UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF NEW YORK
July 27, 1979
James M. MORRISSEY and Ralph Ibrahim, Individually and on behalf of the members of the National Maritime Union of America, Plaintiffs,
Joseph CURRAN, as President of the National Maritime Union of America and Individually, Shannon Wall, as Secretary-Treasurer of the National Maritime Union of America and Individually, Mel Barisic, Rick S. Miller, James J. Martin, Peter Bocker, Leo Strassman, Robert Nesbitt, William Perry, Abraham E. Freedman, Martin Segal and Leon Karchmer, Individually, Defendants
The opinion of the court was delivered by: CONNER
This is an action under Section 501 of the Labor-Management Reporting and Disclosure Act ("LMRDA"), 29 U.S.C. § 501, brought by two members of the National Maritime Union ("NMU" or "the Union") against past and present officers of the Union and trustees of its Officers' Pension Plan ("OPP") charging various breaches of fiduciary duties, principally in the payment to or for certain officers of unauthorized or excessive salaries, pensions, severance pay and other benefits.
As a prerequisite to this action, 29 U.S.C. § 501(b), plaintiffs on August 2, 1971 wrote to the defendant officers of the NMU, requesting the filing of an action for an accounting of the NMU general fund and pension plan and to recover damages for the losses sustained as a result of breaches of fiduciary duty by the officers "in that they did suffer and permit expenditures of moneys from the NMU general fund which expenditures were not for the benefit of the organization and its members" and by the trustees "in that they did permit expenditures of moneys from the (maritime Union Pension) Plan, which expenditures were contrary to the terms of the Plan and not for the benefit of the participants of said Plan." The letter set forth a number of specific examples of the alleged breaches, adding that they were "merely illustrations and your actions should not be limited to recovery solely of these items" but of all losses "discovered or discoverable in the necessary accounting proceedings."
When, as expected, no action resulted, plaintiffs applied to this Court, pursuant to Section 501(b), for leave to bring suit. On January 9, 1973, Judge Robert L. Carter granted leave to commence a proceeding, Inter alia,
"1. For an accounting of the general funds of the NMU;
"3. For an accounting of the NMU Officers' Pension Fund;
"4. For damages, injunctive and other appropriate relief against the defendants with relation to the breaches of their fiduciary duties under Title 29 U.S.C. (s) 501 * * *."
The original Complaint charged thirteen specific violations of trust and, by a memorandum and order dated February 25, 1975, 76 CCH Labor Cases P 10,695, the Court granted leave to file an Amended Complaint alleging six more.
The action went to trial on February 23, 1976. After two trial days, plaintiffs rested and defendants moved orally to dismiss the Complaint for failure to make out a Prima facie case. In the ensuing discussion, plaintiffs' attorney indicated that he had been hampered in preparing for trial by the Union's delay in producing documents and that he had wished to take additional testimony but had been unable to obtain service of subpoenas on the witnesses. The Court, remarking that valuable rights of Union members should not be lost through inadequate trial preparation, adjourned the trial to afford plaintiffs' counsel a further opportunity to put their case in order. To accommodate defendants' counsel and witnesses, defendants were allowed to proceed with the beginning part of their case the following day.
The second and final installment of plaintiffs' main case was presented from April 19 through April 21, 1976. At its conclusion, defendants renewed their motion to dismiss. Because plaintiffs' case had been presented in a somewhat disorderly fashion, the Court asked plaintiffs to submit a written statement, supported by citations to the record, setting forth what they believed their proofs had shown, and defendants were asked to file written answering statements.
In their memorandum, plaintiffs asserted that the proofs established that defendants had breached their fiduciary responsibilities in eight respects. In an unreported Memorandum and Order entered May 19, 1977, the Court dismissed the Complaint as to three of the eight, leaving in the case the following five claims:
1. that defendant Joseph Curran, retired president of the NMU, was paid a salary that was unauthorized and excessive;
2. that the defendant officers had received unauthorized cash payments in lieu of vacations;
3. that NMU funds had been used to pay personal expenses of the defendant officers;
4. that the OPP (and its successor plan) were overfunded and that they provide excessive pensions; and
5. that NMU general funds had been transferred to the "Fighting Fund" and used to make political contributions.
The remainder of defendants' case was put on in two sessions, the first covering November 31 to December 3, 1977, and the second January 18 and 19, 1978.
From a study of this additional evidence, it appeared that the Court's dismissal of the plaintiffs' claim that "excessive" severance pay had been given to the retired officer defendants was too sweeping in its terms. That dismissal was expressly based upon the Court's determination that the NMU's scheme of giving severance pay in an amount equal to one month's pay for each year of employment had been authorized by the membership and that plaintiffs had failed to establish "that the membership authorization was obtained in any improper manner or that the authority conferred was somehow exceeded." Upon a review of the full record and briefs, it appeared that, at least in the case of Joseph Curran, and perhaps others as well, the authority conferred had apparently been exceeded by giving severance pay in amounts above the authorized rate.
Because the Court's unqualified dismissal of this claim at the close of plaintiffs' case might have caused defendants to fail to introduce in their case available evidence tending to show that the severance payments were within the authorized limit, the Court, to avoid prejudice to defendants, notified counsel at a conference on December 15, 1978, that it was modifying its previous Order to the extent of reinstating plaintiffs' claim of excessive severance payments, but would afford defendants the opportunity to introduce additional evidence in opposition to that claim. Defendants have not elected to avail themselves of that opportunity and therefore stand on the present record.
This Opinion incorporates the Court's findings of fact and conclusions of law pursuant to Rule 52(a), F.R.Civ.P.
The NMU is a labor organization as defined in 29 U.S.C. § 402.
Plaintiffs James M. Morrissey and Ralph Ibrahim are and have been since before 1950 members of the NMU. Morrissey has been a repeated unsuccessful candidate for the offices of President and Secretary-Treasurer, and a perennial and highly vocal dissident. In addition to speaking out at port meetings and conventions of the NMU, Morrissey has published a paper named "The Call," charging the incumbent administration with various improprieties, including many of the violations of trust alleged in this action, which is but one of a series of actions he has brought against Curran and other Union officers. See, E. g., Morrissey v. Curran, 483 F.2d 480 (2d Cir. 1973), Cert. denied, 414 U.S. 1128, 94 S. Ct. 865, 38 L. Ed. 2d 752 (1974); Morrissey v. Curran, 356 F. Supp. 312 (S.D.N.Y.1973); Morrissey v. Curran, 76 Civ. 738 (RJW), U.S.D.C., S.D.N.Y.
Defendant Joseph Curran was one of the founders of the NMU and its President from 1938 until his retirement on March 1, 1973. Defendant Shannon J. Wall has been President of the NMU from March 1, 1973 to date; he was Secretary-Treasurer from 1966 to 1973 and Vice President from 1961 to 1966. Defendant Mel Barisic was Secretary-Treasurer of the NMU from March 1, 1973 until his retirement on February 28, 1978, having been an employee of the Union for a total of 27 years.
Defendants Rick S. Miller, James J. Martin, Peter Bocker, Leo Strassman and Robert Nesbitt are and were at all relevant times Vice Presidents or National Representatives of the NMU. Defendants Strassman and Nesbitt were apparently not personally served and have not voluntarily appeared; accordingly, they will not be bound by the judgment herein.
Defendant William Perry was Assistant to the President of the NMU from 1958 until he was discharged on January 16, 1969.
Defendants Abraham E. Freedman, Martin E. Segal and Leon Karchmer were trustees of the OPP until it was supplanted by the Staff Pension Plan ("SPP") effective January 1, 1974. Defendant Amalgamated Bank, which was added by amendment, is trustee of the SPP.
The Court has jurisdiction of the action under 29 U.S.C. § 501. Morrissey v. Curran, supra, 483 F.2d 480.
The NMU was founded in 1937 following a walkout of the crew of the passenger ship PENNSYLVANIA in protest against what were perceived as grossly inadequate wages ($ 62.50 a month on the East Coast and $ 67.59 on the West Coast) and intolerable working conditions. Joseph Curran, a boat deckman and ship's delegate on the sister ship CALIFORNIA, whose crew soon joined the strike, was a prime mover in the founding of the Union, became its first President in 1938 and held the office for 35 years until his retirement in 1973.
In large measure due to the efforts of the NMU and its rival labor organization, Seafarers' International Union, the pay of American merchant seamen has risen spectacularly through the years, even while their working conditions were substantially improved. Thus, under the NMU's 1977 contracts, an able-bodied seaman on a mechanized ship was paid $ 984.65 per month plus overtime at a rate of $ 7.22 per hour.
Curran was regarded by many NMU members, not without some justification, as the chief author of this dramatic improvement in the lot of seamen. Curran understandably became their hero, and their adulation of him approached idolatry.
However, these economic blessings turned out not to be unmixed. The effect of the enormous increase in labor costs for U.S.-flag ships, coupled with the freedom of foreign-flag ships from costly compliance with stringent U.S. safety regulations, placed the U.S.-flag ships at an almost insuperable competitive disadvantage, and inexorably produced a drastic decline in the U.S. merchant fleet, to the point where only approximately 6% Of the U.S.-foreign shipments are currently carried in U.S.-flag vessels. The membership of the NMU dropped from approximately 50,000 in 1959 to less than 15,000 today. Even the latter number is deceptively high; there are actually only about 6,500 jobs currently available on ships under contract to the NMU. To spread the work, no member is permitted to start a voyage in a year in which he has completed 210 days (7 months) of work. At any given time, over half of the NMU members are idle.
