UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF NEW YORK
December 19, 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
OPINION AND ORDER
All of the active parties, as well as a retired NMU member, Edward Pogor, have filed motions to amend or for reconsideration of this Court's Opinion dated July 27, 1979 ("the Opinion"), and of its Order dated August 8, 1979, and the Court has considered the extensive affidavits and memoranda filed in connection therewith. The Court's disposition of such motions is as follows:
1. Re Strassman and Nesbitt
At page 36 of its Opinion, the Court stated:
"Defendants Strassman and Nesbitt were apparently not personally served and have not voluntarily appeared; accordingly, they will not be bound by the judgment herein."
Plaintiffs contend that Strassman and Nesbitt entered their appearances through the attorneys who represented all of the defendants except Joseph Curran and therefore should be bound by the judgment. The record does not sustain that contention. The marshal's return of service indicates that neither Strassman nor Nesbitt was served, despite at least two unsuccessful attempts on each. Separate answers to the original complaint were filed by Joseph Curran, by Martin E. Segal, and by Abraham E. Freedman, and a joint answer was filed by Mel Barisic, Rick Miller, James Martin and Peter Bocker. No answer was ever filed by Strassman or Nesbitt.
The first mention of either Strassman or Nesbitt thereafter in the pleadings file was in listing them among the other defendants in the heading of defendants' supplemental answers to interrogatories filed in March 1974, over a year after the complaint was filed. This was after the original attorney of record, Abraham E. Freedman, who was general counsel of the NMU as well as a defendant in the case, had been replaced by outside trial counsel, George Koelzer. Thereafter the names of Strassman and Nesbitt were similarly included with those of the other defendants in the headings of two memoranda of law filed in January and February of 1975 in opposition to motions to amend the complaint and for a separate trial of certain issues, and in the headings of two notices of taking deposition filed in February and December of 1975. Their names were also included in the list of defendants represented by counsel in the transcripts of some of the pre-trial depositions and in some letters of defendants' counsel to the Court, as well as in defendants' post-trial briefs.
However, that such inclusions were merely inadvertent seems evident from the omission of their names from other papers, most significantly from the heading of defendants' answer to the amended complaint filed in March of 1975. Such occasional and apparently inadvertent inclusions of the names of Strassman and Nesbitt are clearly insufficient to give the Court personal jurisdiction over them.
While, as officers of the Union, Strassman and Nesbitt were undoubtedly aware that the action had been filed and that they were named as defendants, such knowledge is not a substitute for service on them. If it were, no motion under Rule 12(b)(2), F.R.Civ.P., could ever be granted, and the rule would be a nullity.
There was nothing in the file of the case tending to indicate that either Strassman or Nesbitt ever saw any of the papers in which their names were listed among the defendants in whose behalf the paper was being filed, or that they were even aware of such inclusion. While they undoubtedly knew that Freedman and later Koelzer were defending the action on behalf of at least some of the officers other than Curran, there is no evidence that they ever authorized either attorney to represent them, or that they were ever consulted in connection with the defense.
It is unfortunate that plaintiffs' counsel did not pursue further efforts to obtain service on Strassman and Nesbitt because, even if these two defendants continued to be successful in evading personal service, the Court would surely have approved some form of substituted service, for example by registered mail. Although both of them were apparently residents of New Jersey at the time the action was commenced, as officers charged with misapplication of the funds of a union headquartered in Manhattan, they were clearly subject to service under the New York long-arm statute, CPLR § 302. However, the mere fact that they could readily have been served does not dispense with the necessity of actual service.
If Strassman and Nesbitt had themselves done anything, even inadvertently, which created the reasonable impression that they were submitting to the Court's In personam jurisdiction, thereby causing plaintiffs' counsel to forego an obvious opportunity to serve them, the Court might properly treat their conduct as a voluntary appearance, but there is no evidence that they themselves as distinguished from the defendants' attorneys did anything to estop them to deny personal jurisdiction. Under these circumstances, it would be manifestly unfair to Strassman and Nesbitt to bind them by the judgment even if the Court had the power to do so, which it does not.
The above-quoted portion of the Court's Opinion will therefore remain unchanged.
2. Re Deep Sea pensions
At page 54 of the Opinion, it was stated:
"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."
Plaintiffs assert that this statement is incorrect because the period of service as a Union officer (originally all such time but now only the first five years) is counted for the purpose of determining eligibility for a Deep Sea pension.
Plaintiffs' argument is a Non sequitur. Although some (originally all) of the time as an officer is credited against a Deep Sea pension, the reverse is not true. Time as a seaman is not credited in determining the amount of pension benefits under either the Officers Pension Plan or the Staff Pension Plan. The longer the time a man spends in covered employment under the Deep Sea plan, the lower will be his pension as an officer. Because the officers' pensions are much greater than the Deep Sea pensions, it is unlikely that an officer's Deep Sea pension would exceed the amount by which his officer's pension was reduced because of the time he spent as a seaman before he became an officer. Thus, in determining the reasonableness of the officers' pension plans, the fact that some of them are also eligible for Deep Sea pensions may be disregarded.
