Back to DC Public Schools main page
Government and People
CASE NUMBER: 1:02CV02536 (EGS)
PLAINTIFF'S MOTION FOR A PRELIMINARY INJUNCTION AND TO APPOINT A MONITOR PURSUANT TO FEDERAL RULE OF CIVIL PROCEDURE 53As set forth in the accompanying Memorandum of Points and Authorities, the defendant, American Federation of Teachers ("AFT") has assumed an administratorship of the Washington Teachers Union ("WTU"). However, the AFT is also potentially liable to the WTU for breach of common law and federal statutory fiduciary duties. Consequently the AFT has a conflict of interest in certain areas of its administratorship particularly with regard to decisions relating to litigation and decisions that affect the future governance of the WTU.
Plaintiff, Nathan A Saunders II, seeks to remedy these conflicts through injunctive relief. Saunders, on behalf of the WTU respectfully moves the court under Federal Rules of Civil Procedure 65 for a preliminary injunction enjoining the AFT from settling any claims or cases relating to the WTU, employing former Officers or Executive Board Members of the WTU, making expenditures on behalf of the WTU that are outside of the ordinary course of business, including payments of delinquent back dues from the WTU to the AFT, or altering the WTU's constitution without the approval of this Court. Saunders simultaneously moves for the Court to appoint a monitor pursuant to Federal Rule of Civil Procedure 53, to be paid for by the AFT, and to oversee the actions of the AFT's administrator in accordance with this injunction. The monitor will provide reports and recommendations to the Court and the WTU membership that the AFT's proposed actions with regard to the subjects of the preliminary injunction are in the best interests of the members of the WTU.Respectfully Submitted,
WILMER CUTLER & PICKERING
2445 M. St. N.W.
Washington D.C. 20037
March 3, 2003
UNITED STATES DISTRICT COURT
Nathan A. Saunders II, (derivatively on behalf of the Washington Teachers Union), Plaintiff,
v.Esther Hankerson, et al., Defendants
CASE NUMBER: 1:02CV02536 (EGS)THE COURT, having considered Plaintiff's Motion For A Preliminary Injunction And To Appoint A Monitor Pursuant To Federal Rule Of Civil Procedure 53; and Memorandum and Points of Authorities in support thereof, and being advised of the grounds for the motion,
HEREBY ORDERS that Saunder's motion is GRANTED; that the American Federation of Teachers ("AFT") is enjoined from taking any action with regard to: settling any claims or cases relating to the WTU, employing former Officers or Executive Board Members of the Washington Teachers Union ("WTU"), making expenditures on behalf of the WTU that are outside of the ordinary course of business, including payments of delinquent back dues from the WTU to the AFT, or altering the WTU's constitution without the approval of this Court.
AND APPOINTS a monitor, to be paid for by the AFT, to oversee the actions of the AFT's administrator in accordance with this injunction and to provide recommendations and reports to the Court and the WTU membership that the AFT's proposed actions with regard to the subjects of the preliminary injunction are in the best interests of the members of the WTU.
Emmet G. Sullivan
Nathan A. Saunders II, (derivatively on behalf of the Washington Teachers Union), Plaintiff,
v.Esther Hankerson, et al., Defendants
CASE NUMBER: 1:02CV02536 (EGS)
MEMORANDUM OF LAW IN SUPPORT OF PLAINTIFF'S MOTION FOR A PRELIMINARY INJUNCTION AND TO APPOINT A MONITOR PURSUANT TO FEDERAL RULE OF CIVIL PROCEDURE 53
TABLE OF CONTENTS
A. AN INJUNCTION IS NECESSARY TO SAVE PLAINTIFF FROM IRREPARABLE HARM
FEDERAL CASESAlton & Southern Railway. Co. v. Brotherhood of Maintenance of Way Employees, 883 F. Supp. 755 (D.D.C. 1995), affd, 72 F.3d 919 (D.C. Cir. 1995)
Brink v. DaLesio, 453 F. Supp. 272 (D. Md. 1978)
Church of Scientology International v. Eli Lilly & Co., 848 F. Supp. 1018 (D.D.C 1994)
Clayton v. International Union, United Automobile, Aerospace, and Agriculture Implement Workers, 451 U.S. 679 (1981)
Cone Brothers Contracting Co. v. Bricklayers, Masons, Plasterers, Marble Masons, Tile Layers, Terrazzo Workers and Cement Finishers Union No. 2; Florida, 263 F.2d 297 (5th Cir. Government of Rwanda v. Rwanda Working Group, 227 F. Supp. 2d 45 (D.D.C. 2002)
Head v. Brotherhood. of Railway, Airline and Steamship Clerks, Freight Handlers, Express Station Employers, 512 F.2d 398 (2d Cir. 1975)
International Union United Mine Workers v. Dist. 50 United Mine Worker's, 435 F.2d 421 (D.C. Cir. 1970), cert. denied 402 U.S. 906 (1971)
Local 28 Sheet Metal Workers' International Association v. EEOC, 478 U.S. 421 (1986)
Pignotti v. Local #3 Sheet Metal Workers' International Association, 477 F. 2d 825 (8th Cir. 1973)
Shirley-Herman Co., v. International Hod Carriers, Bldg. & Common Laborer's Union, Local No. 210, 182 F.2d 806 (2d Cir. 1980)
United States v. International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers, AFL-CIO, 803 F. Supp. 748 (S.D.N.Y. 1992)
United States v. Microsoft Corp., 147 F.3d 935 (D.C. Cir. 1998)
Washington Metro Area Transit Commission v. Holiday Tours, Inc., 559 F. 2d 841 (D.C. Cir. 1977)
Weaver v. United Mine Workers, 492 F.2d 580 (D.C. Cir. 1973)
Woodell v. International Brotherhood of Electrical Workers, Local 71, 502 U.S. 93 (1991)
STATE CASESGlekas v. Boss & Phelps. Inc., 437 A.2d 584 (D.C. 1981)