Despite an increase of the annual dues in 1976 from $ 160 to $ 240, the NMU has run at an annual deficit averaging over half a million dollars every fiscal year since 1972, with the exception of the fiscal year ending June 30, 1974, when the NMU realized some $ 6,000,000 from the sale of a building in New York City.
ORGANIZATION OF THE NMU
The organization of the Union was described in our Memorandum and Order of May 19, 1977, and was succinctly summarized in Morrissey v. Curran, 423 F.2d 393, 395 (2d Cir.), Cert. denied, 399 U.S. 928, 90 S. Ct. 2245, 26 L. Ed. 2d 796 (1970):
"The structure of the NMU and the powers and duties of its officers and various internal governing bodies are set out in the Union's constitution. It makes provision for three governing units which have nation-wide jurisdiction. The ultimate authority is vested in the National Convention, which meets triennially and is composed of the elected delegates from various ships and ports. When the National Convention is not in session, the Union is governed by the National Council, which holds regular annual meetings and consists of the elected national officials and certain other delegated representatives. When the National Council is not in session, governing authority rests in the National Office, made up of the national president, secretary-treasurer, three vice presidents, and three national representatives. This body is primarily responsible for the day to day, internal administration of NMU affairs."
With respect to officers' compensation, Article 14, § 1(a) of the 1960 and 1965 NMU Constitutions provided:
"The National Council shall fix the salaries for all officers of the Union, subject to approval as provided by this Constitution."
In 1972 this section was amended to read:
"The National Council shall establish the rates of compensation, including pension, welfare and other fringe benefits for all officers of the Union, subject to approval of a majority of the total members voting at regular membership meetings."
APPLICABLE LEGAL PRINCIPLES
The LMRDA was enacted as
"a response to the disclosure of official pilfering, union violence and the use of union office for personal profit during hearings held by the Select Committee on Improper Activities in the Labor or Management Field chaired by Senator McClellan. S.Rep. No. 187, 86th Cong. 1st Sess., 2 U.S.Code Congressional and Administrative News 2318 (1959). To expose conflicts of interest and stamp out embezzlement and self-dealing by union officials, the Act required unions to comply with certain reporting and disclosure requirements, established new crimes, and codified the fiduciary obligations of union representatives. See Cox, Internal Affairs of Labor Unions Under the Labor Reform Act of 1959, 58 Mich.L.Rev. 819 (1960)."
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 "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. Thus the reach of Section 501 extends to every area in which subversion of the interests of the union membership may be accomplished by union officials or representatives bent on acting in culpable derogation of those interests." Hood v. Journeymen Barbers, Hairdressers, etc., 454 F.2d 1347, 1354 (7th Cir. 1972).
"The content of the fiduciary obligation in Section 501(a) is outlined only in broad principles. Professor Cox has authoritatively stated that "The principles stated in section 501(a) were drawn from the Restatement of Agency in an effort to incorporate the whole body of common law precedent defining the fiduciary obligations of agents and trustees with such adaptions (sic) as might be required to take into account "the special problems and functions of a labor organization * * * ." " * * * At a minimum, there must be safe, honest, loyal, and conscientious management of the fund." Id. at 1355 (footnotes omitted).
But actions under Section 501 often do not involve outright embezzlement. Frequently, as in the case of some of the expenditures challenged here, the accused officers can point to an express or implied authorization thereof by either the Constitution or by-laws or by a vote of the members.
At least in cases where self-dealing is not involved, and where the disbursement produces some apparent union benefit, authorization is a defense to an action under Section 501. Indeed, during the hearings on LMRDA, Senator John F. Kennedy stated:
"Union officers will not be guilty of breach of trust under this section when their expenditures are within the authority conferred upon them either by the constitution and bylaws, or by a resolution of the executive board, convention or other appropriate governing body including a general meeting of the members not in conflict with the constitution and bylaws." 105 Cong.Rec. 17900 (1959).
See also Office of the Solicitor, U.S. Dept. of Labor, Legislative History of the Labor-Management Reporting and Disclosure Act of 1959, 1021 (1964).
In McNamara v. Johnston, supra, 522 F.2d at 1165-66, the Court of Appeals for the Seventh Circuit, drawing on common-law principles of agency, ruled:
"(Fundamental) fairness requires, that as between agent and principal, an agent cannot be held liable for the use of the principal's property in an unlawful manner when it is reasonable to infer that the principal authorized the agent's conduct. * * * (So) long as the expenditures were authorized in some fashion, plaintiffs can have no cause of action on behalf of the union for breach of fiduciary duty." (Footnotes omitted.)
And in United Mine Workers of America v. Boyle, 91 L.R.R.M. 2549, 2551 (D.D.C.1975), the court ruled:
"(It) is clear that the plaintiff has the dual burden of establishing (1) that the expenditure was not properly authorized, and (2) either that union assets were converted to an individual's own use, or that the union had been deprived of the benefit of the funds involved." (Footnote omitted.)
However, in United States v. Silverman, 430 F.2d 106, 114 (2d Cir. 1970), Cert. denied, 402 U.S. 953, 91 S. Ct. 1619, 29 L. Ed. 2d 123 (1971), the Court of Appeals for the Second Circuit stated:
"It is clear that when there is no possible union benefit from the use of the union funds made by the official, it makes no difference whether the use was authorized. Thus, in United States v. Dibrizzi, 393 F.2d 642 (2d Cir. 1968), the jury could have found that the expenditures "were personal non-business expenses and in no way incurred in furtherance of the union's business.' Our court stated that:
"Even if appellant may have established that his expenses were, as he claims, authorized and adopted by the union, such does not absolve him of his crimes * * * .' 393 F.2d at 645."
Although both Silverman and Dibrizzi involved prosecutions under 29 U.S.C. § 501(c), the criminal counterpart of Section 501(b), there is no apparent reason why the plaintiff's burden in a civil case seeking only a reimbursement of monies improperly expended should be greater than the government's burden in a criminal proceeding in which the union officials are exposed to the possibility of imprisonment for terms of up to five years on each count.
In Puma v. Brandenburg, 324 F. Supp. 536, 544 (S.D.N.Y.1971), notwithstanding the fact that the Officers' Pension Plan under challenge had been ratified by the union membership, Judge Pollack stated:
"However, merely because an Executive Board has the power to set officers' salaries (including pensions), does not mean that it has unlimited power to do so. Section 501 of the LMRDA imposes on labor representatives a fiduciary duty to the labor union and its members in respect of the management of union funds and other property. This fundamental obligation applies as well to the conduct of union representatives prior to the effective date of the LMRDA. Consequently, the terms of the instant Officers' Pension Plan must be inspected in the light of this fiduciary duty to determine whether the Plan was essentially fair or whether it was so over-generous or otherwise improper as to amount to a violation of trust."
And in United States v. Ladmer, 429 F. Supp. 1231, 1243 (E.D.N.Y.1977), Judge Dooling stated:
"(T)he essential difficulty with the argument for authorization is that formal resolutions cannot authorize the expenditure of the funds of labor organizations where the expenditures are not for union benefit but are for the personal benefit of the recipients."
The compensation of union officers falls in the hybrid class of expenditures that involve self-dealing (at least where the officers serve on the council or other body that fixes officers' salaries subject to membership ratification), but which also produce a Union benefit, since no labor organization can function effectively without competent leadership.
Where the Union members have expressly authorized a specific level of compensation for the officers, a court must be hesitant to substitute its judgment for that of the members, 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 that is, where the court can reliably conclude that the membership would not knowingly and freely have authorized such extravagant emoluments for its officers.
This is in keeping with the stricture of the Court of Appeals in Gurton v. Arons, 339 F.2d 371, 375 (2d Cir. 1964):
"The provisions of the L.M.R.D.A. were not intended by Congress to constitute an invitation to the courts to intervene at will in the internal affairs of unions. Courts have no special expertise in the operation of unions which would justify a broad power to interfere. The internal operations of unions are to be left to the officials chosen by the members to manage those operations except in the very limited instances expressly provided by the Act. The conviction of some judges that they are better able to administer a union's affairs than the elected officials is wholly without foundation."
Although that statement was made in the context of an action challenging voting procedures, a matter that the court ruled was beyond the reach of Section 501, since that section only "applies to fiduciary responsibility with respect to money and property of the union," it does bespeak a wholesome reticence about substituting a court's notion of fairness for that of the union members or their authorized representatives.
Before turning to the specific charges of impropriety made by plaintiffs, a brief discussion of two threshold issues to which defendants surprisingly devoted roughly half of the length of their briefs is required.
Actions under Section 501 are equitable in nature rather than legal, Local No. 92, International Association of Bridge, S. & O. I. Workers v. Norris, 383 F.2d 735, 741 (5th Cir. 1967), and are governed by the doctrine of laches, rather than any local statute of limitations. Yablonski v. Mine Workers, 80 L.R.R.M. 2594 (D.D.C.1971).
