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INTERNATIONAL BHD. OF TEAMSTERS v. HOFFA

UNITED STATES DISTRICT COURT DISTRICT OF COLUMBIA


May 14, 1965

INTERNATIONAL BROTHERHOOD OF TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN AND HELPERS OF AMERICA, etc., Plaintiff,
v.
James R. HOFFA et al., Defendants

The opinion of the court was delivered by: ROBINSON

The pending motions in this case present for resolution issues as to the eligibility of members of a labor organization to maintain a derivative action against its representatives for alleged breaches of fiduciary obligation, and the proper role of the organization and its counsel in the litigation.

This action is brought in the name and for the benefit of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America, an unincorporated labor organization, *fn1" by six individuals, as its trustees ad litem, who claim membership in it through membership in good standing in one of its affiliated local unions. The individual defendants are alleged to be the officers of the International who collectively compose its General Executive Board, and its International Trustees charges with the duty of auditing its financial records and approving proper and duly authorized expenditures of its funds. The corporate defendants are alleged to be fidelity bond insurance companies which have indemnified the International against specified breaches of fiduciary duty by the individual defendants. *fn2"

 The complaint *fn3" charges that the officer defendants, as members of the General Executive Board, have authorized disbursements from its funds in violation of fiduciary obligations imposed upon them by the Labor-Management Reporting and Disclosure Act of 1959 *fn4" and the common law of the District of Columbia. *fn5" It is asserted specifically that these defendants authorized expenditures for the cost of defense of the International's General President in three criminal proceedings brought against him. It is alleged on belief that other funds have been spent for the defense of the General President in other proceedings, and for the defense of other officials of the International and of affiliated local unions as well. *fn6"

 The complaint seeks injunctive relief against further expenditures of this character, an accounting by the individual defendants for the funds so spent, and a judgment in the International's favor against the individual defendants and their sureties for the amount determined to be owed.

 I

 The complaint charges that prior to the commencement of this suit, fourteen members in good standing of a local affiliate, four of whom are trustees ad litem herein, made demand upon, and met refusal by, the International's General Executive Board to take necessary action to prevent funds from being spent for these purposes and to recover funds allegedly already so spent. On its face it appears that the two remaining trustees ad litem did not participate in this effort, and it is nowhere claimed that they made any other pre-litigation demand that the International itself seek remediation or that they were in any wise justified in failing to do so. The International, accordingly, has moved that they be dropped from the case.

 The Act imposes upon 'officers, agents, shop stewards, and other representatives of a labor organization' *fn7" fiduciary obligations inuring to the benefit of both the organization and its collective membership. It is 'in relation to such organization and its members as a group' that their 'positions of trust' are held and the concommitant obligations delineated by the Act are owed. *fn8" And, more specifically, it is these representatives who are commanded to hold the organization's 'money and property solely for the benefit of the organization and its members.' *fn9"

 For a violation of duty, the Act provides, a member may sue, but his standing to do so is conditioned upon satisfaction of stated requirements. 'The labor organization or its governing board or officers,' after breach of obligation is asserted, must 'refuse or fail to sue or recover damages or secure an accounting or other appropriate relief within a reasonable time after being requested to do so by any member of the labor organization' *fn10" and, even then, it is 'such member' who 'may sue.' *fn11" This can hardly be taken as a suggestion that a member who did not make such request is nevertheless authorized to bring the action.

 Despite the danger that in particular applications literalness may tend to stifle true legislative intent, *fn12" it is clear that here the statutory language must be given its natural meaning. The Act was not 'intended by Congress to constitute an invitation to the courts to intervene at will in the internal affairs of unions'; *fn13" rather, there was an underlying 'general congressional policy to allow unions great latitude in resolving their own internal controversies.' *fn14" That policy is best subserved by close adherence to the words Congress chose to use in prescribing the conditions under which judicial resolution of such a controversy might occur. *fn15" Particularly is this so where, as here, a statute which confers a new right as a matter of federal law also utilizes restrictive language in specifying the remedy for its infringement. *fn16" It seems consistent with the general frame as well as the language of the section under investigation *fn17" to construe it, as other courts have done, to mean that when no member makes the stipulated request the statutory action cannot be brought at all, *fn18" and when such a request is made only the members making it can later sue. *fn19" Here two of the trustees ad litem did not join in the prior demand *fn20" upon the General Executive Board, and their failure to do so disables them from maintaining this suit to the extent that it is founded upon the provisions of the Act.

 Nor is standing to sue derived from the consideration that the action seeks also to enforce a common law remedy *fn21" -- one, it seems, not superseded by the Act. *fn22" In an appropriate derivative proceeding, of which the stockholders' derivative suit is the most conspicuous example, *fn23" one secondarily interested in the subject matter is enabled to sue to vindicate a right when the party primarily interested refuses to do so. The litigation, a creature of equity, is permitted because the suitor has no remedy at law to redress the refusal of him who holds the primary right to sue, *fn24" but a previous demand for action, unless adequately excused, is a condition precedent to its maintenance. *fn25" Here, notwithstanding the ease with which satisfaction of such conditions may now be pleaded, *fn26" the complaint not only fails to show that the two questioned trustees ad litem met the requirement of a demand, but discloses affirmatively that they did not participate in the only demand that is alleged. By the most liberal standards these two have failed to demonstrate enough to presently enable them to remain in this action. *fn27"

 The International's motion to drop these parties is procedurally proper *fn28" and its position thereon factually and legally sound. The motion will be granted.

