Opinion ID: 445220
Heading Depth: 1
Heading Rank: 2

Heading: the subsection 201(c) claim

Text: 6  Mallick's first claim arises under subsection 201(c) of the LMRDA. The relevant passage from subsection 201(c) reads: 7 Every labor organization required to submit a report under this subchapter shall make available the information required to be contained in such report to all of its members, and every such labor organization and its officers shall be under a duty ... to permit such member for just cause to examine any books, records, and accounts necessary to verify such report. 8 29 U.S.C. Sec. 431(c). Mallick argues that subsection 201(c) grants union members a general right of access to records underlying the LM-2 reports, qualified only by the requirement that they show just cause. Under this view, a union member need not show any troubling item at all on his union's LM-2 reports to establish a right to examine the underlying records. According to Mallick, the phrase necessary to verify such reports merely limits the right of examination to records of those transactions actually summarized in the LM-2. Thus, although non-financial records concerning, for example, organizing and negotiating strategy would not be available, any records of transactions reflected in items on the LM-2 report would be. 9 The IBEW replies that the LM-2 report it filed for 1980-1981, the reporting year in which Boswell was settled, was accurate and showed no items that were grossly disproportionate in amount. On its view, Mallick therefore does not seek to verify the report, and consequently has no right to examine the underlying records. 10 Mallick does not concede that he must show anything on the face of the report suggesting improprieties. But he believes that even if there is such a requirement, he has met it. Specifically, Mallick notes that the LM-2 report showed a drop of nearly $400,000 in the balance of a special reserve fund IBEW maintains for legal expenses, called the Defense Fund. From 1973 to 1980, the Fund balance did not vary by more than 1% from $5,000,000; the $400,000 change in 1980-1981 represented a decline of about 8%. 8 According to the IBEW constitution, the Fund shall be for the sole purpose of providing legal defense. No disbursements shall be made from this fund except for the legal defense of L.U.'s [local unions] and their members, or for the defense of an International Officer or Representative .... IBEW Const. art. XI, Sec. 1 (1982), R. Item 8, Exhibit C at Exhibit A. Mallick argues that the sudden drop suggests an abnormally high outlay for legal expenses in that year. 9 11 The IBEW has acknowledged that before Mallick brought this action, it had not disclosed to its members whether the Boswell costs were paid from the Defense Fund or the General Fund. The IBEW Constitution does not appear to require that all attorneys' fees for IBEW representation be paid from the Defense Fund, and does not clearly state whether settlements and attorneys' fees for adverse parties are ordinarily paid from the Fund at all. 10 12 The 1980-1981 LM-2 report also stated that the IBEW had spent $2,082,887 in Professional Fees. This item, however, includes payments for auditing, economic research, and similar services, as well as for outside legal work. It does not include compensation to employees for professional services, which is accounted for separately. 11 13 In deciding this case, we assume that the LM-2 report accurately set forth the required information. We note, however, that the report would leave an interested union member almost completely uninformed about basic union financial practices concerning litigation. He would have little idea of the total expenditure on legal costs, let alone how the total expenditure breaks down. 12 He could not evaluate the specific concern Mallick raises: that the IBEW defends union democracy suits like Boswell without regard to costs or to the interests of the members. Finally, he would be entirely unable to understand the meaning of the change in the Defense Fund balance, which might reflect anything from unusual but essentially random fluctuation to a very sharp increase in actual legal costs, possibly caused by payments in a single major litigation. 14 We must decide whether the LMRDA affords a union member in this position any remedy. That question involves two subsidiary inquiries. First, does the right of examination merely assist union members in forcing their unions to file accurate reports? And second, if the right of examination goes beyond this limited scope, does it extend to the facts presented here? To address these problems, we examine the statutory text in light of its legislative history. B 15 The district court held that because Mallick had not shown that the LM-2 report was untruthful, inaccurate, or incomplete, District Court Op., supra note 2, at 3, examination of the underlying records was not necessary to verify the reports. This is a plausible reading of the statutory text, but it is certainly not the only possible interpretation. As the various theories of the parties and the rather tangled web of judicial decisions concerning subsection 201(c) make plain, its language is simply too general and ambiguous to resolve this controversy. Moreover, the Supreme Court has cautioned lower courts to be especially leery of interpreting the LMRDA based on uncertain inferences from word-by-word parsing of the statute. We must look to the objectives Congress sought to achieve, and avoid ' placing great emphasis upon close construction of the words. '  United Steelworkers v. Sadlowski, 457 U.S. 102, 111, 102 S.Ct. 2339, 2345, 72 L.Ed.2d 707 (1982) (quoting Wirtz v. Local 153, Glass Bottle Blowers Ass'n, 389 U.S. 463, 468 n. 6, 88 S.Ct. 643, 646 n. 6, 19 L.Ed.2d 705 (1968) and Cox, Internal Affairs of Labor Unions Under the Labor Reform Act of 1959, 58 Mich.L.Rev. 819, 852 (1960)). 