Remeikis v. Boss & Phelps Inc., 419 A.2d 986 (D.C. App. 1980)
Rose v. Silver, 394 A.2d 1368 (D.C. 1978)
Security National Bank v. Lish, 311 A.2d 833 (D.C. 1973)
DOCKETED CASESSaunders v. Hankerson et al., No. 02-2536 (EGS)
UNPUBLISHED CASESPetties v. District of Columbia, No. CIV. A. 95-1048, 2002 WL 31681362 at 5 (D.D.C. Nov. 22, 2002)
United Mine Workers of America v. Boyle, No. 3436-69, 1978 WL 1601 (D.D.C May 3, 1978)
United States v. Local 1804-1. International Longshoremen's Association, No. 90 Civ. 0963, 2003 WL 194584 (S.D.N.Y. Jan. 29, 2003)
STATUTESLabor-Management Relations Act (LMRA), Section 301, 29 U.S.C. § 185(a)
Labor-Management Reporting and Disclosure Act of 1959 (LMRDA) 29 U.S.C. § 501(a)
Labor-Management Reporting and Disclosure Act of 1959 (LMRDA), 29 U.S.C. § 501(b)
RULESFederal Rule of Civil Procedure 53
Federal Rules of Civil Procedure 65
Federal Rule of Evidence 801(d)(2)
Restatement (Second) Torts § 874, cmt a
The AFT breached its fiduciary duty and duty of care to the WTU by failing to enforce its audit provisions against the WTU between the years 1996 and 2002. During that time period, several Executive Board members, WTU staff, and their associates misappropriated approximately five million dollars ($5,000,000.00) in Arm funds. By failing to enforce its audit procedures against the WTU, the AFT permitted the WTU's treasury to be depleted and the WTU to slide into debt with the AFT and other creditors.
When the damage was finally discovered in July of 2002, the AFT waited six months, until January of 2003, before assuming an administratorship of the WTU. After unsuccessfully seeking redress from both the WTU and the AFT, the plaintiff, Nathan A. Saunders II, filed a derivative suit on behalf of the WTU membership against the AFT and other defendants in December of 2002. The AFT did not file a lawsuit against the individuals involved in the misappropriation until January 2003. It did not include the Independence Federal Savings Bank, which appeared to be complicit in the misappropriation, as a Defendant in its lawsuit, until February of 2003. It has yet to take any action against the individuals at the AFT, or on the Executive Board of the WTU whose lapses in oversight permitted the situation to develop.
The AFT has a conflict of interest between its role as administrator of the WTU and its role as a party potentially liable to the WTU. While the AFT has an important role to play as an administrator, the members of the WTU deserve assurance that those areas closest to the area of conflict -- for example decisions related to litigation and decisions affecting the future governance of the WTU -- have been made solely in the best interests of the WTU.
Saunders brings this motion pursuant to Federal Rule of Civil Procedure 65 for a preliminary injunction enjoining the American Federation of Teachers from settling any claims or cases relating to the WTU, employing former Officers or Executive Board Members of the WTU, making expenditures on behalf of the WTU that are outside of the ordinary course of business, including payments of delinquent back dues from the WTU to the AFT, or altering the WTU's constitution without the approval of this Court. Saunders simultaneously moves for the Court to appoint a monitor pursuant to Federal Rule of Civil Procedure 53 to oversee the actions of the AFT's administrator and to provide assurances to the WTU and recommendations to the Court that the AFT's proposed actions are in the best interests of the members of the WTU with regard to the aforementioned subjects of the preliminary injunction.
The AFT is the parent labor organization of the WTU. All members of the WTU are members of the AFT. The AFT assumed an administratorship of the WTU effective January 22, 2003, after it was discovered that former members of the WTU Executive Board, WTU employees, and their friends and families had engaged in a scheme to misappropriate WTU funds.1 number of other individuals were involved including: Cheryl and Michael Martin, Hemphill's daughter and son in law, Errol Aldermann, Michael Martin's business associate, and Gwendolyn Clark, Bullock's sister. See id. At least one of the Executive Board members, Esther Hankerson, the Vice-President, should have known that Bullock was writing WTU checks to herself. See id. at 25-26 (Bank alerted Hankerson that her signature had been forged on an $8,000 check made payable to Bullock). During the course of the misappropriation, neither Hankerson nor any other member of the WTU Executive Board or Board of Trustees questioned the expenditures being made by Bullock or Baxter. See id. at 26.
The fraud and theft finally came to light in June and July of 2002 after Bullock caused an unauthorized dues deduction to be made from the paychecks of the WTU membership. See Forensic Investigation at 3, 8-9; "Teachers Want D.C. To Share Burden; City, Schools Faulted in Union Dues Problem," Washington Post at B01, Jan 30, 2003, Ex. 2 to Byme Decl. The amount that was supposed to be deducted from each paycheck was sixteen dollars ($16.00); the amount actually deducted was one hundred sixty dollars ($160.00). See Forensic Investigation at 3-4. At least one WTU member complained to the AFT, which commenced an investigation into the WTU finances in August of 2002. See id. at 3-4, 9.
