Loretangeli v. Critelli
| Decision Date | 01 August 1988 |
| Docket Number | AFL-CI,No. 87-5886,A,87-5886 |
| Citation | 853 F.2d 186 |
| Parties | 128 L.R.R.M. (BNA) 3153, 114 A.L.R.Fed. 835, 109 Lab.Cas. P 10,640 Dino LORETANGELI, Frank Forst, Thomas Stiglic, and Local 194, New Jersey Turnpike Employees' Union, International Federation of Professional and Technical Engineers,ppellants, v. Dominick CRITELLI, Michael T. Waske, Rudolph E. Thomas, Vincent C. Cacchiotti, Ralph J. McElfresh, Des Cupid, Gregory Junemann, John H. Dunne, and Rodney A. Bower. |
| Court | U.S. Court of Appeals — Third Circuit |
David Tykulsker (argued), Ball, Livingston & Tykulsker, Newark, N.J., for appellants.
David S. Barr, Barbara L. Camens (argued), Barr & Peer, Washington, D.C., James R. Zazzali, Kenneth I. Nowak, Zazzali, Zazzali & Kroll, Newark, N.J., for appellees.
Before STAPLETON, GREENBERG, and ROSENN, Circuit Judges.
This appeal arises out of a dispute between the International Federation of Professional and Technical Engineers, AFL-CIO (Federation), and some of its membership over the Federation's disbursement of union funds. The primary question raised is the scope of the "good cause" prerequisite to the institution of federal suits by union members against union officials under the Labor Management Reporting and Disclosure Act (LMRDA or the Act), 29 U.S.C. Sec. 501 (1982).
The plaintiff-appellants, members of Local 194, New Jersey Turnpike Employees' Union, and the Local itself, sought to challenge the payment of rebates of per capita dues to two other union locals made by the parent organization, the Federation. The plaintiffs claimed that the defendants, the nine members of the Executive Council of the Federation, had breached their fiduciary duties under the LMRDA, 29 U.S.C. Sec. 501(b), by making the rebates in violation of the Federation's constitution. The district court dismissed the complaint and denied the plaintiffs' motion for a preliminary injunction, holding that the plaintiffs had failed to show "good cause" for their suit because the defendants' actions were authorized under the Federation's reasonable interpretation of its constitution. We reverse the dismissal of the complaint and remand the case for further consideration of the plaintiffs' application for a preliminary injunction. 1
The Executive Council is specifically "empowered to authorize such expenditures of the funds of the Federation as in its judgment are necessary to carry out and fulfill the purposes and objectives of the Federation." 2 Article X Sec. 1. The Council's apparently broad authority is circumscribed by a general constitutional provision which appears to deny it the power to selectively "grant special financial assistance in the form of rebates, refunds, etc., to any local union." Article XVIII Sec. 2. The proper interpretation of this constitutional provision lies at the heart of the present appeal.
It is undisputed that the Federation has maintained a long-standing practice of granting "special financial assistance" to certain local unions for the purpose of meeting union objectives. The plaintiffs contend, however, that this special financial assistance has only recently taken "the form of rebates." It is also undisputed that in 1984 the Federation began rebating 52% of the per capita dues paid by Local 17 and 18.1 or 22% of the per capita dues paid by Local 195. 3 Rebates provided these locals with a substantial benefit. From 1985 through 1986, the Federation rebated over $60,000 to Local 195 and $170,000 to Local 17, for a total exceeding $234,000. The rebates continue to the present day, although at a reduced rate. The locals receiving rebates are the two largest in the Federation and the chief officer of each is a member of the Executive Council.
The Executive Council rebated a substantial portion of the per capita dues of the locals despite the Federation's serious financial problems. The Federation had a deficit of $78,000 for fiscal year 1986-1987 and it projected a deficit of $137,000 for fiscal years 1987-1989. The Federation preserved its fiscal integrity only through a drastic economic reorganization, which included the layoff of three of the Federation's eleven staff members. The effect of these terminations is disputed: the plaintiffs contend that the layoffs have crippled the Federation's ability to serve its locals and the defendants claim that there has been no change in effectiveness.