3. Re personal automobiles
At pages 48-49 of the Opinion, it was stated that plaintiffs' claim that the provision of automobiles for the personal use of NMU officers constitutes a misuse of Union funds was expressly excluded as an issue in this case, and had been asserted in a later-filed action between the same parties then pending before Judge Ward of this Court.
Plaintiffs now state that "That claim in the action before Judge Ward was withdrawn, without prejudice, because proof on that issue had been submitted in this action."
The withdrawal is unfortunate and inexplicable because during the trial of this action it was repeatedly stated that the issue of the personal automobiles was no longer in this case. It would be manifestly unfair to defendants for the Court to decide the issue on the basis of the present record, after defendants had been led to believe that in this case they need adduce no evidence on that issue.
If plaintiffs are unable to reassert this claim in the action before Judge Ward, and are willing to stand on the present record in this case, they may move to reopen the trial to permit defendants to introduce any evidence they may have in opposition to the claim. In opposition to such motion, defendants will, of course, be permitted to demonstrate any prejudice to them resulting from the delay in the trial of this claim.
4. Re surcharge
At pages 40-41 of the Opinion, the Court stated that "during the trial of this action plaintiffs, with the approval of the Court, expressly waived any claim of surcharge."
Plaintiffs' counsel Arthur E. McInerney asserts that it was his intention to waive surcharge only with respect to the alleged excessiveness of Curran's pension. It is true that the oral waiver occurred during a discussion of "the question whether the issue of Mr. Curran's pension benefits is properly before the Court." (Transcript ("Tr.") 216). The Court indicated that it would permit plaintiffs to adduce evidence on the issue, and that if the defendants "feel you have been prejudiced in any way because of a failure to get more specific notice, I will make sure you are not harmed by giving you the right to come in after we adjourn here to bring in any evidence you want to bring in, bearing on these issues" (Tr. 221) and that "(if) you want more discovery after the trial, you may have it." (Tr. 222). Mr. George Koelzer, the attorney for the non-Curran defendants, then stated, "My position is slightly different and I accept the Court's ruling * * *. However, the gentlemen I represent conceivably now, in the light of the Court's ruling a few moments ago, could be liable for a surcharge. That has never been raised * * *. (T) here has not even yet been intimated in any papers anywhere on file that I know of that there would be any conceivable claim for surcharge against my defendants in the event the Court did rule that the Curran benefits were excessive." (Tr. 222-23).
After further discussion, the Court asked plaintiffs' counsel, Mr. McInerney, "Whether he is really claiming surcharge." He responded, "I will take the charge of Mr. Koelzer's client(s) out of it."
After some clarification, the Court stated "All right. The issue of surcharge is out then." Mr. McInerney quickly added, "Except for Mr. Curran." (Tr. 227-28).
Curran's counsel, Mr. Dooley, then interjected, "If the surcharge is out, Joe Curran is out there alone bearing the cost of this suit and if that isn't prejudice, I don't know what prejudice is." The Court responded, "You can brief this after trial as to whether the surcharge is in or out. We will go ahead and receive evidence now as though it is in." (Tr. 228).
From the context of the discussion in which the waiver was made, it seems clear that Mr. McInerney did intend to waive a claim of surcharge against the non-Curran defendants only with respect to Curran's pension benefits.
In their main post-trial briefs, the parties did not discuss the issue of surcharge; plaintiffs merely proposed conclusions of law to the effect that all of the defendants except Perry would be surcharged for all the expenditures made in violation of Section 501. Moreover, even in their present submissions, the parties cite no authorities either supporting or opposing the availability of surcharge as a remedy in this case.
There is a serious question whether surcharge of the non-Curran defendants would be appropriate in this case, whether or not the claim of surcharge against them was waived.
Section 501 does not mention surcharge but merely states that, after obtaining Court authorization, a union member may sue "to recover damages or secure an accounting or other appropriate relief." Nor is there any reference to surcharge in the legislative history of the LMRDA, in which "the question of remedies was given scant attention." Clark, The Fiduciary Duties of Union Officials Under Section 501 of the LMRDA, 52 Minn.L.Rev. 437, 470 (1967). And it is interesting that in a section of the Clark article entitled "Remedies Envisioned by Section 501(b)" there is no mention of surcharge.
The only case which the Court has been able to find in which a union officer or trustee was surcharged for monies improperly paid to others is 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). In that case, the Court of Appeals affirmed the judgment of Judge Dudley Bonsal of this Court surcharging Abraham E. Freedman, a trustee of the Officers Pension Plan, for retirement benefits paid to William Perry who, although he had served as Assistant to the President, Joseph Curran, had never been an officer of the Union.