Defendants argue that this action alleging improprieties going as far back as 1963, eight years before the demand letter, is barred by laches. However, defendants fail to suggest any respect in which they have been prejudiced by the delay in bringing suit.
Most of the improprieties complained of excessive compensation and pensions and payment of personal expenses are continuing offenses. As the Second Circuit stated in Morrissey v. Curran, supra, 423 F.2d at 399:
"(T)he matter of improper payments of union funds to persons not entitled to them is a continuing offense and cannot bar an injunction to prevent continued payments or an accounting for all of the unlawful expenditures."
If plaintiffs were seeking by this action not merely to recover from the recipients of improper payments or other benefits, but to surcharge the officers or trustees responsible therefor, it could be argued with considerable force that those subject to surcharge for improper expenditures that did not directly benefit them would have been seriously injured by the delay, since an earlier adjudication of the propriety of these expenditures would have allowed them to take corrective action and limit their personal liability. This, indeed, was the reason expressed by Judge Danaher for his dissent in Morrissey v. Curran, supra, 423 F.2d at 405.
However, during the trial of this action plaintiffs, with the approval of the Court, expressly waived any claim of surcharge, thereby limiting the relief sought to recovery from the defendants who received excessive payments or perquisites and an injunction against their continuation in the future. The delay in bringing suit obviously did not injure those who continued throughout the period of delay to receive benefits to which they were not entitled. And there is clearly no reason why those who have misapplied union funds and are still doing so should be allowed to continue merely because their misdeeds went so long unchallenged.
Defendants also argue, with a fervor approaching vehemence, that plaintiffs have prosecuted this action in a manner which constitutes harassment. Defendants are particularly critical of what they feel are plaintiffs' repeated and unexpected shifts in the grounds of suit, rendering it impossible for defendants to prepare for their defense, and thereby depriving them of due process.
As already remarked, the trial was indeed somewhat unconventional, and plaintiffs' proofs were adduced in a rather disorganized manner, leading the Court to comment at one point
"I have a disquieting feeling that we are not trying this case; we are groping for it."
At another point, the Court observed that plaintiffs appeared to be "combining trial with discovery."
However, not all of the blame can be lodged with plaintiffs. Defendants met plaintiffs' discovery demands with exhausting and exasperating inaction and evasion. Repeatedly, discovery to which plaintiffs were clearly entitled was obtained only after a series of time extensions, broken promises and ultimate Court intercession. There were additional obstacles to discovery that were not of defendant's creation: a great bulk of the Union's files had been surrendered to the United States Attorney for the District of New Jersey for examination in connection with a pending criminal investigation.
Whatever its cause, the frustration of plaintiffs' discovery efforts was a principal factor in the Court's allowing plaintiffs unusual latitude in the presentation of their case.
Moreover, there were no issues tried which did not fall fairly within the broad specifications of misfeasance in plaintiffs' demand letter, the even broader descriptive paragraphs of Judge Carter's order authorizing the action, and even within the more specific paragraphs of this Court's Memorandum and Order of May 19, 1977.
Defendants do not contend otherwise, but instead complain that the very breadth of the demand letter and the authorizing order left them open to all manner of charges, without adequate notice as to what they should prepare to meet. Defendants' protestations of surprise become almost ridiculous when it is recalled that there was a hiatus of Over a year between the close of plaintiffs' case and the time defendants were required to put in their case, during which interval plaintiffs submitted memoranda in opposition to defendants' motion to dismiss, reciting in detail, with citations to the testimony and exhibits, exactly what plaintiffs believed they had proven.
It would be difficult to imagine trial procedure that could have given the defendants more complete and precise advance notice of the charges against them, or a better opportunity to meet them.
Finally, it is perhaps not inappropriate to note that the very nature of the action justifies some flexibility in the normal trial procedure. Actions under Section 501 have been likened to stockholders' derivative suits. McNamara v. Johnston, supra, 522 F.2d at 1162. The interests of the Union members, like those of the stockholders, are championed by a volunteer representative in whose selection they had no voice. Their self-appointed protagonist chooses the trial attorneys, selects and frames the charges against the defendants, and may even become a principal witness at the trial. The plaintiff and his counsel may or may not be well fitted for their roles. If, for this or any other reason, their performance is less than fully competent, important rights of the absent members the real parties in interest may be destroyed by Res judicata or collateral estoppel. This imposes a special responsibility on a Court to assure that the interests of the union members are fully preserved, while maintaining absolute judicial objectivity and safeguarding the equally important rights of the defendants to due process.
To the extent that the Court in this case has relaxed the conventional protocol of trial, it was only for the purpose of ensuring that all relevant and material evidence bearing on the Court's decision would be made available to the Court. Defendants have been unabashed beneficiaries of this liberality; almost up to the date of this opinion, they were continuing to supply to the Court, at its request, proofs of authorization of some of the challenged expenditures. It therefore ill becomes them to protest that access to other relevant evidence should have been foreclosed in obeisance to procedural formalism, particularly where they had ample notice of and opportunity to meet all plaintiffs' proofs.
With these preliminaries out of the way, we may at last turn to plaintiffs' specific allegations of impropriety.
Curran's base salary was fixed at "$ 25,000 net" on June 29, 1959, was raised to "$ 30,000 net" for the years 1962 and 1963 and was raised to "$ 40,000 net" for 1964. In addition, as the NMU members received increases through collective bargaining, the salaries of the officers were increased by 10% In 1969, 6% In 1971 and 5% In 1972. Thus Curran's authorized salary, at the time of his retirement in 1973, was $ 48,972 "net."
The Union has construed the term "net" to mean after all taxes, and has paid the Federal, State and City income taxes and Social Security taxes on Curran's salary, giving him the specified amount as take-home pay.
In addition, commencing in 1963, Curran was annually given pay "in lieu of vacation" apparently equal to his salary, plus taxes, for the entire four-week vacation period allowed by the NMU Constitution in each year through 1968 and for four weeks of the sixty days allowed each year thereafter. In addition, in 1963 he was given retroactive pay "in lieu of vacation" for the preceding five years, at a total cost to the Union of $ 31,000, including taxes, in that one year.
The annual costs to the Union were as follows:
Plaintiffs argue that the Union's payment of the taxes on Curran's salary was illegal in view of Section 385 of the New York Tax Law, which provides:
"It shall be unlawful for any person to agree or contract directly or indirectly to pay or assume to bear the burden of any tax payable by any taxpayer under the provisions of this article. Any such contract or agreement shall be null and void and shall not be enforced or given effect by any court."
That provision, of course, concerns only New York state taxes and would be wholly irrelevant to the Union's payment of federal and city taxes. Fridrikson v. Fridrikson, 35 A.D.2d 939, 316 N.Y.S.2d 469 (1st Dept. 1970).
Moreover, even as to State taxes, the statute merely provides that agreements to pay the taxes of another are void and unenforceable. The present suit does not seek to nullify an executory contract to pay Curran's taxes. Instead it is contended that past payment of his taxes constituted a breach of fiduciary duty in violation of Section 501.
This Court cannot conclude that it did. The Court of Appeals for the Third Circuit in Farnsworth v. Commissioner of Internal Revenue, 270 F.2d 660, 664 (3d Cir. 1959), was confronted with the somewhat analogous question whether payments of the taxes owed by one's business partners were deductible for tax purposes in view of the New York statute voiding agreements to make such payments. The court reasoned:
"Section 385 is not a criminal, a quasi-criminal, or even a penalty statute. Its sanctions are purely civil, i. e., the denial of enforcement of contracts made contrary to its provisions. (Footnote omitted.)
"Under Section 385 payment is not a statutory violation. The contract for the payment is merely rendered unenforceable. Here, the compromise agreement was executed fully. This is not a minor distinction in view of the fact that the New York Fisc was not frustrated for it received the funds for which it contracted by way of the compromise agreement."
In a footnote, the court added:
"The precise motivation of Section 385 is difficult to ascertain. There seems to be no available legislative history. However, it is interesting to note that many States recognize as legal covenants to pay other's income taxes. See e.g., Young v. Illinois, 310 Ill. 75, 141 N.E. 369, 30 A.L.R. 985; Republic Bldg. v. Gaertner, 201 Ky. 509, 256 S.W. 1111, 30 A.L.R. 982; Kimball v. Cotting, 229 Mass. 541, 118 N.E. 866, L.R.A. 1918C, 1189. It is possible that the intent of the New York State Legislature in enacting Section 385 was merely to prevent collusive or otherwise illegal agreements in respect to divorce proceedings." Id. at 664 n.6.
It seems to this Court at least equally likely that the purpose of the statute was to prevent the loss of revenue that the state would suffer if the taxes were computed on the net income rather than on the gross (including the indirect income that the taxpayer receives by virtue of the payment of his state taxes).
Here there was no frustration of such state purpose because the taxes were computed on the basis of the gross cost to the Union of the direct payments to Curran plus all taxes, federal, state and city.
