Appeal from a judgment of the United States District Court for the Southern District of New York (William C. Conner, Judge) in an action for breach of fiduciary duties against union officers and a union employee under § 501(b) of the Labor-Management Reporting and Disclosure Act, 29 U.S.C. § 501(b). Affirmed in part, reversed in part, and remanded.
Before Timbers, Van Graafeiland and Newman, Circuit Judges.
This appeal concerns the scope of the fiduciary duty imposed on union officers by § 501 of the Labor-Management Reporting and Disclosure Act (LMRDA), 29 U.S.C. § 501 (1976). James M. Morrissey and Ralph Ibrahim, members of the National Maritime Union, brought this action under § 501, alleging that the defendants officers and an employee of the Union, including former Union President Joseph Curran had breached their fiduciary duties by authorizing and receiving various forms of improper payments and excessive compensation. After protracted proceedings,*fn1 the United States District Court for the Southern District of New York (William C. Conner, Judge) found the defendants liable on some of the allegations of the complaint. Both sides have appealed. We affirm in part, reverse in part, and remand.
The Union's constitution requires that all forms of officer compensation must be approved by the vote of the Union membership. The constitution also permits the National Office, which consists of the Union's five officers and the national representatives, to authorize any expenditures it deems necessary for the proper administration of the Union's affairs. Six of the seven defendants are or were officers of the Union and constituted the National Office at the times relevant to this lawsuit. Joseph Curran was instrumental in founding the Union in 1937 and was its first President, serving from 1938 until his retirement in 1973. Shannon Wall succeeded Curran as President and is the only defendant who has not yet retired from his position; the others retired, before reaching age 65, during the course of this litigation. Mel Barisic was Secretary-Treasurer of the Union, and the remaining officers-defendants, Rick S. Miller, James J. Martin, and Peter Bocker, were Vice-Presidents and National Representatives. William Perry, the only non-officer defendant, was employed by the Union as Curran's assistant from 1958 until discharged in 1969.
Morrissey and Ibrahim (hereafter "Morrissey") challenged the reasonableness of the Union's officer pension and severance pay plans, as well as Curran's compensation arrangement, all payments that had been authorized by membership vote in accordance with the constitutional requirement. Morrissey also objected to two financial arrangements adopted by the National Office: flat weekly expense allowances and payments known as "pay in lieu of vacation." In addition, he alleged that the defendants used Union funds for numerous personal expenses. The facts and the District Court's rulings are more appropriately set forth in connection with each of the myriad of claims that we are obliged to consider.
Before turning to the specific claims, we must give some consideration to the scope of § 501 and the judicial role it contemplates. The recurring issues on this appeal are whether judicial inquiry into union activities under § 501 must cease when the officers' actions have been duly authorized by the union membership, constitution, or bylaws; and whether the fiduciary standard imposed upon union officers by § 501 more closely approximates the common law norms for trustees or those for corporate directors. As Justice Frankfurter observed, "(T)o say that a man is a fiduciary only begins analysis; it gives direction to further inquiry" which includes asking "What obligations does he owe as a fiduciary?" Securities and Exchange Commission v. Chenery Corp., 318 U.S. 80, 85-86, 63 S. Ct. 454, 458, 87 L. Ed. 626 (1943).
Section 501(a) declares that union officers "occupy positions of trust in relation to (the union) and its members" with respect to the funds they manage, but cautions that the fiduciary obligations of these officers should be interpreted with due regard to the "special problems and functions of a labor organization." 29 U.S.C. § 501(a) (1976). Aware of the different degrees of fiduciary responsibility that existed at common law, Congress expected contextual considerations to shape the standard applicable to union officials. See Supplementary Views*fn2 to H.R.Rep.No.741, 86th Cong., 1st Sess., reprinted in (1959) U.S.Code Cong. & Ad.News 2318, 2475, 2480. This sensitivity to the special labor context in § 501 is reflected in one of the principles Congress expressly followed in drafting the overall legislative scheme: minimum interference in the internal affairs of unions. S.Rep.No.187, 86th Cong., 1st Sess., reprinted in (1959) U.S.Code Cong. & Ad.News 2318, 2323. Focusing on this principle, the defendants argue that the District Court could not consider the reasonableness of any of the payments because they were authorized by either the vote of the Union membership or the National Office acting pursuant to the "necessary expenditures" clause of the constitution and bylaws.
Although Congress contemplated minimal judicial intrusion and did not intend the statute to limit the purposes for which a labor organization's funds could be expended when decisions had been made by members in accordance with their constitution and bylaws, see, e. g., 105 Cong.Rec. 17,900 (1959) (Sen. Kennedy), we do not think that Congress thereby intended to establish authorization as a complete defense to § 501 claims.*fn3 For that would permit a union constitution to vest limitless spending power in union officers and, even where membership vote is required, leave dissenting members powerless to halt abusive practices. Such a result could not have been intended by a Congress anxious to curb the wide-scale corruption among union officials found by the McClellan Committee,*fn4 which had identified the need for legislation, see S.Rep.No.187, supra (1959) U.S.Code Cong. & Ad.News at 2318.