The AFT produced its preliminary audit results on January 16, 2003. See Forensic Investigation. As a result of the investigation, the following facts have come to light:
Notably, the AFT's Forensic Investigation does not state the amount of the delinquent per capita dues the AFT received in June of 2002, nor does it state how much is still due and owing by the WTU to the AFT in delinquent dues.
If the AFT had abided by the terms of its own constitution, the misappropriation of funds at the WTU likely would have been discovered long before to August of 2002. The AFT's constitution requires its local unions, such as the WTU, to submit an annual financial statement for the local, including a statement of assets and liabilities and statement of income and expenses, to the AFT Secretary-Treasurer within five months after the local's fiscal year end. See AFT Constitution art. ix § 8, Ex. 3 to Byrne Decl. The AFT's constitution also requires its local unions, like the WTU, to submit audits of the local's finances to their members and to the AFT at least every two years. See id. art. iv § 6.
The AFT further has assumed the duty of assisting and providing advice to local treasurers and audit committees in maintaining the locals' finances and conducting the audits. For example, the AFT provides two guidance documents on its website for treasurers and audit committees of local unions.3
The first publication, "Keeping the Records Straight,"
outlines bookkeeping procedures and financial control programs. See
"Keeping the Records Straight," Ex. 4 to Byrne Decl. It
provides advice on dues and dues collecting, membership records and
reporting, budgeting, financial, control procedures, the local's
checking account, keeping financial records, financial reporting,
federal and state reporting requirements, payroll and payroll taxes,
paying the per-capita tax to the AFT, organizing a credit union, and
accounting for Committee on Political Education ("COPE")
funds. See Ex. 4 to Byrne Decl. The introduction states that "[t]his
manual was prepared to assist local union officers who are responsible
for the financial records of their local union. It is the purpose of
this book to provide guidelines for keeping the records straight but not
to dictate an exact procedure,
except where a requirement from the AFT constitution or the IRS is
See id. at 1 (emphasis added). In addition to recommending that local
unions hire accountants and attorneys to assist them, the AFT provides a
staffed hotline phone number to answer local treasurer's questions. It
describes this service as "expert advice" stating, "[o]ur
staff is also prepared to assist local officers. To reach our staff,
please call the AFT Financial Services Department at 1-800-238-1133
at times, can save a good deal of money as well as prevent needless
frustration." See id. (emphasis added).
The second publication, the "AFT Guidelines for Audit Committees," outlines the procedures to be used by members of a local union's audit committee for conducting audits in the event that the local determines not to hire an outside accountant. See AFT Guidelines for Audit Committees ("AFT Guidelines"), Ex. 5 to Byrne Decl. The document commences with a letter from Edward J. McElroy, the AFT's Secretary-Treasurer to the local's Audit Committee. It states that:
Ex. 5 to Byrne Decl., introductory letter (emphasis added). The language of the guidelines is mandatory. The "Instructions" state that the "purpose of this review [the audit] is to make sure that the financial statements are accurate by verifying from which they are produced [sic], and to assure the membership that the union's funds are being handled properly." Id. at 1. As with the "Keeping the Records Straight" publication, the AFT holds itself out as offering advice for committees facing difficulties. It states that "[i]f in performing your examination you discover that the records have so many deficiencies that you are having trouble writing your report, or if you discover that not all funds are accounted for, contact the AFT Financial Services Department for advice at (202) 879-4.493." Id. at 12.
The AFT has significant powers to enforce its audit requirements, including the power to investigate a local union when the local's conduct fails to comply with the provisions of the AFT constitution, or when the local's conduct is "not in harmony with the principles of the AFT and tends to bring the AFT into disrepute." See AFT Constitution art. vi §§ 14(b) & (c), Ex. 3 to Byrne Decl. In addition, the AFT can commence an investigation or suspend a local for failure to pay its dues to the AFT. See id, at art. vi § 14(c); art. ix §§ 2, 3, 4 and 5. The AFT currently claims that the WTU owes five hundred thousand dollars ($500,000.00) in delinquent dues payments to the AFT, yet it did not commence any investigation to determine why the WTU was delinquent until August 2002. See "Teacher's Union Owes $2.5 Million," The Washington Post, Feb. 23, 2003 (AFT's disclosures indicate that the WTU owes it $500,000), Ex. 6 to Byme Decl.
The AFT failed to enforce any of its audit requirements against the WTU. The AFT did not receive any audits from the WTU after 1996, although the WTU should have conducted at least three audits between 1996 and 2002. See Forensic Investigation at 9 (citing lack of adherence to basic internal controls that existed at the WTU, and lack of maintenance of financial records and supporting documentation). The AFT and McElroy have implicitly conceded that they have a duty to follow up with the AFT's local unions that do not submit audit statements. On September 30, 2002, McElroy wrote to locals that had failed to submit statements for 2001 requesting that they comply with the article IV section 6 requirement within 60 days. See Letter from Edward J. McElroy, Secretary-Treasurer, AFT, to Presidents and Treasurers of Local Unions, (Sept. 30, 2002), Ex. 9 to Byrne Dec1.4 As a dues-paying local of the AFT, the WTU and its members were entitled to the level of oversight set forth in the AFT's constitution for the entire period of 1996 to 2002. The AFT's failure to demand audits meant that Bullock, Baxter, Hemphill, Holmes, Clark, Michael and Cheryl Martin and Alderman's actions were not scrutinized as they should have been under the AFT's constitution. As a result of the AFT's failure, the WTU is in serious financial difficulty and is unable to competently represent its members.