Plaintiffs challenge the payment of taxes on Curran's salary on the additional ground that the members of the NMU did not realize when they voted to approve a specified amount "net," that this meant that the Union would pay all federal, state and city taxes on Curran's salary; much less did they appreciate the magnitude of the gross cost to the Union of the salary plus taxes.
Curran's salary was changed to a "net" basis in 1959. The proposition for this salary change which was submitted to a union-wide referendum merely read "That the President of the National Maritime Union be paid $ 25,000 net per year." However, the proposition was discussed in meetings of the NMU members in each official port before the vote. Port Agents or other NMU officials who attended the July 1959 port meetings in New York City, Philadelphia, Charleston, Mobile, Tampa, Joliet, San Francisco and San Pedro testified at the trial. Each stated unequivocally that at the meeting he attended it was explained, in substance if not In haec verba, that the term "net" as used in the proposition meant that the Union would pay all of the income taxes due on Curran's salary, leaving him the specified amount as take-home pay.
Several witnesses explained that this concept of net pay was a familiar one to seamen, since at the completion of each voyage, when the crewmen are paid off, each receives a voucher showing his gross pay and each of the deductions, including income tax withheld, as well as the net amount paid to him.
The July 16, 1959 issue of The NMU Pilot, which is circulated to all members of the Union, contained an article by Steve Federoff, the NMU Secretary-Treasurer, urging support of the referendum in which it was stated, with reference to Curran:
"He has devoted his life to achieving better living and greater security for seamen and to the building of a free, democratic and strong National Maritime Union. It is only fitting that we should see that he receives $ 25,000 per year Take-home pay for as long as he is president of NMU." (Emphasis added.)
There thus appears to be little doubt that even at the time the members initially voted to approve a "net" salary for Curran, they were generally aware that the amount specified would be his take-home pay, and that in addition thereto the Union would be paying very substantial taxes thereon.
Moreover, in later years, information regarding the total cost to the Union was widely disseminated. For example, plaintiff Morrissey testified that about 1963 he had read an article in U.S. News & World Report listing the highest paid labor leaders in the country and noted that Curran topped the list with "$ 105,000 that year, I think." (1963 was the year in which Curran was given retroactive pay in lieu of vacation for a number of past years.) Morrissey further testified that as early as 1966, in his releases to NMU members, he had pointed out that Curran's "net" salary of $ 40,000 was costing the Union "$ 85,000 a year or $ 95,000."
Plaintiffs, both in their cross-examination of the witnesses and in their briefs, have stressed that no one other than the Union officials directly involved in the actual payments knew exactly the gross cost to the Union for Curran's salary and taxes. But this is scarcely surprising. Nor is it persuasive that the members voted to approve Curran's salary without realizing that the cost to the Union would substantially exceed the "net" salary specified. Given the esteem in which Curran was generally held by the members, it appears likely that they would have approved the salary even if they had known in advance its exact cost to the Union.
The Court concludes that the Union's payment of all the taxes due on Curran's "net" salary was not a violation of Section 501.
1. Severance pay
At the time of his retirement in 1973, Curran was given gross severance pay amounting to $ 363,296.46, which was calculated to leave him.$ 142,835 net after taxes.
The NMU membership had approved a provision proposed by the National Council authorizing severance pay for officers with more than 25 years of continuous service, as Curran had, of one month's pay for each year of service. This entitled Curran to severance pay equal to 35 months' salary.
As previously mentioned, Curran's authorized rate of pay was $ 48,972 per year or $ 4,081 per month. Multiplying the latter figure by 35 yields a product of.$ 142,835, which was the authorized net severance pay after taxes. The record does not reflect whether the taxes payable on Curran's severance pay were actually equal to the difference of $ 220,461.46 which was allowed him for that purpose. The Court will order an accounting in which his taxes for 1973 shall be computed, and he must make full restitution, plus interest, of any excess of that allowance over the taxes actually payable on his severance pay.
2. Tax refunds
Curran received still another form of compensation which the Union members, and probably even the members of the National Council, did not know about, much less authorize. These were the annual federal, state and city income tax refunds which Curran received and retained in the following amounts:
Obviously these refunds, representing overpayments by the NMU of the taxes on Curran's salary, should have been returned to the Union rather than being pocketed by Curran.
Moreover, the refunds would have been even greater except for the fact that in each year Curran had outside income on which taxes were payable. He reported interest income as follows:
He also reported an excess of reimbursements over expenditures in connection with AFL-CIO meetings as follows:
Since Curran received refunds every year, it is obvious that the estimated tax payments which the Union made for Curran each year were more than sufficient to cover the actual taxes on not only his NMU salary but his outside income as well. Had it not been for Curran's outside income, the refunds, to which the Union was entitled, would have been even greater. Thus, the Union has, in effect, paid the taxes on the outside income. This was clearly not within the authorization to pay the taxes on Curran's NMU salary. Curran must therefore reimburse the Union, with interest, for the difference between the net taxes actually paid on his reported income (including the outside income) and what the taxes would have been without the outside income. The exact amounts to be repaid will be determined by an accounting.
PAY IN LIEU OF VACATION
In addition to the aforementioned payments to Curran "in lieu of vacation," the other defendant officers received such payments for the years 1963 through 1972 in the following total amounts:
Wall $ 17,309.52 Barisic 2,600.00 Miller 6,280.00 Martin 880.00 Bocker 6,764.00 Strassman 9,120.00 Nesbitt 15,830.00
Through 1968 the NMU Constitution, Article 14, § 3 provided:
"All officers having one (1) or more years of continuous service shall receive four (4) weeks of vacation with pay at such time or times as may be determined by the National Office."
In 1969, this Section was amended to provide "sixty (60) days of vacation with pay." The provision has remained unchanged since that time.
The giving of pay "in lieu of vacation" is not mentioned in the Constitution or by-laws, and defendants do not contend that the practice was ever expressly approved by the NMU membership. Instead, they merely argue that such payments are customary and reasonable where employees are required to give up part or all of their vacation time to work on the business of the employer.
If Union officers actually were required to sacrifice their vacation to attend to Union business that was so urgent that it could not await their return, and which was of such nature that it could not be adequately handled by others, it would not appear unreasonable to compensate them, at their regular rates of pay, for the time so spent. Such expenditures would at least arguably fall within the general provision of Article 8, § 13, that:
"The National Office is empowered to authorize the expenditures of such funds as it may deem necessary for the proper administration of the Union's affairs, consistent with the stated purposes and objects of this Constitution."
And such expenditures would at least arguably be free of the requirement of Article 14, § 1(a) of the NMU Constitution that the "salaries" of officers are subject to approval by the membership, since they would not represent changes in the base salary, but overtime compensation, at the same rate, for work done during the vacation periods to which the officers were entitled under the Constitution.
But, in the case of Curran, at least, the evidence is overwhelming that the pay "in lieu of vacation" was given not as compensation for vacation time actually sacrificed to work on urgent Union business, but automatically, as an unauthorized increase in salary.
No contemporaneous records of Curran's vacation time were kept. Apparently no one dared request substantiation of his perennial claim that he never had a vacation, although it was common knowledge that, particularly in the latter years of his presidency, he spent only a small fraction of the time in his New York office. Curran acquired a home in Boca Raton, Florida in 1964, and spent considerable time there each year until 1972, when he transferred his legal residence there. Perry estimated that Curran was in Florida 70% Of the time during that period "not doing a damn thing." Curran owned a series of power boats on which he cruised not only off Florida but also the Bahamas, Block Island and Nantucket. He insists that he was always available for calls on Union business and was frequently consulted. His claim of frequent consultation, at least, appears to be valid. Perry himself said that he sometimes spoke to Curran by telephone as many as 5 or 10 times a day.
But it is clear that, at the very least, Curran took his full allotted vacation period every year. Indeed, on cross-examination he admitted that, in addition to his lengthy stays in Florida and afloat, he took a two-week vacation trip to Mexico in 1968 and took five weeks off in 1970, two weeks of which were spent on a trip to Europe to visit his son in Heidelberg. Nevertheless, each year he received extra pay for at least four weeks every year, and even more in 1970, admittedly "on the assumption that (he) never had a vacation." The irrebuttable weight accorded this assumption is betrayed by the fact that his pay "in lieu of vacation" for each calendar year was given on the first payday of that year.
The impropriety in the case of Perry was even more blatant. When Perry was discharged in January 1969, he was paid in full to the end of his contract, which ran to October 20, 1974. In the Court's Memorandum of May 19, 1977, it was concluded that the contract was enforcible, and that no violation of Section 501 was involved in paying Perry his salary for the full unexpired term of the contract. However, there was no conceivable justification for giving Perry an extra month's pay "in lieu of vacation" for each remaining year of the contract.
Of the $ 176,602.61 which Perry received at the time of his discharge, $ 9,294.82 represented pay "in lieu of vacation for the 41/2 years remaining on his contract. Perry's discharge in effect gave him a 41/2-year paid vacation, all of which he took. Having taken it, and having done no work for the Union during that period, he is clearly not entitled to any pay in lieu of vacation.
