Cooperative Milk Service, Inc. v. Hepner

Markell, J., delivered the opinion of the Court. This is an appeal from a decree that defendant account to plaintiffs for the difference between the respective amounts paid to plaintiffs for milk shipped by them through defendant between February 1, 1950 and July 15, 1950 and the amounts they would have received if they had been paid the average prices per hundredweight received by all who shipped through defendant for all milk shipped during that period. Defendant, Cooperative Milk Service, Inc., the Cumberland association, is a cooperative association incorporated in 1948 under the Maryland cooperative associations act. Code, Article 23, sections 430-459.

Among its purposes and powers (each stated to be both) are, “To engage in any activity in connection with producing, marketing, selling, preserving, * * * packing, handling, storing or utilization of any agricultural products of its members; * * * or in any one or more of the activities specified in this Article, and to transport the products ¹⁰⁷ of its members, * * and “To distribute to the patrons, members and non-members alike, the proceeds of the business of the Association after payment of all necessary expenses and authorized deductions to the members in proportion to the volume of business transacted by such patrons with the Association.” Defendant entered into a marketing agreement with each of its members and other producers, for a term of two years and until terminated by either party, whereby defendant bought and the producer sold to defendant all milk and milk products produced by the producer, to be delivered at such place or places as defendant might direct. By the agreement defendant was authorized “to establish from time to time, daily, weekly, monthly, or seasonal pools of the agricultural products marketed by it of the same variety, grade and quality, and all producers having such products in a particular pool shall share ratably in the net amount received therefrom”, and it was provided, among other things, that “this agreement is one of a series dependent for its true value upon the adherence of each and all of the contracting parties to each and all of the said agreements, but the cancellation of this agreement or the failure of the Producer to comply herewith shall not affect other similar agreements”, that “the Articles of Incorporation and the By-Laws, now or hereafter in effect, and this agreement constitute the entire agreement between the Association and the Producer” and that defendant might “enter into agreements with other producers differing in terms from those contained herein but consistent with the By-Laws of the Association without invalidating this agreement, provided that the Producer at his request may sign a similar agreement as a substitute for this agreement.” In April, 1948, defendant purchased the Cumberland milk receiving station of the Embassy Dairy (James J. Ward) of Washington, D. C. From May 1, 1948 till June 30, 1949 defendant sold its milk to Embassy Dairy, receiving the “Blend Price”, which is considerably higher ¹⁰⁸ than the “Manufacturers’ Price” paid for milk to be sold to ice cream manufacturers and others. During this time defendant was actively engaged in trying to find another market for its milk because of uncertainty of the situation in Washington. From a survey it had found that of all milk outlets on the eastern seaboard the Washington market paid the highest blended milk price.

Eighty-five per cent of the milk distributed in Washington was distributed by Maryland and Virginia Milk Producers Association, the Washington association. The Washington association was interested in securing a new milk shed in the Cumberland area. Like Washington prices, Washington requirements for qualification of producers are high. During the war, on account of milk shortage, these requirements were relaxed, and temporary Health Department permits were issued to producers, including members of defendant, who could not qualify under the strict Washington requirements.

These requirements relate not only to tests of milk itself, but also to buildings and other conditions of production. New construction or reconstruction to comply with these requirements might be costly. Some of defendant’s members were financially unable to incur such expense or considered that it would not pay to do so. Cancellation of temporary permits loomed ahead in the indefinite, but not remote, future.

In the spring of 1949 defendant negotiated with the Washington association regarding use of the Washington association as an outlet for defendant’s milk. The matter had been brought to a head in April, 1949 when Embassy Dairy notified defendant that on and after April 18th all milk in excess of 3,000 gallons a day would be paid for on the basis of only $2.50 per hundredweight, which was approximately the manufacturers’ price. This reduced the average price for all defendant’s milk, received by each of its members. The Washington association advised defendant that it was not willing to accept milk and pay the blend price for it unless the milk came from shippers who were its own members and ¹⁰⁹ with whom it had a marketing contract, but was interested in securing members in the Cumberland area and would be willing to buy from its own members who might use defendant’s receiving station as a receiving station.

Before June 18, 1949 negotiations between defendant and the Washington association had led to sharp differences of opinion among defendant’s members. In a letter from defendant’s secretary to its stockholders, dated July 15th, it was said, “Your officers have contacted most of the membership and find that a majority of the members desire to market their milk through the Washington Association and these members produce over half the milk of the Association. In view of the fact that the Association does not have any definite contract with any other outlet, it is the opinion of the Board that it would be to the best interest of the producers and the Association that arrangements be affected [sic] whereby members who desire to do so and are eligible may market their milk through the Washington Association. To effect this, the Board of Directors is willing to cancel the marketing contract of all members who wish to market their milk through the Maryland and Virginia Milk Producers Association, Incorporated, upon the express condition that the members so cancelling shall remain members of the Association and agree to use the plant of the Association as a receiving station for their milk and shall give the Association an assignment of part of their account with the Washington Association to cover the cost of [handling?] and shipping their milk. * * * The Association will continue to market milk of any members who do not wish to market their milk through the Washington Association.