The Court cited no prior decisions in support of its ruling, but merely stated that the record amply supported Judge Bonsal's finding that Freedman had shown a "reckless indifference" to his duty as trustee and that the issue of Perry's entitlement to an officer's pension did not involve "complex legal questions on which reasonable men could disagree." 483 F.2d at 484-85.
In the rather unusual circumstances of the present case, surcharge of the other officers for monies improperly paid to Curran seems inappropriate in view of Curran's virtually absolute dominance of the Union. The other officers were not directly involved in authorizing most if not all of the challenged expenditures and they probably could not have stopped them if they had tried. Even if they went directly to the Union membership and attempted to obtain support for stopping the expenditures, they might not have been successful and they would doubtless have been omitted from the slate of nominees for the next election if, indeed, they had not been removed before that time.
Moreover, the Court, in deciding that the action had not been barred by laches, relied heavily on the fact that surcharge had been waived. It would be manifestly unfair to permit plaintiffs to delay instituting action for a number of years while the defendant officers failed to protest the making of payments which, while improper, did not directly benefit them, and then charge them personally for all the monies so disbursed, without giving them notice of the claimed impropriety and an opportunity to attempt to rectify it and curtail their liability.
The Court therefore will not surcharge any of the non-Curran defendants in this action. Each will be liable only for the monies improperly disbursed to him or for his benefit, with interest from the date of disbursement. Curran, of course, will be surcharged only for improper expenditures made prior to his retirement on March 1, 1973.
5. Re Defendants' Attorneys' fees
Plaintiffs have further moved for an order enjoining defendants from employing in this action counsel paid or to be paid with funds of the NMU, and directing them and their counsel to return any such sums heretofore paid to them.
In response to the motion, defendants have filed the affidavits of Seymour Waldman of the law firm of Waldman & Waldman, who have recently been substituted as attorneys for the defendants Wall, Barisic, Martin, Miller and Bocker; of Selvyn Seidel of the firm of Hale Russell Gray Seaman & Birkett, who have recently been substituted as attorneys for Curran; and of Ned R. Phillips of the law firm of Phillips & Cappielo, who are presently counsel to the NMU. The Waldman and Seidel affidavits assert that none of their legal fees or disbursements on behalf of the defendants they represent are being paid for by the NMU. The Phillips affidavit asserts that the NMU counsel have performed no services on behalf of the defendants in the litigation and will perform none in connection with the appeal, and that no legal fees or disbursements of counsel for defendants in this action have been paid by the NMU except for approximately $ 15,400 which was paid to Mr. Koelzer's firm, "representing only a minor part of the services rendered by them in this extensive litigation," which was paid "only after many charges against the individual defendants were withdrawn or dismissed."
The Court agrees with defendants that, under the circumstances, the injunction which plaintiffs seek is unwarranted. Counsel for the Union apparently recognize that it is improper for the Union to advance funds for the defense of its officers against charges of breach of fiduciary duty. If the officers are exonerated, they may apply to the Court for reimbursement from Union funds. See Note, Counsel Fees for Union Officers Under the Fiduciary Provision of Landrum-Griffin, 73 Yale L.J. 443 (1964). It is premature to consider the possibility of reimbursement in this case until after disposition of any appeals.
6. Re the Resolution of August 27, 1979
Plaintiffs have asked the Court to declare null and void the resolution of the New York Port Meeting of the NMU on August 27, 1979 which purported to exculpate the Union officers for their payment to themselves of $ 100 monthly allowances. The resolution recited that the Court had "arbitrarily disregarded" the use of such allowances for "legitimate union expenses," and that the membership knew and approved of the allowances and was of the view "that the Union should be administered by its officials, not by the court." It was therefore resolved that the membership ratify "the constitutionality and the practice" of the allowance "past, present and future."
Plaintiffs assert that this resolution violates Section 501's express prohibition of general exculpatory provisions.
The Court does not agree that the resolution is a general exculpatory provision of the type proscribed by Section 501 that is, one which anticipatorily exonerates the officers from any future violation of their fiduciary responsibilities. However, it does purport to ratify past practices which the Court has found to be a violation of Section 501. Defendants' counsel nevertheless asserts that "no defendant has sought to rely upon that resolution or to utilize it in any way in exculpation of the judgment to be entered by the Court."
Unless and until that happens, the validity of the resolution is not before the Court for consideration. The Court's Opinion stands, in no way nullified by the resolution.
Defendant Curran has moved for reconsideration of that portion of the Court's Opinion which rules that Curran's pension should have been computed on the basis of his "net" salary rather than on the basis of his "total compensation," including the federal, state and local taxes paid thereon.
The motion is granted to the extent that the Court has reconsidered the matter, but the Opinion will not be amended as urged by Curran.