With respect to the other defendants, however, the record is not so clear. Breit, the NMU comptroller, testified that records of their vacation periods were kept and that they were given pay "in lieu of vacation" for only the vacation time which they actually sacrificed. To confirm this, their "vacation cards" were introduced in evidence. And the defendants Wall, Barisic, Miller, Martin and Bocker all testified that they never received extra pay for any vacation time they actually took.
There is considerable reason to view these generalizations with skepticism, just as there was undoubtedly exaggeration in the claims of several of the defendants that they "never" or "seldom" took vacations, or that, when they did, they were often called back on urgent Union business. Indeed, several of the officers received pay "in lieu of vacation" in a pattern so nearly uniform as to create a strong inference of automatic treatment.
Wall received a full month's extra pay every year except 1964 and 1970. This means that in the years 1963 and 1965, when he was entitled to only four weeks' vacation, he claimed to have had no vacation At all.
The same is true of Nesbitt, who received at least a full month's extra pay every year except 1964. Nesbitt made up for this one omission by taking more than a month's extra pay in 1963 and 1969. Since he was entitled to only four weeks' vacation in 1963, he must have been given that year retroactive pay in lieu of vacation for previous years, as Curran was.
Miller similarly received in 1963 pay in lieu of vacation amounting to $ 3,000, which was greater than his salary for the full four weeks' vacation period.
Miller testified that after the Constitution was amended in 1966 to allow 60 days of vacation, it was customary for the officers to take only 30 days and to draw pay in lieu of vacation for the balance. Strassman at least was paid in accordance with this pattern; he received no pay in lieu of vacation prior to 1966 and one month's salary each year thereafter. Martin similarly received a total of only $ 1,360 pay in lieu of vacation for the five years 1963 through 1967, but received a month's extra pay each year from 1968 through 1970.
There was no convincing evidence that the claimed sacrifice by these officers of one-half of the 60 days of vacation they were allowed after 1966 was required for the handling of urgent Union business that could not be handled by others. It apparently was simply a voluntary practice routinely followed by most of the officers as a means of effectively increasing their annual salaries.
Nor is there any evidence that the Union members anticipated when they voted to approve an increase of the vacation period from four weeks to 60 days, that most of the officers would regularly continue to take only 4 weeks' vacation and draw an extra month's pay in lieu of vacation every year. If this practice had indeed been contemplated, the proposition should have been stated in terms of an increase in salary for the officers.
The practice of giving pay in lieu of vacation was discontinued after 1972. It seems no mere coincidence that the discontinuance followed shortly after plaintiffs' letter to the Union officers demanding the filing of an action for recovery of excessive compensation, with specific reference to unauthorized pay in lieu of vacation.
Notwithstanding all these considerations, the Court cannot conclude with any degree of assurance that any of the defendants, other than Curran and Perry, received pay "in lieu of vacation" for vacation time which he actually took.
Assuming that an officer actually sacrificed some or all of his vacation time, whether or not it was necessary for him to do so, the officer would have given up something of value, and it would be unfair to delay for years any challenge of the practice, while allowing the sacrifice to continue.
The Court thus concludes, as to the payments "in lieu of vacation" to all the officers other than Curran and Perry, that no violation of Section 501 has been established.
The NMU maintains at the Union headquarters in New York City a small fleet of automobiles for general use. This fleet currently includes a Cadillac limousine, a Dodge van and a Ford station wagon. In 1968 and 1970 it included a number of Volkswagen vans.
In addition, for a number of years prior to February 1, 1971, the Union furnished individual automobiles (originally Lincoln Continentals and later Cadillacs) to the defendants Curran, Wall, Barisic, Miller, Strassman, Nesbitt and Perry, as well as to Hoyt Haddock, the Washington, D.C. lobbyist for the maritime industry. Some of these automobiles were purchased outright by the NMU and others were obtained on long-term leases. Some of the money thus expended came from the NMU general fund and some, unaccountably, from the NMU Fighting Fund, which is financed by purportedly voluntary contributions of Union members, and is intended for educational and political purposes, such as contributions to political campaigns, lobbying and the like.
Each of those who were furnished an automobile by the NMU was also provided with oil company credit cards on which he charged the gasoline and oil and presumably the other expenses of operating and maintaining the vehicle.
Although furnishing an automobile to a Union officer for his personal use was at least arguably within the scope of the "demand" letter and of Judge Carter's order authorizing suit, in answer to interrogatories requesting a specification of the types of expenditures which plaintiffs would charge to have been improper, plaintiffs did not list the cost of the personal automobiles furnished to the individual defendants. Accordingly, at a conference before the trial, the Court ordered that this item would be excluded from the case. Plaintiffs shortly thereafter brought a separate action against the defendants in which they asserted this claim, together with a claim for misuse of moneys in the seamen's pension fund. That action, 76 Civil 738, was assigned to and is still pending before Judge Robert J. Ward of this Court.
Accordingly, the claim that the provision of personal automobiles constitutes a misuse of Union funds will not be considered herein.
b. Expense accounts
Each officer of the NMU was given an apparently unlimited expense account. In addition to being furnished by the NMU with credit cards of all of the leading credit card companies, each officer was authorized to incur charges against the Union at leading hotels and airlines. The total disbursements of the NMU for such charge accounts during the six-year period from 1967 through 1972 were as follows:
In addition to these charge privileges, the officers were reimbursed for their out-of-pocket expenditures for Union purposes. Each officer approved his own expense account. The reimbursed out-of-pocket expenses for each officer (not including the credit card charges) averaged over $ 3,000 per officer for the fiscal year ending June 30, 1969 (the last year such expenses were separately reported). Including the credit card charges, the reimbursed expenses averaged over $ 5,000 per year per officer.
The only evidence that any of these expenditures were not for legitimate Union purposes was the testimony of Perry to the effect that whenever he travelled with Union officers he picked up all the checks and the officers nevertheless put in vouchers for the same expenses.
Not surprisingly, this charge was denied by each of the officers who testified about the matter, and by Milton Breit, the NMU Comptroller. In view of the conflict in the testimony and the lack of any records establishing the existence, much less the extent, of misuse of Union funds to reimburse personal expenses of the defendant officers, the Court is regrettably forced to conclude that this charge has not been proven.
c. Weekly "allowances"
In addition to apparently unlimited credit-card privileges and reimbursement for all out-of-pocket expenditures, after February 1, 1971, when the Union ceased furnishing an automobile to each national officer for his personal use, each officer was given an "allowance" of $ 100 per week, for which he was not required to account. Defendants contend that the automobiles which had theretofore been furnished to the officers individually, together with the gasoline and other operating expenses, cost the Union at least $ 100 per week for each automobile. However, no membership approval of the expenditure for the personal automobiles, much less the allowances, has been brought to the attention of the Court in response to its specific request therefor.
Since automobiles have been and are available at NMU headquarters for use on Union business, and since all of the officers' business expenses, for airline tickets, rental cars, hotels, meals and everything else have been and are either charged to or reimbursed by the Union, these no-questions-asked "allowances" are clearly redundant. They amount to nothing more than a device for giving the officers an unauthorized increase in pay.
Each defendant officer shall be required to reimburse the NMU general fund in full for the total amount of the allowances which he received, as determined by the accounting.
While it is conceivable that some of the cash "allowances" was actually used by the recipient for legitimate Union expenses, it appears certain that the amounts so used were far exceeded by the personal expenses of the recipient which were charged to or reimbursed by the Union. To order the defendant officers to make restitution only to the extent of the "allowances" is thus to give them the benefit of the doubt. This accords with the approach approved by the Court of Appeals in United States v. Ferrara, 451 F.2d 91, 98 (2d Cir.), Cert. denied, 405 U.S. 1032, 92 S. Ct. 1291, 31 L. Ed. 2d 489 (1971):
"Ordering repayment of portions of the unauthorized personal expenditures ($ 17,000 by appellant Ferrara and $ 5,000 by appellant Russell) was proper. United States v. Berger, 145 F.2d 888 (2d Cir. 1944), cert. denied, 324 U.S. 848, 65 S. Ct. 685, 89 L. Ed. 1408 (1945); Cf. United States v. Caiello, 420 F.2d 471, 476 (2d Cir. 1969), cert. denied, 397 U.S. 1039, 90 S. Ct. 1358, 25 L. Ed. 2d 650 (1970). By limiting the amounts to be repaid to sums substantially lower than the total expenditures made, the trial judge here avoided the problem of determining independently the "exact amount' to be reimbursed to the Union, United States v. Stoehr, 196 F.2d 276, 284 (3rd Cir.), cert. denied, 344 U.S. 826, 73 S. Ct. 28, 97 L. Ed. 643 (1952), a problem which might otherwise require a remand. See Karrell v. United States, 181 F.2d 981 (9th Cir.), cert. denied, 340 U.S. 891, 71 S. Ct. 206, 95 L. Ed. 646 (1950)."
d. Miscellaneous personal expenses
Perry testified that the NMU paid all of Curran's personal expenses, for everything from his "booze to his bobby pins." The NMU Comptroller, Milton Breit, explained that he handled all Curran's finances, paying all his bills, either by cash or check, preparing his tax returns, and even supplying him with pocket money. However, Breit insisted that all of the checks were drawn on Curran's bank account and all of the cash disbursements came from a petty cash fund which Breit kept for Curran and which was established and replenished by deducting $ 500 a month from Curran's pay check before depositing the balance in his bank account.