Further Exhaustion of Administrative Remedies Is Futile
Saunders asserts that any further attempts to exercise administrative remedies against the AFT, even assuming that such remedies are available, would be futile because the AFT denies it had any responsibility to enforce its audit requirement. For example, in this Court on January 21, 2003, the AFT represented that it had no duties to monitor the WTU's finances. Counsel for the AFT stated that:
The National Union has very limited powers over the locals. [The AFT] is an unusual union in that regard, where the locals are very autonomous and the first instance of governance is to the locals... There are limited powers that the AFT has over a local, and sometimes they go from almost nothing, with a large gap, up to trusteeship, which is a process that has begun[.] (Emphasis added.)
Saunders v. Hankerson et al., No. 02-2536 (EGS) Tr. Status Hearing, Jan. 21, 2003 at 6. The AFT also represented that it had no duties to oversee the completion and presentation of the WTU's audit process. Counsel for the AFT stated that:
The audits are for the membership not the AFT. And, indeed there are no powers specifically given to the AFT in regard to these audits. There is no requirement to audit the audit or do anything about it. Id. The AFT has failed to take action against those AFT officers and employees responsible for ensuring that the audit process at the WTU and its other locals took place or that the WTU was complying with its financial obligations to its membership and to the AFT. Any further attempts to exercise administrative remedies against the AFT would be futile.
The Plaintiff Seeks The Appointment of A Monitor
The AFT has a conflict of interest between its role as an administrator of the WTU and its role as a party potentially liable to the WTU. The AFT has an important role to play and resources that may be of great benefit to the WTU. At the same time, however, the members of the WTU deserve assurance that those decisions coming closest to the area of conflict -- for example decisions related to the litigation and decisions that affect the future governance of WTU -- have been made solely in the best interests of the WTU and without regard to any other interests of the AFT. A requirement that these (and only these) decisions come before the Court or before a monitor appointed by the Court will best provide this assurance. Consequently, Saunders seeks the appointment of a monitor to be paid for by the AFT, to ensure that all decisions taken by the AFT administrator to settle claims or cases relating to the WTU, to employ former WTU Officers or Executive Board members, to make non-ordinary course expenditures, including the payment of any sums the AFT claims it is owed by the WTU, or to amend the WTU constitution, are in the best interests of the members of the WTU.
The AFT has both created a fiduciary duty and an ordinary duty to act with care to ensure that its audit requirements are complied with, as is evidenced by:
The AFT did not enforce its audit requirements with regard to the WTU. This negligence and breach of fiduciary duty is actionable under both common law and Federal labor law.
I. A PRELIMINARY INJUNCTION IS NECESSARY TO PROTECT THE WTU'S INTERESTS
In Washington Metro. Area Transit Comm'n v. Holiday Tours, Inc., 559 F. 2d 841 (D, Cir. 1977), the D.C. Circuit set forth a four-factor balance of equities test to determine the appropriateness of injunctive relief.5 The factors are (1) whether the petitioner has "made a strong showing that it is likely to prevail on the merits;" (2) whether the petitioner has "shown that without such relief it will be irreparably injured;" (3) whether the issuance of injunctive relief would "substantially harm other parties interested in the proceedings;" (4) whether injunctive relief is in the public interest. Id at 843 citing Va. Petroleum Jobbers Ass'n v. FPC, 259 F.2d 921 (D.C. Cir. 1958). In determining the relative weight of the first factor to the other equitable factors, Holiday Tours held that courts must apply a flexible approach:
Id. at 843. See also Petties v. District of Columbia, No. CIV. A. 951048, 2002 WL 31681362 at* 5 (D.D.C. Nov. 22, 2002) ("Plaintiffs are not required to prevail on each of these factors. Rather under Holiday Tours, the factors must be viewed as a continuum, with more of one factor compensating for less of another.")
A. AN INJUNCTION IS NECESSARY TO SAVE PLAINTIFF FROM IRREPARABLE HARM
The current situation is complicated by the fact that AFT's negligence and breach of fiduciary duties render the AFT partly responsible for the misappropriation of WTU's funds. While the misappropriation created an emergency situation that made it proper under the LMRDA for the AFT to impose an administratorship, the AFT's administrator should be enjoined from taking certain actions in order to avoid actual or apparent conflicts. The actual and apparent conflicts discussed below -- some of which have, already occurred -- will hinder efforts to turn the WTU into a viable union and, thus, irreparably harm the Union and its members.
The most obvious conflict is that the AFT is administering the WTU through an administrator who is not independent of the AFT while, at the same time, the AFT is potentially liable to the WTU for its negligence and breach of fiduciary duty. One problem created by this situation is the issue of whether the WTU will be required to pay the AFT $500,000 in back dues. See "Teacher's Union Owes $2.5 Million," The Washington Post, Feb. 23, 2003 (AFT's disclosures indicate that the WTU owes it $500,000) Ex. 6 to Byrne Decl. In June 2002, the WTU owed the AFT an undisclosed amount in back dues. It appears, however, that the former WTU President used some funds from the $160 improperly garnered from each WTU member's paycheck in June and July of 2002 to pay at least a portion of the Union's back dues. See Forensic Investigation at 3-4, 9 (AFT commenced its investigation because of the coincidence of WTU's payment of large sums of delinquent dues with WTU member complaints of the excess dues deduction.).
