International Union Pacific Operating Eng. v. Ward, 08-1631.

• Citation: 563 F.3d 276
• Decision Date: 16 April 2009
• Docket Number: No. 08-1631.,08-1631.
• Parties: INTERNATIONAL UNION OF OPERATING ENGINEERS, LOCAL 150, AFL-CIO, Plaintiff-Appellant, v. Joseph P. WARD, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

563 F.3d 276

INTERNATIONAL UNION OF OPERATING ENGINEERS, LOCAL 150, AFL-CIO, Plaintiff-Appellant, v. Joseph P. WARD, Defendant-Appellee.

No. 08-1631.

United States Court of Appeals, Seventh Circuit.

Argued October 27, 2008.

Decided April 16, 2009.

Bryan P. Diemer, Dale D. Pierson (argued), IUOE Local 150 Legal Department, Countryside, IL, for Plaintiff-Appellant.

Eugene G. Callahan, Callahan & Associates, Oak Brook, IL, Thomas D. Decker (argued), Decker & Associates, Chicago, IL, for Defendant-Appellee.

Before KANNE, WILLIAMS, and SYKES, Circuit Judges.

KANNE, Circuit Judge.

In early 2007, the appellant, International Union of Operating Engineers, Local 150, AFL-CIO, filed a two-count complaint against one of its former officers, the appellee, Joseph P. Ward, in the Northern District of Illinois. Count I of the complaint alleged violations of § 501 of the Labor-Management and Reporting Disclosure Act of 1959 (LMRDA), 29 U.S.C. § 501, which establishes fiduciary duties owed by a labor organization's officers to the organization and its members. Following the close of discovery, the district court granted Ward's motion to dismiss the Union's § 501 claim for lack of subject-matter jurisdiction. The district court determined that § 501 did not provide the labor organization, as an entity, with a federal cause of action against its officers for alleged violations of the duties set forth therein. Local 150 appeals this decision. For the reasons that follow, we conclude that § 501 does contain an implied cause of action for a labor organization to sue its officers for breaches of their fiduciary duties. We reverse the decision of the district court and remand for further proceedings.

I. BACKGROUND

The plaintiff, Local 150, is a labor organization that represents approximately 22,000 employees in Illinois, Indiana, and Iowa. Defendant Joseph Ward served as the treasurer of Local 150 from the time the organization elected him to that position in 1986 until his resignation in 2007.

In its complaint, Local 150 accused Ward of purchasing a piece of real estate that Ward knew Local 150 was interested in purchasing for itself. The property in question was an empty parcel located adjacent to Local 150's District 2 offices in Joliet, Illinois. In 1994, the seller of the property contacted Local 150's president, Bill Dugan, who confirmed the Union's interest in purchasing the property. Dugan gave Ward the responsibility of monitoring the situation. Local 150 alleged that soon thereafter Ward told the seller that the Union was no longer interested in purchasing the parcel and falsely informed Dugan that the property had been sold to a third party. In fact, however, the property was not sold until several months later, when an investment group that included Joe Ward as a member purchased it for approximately $75,000. Ward's investment group sold the same property in 2003 for $885,000, netting a handsome profit for its constituents.

In January 2007, Local 150 named Joe Ward as the sole defendant in a two-count complaint filed in the United States District Court for the Northern District of Illinois. Count I of the complaint sought damages for alleged violations of § 501 of the LMRDA, which codifies the fiduciary duties that a labor organization's officers owe to the organization and its membership. Count II alleged similar breaches of fiduciary duties under Illinois state law.

Ward filed a motion to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(1), which the district court granted on February 14, 2008. The district court concluded that § 501 does not contain a private cause of action for labor unions to bring claims under the LMRDA in federal court, rendering the district court without subject-matter jurisdiction to hear the dispute. The court dismissed the Union's federal claim with prejudice. In so doing, the district court, in its discretion, also refused to exercise supplemental jurisdiction over the state law claim, dismissing it without prejudice. Local 150 now appeals the district court's decision that it lacked subject-matter jurisdiction to hear the Union's federal claim.

II. ANALYSIS

We review de novo whether a district court properly dismissed a case for lack of subject-matter jurisdiction. Peters v. Vill. of Clifton, 498 F.3d 727, 729-30 (7th Cir. 2007). We begin our analysis with a brief examination of the contents and history of the LMRDA. We then discuss the limited nature of federal courts' jurisdiction and the general prerequisite to that jurisdiction of a federal cause of action. With that context, we finally turn our attention to the decisive question in this case: whether § 501 of the Act creates a private cause of action for labor organizations to sue in federal court for alleged violations of the duties it establishes. We conclude that it does.