Congressman Barden, the Chairman of the House Committee on Education and Labor, stated that a union's constitution and bylaws were not solely determinative of the scope of fiduciary duty under the Act. 105 Cong.Rec. 18,153 (1959). This view is further reflected in § 501(a)"s prohibition of exculpatory provisions in union constitutions, bylaws, or membership resolutions. Even legislators willing to give substantial deference to union authorization were concerned primarily about judicial intrusion into union politics and social policies, which might lend support to anti-labor forces, cf. 105 Cong.Rec. 17,900 (1959) (Sen. Kennedy); see 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); they did not contemplate giving free rein, through the device of authorization, in the use of union funds for the personal benefit of union officers.
Analysis of the special labor context reenforces this view of the congressional purpose. The centralization of power and authority in modern labor unions, as their membership has grown, has resulted in an organizational structure in which the rank and file may not be able to influence union policy effectively. A group of officers runs the union's daily affairs, with broad powers to construe the constitution and bylaws and ample opportunity to permit questionable spending practices. See Note, The Fiduciary Duty of Union Officers Under the LMRDA: A Guide to the Interpretation of Section 501, 37 N.Y.U.L.Rev. 486, 495-98 (1962). Similar problems of inadequately restrained management have been noted in the corporate structure, where the divergence between management and shareholder interests creates opportunities for financial abuse by corporate managers, and direct monitoring of management by shareholders is difficult and expensive.*fn5 See Jensen & Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J.Fin.Econ. 305 (1976). But unlike shareholders, who can sell their ownership interest if dissatisfied with management's conduct, union members dissatisfied with an unresponsively-managed union cannot sell their membership rights nor, in most cases, is it realistic to expect them to resign from membership or change to another union. Moreover, while external checks on corporate managerial abuses are sometimes imposed by market forces the hiring and firing of corporate managers and the buying and selling of corporate control, see Jensen & Meckling, supra, there is little evidence of similar restraints upon union leadership.
We have recognized, as have many other courts, that the Act does not give courts a license to interfere broadly in internal union affairs. Gurton v. Arons, 339 F.2d 371, 375 (2d Cir. 1964); see Gabauer v. Woodcock, 594 F.2d 662 (8th Cir.), cert. denied, 444 U.S. 841, 100 S. Ct. 80, 62 L. Ed. 2d 52 (1979); Vestal v. Hoffa, 451 F.2d 706, 709 (6th Cir. 1971), cert. denied, 406 U.S. 934, 92 S. Ct. 1768, 32 L. Ed. 2d 135 (1972). At the same time, authorization cannot be used to shield the very acts that prompted the legislation, misappropriation and abuse of union funds by officers for their personal benefit. See McNamara v. Johnston, supra, 522 F.2d at 1163 (no § 501 breach where expenditure authorized so long as funds expended without personal gain); Clark, The Fiduciary Duties of Union Officials Under § 501 of the LMRDA, 52 Minn.L.Rev. 437, 450 (1967) (authorization protects officer from liability only where no personal benefit accrued to officer from expenditure). We thus adopt the view, consistent with the thrust of § 501, that where a union officer personally benefits from union funds, a court in a § 501(b) suit may determine whether the payment, notwithstanding its authorization, is so manifestly unreasonable as to evidence a breach of the fiduciary obligation imposed by § 501(a).*fn6 Cf. United Mine Workers v. Boyle, 78 Lab.Cas. (CCH) # 11,183, 20,051 n.5 (D.D.C.1975) (judicial scrutiny of authorized expenditure); Puma v. Brandenburg, 324 F. Supp. 536, 544 (S.D.N.Y.1971) (same); Nelson v. Johnson, 212 F. Supp. 233, 257-59 (D.Minn.1962), aff'd, 325 F.2d 646 (8th Cir. 1963) (same); Highway Truck Drivers & Helpers Local 107 v. Cohen, 182 F. Supp. 608, 620-21 (E.D.Pa.), aff'd, 284 F.2d 162 (3d Cir. 1960), cert. denied, 365 U.S. 833, 81 S. Ct. 747, 5 L. Ed. 2d 744 (1961) (same).
Similar considerations guide our interpretation of what fiduciary standard governs the actions of union officers. Morrissey argues that the appropriate fiduciary standard for union officials is the highest available standard, that of the trustee, at least in this case where self-dealing has been alleged. Trustees are held to a strict standard of undivided loyalty, which prohibits undisclosed self-dealing. Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545 (1928). Under such a standard, even if the beneficiary consents to a transaction that benefits the trustee, the fiduciary must nonetheless demonstrate the reasonableness and fairness of the amount he has received. Restatement (2d) of Trusts § 170, Comment w, and § 216 (1959).