The AFT has never fully explained whether the money it received in June 2002 was the money from the unauthorized dues deduction, nor has it disclosed how much money it received at that time. Moreover, the AFT's current claim against the WTU takes no account of the fact that it had the authority under its constitution to commence an investigation into why WTU was delinquent in its dues well before it did and before the amount of the delinquency reached the level of at least $500,000.6 The issue of what is actually owed by the WTU to the AFT is now compounded because the AFT has full control of the WTU's finances. This will raise significant concerns in the minds of the WTU's members about the AFT giving itself preference in any money realized from the sale of the assets seized by the government or any other source of recovery.
A second problem involves the AFT's retention of Esther Hankerson as a paid employee at her former Vice-President's salary of approximately $87,000 per annum. Hankerson was the VicePresident of the WTU during Bullock and Baxter's tenure. Hankerson should have known that Bullock was misappropriating WM funds because the WTU's bank called Hankerson to ask about what appeared to be a forged version of Hankerson's signature on a WTU check. See Forensic Investigation at 25-26. Hankerson allegedly confronted Bullock, who promised to repay the money, however, Hankerson made no effort to alert anyone else to the problem, or to ensure that the money was actually repaid. Id. The AFT's continued employment of Hankerson at her former salary is totally inappropriate, and is not in the best interests of the WTU membership.
Similar problems exist with regard to the redrafting of the WTU's constitution. The AFT has suspended the WTU's constitution during the period of its administratorship. It has indicated that changes will be made to the WTU's governance. Any changes to such a fundamental document require a process that is free of any appearance of conflict.
The current examination of the WTU's problems and restructuring of the WTU is at a crucial juncture. Changes need to be made to the union's governance and management system, but they must be achieved in as open a manner as possible with full assurance that they are truly in the best interests of the membership, rather than in the best interests of the AFT. Failure to ensure that there is adequate impartial oversight of the process will result in a high risk of irreparable injury to WTU and its membership. See Alton & S. Ry. Co. v. Bhd. of Maint. of Way Employees, 883 F. Supp. 755 (D.D.C. 1995) ("Where, as here, there is a high risk of imminent irreparable injury, the Court finds that injunctive relief would be appropriate even if the . . . likelihood of success on the merits were quite slim."), aff'd, d, 72 F.3d 919 (D.C. Cir. 1995).
B. THE DEFENDANTS WILL NOT BE SIGNIFICANTLY HARMED BY THE ISSUANCE OF AN INJUNCTION
As stated above, Saunders is not seeking dissolution of the AFT's administratorship. Instead he is seeking oversight of the AFT's administratorship in certain discrete areas by a neutral third party with the power to make reports and recommendations to the Court. Thus, there will be no external interference in the AFT's day-to-day conducting of the WTU's affairs. Instead, the monitor will focus on the large decisions affecting the WTU's future that must be made under these extraordinary circumstances. This will provide a level of transparency and accountability that is not currently possible. See. e.g., Local 28 Sheet Metal Workers' Int'1 Ass'n v. EEOC, 478 U.S. 421 (1986) (while the court had imposed an administrator to enforce its order, the union maintained day to day control of its affairs, but even if there was interference, the public good outweighed the union's interest in self governance).
C. THE ISSUANCE OF AN INJUNCTION IS IN THE PUBLIC INTEREST
The issuance of an injunction is in the public interest. Both the WTU's membership and the general public are deeply interested in the outcome of this case and in ensuring that teachers are protected in the future. The appointment of an independent monitor will assure all WTU members and the general public that their interests are being protected, while permitting the AFT to investigate the issues associated with the misappropriation and to remain involved in the restructuring of its local.
D. SAUNDERS HAS MADE A STRONG SHOWING OF LIKELY SUCCESS ON THE MERITS
Saunders has brought four claims against the AFT derivatively on behalf of the WTU and has a strong likelihood of succeeding on all four claims. First, Saunders is suing both the AFT, as an agent of the WTU, and the AFT's Secretary-Treasurer, Edward McElroy, as an officer of the AFT, under the Labor-Management Reporting and Disclosure Act of 1959 (LMRDA), 29 U.S.C. § 501(b), for breach of fiduciary duty. Second, Saunders is suing the AFT for commonlaw breach of fiduciary duty. Third, Saunders is suing the AFT for common law negligence. Finally, Saunders is suing the AFT for breach of its constitution, which constitutes a contract under § 301 of the Labor-Management Relations Act (LMRA), 29 U.S.C. § 185(a).
1. The AFT and McElroy Breached Their Fiduciary Duties Under the LMRDA, 29 U.S.C. § 501(b).
Under the LMRDA, officers and agents of a union assume a fiduciary duty to the members of the union when dealing with union funds or property. Section 501 (a) of the LMRDA states that:
See 29 U.S.C. § 501(a). A right of action is provided to individual members of a union if the union fails to act within a reasonable time of being requested to take action, to proceed on a derivative basis against the officers, and agents, and representatives of the union. See 29 U.S.C. § 501(b); Weaver v. United Mine Workers, 492 F.2d 580, 585 (D.C. Cir. 1973). Neither the AFT nor the WTU acted within a reasonable time of being requested to do so by Mr. Saunders and other teachers.