16 The LMRDA was enacted after lengthy congressional investigations disclosed that in many instances, union officials had run unions as private fiefdoms, in utter defiance of the interests of members. See Interim Report of the Select Committee on Improper Activities in the Labor or Management Field, S.Rep. No. 1417, 85th Cong., 2d Sess. 4-6 (1958). Congress' response was to pass legislation that sought to end autocratic rule by placing the ultimate power in the hands of the members, where it rightfully belongs, so that they may be ruled by their free consent, [and] may bring about a regeneration of union leadership. 13 17 It carried out that basic policy through a variety of provisions, including a comprehensive Bill of Rights of Members of Labor Organizations, which protects equal voting rights, freedom of speech and of assembly, and other basic safeguards for union democracy, see LMRDA Secs. 101-105, 29 U.S.C. Secs. 411-415; financial reporting requirements for unions, union officials, and employers, see LMRDA Secs. 201-206, 29 U.S.C. Secs. 431-436; detailed procedural requirements for the conduct of union elections, see LMRDA Secs. 401-403, 29 U.S.C. Secs. 481-483; and the imposition of certain fiduciary duties on union officials, see LMRDA Sec. 501, 29 U.S.C. Sec. 501. By ensuring that members could assert practical control over union policies, Congress attempted to prevent corruption with a minimum of direct federal intervention in union decisionmaking. 14 18 Senator Goldwater offered the provision that became subsection 201(c) as an amendment from the Senate floor to the Kennedy-Ervin bill, which was one of a number of labor reform bills considered by the 86th Congress. The original text read: 19 Every labor organization required to submit a report under this title shall make available copies of such reports to each of its members and shall permit such members to examine the books, records, and accounts of such transactions as were or may be necessary to prepare or verify the reports required by section 101. The Secretary shall by regulation prescribe the form and manner for making such reports available to such members, and the time, place, circumstances, and conditions under which such books, records, and accounts may be examined by such members. 15 20 Senator Goldwater simultaneously distributed to the Senate a memorandum explaining his amendment. The first sentence of that memorandum stated without qualification that the amendment requires the union ... to permit the union members to examine the basic records upon which the report is based. 105 Cong.Rec. 6520 (1959), reprinted in 2 LMRDA Legislative History, supra note 13, at 1125. 21 In support of his amendment, Senator Goldwater argued that if union members could not look into the accuracy of the reports, unions might simply file false reports and gamble that the Secretary of Labor, with limited resources to check on many thousands of reports, would not investigate. 16 Nonetheless, neither he nor the other Senators present suggested that the amendment limited the right of examination to situations in which the reports appeared to be false. Senator John Kennedy objected that the amendment would give the right to every union member to examine in detail the records, books, financial statements, checkbooks, and all the details of the union's operations, when the member willed it. 105 Cong.Rec. 6520 (1959), reprinted in 2 LMRDA Legislative History, supra note 13, at 1126. Senator Goldwater replied, [u]nder circumstances to be prescribed by the Secretary of Labor. Id. He added that I should like to make it possible for a union member who believes something is wrong with the bookkeeping, or that something is wrong with the operations of the union, to have access to the books. Id. (emphasis added). He thus agreed with Senator Kennedy that the amendment granted examination at the will of the member, adding only that the Secretary of Labor could limit exercise of the right to reasonable times and places. 22 Senator Goldwater responded to concern that his amendment could be used as a tool for harassing unions or passing their confidential information to management by offering a modified version of the amendment. That version read: 23 Every labor organization required to submit a report under this title shall make available copies of such reports to each of its members and shall permit such members for proper cause to examine the books, records, and accounts of such transactions as were or may be necessary to prepare or verify the reports required by section 101. The Secretary shall by regulation prescribe the cause, form, and manner for making such reports available to such members, and the time, place, circumstances, and conditions under which such books, records, and accounts may be examined by such members. 