The Court cannot accept Curran's reasoning. Curran was voted a "net" salary in a specified annual amount. The Court concluded that this obligated the NMU to pay all of the federal, state and local income and social security taxes on his income, giving him the specified amount as take-home pay.
The Officers Pension Plan and the successor Staff Pension Plan both provided for pensions in an annual amount equal to 21/2% Of the pensioner's "average" salary for each year of service up to a maximum of 40 years (at which point the pension would equal the "average" salary). In computing the "average" salary under either plan, only the more recent periods of employment (when the officer's salary was invariably higher) were considered.
The scheme of both pension plans was thus to provide a prescribed ration between an officer's retirement benefits and his salary as an officer, the ratio being directly proportionate to his number of years of service. For an officer with 35 years of service, as Curran had, the pension benefits are fixed at 35 times 2.5% Or 87.5% Of his "average" salary as an officer.
In the case of all of the officers except Curran, there can be no doubt as to how the computation should be made. They received a regular or "gross" salary, out of which they paid their own income taxes. Their pension benefits obviously should be computed on the same basis. If one of them retires after 35 years of service, his pension is 87.5% Of his "average" salary, and he will continue to pay his own income taxes thereon.
No specific provision was made in the plan for someone who was paid a "net" salary. But it seems logical that the pension benefits should be computed in the same way as the salary in Curran's case an amount sufficient to leave him, after payment of all income taxes thereon, a "net" pension equal to 87.5% Of his "average net" salary.
If, instead, as Curran urges, his gross pension benefits were computed at the rate of 87.5% Of his gross compensation (including all federal, state and local taxes paid on his behalf by the Union), his net retirement benefits (after he had paid all taxes on the gross amount) would be greater than 87.5% Of his "average" net salary as an officer. This is because, as a retiree, he would be in a lower income tax bracket.
The only way to preserve the prescribed ratio between his retirement benefits and his salary as a Union officer is to compute both on the same basis that is, to give him gross pension benefits sufficient to leave him, after payment of all the income taxes thereon, a net amount equal to 87.5% Of his "average" net salary as an officer. This is what the Court provided in its Opinion.
Curran further contends that the Court should not have ordered on August 8, 1979 that, pending the entry of a final order, Curran would be paid pension benefits "in the amount of $ 2,447.42 net per month." It has been computed by Kipnis & Karchner, accountants for the NMU, that a gross monthly payment of $ 3,094.92 will leave Curran $ 2,447.47 net per month after taxes. Before the order in question, Curran had been receiving $ 4,641.03 per month, or $ 1,546.11 more.
Curran's position is that the Court had no power to enter an "interim order" which is injunctive in effect, and which is designed to recoup past overpayments, before a decision on appeal and even before final judgment in this case, without a showing of irreparable harm.
Curran ignores the circumstances under which the order was entered. The Court had rendered an Opinion to the effect that, in the 61/2 years since his retirement, Curran had received a total of some $ 120,000 in excessive pension benefits (not to mention hundreds of thousands of dollars in additional improper payments). The trustee of the Staff Pension Plan was in doubt whether, under the circumstances, pension payments to Curran should continue at all pending the appeal. The trustee understandably did not wish to expose itself to a claim of surcharge if the Court's determination that the previous level of payments was excessive was upheld on appeal, and the continuing overpayments could not be recouped.
In order to avoid financial hardship to Curran in the interim, the Court ordered that benefit payments, at the level which the Court had determined to be proper, continue pending the entry of final judgment. The reduction was not for the purpose of recouping past overpayments, but only for the purpose of preventing any further overpayments. Recoupment, if ultimately deemed appropriate, will come later.
The Court's order of August 8, 1979 will stand.
MOTION OF DEFENDANTS WALL, BARISIC, MARTIN, MILLER & BOCKER ("DEFENDANTS")
Defendants have moved for reconsideration of the three rulings of the Opinion adverse to them.
1. Re the Staff Pension Plan ("SPP")
Defendants have made a series of attacks on the Court's ruling that the SPP, considered in conjunction with the substantial severance pay which each retiring officer or staff member receives, is unreasonable because together they provide retirement income which may exceed the retiree's highest salary while working.
Defendants first assert that they did not know that the reasonableness of the pension plans was an issue before the Court and accordingly did not introduce any evidence thereon. Defendants' professed surprise is itself surprising. Judge Carter's order authorized an action, Inter alia, "For an accounting of the NMU Officers' Pension Fund." The Amended Complaint alleged in Paragraphs 33 and 34 that the officers' pension benefits were "unfair to the membership and * * * overgenerous and improper" and sought a determination of "fair pension benefits." In this Court's Memorandum of May 19, 1977, the section entitled "Officers Pension Plan (OPP)" began with the statement:
"Plaintiffs contend that the pensions paid to Union officials by the OPP are excessive * * *."