 II

 The International has moved for an order dropping it as the plaintiff and permitting its intervention as a defendant. It tenders an answer which, among other defenses presented, would assert the claim that any expenditures involved in this case were made pursuant to an amendment of its constitution adopted at its 1961 convention and were authorized by its General Executive Board consistently therewith. *fn29"

 It is evident that the International is an indispensible party. *fn30" It, not the trustees ad litem, would reap the benefit of any forthcoming recovery, and its presence is equally necessary to protect the defendants, in that event, from subsequent suit. *fn31" The present parties do not dispute this proposition; the contest, rather, is as to the side of the litigation upon which it should be placed.

 Any effort to automatically align the organization as a party is destined to meet certain abortion. While the Act specifies that the object of the suit must be 'to recover damages or secure an accounting or other appropriate relief for the benefit of the labor organization,' *fn32" it does not expressly require that the organization itself be a party, either plaintiff or defendant. That it does not become the plaintiff simply in consequence of the suit becomes even plainer when reference is made to the provision respecting counsel fees and reimbursement of litigation expenses. It is 'counsel prosecuting the suit at the instance of the member of the labor organization' to whom fees may be awarded, and 'such member' to whom reimbursement 'for any expenses necessarily paid or incurred by him in connection with the litigation' may be made, from any recovery effected in the action. *fn33" More importantly, it is evident that while the suit is 'for the benefit of the labor organization,' *fn34" the statutory remedy is a true derivative proceeding -- the suit of the member who 'may sue.' *fn35" The trustees ad litem are actually the plaintiffs in the action, and it goes without saying that the International need not remain on their side of the case merely because by the complaint they undertook to place it there.

 Nor is it helpful to endeavor rule-of-thumb alignment as a matter of common law technique. In stockholders' derivative suits the corporation is sometimes treated as a plaintiff, *fn36" but perhaps more frequently as a nominal or active defendant. *fn37" Sometimes it has assisted the plaintiff, *fn38" but at other times the defendant. *fn39" No single criterion appears capable alone of concretizing its true role.

 The trustees ad litem base their opposition to the International's motion upon the claim that to grant it would unbalance the contest. Reliance is placed on holdings in stockholders' derivative suits that the corporation must remain impartial to management defendants charged with personal wrongdoing in their relation to it. *fn40" Certainly both reason and policy lend support to the application of this principle where the corporation has no discernible interest in the action save to assist the parties impugned. *fn41" But it is equally clear that if the corporation's own interests are drawn into the controversy, it may aggressively defend them. Such is the situation where the suit seeks the appointment of a corporate receiver, *fn42" or to set aside a corporate reorganization, *fn43" or to enjoin the performance of corporate contracts, *fn44" or attacks a settlement of corporate litigation. *fn45" No determination is safe without ascertaining the legitimate involvement, and accordingly the proper role, the beneficiary of the litigation should be permitted. *fn46"

 The case has not yet reached the stage at which the International's defense can be heard on the merits. The present question, consequently, is not whether it should prevail on tis claim but whether it may independently advocate its position. It would appear that, as a general proposition, a labor organization should be kept in a neutral role when it can demonstrate no interest in the litigation beyond a shielding of officials whose activities are under attack; it is clear, too, that even when permitted an adversary role, it should be limited to defenses designed to safeguard the institutional issues at stake. *fn47" Certainly those who for good cause bring and in good faith bear the brunt of the fight should be protected against harassment and oppression through the assertion of what are merely the defenses of the individual parties. At the same time, the vital concerns of the organization in the litigation must be recognized and given their just due.

 The International, as a labor organization, has an interest in formulating its own policies, making its own decisions, and conducting its own affairs, which can be disregarded only when in a particular instance it exceeds legal limits. *fn48" By its constitution its convention is its 'supreme governing authority' with 'plenary power to regulate and direct' its 'policies, affairs, and organization.' *fn49" Indisputably, at this point at least, the constitutional amendment, which the International would defend was unanimously adopted in 1961 at a convention of delegates elected by its membership, and already the claims asserted against the individual defendants in this case challenge the legal efficacy of that amendment.

