of all of 3 Rivers’ members is estimated to be 15,000.[8]

The plaintiffs allege that when 3 Rivers sold the Browning Exchange, “3 Rivers failed to retire the capital credits belonging to the members.” They estimate that the amount of capital credits that 3 Rivers has retained from the former Browning Exchange members is approximately $8.88 million dollars.

The Sale Of The Browning Exchange

In December 2020, 3 Rivers sold its Browning Exchange to Siyeh Communications (SiyCom), a telecommunications utility chartered and owned by Siyeh Corporation pursuant to the laws of the Blackfeet Tribe. For what it’s worth, negotiations between the two companies began in 2016.

The plaintiffs allege that “[w]hen 3 Rivers sold the Browning Exchange to SiyCom, the Board of 3 Rivers considered including the capital credits belonging to the members of the Browning Exchange in the sale, but ultimately decided not to include such capital credits in the sale because SiyCom could not afford to buy the Browning Exchange if such capital credits were included in the sale.[9]

The plaintiffs, however, further allege that 3 Rivers has decided to retire those capital credits, but over a 25-year period instead of immediately:

Upon the sale of the Browning Exchange to SiyCom, the board of 3 Rivers decided not to retire the capital credits of the former members of the Browning Exchange, but instead to retain the capital credits for the benefit of 3 Rivers and its remaining members and to eventually retire these capital credits over a period of time, believed to be approximately 25 years. The amount of capital credits that 3 Rivers has retained from the former Browning Exchange members is believed to be approximately 8.88 million dollars.[10]

The plaintiffs then claim that 3 Rivers has enough money to retire those capital credits now, instead of later:

Upon information and belief, 3 Rivers has capital reserves in excess of operating costs and expenses in an amount sufficient to retire the capital credits of the former members of the Browning Exchange without impairing the financial condition of 3 Rivers.[11]

This argument – that 3 Rivers failed to retire capital credits despite having the financial capacity to do so – is probably the most common claim in recent lawsuits over capital credits. The other being that the cooperative violated its own capital credits policy or capital credits bylaw provisions.

There is one other interesting related tidbit from the complaint. When 3 Rivers’ nine-member Board of Trustees considered the sale, one of the named plaintiffs in the lawsuit (Harry Barnes) “was the only Native American member of the Board and the only member of the Board representing the interests of the Browning Exchange members.”[12] According to the complaint, he advised the Board that the capital credits allocated to the Browning Exchange members should be retired prior to the sale. Mr. Barnes was later removed from the Board because he was “no longer a bona fide resident of the area served or to be served by the Cooperative.”[13]

As I mentioned earlier, the parties negotiated the sale of the exchange for a few years prior to entering into an agreement, which means the capital credits issue obviously would have been discussed. It would have been an integral part of any consideration of a potential sale price. The final decision by 3 Rivers to not retire the capital credits immediately should not have come as a surprise.

What Should Happen To Capital Credits When A Cooperative Or Part Of A Cooperative Is Sold?

When 3 Rivers and SiyCom entered into the transaction for the sale of the Browning Exchange, the purchase agreement should have contained a provision indicating when and how capital credits allocated to Browning Exchange members would be retired. It should have indicated whether they were to be included in the purchase price or excluded. In fact, as the complaint shows, this is what happed.

Under the first option, the sale price of the exchange probably included the value of the tangible infrastructure, local exchange carrier operations, assumption of outstanding debt attributable to the exchange, and the amount of capital credits owed to the members located in the exchange. Right? For example, it could have been $10 million for what was being sold, plus $8 million in capital credits, making the sale price $18 million. Following consummation of the deal, $8 million from the purchase price would be used to immediately retire the capital credits allocated to the former members located in the exchange in full. This is exactly what happened in 2014 when Tri County Telephone Association, Inc., a Wyoming cooperative, was sold to BHT Holdings, Inc., a private company.[14] Of course, that transaction involved the sale of an entire cooperative, rather than a single exchange. But, the point here is that the capital credits issue should have been addressed. The complaint explains that the 3 Rivers Board considered including the allocated capital credits in the deal, but they decided against it because it would have made the sale price prohibitive to SiyCom.

This brings us to the alternative. The agreement between the parties specifically excluded capital credits from the purchase price paid by the buyer. According to the complaint, this is exactly what happened. The 3 Rivers Board decided to retire the capital credits allocated to the Browning Exchange members over a 25-year period.[15] From the Browning Exchange members’ standpoint, this is not ideal. They would have preferred to receive an immediate payment in full.