The AFT's Secretary-Treasurer, McElroy, is an officer of the AFT. Under the AFT's constitution, McElroy is responsible for ensuring that the AFT receives a copy of the WTU's annual financial statement and the biennial audit. See AFT Constitution art. ix § 8, art. iv§ 6, Ex. 3 to Byrne Decl.; Letter from Edward J. McElroy, Secretary-Treasurer, AFT, to Presidents and Treasurers of Local Unions, (Sept. 30, 2002), Ex. 9 to Byrne Decl. Consequently, he owes fiduciary duties to the WTU and its members to ensure that the financial statements and audits are received and, if they are not received, to investigate why they are not received. See United States v. Int'1 Bhd. of Teamsters, Chauffeurs, Warehousemen and Helpers, AFL-CIO, 803 F. Supp. 748 (S.D.N.Y. 1992) (Secretarytreasurer of local union held liable for failure to investigate and take remedial action against criminal activity).
The AFT functions, in part, as the WTU's agent at the national level. By adopting provisions in its constitution requiring locals to submit annual financial statements and biennial audits that were to be sent to both the AFT and the local's members, the AFT entered into an agency relationship with the WTU and its members to ensure that such financial statements and audits took place and were presented to the WTU's members. "Congress expected that the principles of § 501 (a) would incorporate common law precedents defining the fiduciary obligations of agents and trustees `with such adaptations as might be required to take into account the special problems and functions of a labor organization.'" Brink v. DaLesio, 453 F. Supp. 272, 279 (D. Md. 1978).
Under District of Columbia Law,7 "an agent is a person who is authorized by a principal to act on her behalf." Government of Rwanda v. Rwanda Working Group, 227 F. Supp. 2d 45, 63 (D.D.C. 2002) citing Johnson v. Bechtel Assoc. Prof'l Corp., 717 F.2d 574, 589 (D.C. Cir. 1983). The agent-principal relationship is characterized by an indication by the principal that an agent will act on his behalf and subject to his control, and a manifestation of the agent's consent to so act. See id. citing Rose v. Silver, 394 A.2d 1368, 1371 (D.C. 1978). "An agent owes her principal a fiduciary duty and a duty of loyalty." Id.
In this case, by affiliating with the AFT rather than with another national educational labor organization, the WTU granted the AFT permission to act on its behalf: The AFT's constitution and publications giving advice to its locals regarding constitutional requirements manifest the AFT's assent to this relationship and indicate the scope of its duties. These duties include providing "expert advice" to locals in ensuring the control of their finances, and compliance with the "financial review mandated by Article IV, Section 6 [of the AFT constitution]." See Ex. 5 to Byrne Decl., introductory letter. The WTU and its membership were entitled to rely on this relationship and the fiduciary duties AFT assumed under it: See Glekas v. Boss & Phelps, Inc., 437 A.2d 584 (D.C. 1981) (agent is liable for duties it has assumed on behalf of a principal). As a result, the AFT owes a fiduciary duty to the WTU to ensure that the AFT and the WTU's members received the WTU's annual financial statement and the three biennial audits between 1996 and 2002. See Int'1 Union United-Mine Workers v. Dist. 50 United Mine Worker's, 435 F.2d 421 (D.C. Cir. 1970), cert. denied 402 U.S. 906 (1971) (Under the LMRDA, autocratic control by a national over the finances of a local creates a fiduciary duty to protect the local's interests).8
Neither McElroy nor AFT appears to dispute that they did not receive the required biennial audit at least every two years. By failing to ensure that the WTU adhere to the AFT's constitutional requirements, the AFT and McElroy breached their fiduciary duties to the members of the WTU. See id.
2. The AFT Has Breached Its Common Law Fiduciary Duties.
The Restatement (Second) of Tort's states that a fiduciary relationship exists when one party "is under a duty to act for or give advice for the benefit of another upon matters within the scope of the relationship." Restatement (Second) Torts § 874, cmt a; Church of Scientology, 848 F. Supp. 1027 (D.D.C 1994). "[W]hether there exists a fiduciary relationship is a fact-intensive question, involving a searching inquiry into the nature of the relationship, the promises made, the type of services or advice given and the legitimate expectations of the parties." Church of Scientology, 848 F. Supp at 1028. As discussed above, the AFT through its constitution assumes the duty of ensuring that audits are conducted by the WTU every two years and that an annual financial statement is prepared each year. The AFT has also held itself out as an authority that provides "expert advice" to locals in establishing and maintaining their financial practices. Moreover the mandatory language involved in the AFT's advisory documents requiring its locals to institute standard financial controls, coupled with the AFT's constitutional ability to enforce its constitutional requirements, creates a legitimate expectation in the WTU that the AFT will ensure compliance with the audit requirements. As stated above, the AFT does not appear to dispute that the audits never took place. The AFT is liable for common law breach of fiduciary duty for failing to ensure that the audits were conducted and financial statements were presented.
The AFT's failure to enforce the audits required by its constitution also gives rise to liability in negligence at common law. In the District of Columbia, "one who assumes to act, even though gratuitously, may thereby become subject to the duty of acting carefully." Remeikis v. Boss & Phelps Inc., 419 A.2d 986, 991 (D.C. App. 1980); Sec. Nat'l Bank v. Lish, 311 A.2d 833, 834 (D.C. 1973) (where information is supplied indirectly for the benefit of a third party, one engaged in supplying information has duty of reasonable care). As discussed above, the AFT assumed a duty to the WTU and its members to receive bi-ennial audits from the WTU. This duty required it to act carefully to ensure that the audits were actually received on a timely basis. The WTU membership has suffered losses as a proximate result of the AFT's breach of duty. If the AFT had not been negligent, the misappropriation of WTU's funds would likely have been discovered long before July 2002.