 The International's interest is broader than the determination of that issue in the litigation as it now stands. *fn50" On one side are the trustees ad litem -- the real plaintiffs -- who are but a tiny fraction of the organization's membership; *fn51" on the other side are but a few of its executives and their sureties who are now before the Court. *fn52" It cannot be said with any real degree of assurance that either side can adequately represent the interest of the nearly two million rank and file members in the convention activity, or is equipped to voice their position on the issue. That the present individual defendants have already pointed to the amendment in their answers is not enough to preclude the International. It is in position to undertake demonstration of whatever considerations it may be felt would protect the amendment from successful assault, and should be allowed to do so. *fn53"

 To admit the International as a party to defend independently the constitutional amendment is not to permit it to shield the individual defendants in any wrongdoing of which they are accused. What in essence the International would be at liberty to defend is simply the action of its members through their delegates assembled in convention. It has a legitimate interest, in an institutional sense, not only in having a judicial determination as to the validity of this action but also in the opportunity to be heard before the issue is resolved. This opportunity will be afforded whenever the International is prepared to utilize it in a proper manner.

 III

 The attorney who signed the International's proposed answer in intervention and who would serve as its counsel, *fn54" however, has already entered his appearance and filed an answer for the International's General Secretary-Treasurer, a member of its General Executive Board and an individual defendant herein. His answer, like the International's admits, but claims justification for, past expenditure of International funds in the defense of certain International officers accused of criminal offenses. It further admits that as a member of the General Executive Board he authorized such expenditures. The trustees ad litem have moved for an order disqualifying his attorney from acting as counsel for the International, and striking its answer in intervention tendered by him, on the ground that such representation would involve a disabling conflict of interests.

 As a matter of general common law in this jurisdiction, the 'funds of a union are not available to defend officers charged with wrongdoing which, if the charges were true, would be seriously detrimental to the union and its membership,' *fn55" and the same broad principle flows from the Act. *fn56" Simultaneous representation of the organization and an individual defendant charged with unauthorized disbursement of its funds would not only to that extent provide assistance of a forbidden type but would produce other detrimental consequences as well. *fn57" In Milone v. English, *fn58" where, unlike here, International officials were charged with fraud, and it was sought to require defendant officers to repay to the International the amount of its expenditures in defense of the suit, which included defense also of the officers, and to enjoin representation of the International and officer defendants by the same counsel, it was stated:

 'The treasury of a union is not at the disposal of its officers to bear the costs of their defense against charges of fraudulently depriving the members of their rights as members. It is clear the complaint in this case charged individual officer defendants with conduct which was seriously detrimental to the interests of the International and to the rights of its members. And in deciding whether or not union funds may be used to defend such a suit the final outcome of the charges is not determinative; for if the charges have substance a sound resolution may be prevented by the very fact of dual representation during the process leading to a decision with respect to the charges. Different counsel would be required in this process. In other words, counsel who are chosen by and represent officers charged with the misconduct, and who also represent the union, are not able to guide the litigation in the best interest of the union because of the conflict in counsel's loyalties. In such a situation it would be incumbent upon counsel not to represent both the union and the officers.' *fn59"

 This Court has similarly forbidden the representation by organization counsel of defendant officers charged with delinquencies in their capacity as such. *fn60" Again analogizing the stockholders' derivative action, Murphy v. Washington American League Base Ball Club *fn61" established for this circuit the proposition that the corporation and an individual defendant cannot be represented by the same counsel, a conclusion reached elsewhere as well. *fn62" Where, as here, union officials are charged with breach of fiduciary duty, the organization is entitled to an evaluation and representation of its institutional interests by independent counsel, unencumbered by potentially conflicting obligations to any defendant officer.

 The fact, pointed to by the International, that in Milone the charges were of fraudulent diversion whereas here they are not, does not remove this case from the mainstream of judicial opinion. As was stated in Murphy,

 'True, the complaint in the instant case charges 'misconduct' and 'improper and wrongful acts,' rather than fraud or criminality. But we think the principle of the Milone decision may be found to apply here, requiring that the corporation and the individual defendants be separately represented.' *fn63"

 And, as Milone admonishes, 'if the charges have substance a sound resolution may be prevented by the very fact of dual representation during the process leading to a decision with respect to the charges.' *fn64"

 Nor is the International's contention that the similarity of the defenses offered by the organization and the individual defendants eliminates possible conflict of interest persuasive to any greater degree. Potential, no less than actual, conflict disqualifies counsel from serving in a double capacity, and the potentiality of conflict is clearly present here. Counsel representing an individual defendant must not only bend every effort to demonstrate that he did not violate his fiduciary obligations but must also assert any and all legitimate claims that, notwithstanding any violation adjudged, the organization is barred from attaching responsibility to him. But if -- despite the constitutional amendment and other defensive events -- breach of duty be found, counsel representing the International will be equally bound to seek from him restoration of the funds expended. *fn65" In that event the interests of the International and the officer would become seriously adverse, and the responsibilities of counsel irreconciliably conflicting, and, however forthright and objective counsel serving both may endeavor to be, the duality of the role would be untenable. *fn66"

 A motion to disqualify counsel is the appropriate remedy for dual representation and the onset of the litigation the proper time for its presentation. *fn67" The motion of the trustees ad litem for disqualification will be granted and the International's proposed answer in intervention rejected. *fn68" The International's motion that it be dropped as a plaintiff and permitted to intervene as a defendant will be denied without prejudice to renewal by independent counsel appearing in its behalf. *fn69"

 Counsel will present an appropriate order effectuating the Court's action consistently with this opinion.


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