Council 49, American Federation of State, County and Mun. Employees Union AFL-CIO by Adkins v. Reach

• Decision Date: 04 May 1988
• Docket Number: P,No. 2904,No. 87-7022,A,AFL-CIO,2904,87-7022
• Citation: 843 F.2d 1343
• Parties: 128 L.R.R.M. (BNA) 2303, 107 A.L.R.Fed. 435, 56 USLW 2680, 108 Lab.Cas. P 10,473 COUNCIL 49, AMERICAN FEDERATION OF STATE, COUNTY AND MUNICIPAL EMPLOYEES UNION, by its Administrator, William T. ADKINS; Localmerican Federation of State, County, etc.; Judy England, as a member of Locallaintiffs-Appellees, Cross-Appellants, v. Harold REACH, as the former Executive Director of Council 49; Jimmy Gosa, as the former President of Council 49; Ruth Boshell as the former Treasurer; Larry Trammell as the former Secretary of Council 49; Defendants-Appellants, Cross-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1343

843 F.2d 1343

128 L.R.R.M. (BNA) 2303, 107 A.L.R.Fed.

435, 56 USLW 2680,

108 Lab.Cas. P 10,473

COUNCIL 49, AMERICAN FEDERATION OF STATE, COUNTY AND

MUNICIPAL EMPLOYEES UNION AFL-CIO, by its Administrator,

William T. ADKINS; Local No. 2904, American Federation of

State, County, etc.; Judy England, as a member of Local No.

2904, Plaintiffs-Appellees, Cross-Appellants,

v.

Harold REACH, as the former Executive Director of Council

49; Jimmy Gosa, as the former President of Council 49;

Ruth Boshell as the former Treasurer; Larry Trammell as the

former Secretary of Council 49; Defendants-Appellants,

Cross-Appellees.

No. 87-7022.

United States Court of Appeals, Eleventh Circuit.

May 4, 1988.

John F. Kizer, Jr., Kizer & Bennitt, Jeff Bennitt, Birmingham, Ala., for defendants-appellants, cross-appellees.

George C. Longshore, Birmingham, Ala., for plaintiffs-appellees, cross-appellants.

Appeal from the United States District Court for the Northern District of Alabama.

Before FAY and KRAVITCH, Circuit Judges, and ATKINS ^*, Senior District Judge.

KRAVITCH, Circuit Judge:

Representatives of Council 49 and Local No. 2904, Alabama affiliates of a national labor organization, brought this action under section 501 of the Labor-Management Reporting and Disclosure Act, 29 U.S.C. Sec. 501, which places a fiduciary duty on union officials. The complaint alleged that the defendants, Harold Reach, Ruth Boshell, Jimmy Gosa, and Larry Trammel, former officials of Council 49, had breached their fiduciary duty by mismanaging and misappropriating union funds during their tenure. ¹ After a bench trial, the district court found the defendants liable on some of the allegations of the complaint and awarded the plaintiffs $43,740.55 in damages. We affirm in part, reverse in part, and remand.

I. BACKGROUND

Council 49 is an affiliate of the American Federation of State, County and Municipal Employees, AFL-CIO ("AFSCME") and is composed of representatives of AFSCME local unions in Alabama. An Executive Board, consisting of a President, a Vice President, a Treasurer, a Secretary, and five other Council members, governs the Council. The Board members are elected at the Council's annual convention and each member serves a two year term.

According to the Constitution of Council 49, the Treasurer's duties are to "receive and take charge of all money and property of the Council," to keep accurate records of receipts and disbursements, and to report periodically on the Council's financial condition to the Council and the local unions. In addition, the Treasurer is authorized to "draw and sign checks for such purposes as are required by [the Council's] Constitution or are authorized by the Council Convention or the Executive Board." The President, among other duties, is required to cosign all checks drawn on Council funds. The Secretary's main responsibility is to keep records of Executive Board meetings, including approvals of expenditures. In addition, the Executive Board is charged with appointing an Executive Director, who arbitrates cases, negotiates contracts, and handles grievances for the local unions. The only full-time employee of the Council, the Executive Director receives a salary set by the Board and is reimbursed for expenses incurred while engaged in union business.

In late 1979, the Executive Board of Council 49 appointed Harold Reach to assume the position of Executive Director. Shortly thereafter, in early 1980, Jimmy Gosa was elected President of the Council. In early 1981, Ruth Boshell and Larry Trammel were elected Treasurer and Secretary, respectively. At the time Reach, Boshell, Gosa, and Trammel assumed control of Council 49, it was operating without financial difficulty and its financial records had been meticulously kept. Under the defendants' control, however, the Council rapidly deteriorated into a state of financial disaster. For example, Boshell and Gosa frequently signed blank checks and checks made out to cash, making it impossible to account for large amounts of the Council's funds. Moreover, Boshell, with Gosa's approval, often disbursed Council funds to Debbie Reach, Harold Reach's wife, who worked part-time as the office secretary. In April, 1984, for instance, $2105.94 in Council funds was disbursed to Mrs. Reach, who was entitled to a salary of only $100 per month for her secretarial work. Boshell and Gosa also wrote checks on the Council's account to pay Reach's personal bills, such as his power and grocery bills. ² In addition, the Board overpaid Reach by approximately $10,000 over the course of his employment. To make matters worse, many checks were drawn on insufficient funds, adding overdraft charges to the list of Council expenses.