4. The AFT Breached Its Constitution Under Section 301 of the LMRA.
In addition to breaching its fiduciary duties, the AFT has also breached its constitutional duties to the WTU under Section 301 of the LMRA, 29 U.S.C.§ 185(a). The provision states: "Suits for violation of contracts between an employer and a labor organization representing employees in an industry affecting commerce as defined in this chapter or between any such labor organizations, may be brought in any district court of the United States having jurisdiction of the parties . . . ." The AFT's constitution constitutes a contract between the AFT and its local members under which the AFT assumes oversight responsibility over the local's finances. See Woodell v. Int'l Bhd. of Elect. Workers, Local 71, 502 U.S. 93, 98-99 (1991). The AFT and the WTU are both "labor organizations representing employees in an industry affecting commerce." 29 U.S.C.§ 185(a). The "affecting commerce" requirement of the provision has been held to be contemporaneous with the reach of the commerce clause. See Shirley-Herman Co., v. Int'1 Hod Carriers, Bldg. & Common Laborer's Union, Local No. 210, 182 F.2d 806 (2d Cir. 1980); Cone Bros. Contracting Co. v. Bricklayers, Masons, Plasterers, Marble Masons, Tile Layers, Terrazzo Workers and Cement Finishers Union No. 2. Florida, 263 F.2d 297 (5th Cir. 1959) (defining "affecting commerce" in the context of § 303 of the LMRA and concluding it applied to all of an employer's activities, not just its business).
Saunders brings this action derivatively to assert WTU's rights against the AFT for breach of that contract.9 The AFT's failure to adequately ensure that WTU submitted audits to the WTU membership and to the AFT violates the AFT's constitution. As a result of the AFT's breach, the WTU has been damaged to such an extent that it is no longer able on its own to adequately represent its members in their collective bargaining agreements or to perform other duties that it owes to its members.
E. THE BALANCE OF EQUITIES IN THIS CASE FAVORS GRANTING THE PLAINTIFF'S MOTION
When the four factors of the Washington Metro. Area Transit Comm'n v. Holiday Tours, Inc., 559 F. 2d 841, standard for granting injunctive relief are applied to this case and weighed against one another they favor granting Saunders motion. The WTU will suffer irreparable injury unless the Court ensures that there is adequate oversight of AFT actions in administering the WTU. There is a strong likelihood of success on the merits. The AFT will not be harmed by the plaintiff's requested relief because it does not interfere with the day to day aspects of administering the WTU. And, finally, ensuring transparency of this process is resoundingly in the public interest and in the best interests of the WTU. Thin, Saunders moves for a preliminary injunction enjoining the American Federation of Teachers from settling any claims or cases relating to the WTU, employing former Officers or Board Members of the WTU, making expenditures on behalf of the WTU that are outside of the ordinary course of business, including payments of delinquent back dues from the WTU to the AFT, or altering the WTU's constitution without the approval of this Court.
II. THE APPOINTMENT OF A MONITOR TO OVERSEE THE OPERATIONS OF THE AFT'S ADMINISTRATOR IS APPROPRIATE UNDER THE CIRCUMSTANCES.
An independent monitor will expedite enforcement of the preliminary injunction order. Federal Rule of Civil Procedure 53, which governs the appointment of monitors, or special masters, states that, in a jury action, a matter can be referred to a special master when "issues are complicated." Fed. R. Civ. P. 53(b). This case involves a number of "complicated" issues because of the procedural posture of the parties and AFT's conflicts of interest. Moreover, monitoring compliance with court orders also raises complicated issues. Accordingly, the D.C. Circuit has recognized that it is a "well-established tradition" to use "special masters to oversee compliance" with court orders. United States v. Microsoft Corp., 147 F.3d 935, 955 (D.C. Cir. 1998); United States v. Local 1804-1. Int'1 Longshormen's Ass'n, No. 90 Civ. 0963, 2003 WL 194584 (S.D.N.Y. Jan. 29, 2003) (imposing a monitor with broad powers on a union, even after the international had imposed a trusteeship, because of doubts about the international's motivations).
Here, Saunders asks that the AFT's administrator not be allowed to settle claims or lawsuits related to the WTU, maintain the employment of former Officers or members of the WTU Executive Board, make any expenditures outside the normal course of business, including payments of money that the AFT claims it is owed by the WTU, or alter the WTU's constitution without the Court's permission. As is described above, each of these issues could create a conflict of interest on the part of the AFT and its administrator in light of the fact that the AFT and one of its officers are responsible for failing to discover to the financial improprieties that occurred in the WTU.
Determining whether a proposed action is in the best interest of the WTU and its members will likely call for a detailed factual examination of the equities of the situation. An independent monitor appointed by the Court, who has insight and access into the WTU's functioning, will readily be able to provide that type of factual analysis. This factual analysis will save the Court and the parties time and resources in determining whether the facts suggest that actions proposed by the administrator are in the best interest of the WTU and its members. Therefore, Saunders requests that the Court select an independent monitor, to be paid for by the AFT. The monitor should have no prior affiliation with either the AFT or the WTU, would observe the administrator's operation of the WTU and would provide the Court and the WTU membership with a report on the merits of any action proposed by the AFT's administrator for which Court approval is required under the requested preliminary injunction.
