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HANAHAN v. LUCASSEN

May 21, 1991

THOMAS HANAHAN, et al., Plaintiffs,
v.
SIGURD LUCASSEN, et al., Defendants. K. MICHAEL MILLER, Plaintiff, v. PATRICK J. CAMPBELL, et al.


Stanley Sporkin, United States District Judge.


The opinion of the court was delivered by: SPORKIN

STANLEY SPORKIN, UNITED STATES DISTRICT JUDGE

 The above-captioned actions are brought by plaintiffs Hanahan, Shoehigh and Miller, members of the United Brotherhood of Carpenters and Joiners (UBC) as derivative suits against various officers of the union. *fn1" Both suits are brought under 29 U.S.C. § 501(b), which authorizes members of a union, after presenting a formal request to sue to the union or its board, to bring a derivative suit against any "officer, agent . . . or representative" of the union who is alleged to have violated his or her fiduciary duties to the union. Plaintiffs in these suits allege that union investments were made negligently and without proper authorization by Mr. Campbell, the former president of UBC; Mr. Lucassen, the current president; Mr. King, the former controller; Mr. Wrigley, the current controller; Mr. McGowan, the former general counsel; and Ms. Krieger, the current general counsel.

 Plaintiffs originally brought these actions separately, Hanahan and Shoehigh filing in Illinois, and Miller filing in Michigan. Under § 501(b), union members are authorized to bring a derivative suit only "upon leave of the court obtained upon verified application and for good cause shown." This showing may be made in an ex parte proceeding. In both the Hanahan and Miller actions, the courts found good cause and permitted the plaintiffs to proceed with the suits. Pursuant to defendants' motion, however, both courts transferred the actions to the United States District Court for the District of Columbia, since all the defendants except one reside in or around Washington, D.C., and any witnesses will most likely be from this area. Because these cases concern identical issues and defendants, and as they are both before me, they will be consolidated for all purposes.

 On May 10, 1991, this Court heard oral argument on two motions. Defendants have moved to dismiss, asking this Court to reconsider the prior ex parte orders granting plaintiffs leave to bring these actions. In addition, plaintiffs have moved for a preliminary injunction prohibiting the UBC from reimbursing any of defendants' attorneys' fees at this time. Each motion is discussed in turn, below.

 Motion to Dismiss :

 I find that plaintiffs have shown good cause to bring this suit. Plaintiffs allege, and defendants do not dispute, that under Presidents Campbell and Lucassen, the UBC shifted over $ 100 million dollars from blue chip investments to risky real estate investments which ultimately resulted in major losses for the union. According to plaintiffs, these investments were not only negligent, but were made without proper authorization by the UBC General Executive Board. Defendants seem to concede that the investments were not expressly authorized by the Board, although they dispute the significance of this fact, and argue for constructive authorization.

 It is not for the Court, at this time, to investigate the full extent of these allegations, or to discern the facts. The § 501(b) "good cause" requirement operates as a gate-keeping mechanism. This suggests a low level of judicial scrutiny at this point. This Court should not rule that there is no "good cause" simply because the defendants may be able to establish sound defenses to plaintiffs' complaints. This would require that the court consider the various legal questions and decide material facts of the case at this preliminary stage. Where questions of fact or complex legal issues exist, the case should not be dismissed at the "good cause" stage. Loretangeli v. Critelli, 853 F.2d 186, 193 (3rd Cir. 1988). I find, as did the district court judges in Illinois and Michigan, that the plaintiffs have presented a colorable claim. Therefore, they will be permitted to proceed with their claims.

 Plaintiffs' complaints are fundamentally flawed in one respect, however. All plaintiffs failed to present a request to the UBC to sue McGowan and Krieger, the union attorneys. Section 501(b) specifically requires that union members present a demand to sue and be refused before leave to bring a derivative suit may be granted. Because plaintiffs failed to comply with a condition precedent to suit, there is a technical defect in the complaints as to these two defendants which prohibits their being named in the suits at this time. Id., at 192. McGowan and Krieger will be dismissed as defendants, but plaintiffs will have thirty days in which to present the demand to sue to the UBC and then, in the event that UBC refuses to bring its own action against said defendants, decide whether it is appropriate to move this Court to add McGowan and Krieger as additional defendants.

 Preliminary Injunction :

 Plaintiffs in the Hanahan case obtained a temporary restraining order prohibiting the UBC from paying attorneys' fees for defendants Lucassen, Wrigley, McGowan and Krieger until after the case was transferred, and in the Miller action, defendants voluntarily agreed to defer any attorneys' payments. *fn2" It is for this Court to decide, now, whether the defendants' attorneys' fees may be reimbursed from UBC funds. The issue before this Court is limited to those fees related to the motion to transfer which was successfully argued and won by defendants. *fn3" Defense counsel agrees that he has no present intent to seek reimbursement for any additional fees until completion of this litigation. Plaintiffs argue that the UBC should be precluded from paying any counsel fees during the pendency of this action because defendants have been accused of wrongdoing as UBC representatives. Only upon defendants' exoneration, plaintiffs argue, can the union pay attorneys' fees.

 The general rule is that union funds should not be used to pay attorneys' fees for the defense of officers charged with violations of their fiduciary duties. The court in Milone v. English, 113 U.S. App. D.C. 207, 306 F.2d 814, 817 (D.C. Cir. 1962) propounded the basic precept:

 
As a general proposition, . . . 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.

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