Brink v. DaLesio

• Decision Date: 19 August 1980
• Docket Number: Civ. No. Y-78-161.
• Citation: 496 F. Supp. 1350
• Parties: Donald E. BRINK et al. v. Leo DaLESIO et al.
• Court: U.S. District Court — District of Maryland

496 F. Supp. 1350

Donald E. BRINK et al. v. Leo DaLESIO et al.

Civ. No. Y-78-161.

United States District Court, D. Maryland.

August 19, 1980.

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Arthur L. Fox, Washington, D. C., and Paul Alan Levy, Washington, D. C., for plaintiffs.

Ransom J. Davis, Baltimore, Md., and Walter E. Dillon, Washington, D. C., for defendants.

JOSEPH H. YOUNG, District Judge.

This civil action by plaintiffs Donald E. Brink and John Eline on behalf of all members of their union and the various employee benefit trust funds it sponsored, against Leo DaLesio and Alfred Bell and two companies owned wholly by Bell, Fund Administration, Inc. and Alfred Bell, Inc., was heard by the Court in May, 1980. The plaintiffs are members of Local 311 of the Teamsters, which is in turn part of Joint Council 62. The parties have stipulated that both plaintiffs "were participants and beneficiaries of the Teamsters Local 311 Health and Welfare Fund when this suit was filed and became participants and beneficiaries of the Affiliated Health and Welfare Fund upon merger of the Funds." This merger took place after the instant suit was filed. Both plaintiffs are participants in, and beneficiaries of, the Local 311 Pension Fund. Neither plaintiff, however, has been either a participant or a beneficiary of the Allied Pension Fund.

Defendant DaLesio was the Secretary-Treasurer and principal executive officer of Local 311 from 1964 through 1977. From 1975 to 1977, he also served as President and principal executive officer of Joint Council 62. In 1963, DaLesio became a trustee of the Affiliated and Allied Funds, and assumed this position with respect to the Local 311 Pension and Welfare Funds upon their creation in 1967. He remained a trustee for the Funds until late 1977. Defendant Bell and his companies performed consulting, administrative, and insurance brokerage service for the Funds from 1963 to 1978.

Each of the defendants is charged with various breaches of fiduciary duties. The claims fall into three categories. The first set of claims is asserted solely against DaLesio and pertain to his receipt of allegedly excessive compensation and perquisites, and to his alleged breach of fiduciary duties in negotiating a lease of office space for the Local. The second category of allegations concerns transactions in which DaLesio received gratuities from individuals providing services to the Union and to the Funds, allegedly in violation of fiduciary obligations. The third part of the case pertains to the allegedly unreasonable commissions and fees paid to defendant Bell or his companies for his services.

To determine the validity of these claims, it is necessary to evaluate defendants' conduct in light of the prevailing legal standards. The Labor-Management Reporting and Disclosure Act of 1959 (LMRDA), also known as the Landrum-Griffin Act, 29 U.S.C. ? 501 et seq. governs DaLesio's conduct in his capacity as a union officer. Title IV of the Employee Retirement Income Security Act (ERISA) 29 U.S.C. ? 1101 et seq., which took effect January 1, 1975, applies to the conduct of the defendants in their capacities as fiduciaries of the Funds. Other sources of duties are ? 302 of the Taft-Hartley Act, 29 U.S.C. ? 186, and the common law.

DaLesio's Receipt of Allegedly Excessive Compensation and Perquisites.

Before turning to the specific expenditures of Union funds challenged by the plaintiffs, it is useful to review the applicable legal standards. 29 U.S.C. ? 501 provides, in relevant part, that:

tthe officers . . . of a labor organization occupy positions of trust in relation to such organization and its members as a group. It is, therefore, the duty of each such person, taking into account the special problems and functions of a labor organization, to hold its money and property solely for the benefit of the organization and its members and to manage, invest, and expend the same in accordance with its constitution and bylaws and . . . resolutions . . to refrain from dealing with such organization as an adverse party . . . and to account to the organization for any profit received by him in whatever capacity in connection with transactions conducted by him or under his direction on behalf of the organization. A general exculpatory provision in the constitution and bylaws of such a labor organization or a general exculpatory resolution of a governing body purporting to relieve any such person of liability for breach of the duties declared by this section shall be void as against public policy.