The plaintiffs made every effort to halt the rebate payments through internal union mechanisms. Plaintiff Forst presented a resolution to the 1986 convention calling for the gradual termination of all financial assistance programs over a five-year period, but the resolution was defeated. 4 The Executive Council also rejected the plaintiffs' demand that it terminate the rebate payments. After these attempts to use internal union procedures failed, the plaintiffs presented an ex parte application in the United States District Court for the District of New Jersey seeking permission to bring suit under 29 U.S.C. Sec. 501. They asserted that the members of the Council had breached their fiduciary duties by authorizing the unconstitutional rebates.
The court found that the plaintiffs had met the good cause prerequisite to suit and permitted the filing of their complaint. The defendants then challenged this ex parte determination, a procedure recognized in Dinko v. Wall, 531 F.2d 68, 73-74 (2d Cir.1976), contending that the plaintiffs had not demonstrated "good cause" because the defendants' actions were authorized under the union's interpretation of the constitution. After briefing, oral argument, and the submission of affidavits, another judge assigned to the action held that the plaintiffs had failed to show good cause. The judge vacated the leave to sue, dismissed the plaintiffs' complaint with prejudice, and denied their motion for a preliminary injunction.
In enacting the LMRDA, Congress found that the free flow of commerce depended on adherence by labor organizations and employers "to the highest standards of responsibility and ethical conduct in administering the affairs of their organizations...." 29 U.S.C. Sec. 401(a). Congress noted that its investigations of labor organizations had revealed breaches of these standards, and it therefore further found "that the enactment of this chapter is necessary to eliminate or prevent improper practices on the part of labor organizations ... and their officers and representatives...." 29 U.S.C. Sec. 401(b) and (c).
The LMRDA makes union officers fiduciaries who have a duty to expend union funds "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...." 29 U.S.C. Sec. 501(a). Members of a labor organization may sue labor officials for violations of their fiduciary duties in federal district court. 29 U.S.C. Sec. 501(b). The Act places certain restrictions on the right to sue, however, one of which is that a union member may not file suit "except upon leave of the court obtained upon verified application and for good cause shown, which application may be made ex parte." Id. (emphasis added).
Section 501 thus reflects two different policy concerns. In subdivision (a), Congress intended to protect rank and file union members by imposing a duty on union officials to act as fiduciaries with respect to union funds and property. 29 U.S.C. Sec. 501(a). Yet, concerned with the potential for harassing and vexatious suits brought without merit or good faith against union officials, and also with the specter of unwarranted judicial intrusion into the processes of union democracy, Congress designed section 502(b)'s good cause requirement as a prerequisite to suit. Courts have struggled to give a content to the "good cause" requirement that will effectuate both policies.
The district court, relying on a test for "good cause" developed by the Court of Appeals in Dinko v. Wall, 531 F.2d 68 (2d Cir.1976), examined the plaintiffs' probability of success on the merits of their claims and denied leave to file suit. The plaintiffs contend that the district court erred in adopting this analysis. 5 Review of this question of law is plenary. D.P. Enterprises v. Bucks County Community College, 725 F.2d 943, 944 (3d Cir.1984).
The Ninth Circuit Court of Appeals undertook the first extensive analysis of the good cause requirement in Horner v. Ferron, 362 F.2d 224, 229 (9th Cir.), cert. denied, 385 U.S. 958, 87 S.Ct. 397, 17 L.Ed.2d 305 (1966). The Horner plaintiffs were union members who sought to bring a section 501 suit against union officers who had established and funded a severance plan for their own benefit without valid authorization. Id. at 228. After reviewing affidavits, memoranda, and oral testimony, the district court denied the plaintiffs' application to bring suit, finding a lack of good cause. Id. at 227. The court of appeals reversed.
Initially, the appellate court noted that the existence of "good cause" might be discernible from the allegations of the verified complaint filed ex parte. Id. at 228. If either the court or the defendant requested a hearing, the court could, if it so chose, "look somewhat beyond the complaint in determining whether the plaintiff ha[d] made the 'good cause' showing required...." Id. at 229. The absence of good cause might be demonstrated through undisputed affidavits showing that the plaintiffs had failed to comply with some condition precedent to suit or that the action was barred by the statute of limitations, or by the application of the principles of res judicata or collateral estoppel. Id.
The scope of the district court's inquiry was, however, to be limited:
[W]e think it inappropriate to consider, at such a hearing, defenses which require the resolution of...
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