24 Id. at 6522 (emphasis added to indicate changed passages), reprinted in 2 LMRDA Legislative History, supra note 13, at 1127-28. 17 Immediately before the amendment was adopted, Senator Javits, who prepared the compromise amendment with Senators Goldwater and Kennedy, stated: 25 I think this is an excellent solution of the matter, because it equates the rights of the union members with the rights of corporate stockholders, and it prevents a proliferation of the inspection. I believe the amendment is acceptable, because it would prevent vexatious forays into the unions' books. 26 Id. at 6523, reprinted in 2 LMRDA Legislative History, supra note 13, at 1128. 18 27 In short, both the language of the Senate provision and the debate preceding its adoption indicate that the provision would have given union members a general right to examine union records underlying the LM-2 reports, provided that the members showed proper cause. The Senate relied on the proper cause requirement to prevent harassment of unions, and not on any notion that examination was available only if the LM-2 reports were suspicious. 28 Representatives Landrum and Griffin subsequently introduced two identical bills in the House of Representatives. The Landrum-Griffin bill required unions to make their financial reports available to members, and to permit such member for just cause to examine any books, records, and accounts necessary to verify such report. H.R. 8400 Sec. 201(c), 86th Cong., 1st Sess., reprinted in 1 LMRDA Legislative History, supra note 13, at 619, 636. 19 The bill as reported by the House Committee on Education and Labor and as passed by the House retained this language. The conference report adopted the House version of subsection 201(c), see Comm. on Conference, Labor-Management Reporting and Disclosure Act of 1959, H.R.Rep. No. 1147, 86th Cong., 1st Sess. 31-32, reprinted in 1 LMRDA Legislative History, supra note 13, at 935-36, and that version was the one ultimately enacted, see LMRDA, Pub.L. No. 86-257, Sec. 201(c), 73 Stat. 519, 525 (1959). 20 29 The legislative history in the House does not explain the significance of the differences between its version of subsection 201(c) and the version in the bill passed by the Senate. 21 The House report does, however, set forth general principles relevant to the interpretation of the subsection: 30 The members of a labor organization are the real owners of the money and property of such organizations and are entitled to a full accounting of all transactions involving such money and property. Because union funds belong to the members they should be expended only in furtherance of their common interest. A union treasury should not be managed as though it were the private property of the union officers, however well intentioned such officers might be, but as a fund governed by fiduciary standards. 31 .... [I]f unions are to enjoy the protection of rights and exercise the broad powers which are guaranteed to them by the National Labor Relations Act and the Railway Labor Act, they ought also to be held responsible for abuses that have accompanied the exercise of such powers and rights by some union leaders. 32 Similarly the rules governing the conduct of the union's business, such as dues and assessments payable by members, membership rights, disciplinary procedures, election of officers, provisions governing the calling of regular and special meetings--all should be known to the members. Without such information freely available it is impossible that labor organizations can be truly responsive to their members. 33 It is the purpose of this bill to insure that full information concerning the financial and internal administrative practices and procedures of labor organizations shall be, in the first instance available to the members of such organizations. In addition, this information is to be made available to the Government, and through the Secretary of Labor, is to be open to inspection by the general public. By such disclosure, and by relying on voluntary action by members of labor organizations, it is hoped that a deterrent to abuses will be established. 34 House Comm. on Education and Labor, Labor-Management Reporting and Disclosure Act of 1959, H.R.Rep. No. 741, 86th Cong., 1st Sess. 7-8, reprinted in 1959 U.S.Code Cong. & Ad.News 2424, 2430, and in 1 LMRDA Legislative History, supra note 13, at 759, 765-66. 35 This passage principally refers to section 501 of the LMRDA, 29 U.S.C. Sec. 501, which creates a fiduciary relationship between union officials and union members. We deal with Mallick's claim under that section below, but the House committee's emphasis on the broad duty of disclosure owed to union members by their officers is surely relevant in interpreting subsection 201(c) as well. In our view, it would be strange if subsection 201(c)--a provision evincing special concern with the disclosure of financial information--were read as narrowly limiting the general fiduciary principles that govern other aspects of the financial relationship between union officials and union members. 