Perry also testified that all of Curran's suits were custom made for him by a tailor named Jesse Israel and paid for by the NMU. He said that Israel came to the NMU headquarters on a number of occasions to measure Curran for suits. Curran denied ever getting a suit from Israel and further denied that the NMU had ever paid for one of his suits except once when his only suit was torn and a collection was taken up to buy a replacement. However, Curran's flat denial strains credulity in view of Breit's testimony that at least "once or twice" he saw Israel in the NMU office fitting Curran for a suit. But Breit denied ever having paid for a suit for Curran.
Perry further testified that he and a number of other NMU employees spent many weekends working at Curran's farm in Dutchess County, New York, doing construction and maintenance work as well as routine farm chores. One of the employees called by plaintiffs to testify on this matter denied he had ever been to Curran's farm and another admitted being there some ten times in 1966 and 1967 and painting the house at least partially inside and outside, but he insisted that Curran had personally paid him for his work. Still another employee said he had been there three times and had done some work on the barn, without stating whether he was paid.
Perry also said that Curran received substantial gifts from various persons or organizations doing business with the NMU. He claimed that the contractors who were constructing several buildings for the NMU in New York City did considerable "free" work at Curran's farm, completely rebuilding the interior and installing a new kitchen. Perry asserted that the NMU paid for the materials, as it also did for work on the house of defendants Mel Barisic, Shannon Wall and other Union officials. Perry also claimed that the furniture for Curran's Boca Raton home was paid for by Abe Freedman, the NMU legal counsel, who was on a $ 50,000-a-year retainer. Curran denied this, stating that all of the furniture in the Boca Raton house was brought down from his farm in Dutchess County, and that the only new furnishings bought for the Boca Raton house was a rug which he paid for himself.
Perry further charged that meat for all the national officers, paid for either with NMU funds or by steamship companies, was delivered to the Union offices once a week by Kansas Meat Packing Co.; defendant Mel Barisic took the officers' advance meat orders and the officers picked up their meat every Friday afternoon and took it home. Perry added that one Friday after he had been fired, he picked up all the meat that was there and took it to his own home. Several of the NMU officers who testified denied receiving any free meat, except an occasional Christmas turkey. Two NMU checks to Kansas Meat Packing Co. were introduced in evidence, but there was testimony that one of these checks was for Christmas turkeys distributed in underprivileged neighborhoods and the other was for feeding the crew of a vessel stranded at a Brooklyn pier.
In cross-examining Perry, defendants attempted to portray him as disgruntled and vindictive, because of his discharge from the NMU. However, Perry was paid in full for the four and one-half years remaining on his employment contract a total of $ 176,602.61 and in addition, although he was not an officer of the Union, was given a lump-sum pension payment of $ 222,000 from the OPP. Plaintiffs obtained a judgment against Perry in this Court for the amount of the pension, but the judgment was never collected from Perry; instead, it was surcharged against Abraham Freedman, one of the three OPP trustees responsible for the improper payment, the other two trustees having been immunized from liability by an exculpatory provision in the Trust Agreement. Morrissey v. Curran, supra, 483 F.2d at 483. Thus, while Perry's discharge may have wounded his pride, it was a bonanza for his exchecquer.
The evidence, considered as a whole, creates a powerful impression that the flagrant misuse of NMU funds for the payment of personal expenses of the officers was standard operating procedure, and that the acceptance of substantial personal favors as a form of kickback from suppliers was far from a rarity.
However, the specific details of such transactions dates, amounts, etc. cannot be gleaned from the present record. Perry's accusations, made wholly from memory, were understandably lacking such particulars. Nor would an accounting be likely to uncover records of the misapplication of funds; the expense accounts surely all appear legitimate on their face. Thus the ordering of an accounting would doubtless be merely an exercise in futility.
The Court is again left with no alternative but to conclude, reluctantly, that plaintiffs have failed to prove this aspect of their case.
e. Travel expenses
Curran testified that on two different occasions within a four-year period he and a number of other NMU officers and the trustees of the NMU Seamen's Pension Plan or "Deep Sea" Fund, and all of their wives took the grand tour to Spain, Portugal, England, Denmark and Italy, with all of the expenses being paid for out of the Deep Sea Fund. Curran claimed that the object of these junkets was to visit retired members living in Europe and "find out how our pensioners were making out." The Court cannot believe it was really necessary to take so many officials And their wives to check on the status of a few retirees living in Europe. It therefore concludes that the only significant purpose was the personal enjoyment of the participants.
Although the trustees of the Deep Sea Fund are not parties to this action, the defendant officers who participated in these trips should make full restitution to the Deep Sea Fund for their share of the cost thereof, to be determined by the accounting.
Many other personal vacation trips were taken by the defendant officers at the expense of the NMU general fund. Milton Breit, for example, made trips to London, Rome and Israel at Union expense. He claimed that the trips were on Union business, but his explanation of the nature of that business was unconvincing, particularly in view of Curran's testimony that he had not instructed Breit to make such trips and did not even know that he had gone. These trips appear to have been substantially personal in nature with any Union purpose being inconsequential. However, since Breit is not a party to this action, and since any claim for surcharge has been waived, restitution by Breit will have to await a separate action.
The cost of Curran's numerous trips between his home in Florida and NMU headquarters in New York was paid out of the NMU general fund. Curran's decision to move from New York to Florida was based purely on personal considerations. There is no reason why the Union should pay the additional transportation cost which that choice entailed. Curran will be required to make full restitution for the cost of these trips, to be determined by the accounting.
f. Legal services
Plaintiffs also seek reimbursement from Curran for $ 7,527.97, the amount disbursed by the NMU in payment of two bills to Curran from the law firm of Paul, Weiss, Rifkind, Wharton and Garrison for legal services rendered during the period from March 6 to December 10, 1973 in connection with two lawsuits against Curran and other NMU officers. One action is identified only as "Morrissey v. Curran" and is presumably the present action. The other action is identified only as "Wimbush v. Curran". It is presumably the same case in which a decision is reported at 356 F. Supp. 316 (S.D.N.Y.1973), in which Judge Carter granted Wimbush, a former NMU patrolman, and other Union members, leave to sue Curran and other officers under Section 501 of LMRDA for recovery of amounts paid by the NMU for allegedly personal expenses and for "unused" vacation time which was allegedly taken.
The Wimbush action was settled in 1973 for the modest sum of $ 10,792.18, which was paid to Wimbush by the NMU. The record contains no explanation of the reason for the settlement or the basis of computation of this settlement figure. However, the pendency of this action might have furnished a reason for Wimbush to discontinue his action. In that connection, it is interesting to note that one of the last services described in one of the attorneys' bills was "consideration of relationship of Wimbush to Morrissey v. Curran."
It is also unclear from the record whether Paul, Weiss represented only Curran in these actions, or the other officers as well. But it appears significant that the bill was mailed to Curran at his home in Boca Raton, despite the fact that he had retired from the presidency of the NMU on March 1, 1973, shortly before the first of the services were rendered.
Since in both this case and the Wimbush case, the defendants were accused, with ample justification, of having misapplied Union funds to their personal profit, the use of Union funds for the payment of legal services rendered in the defense of these charges is "inconsistent with the aims and purposes of the Labor Management Reporting and Disclosure Act, supra, and beyond the powers of the (Union)." Highway Truck Drivers and Helpers, Local 107 v. Cohen, 334 F.2d 378, 381 (3d Cir.) Cert. denied, 379 U.S. 921, 85 S. Ct. 277, 13 L. Ed. 2d 335 (1964). See also Morrissey v. Segal, 526 F.2d 121, 127 (2d Cir. 1975), in which the court, in discussing the cases relied on there by the pension trustees to justify reimbursement of the costs of their defense of actions under Section 501, stated
"(In) no case was it suggested that indemnification would be required or even proper after an adjudication that trustees had breached their duty to the union."
This Court concludes that the Union should not have paid for legal services rendered in the defense of this and the Wimbush action, and that Curran, who is at least the principal beneficiary of the misappropriations proven herein, if not the sole client represented by Paul, Weiss, should make full restitution therefor.
Article 14, Sec. 7 of the NMU Constitution provides that
"All officers shall be eligible for benefits under the NMU Officers' Pension Plan, subject to such rules and regulations as the Trustees of that Plan may establish."
As of December 29, 1952, the NMU entered into an Agreement and Declaration of Trust with the three then trustees, defendant Martin E. Segal, who was then legal counsel for the NMU, defendant Leon Karchmer, of the accounting firm of Kipnis & Karchmer, who were auditors for the NMU, and Herman E. Cooper. By this Agreement and Declaration, the NMU agreed to establish the OPP with an initial payment of $ 80,000 and with subsequent quarterly payments equal to 23% Of the compensation paid to the officers by the NMU. The Agreement also provided:
"The Trustees shall, as soon as practicable after the execution of this Agreement and Declaration of Trust, meet and adopt a Pension Plan for the purpose of paying retirement benefits to the officers of the Union. The trustees shall have sole and full discretion to determine the amount of such benefits and the terms and conditions of payment and shall have the power to conclusively determine all questions concerning the payment of benefits to any individual recipient or proposed recipient."