The Council's financial problems, however, were not limited to the defendants' freewheeling use of the Council 49 checkbook. Since early 1981 Boshell had not withheld payroll taxes from Reach's salary, resulting in unpaid taxes, interest, and penalties of $40,740.55 by the time this suit was filed in September, 1985. In addition, in 1979, William Thomason, an attorney, began representing the Council. Although he was never paid in full for his services, Thomason continued to represent the Council and accrue fees that the Council could not afford to pay. In January of 1983, Thomason obtained a default judgment against the Council for $85,000, for services rendered from March, 1979 through October, 1982. Even after obtaining the judgment, Thomason continued to represent the Council. Boshell did not report the default judgment, or the IRS tax liability, on the Council's monthly balance sheets.

By early 1985, AFSMCE International, the parent organization, became aware of Council 49's financial troubles and placed it under administratorship. Leamon Hood, AFSCME International's area director, was appointed administrator. Shortly thereafter, on April 4, 1985, Reach resigned as Executive Director and requested that Hood pick up the Council's files from Reach's home, where they were being stored. The files consisted of cancelled checks, receipts, financial reports, and minutes of Board meetings. Apparently Hood did not immediately respond to this request, and by a letter dated May 10, 1985, Reach informed Hood that he had placed the Council's files "on the side of the nearest public thru-fare to my residence" and that Hood would have to pick them up there if he wanted them. After making a diligent search of the area, however, Hood was unable to find the files, and they have not turned up since. Consequently, the evidence at trial consisted of the few Council records that Reach had not left by the roadside and copies of checks provided by the Council's bank.

After Reach resigned and Council 49 was placed under administratorship, the other defendants were ousted from the Board. A newly reconstructed Council worked out a payment schedule with the IRS that allows the Council to reduce its tax debt by monthly installments of $1,000. Since June, 1985, the Council has met this schedule. Also, as a result of negotiations with Thomason, the Council reduced its debt to him to $15,000.

The district court found that the defendants had breached their fiduciary duty to the Council by failing to pay taxes on Reach's salary and by overpaying Reach. The court held the defendants jointly and severally liable for the $40,740.55 tax debt to the IRS and for $3,000 in overpayments to Reach. The district court, however, rejected the plaintiffs' argument that the defendants breached their fiduciary duty by incurring the debt to Thomason and the bank overdraft charges. The defendants appeal the district court's finding of liability under section 501 and dispute the measure of damages as to the payroll tax issue. The plaintiffs cross-appeal, arguing that incurring the debt to Thomason and the overdraft charges were breaches of fiduciary duty, and that the district court was clearly erroneous in awarding only $3,000 in damages for the overpayment to Reach.

II. LIABILITY UNDER SECTION 501

Section 501(a) of the Labor-Management Reporting and Disclosure Act, 29 U.S.C. Sec. 501, provides that union officers "occupy positions of trust in relation to [the union] and its members as a group." Accordingly, section 501 requires each officer "to hold [the organization's] 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 any resolutions of the governing bodies adopted thereunder...." Section 501 stresses that in carrying out his or her duty, a union officer should take "into account the special problems and functions of a labor organization."

In drafting section 501, Congress did not intend to give courts a license to interfere broadly in internal union affairs. See Brink v. Dalesio, 667 F.2d 420, 424 (4th Cir.1981); Morrissey v. Curran, 650 F.2d 1267, 1272-73 (2d Cir.1981); McNamara v. Johnston, 522 F.2d 1157, 1163 (7th Cir.1975), cert. denied, 425 U.S. 911, 96 S.Ct. 1506, 47 L.Ed.2d 761 (1976). Section 501 is not an invitation for courts to substitute their judgment on how a union should be managed for that of the union officers. Accordingly, where decisions regarding the use of union funds have been authorized in accordance with the union's constitution, by-laws, or other applicable governing provisions, "a court will typically not have cause to review the reasonableness of the [decision]." Ray v. Young, 753 F.2d 386, 390 (5th Cir.1985).

Authorization, however, is not a complete defense to an accusation of breach of fiduciary duty under section 501. Id. at 389; Morrissey, 650 F.2d at 1272. Because section 501 was adopted primarily to address the problem of corruption among union officials, see Ray, 753 F.2d at 389; Morrissey, 650 F.2d at 1272-73; McNamara, 522 F.2d at 1163, it has been "given its strongest reading in [cases] involving a union officer's diversion of union...