The primary target of this legislation was the widespread embezzlement and misuse of union funds by officers. Gabauer v. Woodcock, 594 F.2d 662 (en banc) (8th Cir.1979); McNamara v. Johnston, 522 F.2d 1157 (7th Cir.1975), cert. denied, 425 U.S. 911, 96 S.Ct. 1506, 47 L.Ed.2d 761 (1976), and it has touched off a lively debate concerning the extent to which courts should defer to union officers' judgments concerning the propriety of various types of expenditures. Compare, e. g., Sabolsky v. Budzanoski, 457 F.2d 1245 (3d Cir.), cert. denied, 409 U.S. 853, 93 S.Ct. 65, 34 L.Ed.2d 96 (1972) (strictly scrutinizing union's failure to disband locals with less than ten members) and Farrington v. Benjamin, 468 F.Supp. 343 (E.D.Mich.1979) (closely examining payment of fees to accountants, attorneys and union members as election assistants where such payments represented reasonable compensation but were not properly authorized) with McNamara, supra, 522 F.2d at 1164; Gabauer, supra, 594 F.2d at 668-70 (holding authorized, but illegal political contributions not to be actionable under ? 501); and Kahn v. Hotel Employees' International Union, 469 F.Supp. 14 (N.D.Cal. 1977), aff'd, 597 F.2d 1317 (9th Cir.1979) (disclosure of conflicts of interest only required in cases where membership has a right to vote on challenged decision). In so ruling, the court in Gabauer, supra, 594 F.2d at 670 rejected the argument that "any expenditure unrelated to legitimate bargaining activities violates ? 501." See generally, Comment, Determining Breach of Fiduciary Duty Under the Labor-Management Reporting and Disclosure Act: Gabauer v. Woodcock, 93 Harv.L.Rev. 608, 611 (1980); Leslie, Federal Courts and Union Fiduciaries, 76 Colum.L.Rev. 1314, 1326-28 (1976); Note, The Fiduciary Duty Under Section 501 of the LMRDA, 75 Colum.L. Rev. 1189, 1190-93 (1975); and Clark, The Fiduciary Duties of Union Officials Under Section 501 of the LMRDA, 52 Minn.L.Rev. 437 (1967). However, courts and commentators unanimously have maintained that stricter judicial scrutiny is appropriate when the expenditure confers a personal benefit on the union official, see, e. g., Morrissey v. Curran, 482 F.Supp. 31, 38 (S.D.N.Y.1979); and Puma v. Brandenburg, 324 F.Supp. 536, 544 (S.D.N.Y.1971); or where it confers no benefit on the union, cf. United States v. Ladmer, 429 F.Supp. 1231, 1240 (E.D.N.Y.1977). Leslie, supra, at 1323.

As noted by the court in Morrissey, supra, 482 F.Supp. at 39, "the compensation of union officers falls into the hybrid class of expenditures that involve self-dealing . . but which also produce a union benefit, since no labor organization can function effectively without competent leadership." Therefore, judicial deference to the level of compensation set by the union is appropriate "except where the authorization was procured through fraud, mistake or duress or where the compensation so far exceeds the norm that fraud, mistake or duress can be inferred with some degree of assurance . . .." Id. at 39-40.

A number of factors are relevant to the Court's inquiry concerning the validity of an authorization. First, the authorization must be obtained through the procedures specified in the Union constitution and bylaws. McNamara, supra, 522 F.2d at 1162; Puma, supra, 324 F.Supp. at 543. Second, the proposal must be presented in an understandable manner so that there is some assurance that consent was "knowingly and intelligently given." Brink v. DaLesio, 453 F.Supp. 272 (D.Md.1978); see also Morrissey, supra, 482 F.Supp. at 54. Voting procedures must be adequate to guarantee "the right of a meaningful vote." Sertic v. Carpenters District Council, 423 F.2d 515 (6th Cir.1970). In that case, the Sixth Circuit disapproved a ballot format in which previously defeated proposals were attached as riders to generally popular proposals to ensure their passage in a referendum. Finally, the timing of the authorization is critical. As indicated above, ? 501 prohibits general exculpatory provisions. No problem is presented under this section if the union official obtains advance authorization for an expenditure. Farrington, supra, 468 F.Supp. 343. If the purported authorization is obtained subsequent to the actual expenditure, the Court must determine whether it is a legitimate ratification or an ineffective exculpatory provision.

A number of commentators have addressed themselves to this problem. Leslie, supra, at 1328, posits that "resort to the common law of fiduciary relationships suggests two lines of analysis; that general exculpations are distinguishable from specific exculpations, and that exculpations are distinguishable from ratifications." He further suggests that a clause in the union constitution or bylaws purporting to insulate officers from liability in a class of cases would be a general exculpatory provision, and therefore void. A resolution passed relieving an officer of liability for a particular breach but not approving of the action would be a specific exculpation. Where a resolution both relieves the officer of liability and approves his conduct, the Court should consider it to be a ratification. One rationale for permitting specific exculpations and ratifications is that they occur "after the fiduciary breach has come to light." Also, they may be necessary when the...