As of February 16, 1953, the Board of Trustees established the first OPP; it was amended several times thereafter. Originally the Plan provided, for an officer with at least 20 years of service, a pension of 50% Of the officer's "average" salary, with proportionately reduced pensions for officers with less than 20 years' service. In computing the officer's "average" salary, his salary for all years prior to 1963 was assumed to be no less than his salary in 1963. By 1972, when Curran retired, the Plan had been made much more generous, providing for a pension of 21/2% Of the "average" salary for each year of service up to a maximum of 40 years (at which point the pension would reach 100% Of the "average" salary).
The "regular" pension is paid for the life of the retired officer, plus the retiring officer's choice of either of two alternative options for benefits to his survivors.
(1) payment at the same rate to a designated beneficiary following the pensioner's death for such additional period as will bring the total number of monthly payments up to 120 (10 years of payments); or
(2) payment at one-half the regular rate to the pensioner's widow for her full remaining life, unless she was more than 10 years younger than the pensioner, in which event the payments would be reduced in proportion to her life expectancy beyond 10 years, with payments to a designated contingent beneficiary for such additional period as is necessary to bring the total payment period up to 10 years.
In addition, with the consent of the Board of Trustees of the OPP, a retiring officer could elect to receive at the time of his retirement a lump-sum payment of "equivalent" value. The "equivalent" value is the present value of the anticipated regular pension payments over the average life expectancy of a man his age at the time. The interest rate used in discounting the projected future payments to present value was initially set by the Trustees at 3% And remained at that level at least until 1976.
In 1962, in view of the upward trend in officers' salaries, the payments from the NMU general fund to the pension fund were raised to 26% Of the salaries.
In Morrissey v. Curran, 302 F. Supp. 32 (S.D.N.Y.,1969), Aff'd, 423 F.2d 393 (2d Cir.), Cert. denied, 400 U.S. 826, 91 S. Ct. 52, 27 L. Ed. 2d 56 (1970), it was ruled that the OPP covered only officers of the NMU and that the payments which had been made to non-officers, including William Perry, were unauthorized. Thereafter, effective January 1, 1972, a new pension plan, called the NMU Employees Pension Plan or Staff Pension Plan ("SPP"), was set up, covering all full-time officers and employees other than those covered by a collective bargaining agreement.
The administration of the SPP was placed under the direction of a Pension Committee, consisting of all of the national officers. This Committee was empowered to compute and certify to the Trustee bank the amount and kind of benefits to be paid to each retiree or terminated employee.
The benefits provided by the SPP were generally the same as those provided by the OPP, except for three significant changes:
1. The "average" compensation was redefined as "the compensation received * * * in the highest 60 complete calendar months of the last 120 complete calendar months prior to retirement or other termination * * * divided by 60."
2. In addition to the lump-sum payment option, three accelerated-payment options were provided, likewise at the discretion of the Pension Committee: equal payments over periods of 36, 60 or 120 months, the total payments in each instance equalling the discounted value of the anticipated future payments over the life expectancy of the pensioner at the time of retirement or other termination.
3. The participant was not required at the time of retirement to elect one of the options for benefits to his widow following his death. Instead, the plan provided that the spouse of the participant would automatically receive the optional benefits having the greatest actuarial value.
In March 1979, in order to comply with the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 Et seq., the SPP was amended by adding a new section 4.20 providing that lump-sum and accelerated-payment retirement benefits "will be computed on the basis of the 1971 Group Annuity Mortality Table and a 61/2% Interest assumption." The amendment recited that it was "effective as of December 1, 1976," but it is unclear whether or how this was intended to affect those who had already received payments under a lump-sum or accelerated-payment option.
Article 4, § 1 of the NMU Constitution requires that all decisions of the National Office "which change the established policies, programs and procedures of the Union must first be approved by the membership before they are made effective." Treating this provision as applying to changes in pension plans, the National Office submitted the OPP for membership approval at port meetings on November 25, 1974. In Dinko v. Wall, 421 F. Supp. 207 (S.D.N.Y.1976), Aff'd mem., 559 F.2d 1202 (2d Cir. 1977), Judge Werker found no "good cause" to believe that the vote taken at these meetings was "invalid and unconstitutional." However, I note that prior to the vote the Union members were not furnished copies of the plan but were merely permitted to read one of several copies which were available at each port and to ask questions about the plan. Considering the complexity of the plan a 22-page legal document it appears highly unlikely that many members really knew the magnitude of the pensions which the plan would provide.
Defendants have argued that Judge Werker's decision is Res judicata as to the claims in this case respecting the pension plan. However, Judge Werker did not rule on the reasonableness of the OPP, but only the regularity of the voting procedure. As previously mentioned, Judge Pollack ruled in Puma v. Brandenburg, supra, that even though the pension levels set there by the Union officers had been ratified by the membership, when they are challenged under Section 501, a court must review them to determine whether they are "so overgenerous or otherwise improper as to amount to a violation of trust." Where, as here, the pension plan is presented in such manner as to create doubt that the members adequately understood it, the Court's mandate to verify the reasonableness of the pension scheme is, if course, especially clear.
Unfortunately, the Court is left without any evidence in the record concerning the levels of pensions paid to retired officers of other labor organizations or corporations. The Court is thus forced to consider the reasonableness of the NMU officers' pensions in the abstract, with no definite benchmark against which to measure them.
Viewed as of the time the pension levels of the OPP were set, they seem generous, to say the least, particularly in conjunction with the very large lump-sum "severance" pay which each officer receives at the time of his retirement. However, perennial monetary inflation has brought the OPP pension levels down into a much more reasonable range. For example, if the OPP had continued in effect, an officer who retired this year after 30 years of service would receive a "regular" pension equal to 75% Of his "average" salary over that period (with his salary as of January 1, 1963 treated as his salary for all periods prior to that date). Assuming an annual inflation rate of only 6% Since 1963, and assuming further that the officer's pay kept pace with the cost of living over that period (which is roughly the rate at which the average officer's salary has increased during that time), an officer who retired in 1979 after 30 years' service would receive a pension equal to 40% Of his salary the final year. If he lived for 13 years after his retirement, by the thirteenth year, continuing inflation at a compounded annual rate of only 6% Would effectively cut his pension in half, to only 20% Of his salary, in constant dollars, at the time of his retirement.
The pensions are, of course, supplemented by the severance pay as well as by Social Security ; in addition, any officers who were seagoing members of the NMU are entitled to pensions from the Deep Sea Fund, currently amounting to $ 275 per month. However, an officer who put in sufficient time at sea to earn a seaman's pension would have less time as a Union officer and would accordingly receive a proportionately reduced pension from the SPP.
In view of all the foregoing factors, the Court probably could not have concluded that the "regular" pension payments under the OPP were so excessive as to constitute a breach of trust.
Under the SPP, however, because of the change in the manner of computing "average" compensation, the effect of past inflation in moderating the pensions has been greatly reduced. An officer who retires now after 30 years of service with annual salary increases averaging 6% Per annum could retire on a "normal" pension equal to approximately 67% Of his final year's salary, in addition to receiving lump-sum severance pay equalling two and one-half times his last annual salary. Investing the latter amount in high-grade corporate bonds at yields currently prevailing would give him additional retirement income equalling approximately 25% Of his last annual salary, bringing his total retirement income up to about 92% Of his top salary, while still leaving the principal of the severance pay intact as an inheritance for his successors. If he were not interested in leaving an estate, which he well might not be in view of the survivor benefits provided by the plan, he could instead invest the severance pay in an annuity and retire on an income slightly higher than his top salary while working!
If the officer instead retired after 40 years of service, his pension and severance pay would be one-third greater. He could retire on a pension equal to more than 89% Of his final year's salary, in addition to lump-sum severance pay equal to three and one-third times his last year's salary. The latter sum, invested in high-grade bonds at current yields, would bring his retirement income up to about 22% Above his top salary; invested instead in an annuity, it would bring his retirement income up to about 28% More than his top salary!
By electing a lump-sum or accelerated payment option, the retiree could enjoy still higher retirement income, because the present value of the anticipated future payments is computed on the basis of assumed interest rates until 1976 only 3% Per annum and currently 61/2% Which are grossly incommensurate with the yields now prevailing in the money markets. Although these options require the approval of either the Trustees of the OPP or the Trust Committee of the SPP, there is no evidence that such consent has ever been refused.
At the actual interest yields now obtainable, a retiring officer can elect a lump-sum pension payment and invest it in high-grade corporate bonds to receive almost as much income as he would receive from the normal pension payments, while leaving the principal intact as a inheritance for his widow or beneficiaries.
For example, an officer who now retires at the age of 65 with 40 years of service, having reached a salary level of $ 50,000 per year after pay increases averaging 6% Per annum, would be entitled to a normal pension of approximately $ 44,700 per year. Under the 1971 mortality tables he has a life expectancy of 13 years at the time of retirement. He could elect, with the apparently automatic approval of the Trust Committee, a lump-sum payment in lieu of pension of roughly $ 385,000 using an interest rate of 61/2% In computing present value. If he invested this sum in Aa-grade corporate bonds at currently prevailing yields, he would receive almost $ 40,000 per year without invading his principal. If he also bought bonds with his severance pay of $ 166,667, he could have an income of some $ 55,000 per year without touching the principal. If he instead invested the entire $ 551,667 in an annuity, he could retire at an income of approximately $ 65,000 a year 30% Greater than his highest salary as an NMU officer!