Charles Davidow No. 331702
March 3, 2003
1. The Forensic Investigation report is admissible evidence because it is an admission by a party-opponent under Fed. R. Evid. 801(d)(2).
2. Despite assuming an administratorship over the WTU and disbanding the former Executive Board, AFT has nevertheless continued to employ Hankerson at her former salary of approximately $87,000 per annum. See "Unreported Forgery Clouds Union Aide's Future," Wash. Post B02, Feb. 12, 2003 (quoting George Springer as admitting that Hankerson is still employed and that he has not changed her salary), Ex. 8 to Byrne Decl.
3. As with the Forensic Investigation, these documents are admissible evidence because they are admissions by a party-opponent under Fed. R. Evid. 801(d)(2).
4. McElroy's letter is admissible evidence because it is the admission of a party-opponent under Fed. R. Evid. 801(d)(2).
5. The specific issue in Holiday Tours was whether or not the court should grant a stay, however, the court observed that the factors "also apply to motions for preliminary injunctions." 559 F. 2d at 842 n. I.
6. Using the AFT's Per Capita Report and Payment Schedule see Ex. 7 to Byrne Decl.) which states that the local owes the AFT $11.95/ full time member/ month and the fact that the WTU has approximately 5000 members, $500,000 appears to be roughly eight months worth of delinquent dues. If AFT never refunded the delinquent dues payments that were made in June 2002 (possibly with the unauthorized deduction), then the total level of delinquent dues could be considerably higher than $500,000 and the corresponding time of delinquency would be considerably longer than eight months.
7. District of Columbia law applies to the common law issues in this dispute. "Under the District of Columbia's choice of law rules, the law governing the claim is to be the law of the state with the most significant relationship to the matters at issue." Church of Scientology Int'1 v. Eli Lilly & Co., 848 F. Supp. 1018, 1026 (D.D.C 1994) citing Hitchcock v. United States, 665 F. 2d 354, 360-61 (D.C. Cir. 1981). The District of Columbia is the jurisdiction with the most significant relationship to the matters at issue because the WTU is located in the District of Columbia, represents teachers in the District of Columbia public school system, and many of the acts alleged in the complaint took place in the District of Columbia.
8. While the D.C. Circuit has never directly ruled on whether a national union can be held directly liable for breach of fiduciary duty under 29 U.S.C § 501(b), several other jurisdictions have held that a union may not be held directly liable. See, e.g., Head v. Bhd. of Ry., Airline and Steamship Clerks, Freight Handlers, Express Station Employers, 512 F.2d 398 (2d Cir. 1975) (LMRDA does not provide for an action against a labor organization but only for an action against ate officer, agent, shop steward or a representative of the organization); Pignotti v. Local #3 Sheet Metal Workers' Int'1 Assn, 477 F. 2d 825 (8th Cir. 1973). This reasoning was adopted by this Court in United Mine Workers v. Bole, No. 3436-69, 1978 WL 1601 at *2(D.D.C May 3, 1978) (Section 501 "has been stringently construed as not reaching actions against labor unions themselves.") The policy behind this reasoning appears to be that the union member was suing derivatively for the benefit of the union and its members and therefore the plaintiff and defendant were in effect the same. See, e.g., Weaver v. United Mine Workers, 492 F.2d 580, 585 (D.C. Cir. 1973) ("The [union] possesses exclusively the financial interest at stake because any recovery in the action belongs to it."). However, none of these cases appear to deal with situations where a national union had assumed oversight powers over the finances of a local, and the local lost money when the national failed to exercise that oversight. Thus, District 50, 435 F.2d 421, provides more relevant precedent in this situation than Boyle, 1978 WL 1601.
9. While a union member must ordinarily exhaust administrative remedies before bringing suit under the LMRA, the Supreme Court has declared that "courts have discretion to decide whether to require exhaustion of internal union procedures." Clayton v. Int'1 Union, United Auto., Aerospace, and Agric. Implement Workers, 451 U.S. 679, 689 (1981). Among the factors that courts consider in such a situation is "whether the internal union appeals procedures would be inadequate . . . to award [the employee] the full relief he seeks under § 301" and "whether exhaustion of internal procedures would unreasonably delay the employee's opportunity to obtain a judicial hearing on the merits of his claim. If any of these factors are found to exist, the court may properly excuse.-the employee's failure to exhaust." Id. Saunders asserts that he exhausted his administrative remedies against the AFT, and that any further attempts to exhaust such remedies would have been futile, given the AFT's stance that it did not owe the WTU any duty to ensure that regular audits were conducted.
UNITED STATES DISTRICT COURT
Nathan A. Saunders II, (derivatively on behalf of the Washington Teachers Union), Plaintiff,
v.Esther Hankerson, et al., Defendants
CASE NUMBER: 1:02CV02536 (EGS)
CERTIFICATE OF SERVICE
I, Patricia M. Byrne, hereby certify that on the 3rd day of March 2003,1 caused a copy of:
to be served by first class mail, postage prepaid, as indicated on all counsel and unrepresented individuals on the attached service list.
Patricia M. Byrne
James M. Cole
A. Scott Bolden
Alfred E. Hubbard
Mary Baird Currie
Lucy R. Edwards
James O. Baxter II
Gwendolyn B. Clark
Back to top of page
Send mail with questions or comments to email@example.com
Web site copyright ©DCWatch (ISSN 1546-4296)