The section concluded:
"Before the Court can rule on this issue, Or on the reasonableness of the pensions themselves, it must have before it the kind of comprehensive evidence presented to Judge Pollack in Puma v. Brandenburg, supra. Therefore defendants' motion to dismiss this claim must be denied at this time." (Emphasis added).
That Memorandum was filed after the conclusion of plaintiffs' case, six and a half months before defendants were required to begin the presentation of their case and over eight months before they rested.
Defendants were thus put on specific notice that the reasonableness of the pension benefits was a live issue, at a time when they had ample opportunity for preparation to present any evidence they had bearing on the issue. They did not avail themselves of that opportunity. Thus, as the Court observed in its Opinion, it was left with no evidence, other than the plans themselves, and the financial records of the NMU, on which to base a determination of reasonableness. The Court was thus compelled to make the determination merely by comparing a pensioner's retirement income to his salary.
Now, in their Motion for Reconsideration, defendants have come forward with a considerable mass of material which they assert they would have presented if they had known that the issue was being litigated. In the spirit of informal truth-seeking which has characterized these proceedings, the Court will treat this as an offer of proof and will reconsider the issue in the light of such additional evidence.
Defendants also assert that they did not know that the officers' severance pay would be taken into account in determining the reasonableness of the SPP. That is perhaps unfortunate but surely unpersuasive. Where the severance pay is as large as it has been here, it becomes part of a retirement benefits "package" which must be considered in its entirety. For example, Joseph Curran was given a lump sum severance payment of $ 142,975 After taxes ($ 409,975 before taxes). Mel Barisic, who retired as Secretary-Treasurer in 1978, received $ 147,339 (before taxes). Such amounts cannot be airily dismissed as "relocation expenses," as defendants seek to do.
However, defendants do make a valid point which the Court had not mentioned in discussing, at page 55 of its Opinion, the level of retirement income which could be generated by investment of the severance pay, namely, that the severance pay is subject to income taxes in the year in which it is received, unless it is "rolled over" into an individual retirement account ("IRA").
Defendants further assert that the Court's computations of retirement income based on illustrative employees who had up to 40 years of service at the time of retirement are unrealistic, because no officer or staff member has yet retired with more than the 35 years of service which Joseph Curran had at the time of his retirement. Of all the present officers and staff members, only two employees, both secretaries, will have had 40 years of service by the time they reach the retirement age of 65. The five present officers will have had from 25 to 38 years of service by age 65.
Finally, defendants point out that, effective June 30, 1978, the severance pay structure was modified to impose much lower limits on the payments. Under the scheme in effect theretofore, each retiree who had more than six years of service received one month's pay for each year of service. Under the new arrangement, retirees with less than 25 years of service as of June 30, 1978 are limited to a maximum severance pay equal to 12 months' salary, while those with more than 25 years' service the NMU president, Shannon Wall, and two others are limited to a higher maximum equal to 24 months' salary.
Defendants omitted to mention that within a few months before June 30, 1978, most of national officers, including the defendants Barisic, Martin, Miller, Bocker, and Nesbitt, resigned. It seems obvious that the motive for their sudden mass exodus was to beat the deadline for reduction of the severance pay, and perhaps avoid other limitations on retirement benefits which might be imposed as a result of the Court's then-pending decision in this case. The unseemly haste of their departure may be appreciated from the fact that Barisic was only 56 years of age at the time of his retirement, Martin was 58, Miller 51, Bocker 52 and Nesbitt 60.
Thus the reasonableness of the retirement benefits "package" must be considered not only on the basis of the revised severance pay structure, but also on the basis of the benefits given those who "jumped ship" to beat the reduction.
Of the five officers who resigned shortly before June 30, 1978, Barisic received the highest severance pay, $ 147,339 before taxes or $ 99,389 after taxes. He has indicated his election of an optional lump sum payment in lieu of pension, in the amount of $ 359,840, although he has not yet received it. Assuming that this entire amount was received in the same year, it would be subject to federal and state income taxes in that year. Assuming further, for purposes of discussion, that the entire amount was subject to taxation at the maximum federal rate of 70% (a reasonable assumption if that amount was received the same year as the severance pay), a balance of $ 107,952 would remain after taxes. Lumping this with the $ 99,389 after-tax balance on his severance pay would bring his total retirement capital up to $ 207,341. Investing this amount in high-grade corporate bonds would yield him total retirement income of slightly more than $ 20,000 a year, without invading the principal. This is far less than the regular pension of $ 29,329 to which he was entitled, in addition to the income he could earn by investing his severance pay. Thus, it is obvious that he would not have elected the lump-sum option without the intention of rolling it over into an IRA.