A. The Labor-Management and Reporting Disclosure Act of 1959

In 1959, Congress passed the LMRDA, also known as the Landrum-Griffin Act, Pub.L. No. 86-257, 73 Stat. 519 (codified as amended at 29 U.S.C. § 401 et seq.), in response to growing concerns over corruption, violence, and racketeering within the leadership of labor organizations across the country, see Hood v. Journeymen Barbers, Hairdressers, Cosmetologists & Proprietors Int'l Union, 454 F.2d 1347, 1354 (7th Cir.1972); Phillips v. Osborne, 403 F.2d 826, 828 (9th Cir.1968). A year earlier, a congressional committee known as the Select Committee on Improper Activities in the Labor Management Field released a report, popularly referred to as the McClellan Committee Report, detailing these problems. See S.Rep. No. 85-1417 (1958); see also Phillips, 403 F.2d at 828. This report served as the catalyst that prompted Congress to promulgate the LMRDA. See Hood, 454 F.2d at 1354 ("[Section 501] was a direct and far-reaching response to the mischief exposed and dramatized by the McClellan Committee. That mischief was the misuse of union funds and property by union officials in its every manifestation."). This case focuses on the first two subsections of § 501 of the Act.

Subsection (a) imposes many fiduciary duties on a labor organization's "officers, agents, shop stewards, and other representatives."¹ 29 U.S.C. § 501(a).² Specifically, the Act requires those individuals, all of whom "occupy positions of trust in relation to such organization and its members as a group," to hold and manage the union's money for the sole benefit of the organization, to refrain from self-dealing, and to remain loyal to the organization. Id. The statute makes it clear that these duties inure to the benefit of the labor organization and the people it represents as a body, not to the members as individuals. Id.

The duty of loyalty is at the forefront of this case. The Act states that a covered individual shall "refrain from dealing with [the] organization as an adverse party or in behalf of an adverse party in any matter connected with his duties and from holding or acquiring any pecuniary or personal interest which conflicts with the interests of such organization." Id. If a union officer engages in such conduct, the Act requires him to account to the organization for any resulting profits he received. Id.

If an officer commits violations of the fiduciary duties set forth in subsection (a), subsection (b) creates a federal cause of action for individual union members to sue and "recover damages ... for the benefit of the labor organization." Id. § 501(b) (emphasis added).³ Because these member suits serve to benefit the union, they are derivative, much like shareholder derivative suits brought on behalf of corporations. See Hoffman v. Kramer, 362 F.3d 308, 317 n. 4 (5th Cir. 2004); Chathas v. Local 134 IBEW, 233 F.3d 508, 514 (7th Cir.2000); O'HarFed Appx.a v. Teamsters Union Local No. 856, 151 F.3d 1152, 1161 (9th Cir.1998). As with shareholder derivative suits, the Act permits a union member to file such a suit only if he first takes prescribed steps. See Int'l Union of Elec., Elec., Salaried, Mach. & Furniture Workers v. Statham, 97 F.3d 1416, 1419 (11th Cir.1996) (comparing the prerequisites for claims brought under § 501(b) to those required for shareholder derivative suits). First, the union member must request, and the union must refuse, that the union take appropriate action to censure its own officer. Hoffman, 362 F.3d at 313-14; see also 29 U.S.C. § 501(b). Second, if the union refuses to take action, the union member must then show good cause for the suit and receive the court's permission to bring the action. Hoffman, 362 F.3d at 314; see also 29 U.S.C. § 501(b). This allows the court to assess the member's claim and ensure that the member seeks the type of remedy that would ultimately benefit the union. See Hoffman, 362 F.3d at 319.

The statute, therefore, openly declares that union members may sue in federal court for violations of the duties that it establishes. The Act is silent, however, on whether it creates a similar federal cause of action for unions. As we discuss below, in this context such a cause of action is a prerequisite for a union to proceed in federal court.

B. The Cause of Action Component of Federal Question Jurisdiction

Federal courts are courts of limited jurisdiction. Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994); Newell Operating Co. v. Int'l Union of United Auto., Aerospace & Agric. Implement Workers, 532 F.3d 583, 587 (7th Cir.2008). The circumscribed nature of the federal judiciary's jurisdiction is a function of restrictions placed upon it by both the United States Constitution and federal statutory law, both of which must authorize a federal court to hear a given type of case. See Kokkonen, 511 U.S. at 377, 114 S.Ct. 1673; Bender v. Williamsport Area Sch. Dist., 475 U.S. 534, 541, 106 S.Ct. 1326, 89 L.Ed.2d 501 (1986).

The Constitution permits federal courts to hear only certain claims,...