Defendants contend that a less rigorous standard, that applicable to corporate officers and directors, is more appropriate for union officials, particularly in this case because the issues concern compensation, which is received for services rendered to the Union. Such services, they argue, benefit the Union, and therefore remove the challenged transactions from typical self-dealing. Under the fiduciary standard for corporate directors, a business judgment rule is ordinarily applied, which presumes the reasonableness of the fiduciary's decision. Treadway Cos. v. Care Corp., 638 F.2d 357, 381 (2d Cir. 1980). The rule, however, does not apply to situations involving self-dealing, where there is a conflict of interest on the part of the directors in the transaction; in such cases a court will review the merits of the decision, and the fiduciary must establish its reasonableness. Lewis v. S. L. & E., Inc., 629 F.2d 764, 769 (2d Cir. 1980).
While it may be true that corporate compensation arrangements are normally reviewed under the standard of the business judgment rule, this occurs because usually the compensation arrangements for the corporate managers are determined by the outside directors. E. g., Beard v. Elster, 39 Del.Ch. 153, 160 A.2d 731 (1960). In this case, however, the individuals receiving the payments are the same persons who established the compensation schedules. In such circumstances judicial scrutiny of the reasonableness and fairness of the transaction is warranted, at least as rigorous as that undertaken when the fiduciary is a corporate director who has an interest in the challenged transaction.*fn7 Ballantine on Corporations § 76, 193 (rev. ed. 1946).
The statutory flexibility in construing labor fiduciary standards was designed to protect union leaders from being held to trustee standards with respect to fund investment policies and to prevent use of the Act to harass or restrict legitimate union activities such as expenditures for education or political causes; in both instances, union goals of advancing membership interests would result in economic policies or decisions different from those expected of a traditional trustee, whose sole legitimate aim is to preserve the trust corpus. See 105 Cong.Rec. 17,900 (1959) (Sen. Kennedy); Dugan, Fiduciary Obligations Under the New Act, 48 Geo.L.J. 277, 290 (1959). Section 501's emphasis on the particular facts of the case, in determining the appropriate fiduciary standard, and the policy underlying its enactment preventing officers' misuse of union funds for their personal benefit support judicial review of authorized expenditures that impart personal financial gain to those officers, just as courts would review self-interested transactions under the corporate director fiduciary standard developed at common law. Under this standard, the court is not at liberty to revise any compensation arrangements more generous than the court might have established. Section 501 does not convert judges into paymasters for union officers. The fiduciary standards for union officers impose liability upon them when they approve their receipt of excessive benefits, significantly above a fair range of reasonableness. With these principles in mind, we turn to the specific contentions raised on this appeal.
1. Curran's Net Salary Contract
Curran was paid under a "net" salary contract, an arrangement approved by the membership. The Union paid Curran a gross compensation amount sufficient to cover his income taxes so that he would "net" after taxes the authorized salary amount.*fn8 Morrissey challenges the District Court's finding that Curran's net salary contract was validly authorized by the Union membership. He contends the authorization was invalid because the membership did not know, when it approved the contract, that "net" meant "net after taxes." He also contends that the contract was void and unenforceable because it allegedly violated New York State tax laws.
Morrissey testified that the meaning of "net" was not discussed at the membership meetings at which the salary arrangement was approved and that he though "net" meant "net after expenses." He also stressed that no one knew the total gross salary that Curran received. But there was ample evidence in the record to contradict his contentions. Defendants' witnesses, who were union port agents, testified that the meaning of the term "net" was discussed at the membership meetings and that the members did know and understand that it referred to "net after taxes." There was evidence that seamen's standard pay vouchers reflect both a gross and net salary, the latter shown as net of all income taxes, and that Morrissey's newspaper in subsequent years publicized the fact that Curran's gross pay was much higher than his authorized net salary. Given the conflicting testimony in the record, the District Court's conclusion that Curran's net salary contract was knowingly authorized by the membership was not clearly erroneous.
We further find Morrissey's argument concerning New York State's tax laws unpersuasive. Section 385 of New York Tax Law provides that a contract to pay another taxpayer's taxes is void and unenforceable. N.Y.Tax Law § 385 (McKinney 1975). But the Union did not contract to pay Curran's income taxes; it agreed to pay him a gross salary sufficiently high so that he would net the authorized amount after he paid his own taxes. The arrangement does not technically come within the scope of the statute, and the likely purposes of the statute are neither frustrated nor affected. Presumably, New York intended to prevent the revenue loss and tax avoidance possible from a shifting of income between the taxpayers who are parties to such a contract. Cf. Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 49 S. Ct. 499, 73 L. Ed. 918 (1929). In this case, the State fisc did not incur any losses because no income attributable to one taxpayer was shifted to another; the total income Curran received was included in his own income when he computed and paid his taxes. We therefore affirm the District Court's dismissal of this charge.
Severance pay was based on years of Union service*fn9 and was received in a lump sum upon retirement. The District Court rejected Morrissey's claim that the officers' severance pay was excessive, finding that the payments were validly authorized and not excessive. Morrissey's only "evidence" of excessiveness was the fact that Curran received severance pay equal to ...