If the $ 507,239 total of his $ 147,339 severance pay and his $ 359,840 lump-sum pension were rolled over into an IRA, no income taxes would be payable thereon at the time of retirement. However, defendants assert that this would severely limit the types of investment that could be made, adding that
"Virtually the only permissible investment for an IRA is a bank savings account. See Section 408(a)(2)."
But Section 408(a)(2) of the Internal Revenue Code (Title 26) says no such thing. It only requires that the IRA funds be placed in trust with a bank as trustee. IRA trustees permit a wide spectrum of investment options, designed to appeal to clients with a wide range of investment needs and tastes.
The record reflects no reason why IRA funds cannot be invested in high-grade corporate bonds, for example, to yield 10% Or more at current market prices. Thus Barisic would be able to obtain retirement income of over $ 50,000 a year, plus his Social Security benefits and Deep Sea pension and still leave an estate of over half a million dollars to his beneficiaries.
And Barisic retired prematurely at the age of only 56. If he had continued to work to the normal retirement age of 65 when he would have had 35 years of service instead of 26.5 his regular pension would have been 87.5% Of his "average" salary, rather than 66.25%. If he received raises at an average annual rate of 6% During the additional 8 years of his employment, he would have retired at an annual salary of $ 103,600; his "average" salary would have been about $ 92,000 and his regular pension would have been about $ 80,500 a year.
Alternatively, he could elect a lump sum payout of approximately $ 693,000 using the 6.5% Interest assumption and a 13-year life expectancy.
In addition, even under the newly reduced severance pay scheme, he would be entitled to severance pay equal to 24 months' salary, or $ 207,200, bringing his total lump sum receipts at the time of retirement up to $ 900,000.
Rolling this entire amount over into an IRA would avoid any income taxes at that time and permit its investment to yield up to $ 90,000 a year in retirement income, exclusive of his Social Security benefits and Deep Sea pension, while leaving almost a million-dollar estate intact for his beneficiaries. By retiring early, he gave this up, but obviously only because he wanted to take advantage of relatively even higher benefits while he could still do so.
The Court sees no reason to change its original decision that the pension benefits in effect until June 30, 1979 are so excessive as to constitute a violation of Section 501.
The Court does believe that the reduction of severance pay which went into effect for all but three employees on June 30, 1978 has gone a long way toward reducing the overall benefit package to a reasonable level. For example, an employee who retires at age 65 with 35 years' service, during the last five years of which he received annual raises averaging 6%, would receive a regular pension equal to 76% Of his final (highest) salary. In addition, he would receive severance pay equal to one-year's salary, which could be rolled over into an IRA and invested in high-grade bonds to bring his total retirement income up to 86% Of his top salary, in addition to his Social Security and Deep Sea pension, if any. While this is high, it is not so high as to shock the conscience of the Court, which cannot disregard the moderating effect of the chronic monetary inflation which will almost certainly continue for the predictable future.
However, if the same officer retired after 40 years' service, he would have retirement income equal to 97% Of his highest salary, plus Social Security and Deep Sea pension, a level which could be raised even higher by electing the lump-sum pension option, in view of the anachronistic 61/2% Interest assumption used in computing the present value of future payments. This does seem an inordinately high ratio of retirement benefits to salary.
The Court therefore believes that, in addition to the reduction in severance pay, the pension ceiling should be set at 35 years' service instead of 40. This will affect only a handful of the present employees.
The Court further believes that the reduction in severance pay should affect All employees rather than exempting the three who had had 25 years' service as of June 30, 1978. It is surely no mere coincidence that Shannon Wall, the current NMU president, was one of the three persons who will enjoy this favored treatment. This is disturbingly evocative of the favoritism accorded his predecessor, Joseph Curran.
One final modification of the pension structure should be made. At page 55 of its Opinion, the Court stated that the lump-sum and accelerated payment options permitted even greater 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." Defendants argue that instead of determining the proper discount rate by reference to the yields available on high-grade fixed income securities, the Court should look instead to the overall yield actually being realized on the investment of the pension funds. Because many of the fund's securities were purchased in an era of much lower yields than are obtainable today, the fund realizes an average return of about 6.5% On its principal. It would, of course, be useless to sell the lower-yield securities and reinvest the proceeds in higher-yield securities, because the market value of the former has dropped in substantially exact proportion to their yields.
It is precisely for this reason that defendants' premise is unsound. When a lump-sum payment is made to a retiree, the cash is not raised by selling the fund's older, lower-yielding securities. Instead, in a well-managed fund, there will be a certain amount of more liquid funds available, for example, in short-term certificates of deposit or treasury bills. If the pensioner did not elect, or the committee did not approve, a lump-sum option, these funds would be available instead for investment at the Then-current yield rates. If the fund can put this money into high-grade corporate bonds at a yield of 10%, it is nothing less than waste for them to approve a lump-sum option on which the fund makes an interest deduction of only 61/2% Per annum.