As long as the District of Columbia permits milk from this area to enter Washington under a temporary permit, milk of all members of the Association who are not members of the Washington Association will be sold to the Washington Association. It is your Directors’ hope that the Washington Association will continue paying a blended ¹¹⁰ price for this milk as they are at present. When the District of Columbia cancels its temporary permits, the Association will arrange for other outlets of the milk of its members who do not market it in Washington and secure for them the best price obtainable. The Association wishes to emphasize that the plan now being put into effect will not deprive anyone of a market for their milk.

It merely gives all members a chance to market their milk in the Washington area and secure the best price obtainable for their milk. Since the temporary permits for milk from this area will probably remain in effect for several months longer, those members who at the present time are not [eligible] to go into Washington market will have an opportunity to raise their standards and take advantage of this market.” At a meeting of stockholders, in accordance with the statute (Art. 23, sec. 434), at which fifty-two members were present, amendments of the charter and the by-laws were adopted, and also, by a vote of thirty-seven for to fourteen against, a resolution authorizing the directors “to cancel the present marketing agreement of any member of the Association for the purpose of permitting such member to become a member of the Maryland and Virginia Milk Producers Association, Inc.,. and market his milk through such Association, upon the express condition that such member shall enter into a patron’s agreement with this Association whereby the Association will act as a receiving station for his milk, and such member shall assign part of his monthly account with Maryland and Virginia Milk Producers Association, Inc., to cover the cost of operating expenses in connection with such receiving operation, and to provide capital for the Association.” The minutes of the meeting state that the president, among other things, “emphasized that if Mr. Ward, of the Embassy Dairy, was correct in his statement that the temporary permits for Washington would not be removed for three years, the milk of every member of the Association would be marketed in Washington as long as the temporary ¹¹¹ permit was available, and that those members of this Association who were non-members of the Washington Association, would receive the blended price for their milk, and this blended price was higher than any other price obtainable in the area. He went on to point out that if the temporary permits were revoked, then the Association would market the milk of members who were not members of the Washington Association in accordance with their contracts, but could not handle this milk through the local station. If they had enough milk to warrant leasing or building an additional receiving station, they would consider doing so.” [Italics supplied.] The charter amendment adopted was the insertion, in a provision denying rights or vote to a stockholder who “has not for a period of twelve months marketed his agricultural products through the association”, of the words “handled, processed or shipped” after “marketed”.

Of the by-law amendments one was the same as the charter amendment, one changed a mention of “marketing business” to “marketing or other business”, one declared that the directors shall have power to authorize agreements of the association “with its patrons for the marketing of their milk, for the handling, cooling and shipping of their milk and for any other purpose permitted by the charter and by-laws”, and one declared that “the association may simultaneously engage in any of the activities set forth” in the charter. Defendant’s members who became members of the Washington association each executed with defendant (1) a “memorandum of agreement” by which defendant cancelled the member’s previous marketing agreement and he agreed to designate and use defendant’s Cumberland plant as a receiving station for his milk, to assign to defendant part of his monthly account with the Washington association, and to sign a patron’s agreement, (2) a patron’s agreement by which defendant agreed “to receive, cool and store” all milk delivered to its plant in Cumberland by him and “to transport same and deliver it” to Washington or elsewhere as directed by the ¹¹² Washington association, and he agreed to assign to defendant such amount from his monthly account with the Washington association as might be necessary to cover (a) costs of handling and transporting, (b) expenses, including interest and dividends on capital, (c) capital revolving fund, not to exceed fifteen cents per hundredweight of his milk handled and (d) capital reserve, not to exceed five cents per hundredweight, and (3) the assignment from his account with the Washington association. They each also executed a marketing agreement with the Washington association. The members of defendant who were also members of the Washington association constituted a majority of the members of defendant but a small minority of the members of the Washington association.

Defendant continued to collect the milk of its members who did not become members of the Washington association and sold it to the Washington association. This milk was commingled with the milk of members of the Washington association and was transported in defendant’s tank trucks to Washington or other points designated by the Washington association. Each month the Washington association sent defendant a check covering the purchase of this milk at the Maryland blend price, and defendant in turn paid these members their pro rata share, less costs, expenses and capital “retains”. The Washington association paid directly to its members the price for their milk, less the assigned deduction paid to defendant.

Only members of the Washington association who had Washington permits received the Washington blend price, which was five cents more than the Maryland blend price. Only members of the Washington association received the “seasonal adjustment payment”. As neither plaintiffs nor defendant make any point as to the seasonal adjustment payments or the difference between the Washington and Maryland blend prices, we need not explain or further mention these payments or this difference. ¹¹³ On January 18, 1950 the Washington association notified defendant that on February 1st the Washington association would discontinue purchasing milk from defendant at the blend price and would pay only the manufacturers’ price.