The 3 Rivers Board had two options for retiring the capital credits in full. The first was included the amount in the purchase price, but as said previously, this would have killed the deal. The other option would be to use cash on hand. Even if 3 Rivers had that much in its bank account, the Board is required to “determine that the financial condition of the Cooperative will not be impaired” by retiring members’ capital credits in full or in part.[16]

Plaintiffs Claim The Sale Of The Browning Exchange Did Not Comply With The Cooperative’s Bylaws

The plaintiffs claim 3 Rivers did not comply with the requirements of its bylaws when it sold the Browning Exchange. The applicable section of 3 Rivers’ bylaws “provides that 3 Rivers may not sell or otherwise dispose of all or any substantial portion of its property unless such sale or other disposition is authorized by the affirmative vote of not less than two-thirds (2/3) of all members at a duly held meeting of the members.”[17] Plaintiffs claim there was no vote prior to the sale, thus it’s a breach of contract under Montana law.

Other Claims Of Disparate Treatment By 3 Rivers Of Its Members Of The Browning Exchange

The complaint claims 3 Rivers has taken a number of actions that treat Native American members differently from non-Native American members.

First, the plaintiffs claim 3 Rivers received FCC funding “for new broadband construction in unserved areas,” but “3 Rivers did not use any of these funds to upgrade service for members of the Browning Exchange.”[18] They claim “3 Rivers used this funding to upgrade service from copper cable to fiber optic cable for all its other members because ‘copper was good enough’ for the Browning Exchange.”[19] It seems the plaintiffs should also bring this argument to the FCC in terms of non-compliance of use of universal service funds, if there is any truth to it. Nevertheless, the complaint alleges this is a violation of Sections 201(b) and 202 of the Communications Act of 1934.

Second, the plaintiffs claim 3 Rivers received $18 to 20 million in high-cost consumer broadband-only loop (CBOL) support “partly by utilizing the Browning Exchange members in its accounting calculations, even though 3 Rivers ultimately never furnished any CBOL service to the Browning Exchange members.”[20] Basically, the plaintiffs are claiming 3 Rivers is cooking its books. What a wild claim. This allegation is rolled into the plaintiffs’ unjust enrichment claim.

**********

[1] Barnes et al. v. 3 Rivers Telephone Cooperative, Inc., Case No. 4:21-cv-00118, Class Action Complaint And Demand For Jury Trial, United States District Court for the District of Montana (filed Nov. 30, 2021) (Complaint); See also Native American 3 Rivers Communications Members Denied Capital Credits Worth Millions, Class Action Alleges, Corrado Rizzi, www.classaction.org (Dec. 3, 2021), https://www.classaction.org/news/native-american-3-rivers-communications-members-denied-capital-credits-worth-millions-class-action-alleges.

[2] Browning Exchange Update, News, https://3rivers.net/, 3 Rivers Telephone Cooperative, Inc. (Jan. 8, 2021), https://3rivers.net/news/browning-exchange-update.

[3] Complaint at ¶ 4. The Plaintiffs claim 3 Rivers’ actions “violate[] the Federal Communications Act, Title VI of the Civil Rights Act of 1964, and the Montana Consumer Protection Act,” and they “constitute[] a breach of 3 Rivers’ contract with the Browning Exchange members, a breach of 3 Rivers’ fiduciary duty to the Browning Exchange members, a breach of the implied covenant of good faith and fair dealing, and unjust enrichment of 3 Rivers at the expense of the Browning Exchange members.” Complaint at ¶ 5.

[4] Complaint at ¶ 7.

[5] 3 Rivers registered as a cooperative in Montana on July 13, 1953. Cooperative telephone companies are exempt from taxation under the Internal Revenue Code, “if 85 percent or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses.” 26 U.S.C. § 501(c)(12).

[6] Puget Sound Plywood, Inc. v. Commissioner, 44 T.C. 305, 306 (1965), acq. 1966-2 C.B. 6 (1966).

[7] Complaint at ¶ 25.

[8] Complaint at ¶ 24.

[9] Complaint at ¶ 33.

[10] Complaint at ¶ 34.

[11] Complaint at ¶ 35.

[12] Complaint at ¶ 40.

[13] Complaint at ¶ 41.

[14] See 800 TCT Co-Op Members Share In $51M Sale, Greg Ellison, www.codyenterprise.com (Sep. 29, 2014, updated Oct. 1, 2014), https://www.codyenterprise.com/news/local/article_30a4db6a-4825-11e4-b8f9-97cb7e8ccce8.html.

[15] Complaint at ¶ 34.

[16] Complaint at ¶ 28 (citing 3 Rivers Bylaws, Article VIII, Section 2).

[17] Complaint at ¶ 42.

[18] Complaint at ¶ 38.

[19] Id.

[20] Complaint at ¶ 39.