The fund's loss becomes a windfall to the pensioner, who can invest the lump sum to earn the same 10% The fund could have earned.
Thus, whether viewed from the standpoint of what the pensioner gets or from the standpoint of what the fund gives up, the interest assumption should be based on the yields obtainable on high-grade fixed income securities during the life expectancy of the pensioner. This involves some prognostication, but doubts should be resolved against the one who elects a lump-sum option, rather than against the fund, as they now are.
Pending modification of the pension plan in the respects discussed above, the Court adheres to the relevant portion of its Opinion.
2. Re the $ 100 Weekly Allowances
In its Opinion, the Court concluded that the $ 100 per week "allowance" which each officer has received without being required to account therefor was merely an unauthorized increase in compensation because each officer was furnished credit cards with which to charge expenditures for Union purposes, and also was reimbursed for all cash disbursements for such purposes, so that the cash "allowance" was wholly redundant.
Defendants assert that they did not understand that this "allowance" was among the "miscellaneous expenses" which the Court, in its Memorandum of May 19, 1977, indicated were still in issue.
It is true that the Court, in giving certain examples of the disputed personal expenses in its Memorandum, did not specifically refer to this allowance. But the Memorandum posed the issue in terms broad enough to include the allowance. The Court stated that plaintiffs "did introduce evidence that many personal items for Union officers were paid for by the Union;" that "(clearly) these payments for personal needs were compensation to officers in excess of that approved by the National Council and the Union membership;" and that "defendants should respond to plaintiffs' proof with evidence as to the pattern and practice of payments from Union funds for officers' personal expenses, including travel costs."
Nevertheless, again consonant with its objective of getting the facts without the hindrance of procedural formality, the Court will treat defendants' statements respecting the evidence they could have introduced as an offer of proof and will reconsider the issue in the light of this additional input.
Defendants first suggest that the allowances must be proper because they are reported to the Secretary of Labor on the Union's annual LM-2 reports. But the Department of Labor has no way of determining whether the allowances are spent for Union purposes or on personal expenses.
Defendants next point out that the Court was unable to determine how the allowances were expended, and assert that they were intended to cover minor cash expenses such as taxi fares and local telephone calls, which could not be charged on a credit card, and which were too small to justify the preparation of an expense voucher in order to obtain reimbursement from the Union.
The Court confronted this issue in its Opinion and concluded that the officers undoubtedly had some minor expenses for Union purposes which were not charged to or reimbursed by the Union, but the amount of these expenses was almost certainly exceeded by the amount of the officers' personal expenses, for restaurant meals and the like, which were charged to the Union. For example, William Perry testified that Union officers routinely applied for reimbursement for meals which he had paid for with Union funds. The officers validated their own expense vouchers and no one ever challenged them.
Defendants further point out that the officers of several other unions also receive a weekly cash expense allowance, notwithstanding the fact that they are provided with credit cards and are reimbursed for vouchered expenses. But the commonality of a practice is no guarantee of its propriety. The other unions which provide such allowances may have established accounting or oversight procedures to prevent their misapplication for personal expenses. On the record before it, the Court could not possibly determine the similarity of the practice in other unions, even if it were prepared, which it is not, to take the next step and conclude that because other unions act in this fashion, it is acceptable behavior for the NMU.
Defendants finally point out that the evidence established that the $ 100 weekly cash allowance was instituted in 1971 as a substitute for the individual automobiles which had theretofore been furnished to a number of the officers. However, the furnishing of the individual automobiles is itself the subject of challenge by these plaintiffs, as discussed at page 48 of the Opinion.
Defendants concede that there was never any express membership authorization for the allowances, but argue that the NMU Constitution authorizes the National Office to expend "such funds as it may deem necessary for the proper administration of the Union's affairs." This is no authorization for giving the officers an allowance which is spent for personal purposes and not on Union business. The Court is still firmly convinced that, in light of all the circumstances, the allowances in question represent nothing other than an increase in officers' compensation without the membership approval required by the NMU Constitution.
3. Re Foreign Travel
In its Opinion, the Court found that the officers and their wives have taken foreign trips which were paid for by the Deep Sea Fund, although the trips served no substantial purpose of the Deep Sea Fund or any other Union objective.
Defendants attack that ruling first on the basis that "Section 501 of the LMRDA does not extend to employee-benefit trust funds administered jointly by representatives of labor and management." Defendants add that because this issue is "legal, rather than factual" they will treat it in a separate Memorandum of Law.