Even without evidence as to pensions paid by other employers, this Court is convinced beyond any reasonable doubt that a pension plan which, taken in conjunction with the severance pay to which all retiring officers are entitled, gives them a higher income in retirement than they ever had while working, is so excessive that the Union members would not knowingly and voluntarily have approved it. The Court thus concludes the promulgation of the SPP constitutes a breach of trust by the defendant officers and a violation of Section 501.
During the trial, defendants' attorneys stated, without specific supporting citations, that because of ERISA, the Court had no power to diminish the pensions provided under the SPP. However, none of the briefs have even mentioned this matter. The Court finds no indication in the Act itself, or in the relatively few cases interpreting it, that a court which finds a pension scheme for union officers to constitute a violation by the union officers of their fiduciary duties under Section 501, is rendered powerless, by ERISA, to undo the wrong. It would be a strange result indeed if union officers could set up for themselves a pension plan so extravagant as to amount to phased embezzlement, get it approved by the membership through artful obfuscation and invoke ERISA as an impenetrable shield around their loot. The Court concludes that ERISA does not protect pension plans established in violation of law.
The defendant officers will be directed to propose a new staff pension plan to be submitted first for approval by the Court and then for ratification by the membership after specific disclosure of the retirement income which each of the present officers will receive. Pending such approval, normal pension payments may continue at the levels provided by the SPP, subject to recoupment by reduction of future payments. There will be no further payments under any lump-sum or accelerated payment options until so ordered by the Court; no waiver of rights to elect such options will accrue during the period of such suspension and for thirty days thereafter.
a. Curran's pension
Curran has been receiving regular pension payments under the OPP at the rate of $ 4,641.03 per month or $ 55,692.36 per year. His pension payments were computed on the basis of his gross compensation, including taxes and payments "in lieu of vacation."
This computation was wrong in two respects. In the first place, as has already been discussed, he was not entitled to any pay in lieu of vacation. Moreover, even if he had been, his pension should have been based on his "salary," which does not include additional payments for any vacation time sacrificed.
Secondly, and more significantly, Curran's pension payments should have been computed on the same basis as his salary I. e., first computing the net pension payments on the basis of the net salary, then determining the gross amounts necessary to cover the net pension payments plus the taxes due on the gross amounts. Instead, by computing Curran's gross pension payments on the basis of his gross salary, the trustees have given him, in addition to his net pension, amounts sufficient to pay more taxes than he will actually owe on his gross pension. In other words, since Curran's gross pension payments are less than his gross salary, the income taxes on the pension payments will be computed at lower rates than the taxes which the NMU formerly paid on his gross salary. Moreover, since Curran is now residing in Boca Raton, Florida, he will presumably have to pay proportionately lower state income taxes, and no city income taxes at all.
For example, assuming that Curran's salary was $ 30,000 "net" for each of the 26 years through 1963, and was $ 40,000 "net" during 1964-1968, $ 44,000 "net" during 1969 and 1970, $ 46,640 "net" in 1971, and $ 48,972 "net" in 1972 and for the first two months in 1973, his total "net" salary for 35 years of service would have been $ 1,171,774. His proper annual "net" pension would be 21/2% Of that total, or $ 29,369.35.
The gross pension payments of $ 55,692 per year being made to Curran exceed this estimate of his proper net pension by $ 26,323, which is far more than the total federal and state income taxes which would be payable on an annual income of $ 55,692. Curran's net pension should be computed in the manner indicated and the gross pension should then be determined by adding to the net pension an amount sufficient to pay the federal and state (and local, if any) income taxes on the gross pension. Curran shall make full restitution, with interest, for the past overpayments, and his future payments will be reduced to the proper level.
b. Haddock's pension
Hoyt Haddock, a lifetime personal friend of Curran, was for many years a Washington lobbyist employed as Executive Director of the AFL-CIO Maritime Committee (ACMC) an organization funded primarily by the NMU. He was also employed as Co-Director of the Labor-Management Maritime Committee (LMMC), an organization jointly funded by the AFL-CIO Maritime Committee and by the shipowners. He received salaries from both the ACMC and the LMMC.
He was never directly employed by the NMU, nor ever a member of the NMU although, as previously mentioned, he was furnished a Cadillac automobile paid for by the NMU Fighting Fund, which also paid all of the expenses of running and maintaining it.
Haddock retired in 1972. Since that time, in addition to receiving Social Security Benefits, he has been receiving pensions from both the ACMC and the LMMC.
On top of all this, since October 1, 1972 he has been receiving a $ 300-per- month pension from the NMU, and on September 30, 1972 was given a lump-sum payment of $ 1200, apparently as retroactive pension for the preceding four months.
Since Haddock was clearly not entitled to a pension under either the OPP, the SPP or the Deep Sea plan, his pension payments have come from the NMU general fund.
The payments commenced after Haddock wrote Curran complaining about the inadequacy of his retirement income. The pension payments to Haddock were voted by the National Office and approved by the Union members at port meetings in July 1972.
Under the circumstances, the Court cannot conclude that the payments constitute a violation of trust by the defendant officers.
c. Other pensions
The record does not reflect whether other officers are also receiving, under the OPP, pensions computed on the basis of their total compensation, including pay "in lieu of vacation." If so, their pensions should be recomputed to eliminate this element of the base compensation.
OVERFUNDING OF THE SPP
Not surprisingly, there was a direct conflict in the testimony of the expert witnesses of the opposing parties, respecting whether the SPP was overfunded and whether the contributions thereto from the NMU general fund should be reduced below the current level of 26% Of the salaries of the covered employees.
The usefulness of much of this testimony has been substantially reduced if not destroyed by the fact that it was based upon the assumption that pension payments, including lump-sum payments, would be continued at the present levels an assumption which this decision has rendered invalid.
Following approval of the revised SPP, it will be directed that an independent actuarial firm, acceptable to the NMU and to plaintiffs, be employed, at the expense of the NMU general fund, to render a written opinion as to whether the funds of the SPP are sufficient to pay the anticipated pension obligations and whether a 26% Level of contributions is necessary to maintain the sufficiency of the fund. If the parties are unable to agree upon an actuary, the Court will appoint one. The Court will accept and adopt the opinion of the actuary.
TRANSFER OF GENERAL FUNDS TO THE "FIGHTING FUND"
The evidence established numerous transfers of funds between the NMU general fund and the Fighting Fund, but such transfers were satisfactorily explained. The Court concludes that plaintiffs have failed to establish that moneys of the general fund were misapplied for political purposes.
The record of this case is a sorry chronicle of the arrogance of privilege and the callous betrayal of trust. Even as the American shipping industry was in sickening decline, with the membership of the NMU dwindling to a fraction of its original strength and the number of jobs plummeting even more precipitously, the national officers, although generously paid, were improving their lot with expensive perquisites, including expense-paid vacation junkets on top of pay "in lieu of vacation," accounting-free "allowances" on top of virtually unlimited expense accounts, and with retirement income exceeding their highest salaries while working.
The Union's president, Joseph Curran, fully capitalizing on his popularity and power, enjoyed particularly favored treatment, having a large share of his personal expenses paid, receiving pay "in lieu of vacation" after having taken more than the allotted vacation time, and receiving a pension based on his gross compensation, including the income taxes that the Union had paid for him, and the unearned pay "in lieu of vacation."
Curran must make full restitution to the NMU for:
1. All income tax refunds received by him for the years 1963 through 1972.
2. All taxes paid by the NMU on his outside income.
3. All severance pay retained by him, after payment of all income taxes on his gross severance pay, above the proper net amount of.$ 142,835.
4. All net pay "in lieu of vacation" received by him.
5. The amount of $ 7,527.97 paid for legal services on his behalf.
6. All pension money retained by him, after payment of all income taxes on his gross pension, above the authorized level (approximately $ 29,369 net per year, the exact figure to be determined by the accounting).
7. All costs paid by the NMU for his travel between New York and his home in Boca Raton, Florida.
All of the defendant officers, including Curran, must make full restitution to the NMU for:
8. All of the weekly "allowances" given to them by the NMU without an accounting of their expenditure thereof.
9. All their foreign travel except that which they can show was reasonably required for specific Union business. Upon an offer of proof, the matter will be referred to a Magistrate for hearing and report.
10. Any portion of their pensions based on pay "in lieu of vacation."
William Perry must make full restitution to the NMU for the $ 9,294.82 given him as pay "in lieu of vacation" at the time of his termination.
An accounting will be conducted to determine the amount of all the foregoing items for which specific amounts are not indicated. Interest at the rate of 6% Per annum will be charged on all such amounts from the date of their receipt by a defendant to the date of the judgment order. The SPP will be revised as indicated.
Plaintiffs shall submit a judgment order to be settled on twenty days' notice to defendants.
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