However, in their supporting memorandum defendants cite only two cases on this issue, neither of which supports their position. Cuff v. Gleason, 515 F.2d 127 (2d Cir. 1975), was an action by a longshoreman against the trustees of a labor-management pension trust complaining of their determination that he was ineligible for a disability pension. The Court ruled that the action must be dismissed because neither Section 302 of the Labor Management Relations Act, 29 U.S.C. § 186, nor Section 501 confers federal jurisdiction over such a claim. In the other case, Morrissey v. Curran, 483 F.2d 480, 484 (2d Cir. 1973), Cert. denied, 414 U.S. 1128, 94 S. Ct. 865, 38 L. Ed. 2d 752 (1974), the court did state that "(t)he language of the section (501) is clearly aimed at union officers, not trustees; nor can a trust be equated with "a labor organization'." But this statement was in the context of a discussion of the prohibition in Section 501(a) of general exculpatory provisions in the constitution and by-laws of a labor organization. The Court concluded that Section 501 did not prevent exculpation of the trustees of a pension plan who were not union officers, except where they were guilty of "wilful misconduct." However, the Court proceeded to surcharge one of the trustees, Abraham Freedman, because, in making the challenged payments, he showed a "reckless indifference" to his duty as a trustee. The Court refused to surcharge the NMU president, Joseph Curran, as well, only because the district court had found that he had not, through his alleged domination of the trustees, forced them to make improper payments from the officers' pension fund to a non-officer, William Perry, and that finding was not clearly erroneous. The fact that, under the rubric of Section 501, the Court surcharged a non-officer Trustee makes it clear, A fortiori, that they would have surcharged a union officer if he had been implicated in the misapplication of the pension funds.
The protection of Section 501 is not limited to the general funds of the Union but "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 interests of the Union members obviously include the judicious husbandry of the funds contributed by the ship operator employers of union members to provide pensions for their retirement. The use of such funds for vacation travel of Union officers is clearly in culpable derogation of those interests.
Defendants further assert that the two European trips which the Court referred to in its Opinion both served a proper purpose of the pension fund, since on each trip there were meetings with retired union members living in Europe. The affidavit of Albert Franco, Administrator of the Deep Sea Fund, describes two such trips, one in 1964 and one in 1970. Franco avers that none of the travel expenses incurred on the 1964 trip were paid for with Deep Sea funds. If not, they were presumably paid from the NMU general fund, which is equally reprehensible if the travel did not serve a substantial union purpose.
Franco concedes that the expenses for the 1970 trip were paid with Deep Sea funds, but asserts that the trip was for the purpose of meetings in Madrid, London and Copenhagen with NMU pensioners. Franco states that at that time there were 313 Deep Sea pensioners in Spain and Portugal, 38 in Great Britain and 41 in "Scandinavia and the Low Countries." However, he does not say how many pensioners actually attended the meetings; nor does he mention what was discussed or what was accomplished. And, in any event, it still does not appear necessary to have taken a large number of officers and their wives for these meetings, nor was there any attempted explanation of the purpose of the side trip to Italy which Curran testified the group took.
The Court's ultimate ruling, at page 58 of its Opinion, was that the officers must make restitution for "(all) their foreign travel except that which they can show was reasonably required for specific Union business" and that "(u) pon an offer of proof, the matter will be referred to a Magistrate for hearing and report." The accounting which the Court has ordered will determine, Inter alia, the amount expended for foreign travel of NMU officers since 1963. The officers will have an opportunity to justify their trips if they wish; obviously they will be required to make restitution only if they cannot do so.
This does not shift the burden of proof to defendants, as they complain, but merely the burden of going forward. Plaintiffs have established a Prima facie case of impropriety which defendants must now overcome if they can.
Edward Pogor, a former Security Director of the NMU who retired in November 1976, has moved for leave to intervene and for reconsideration of the Court's Opinion insofar as it states that, pending approval of a modified Staff Pension Plan, no further payments will be made on lump-sum or accelerated payment options.
He states that he desires to elect a lump-sum option and that the Court's Opinion deprives him of this property right without due process.
The Court has found that the Staff Pension Plan, considered in conjunction with the severance pay, is so excessive as to constitute a violation of Section 501. Unless this decision is reversed on appeal, either the severance pay or the pension benefits will be reduced.
Pogor has apparently already received his severance pay. If he now receives the full lump-sum payment provided by the Staff Pension Plan, there may be no practical way of recovering the excess above the level ultimately approved.
To preserve the trust corpus, it was therefore necessary to stop lump-sum payments pending further order of the Court.
But to avoid subjecting retires to unnecessary hardship, the Court provided that "regular" pension payments at the levels provided by the SPP could be made, subject to recoupment of the excessive portion by reduction of future payments, with no waiver of the right of any retiree to elect a lump-sum or accelerated payment option during the period of the suspension and for thirty days thereafter.
Pogor, quite understandably, would like to "take the money and run" before it is finally decided whether there will be a reduction in the level of the payments. For the reasons stated, he cannot be permitted to do so. His motion for leave to intervene is granted only to permit filing of his motion for reconsideration. The latter motion is granted only to the extent that the Court has reconsidered the matter but is otherwise denied.
All of the motions are denied except to the extent indicated.