36 Moreover, the legislative history of the just cause requirement of subsection 201(c) clearly shows that the Senate intended to encourage judicial borrowing of disclosure standards from a related area of the law: the rules governing a shareholder's right to examine corporate books. The Senate thus embedded in subsection 201(c) itself a plain reference to the same fiduciary responsibility in financial matters it created in section 501(a). The House legislative history vigorously reemphasized the idea that these principles define the financial responsibility of union officials. We are therefore reluctant to say that the House's exclusion of records necessary to prepare the reports from examination, coupled with its change of proper to just cause, entirely removed the original stress on fiduciary responsibility from subsection 201(c), and substituted a narrow means of policing accuracy in union filings. 22 37 However, we need not decide whether the necessary to verify language of subsection 201(c) simply defines the records subject to examination, or imposes a requirement that the union member actually seek to verify the LM-2 reports. We hold only that when a union member points to a sudden, apparently significant, and unexplained change in an item on his union's LM-2 report, he has satisfied any connection that subsection 201(c) may require between the report and the underlying records. 38 In our view, this result is more consistent with the policies of the LMRDA than a theory that reduces the right of examination to a check on the union's arithmetic. Typically, union members will be interested in looking at underlying records precisely because they believe the LM-2 reports are accurate, and raise questions about the handling of union funds. Nor do we believe that subsection 201(c) requires that union members allege an actual breach of fiduciary duty in the handling of funds or any other wrongdoing. Permitting a union member to inspect union records is not a method of punishing a union or its officials; it is simply a method of ensuring that union members are sufficiently well informed to participate intelligently in union affairs. At least when the union's LM-2 reports show abrupt and unexplained shifts, a union may not simply dig in its heels and refuse to explain what the change means. 39 Cases dealing with the necessary to verify provision of subsection 201(c) have generally rejected a cramped literalism. In Rekant v. Rabinowitz, 194 F.Supp. 194 (E.D.Pa.1961), for example, the union member complained 40 that the report does not disclose the purpose of the disbursements to officers or of the other disbursements [items in the filed reports], that the item of office and administrative expense is too high because the union has only 23 members and no office, that none of these items was ever discussed at union meetings, reported to or voted upon by the members of the union, and that despite his demand on the union to look at its books and records, he has not been permitted to do so. 41 Id. at 195. The plaintiff apparently did not allege that the union illegally failed to include the additional information he sought in the LM-2 reports, nor was there a specific averment that the statements in the report are not true. Id. Nonetheless, the district court held that with a wider construction [the word 'verify'] also can mean to check generally on the accuracy or completeness of a statement or statements. Under the broader definition plaintiff's averments are sufficient.... Id. 42 A number of other cases deal with the connection between the LM-2 reports and the records sought as an aspect of just cause. In Fruit & Vegetable Packers and Warehousemen Local 760 v. Morley, 378 F.2d 738 (9th Cir.1967), for example, the court described just cause in the following way: 43 The standard for determining whether there was just cause is necessarily minimal. Just cause need not be shown beyond a reasonable doubt, nor by a preponderance of the evidence. It need not be enough to convince a reasonable man that some wrong has been done; it is enough if a reasonable union member would be put to further inquiry. Perhaps it will be that a certain item is disproportionately high ... or that an officer contends that he did not incur the claimed expenses .... Irrespective of the nature of the asserted cause, the test must be whether reason would require substantiation. Id. at 744 (citations omitted). 23 44 In Cumbea v. Local 400, Aluminum Workers' International Union, 460 F.Supp. 60 (E.D.Va.1978), the union member noted that despite regular dues increases a reserve fund denominated a 'strike fund' recently had been transferred into the general fund of the union. This admitted fact put plaintiff on inquiry as to why the transfer of a reserve fund to the general fund had become necessary. Id. at 61. The Cumbea court rejected the union's argument that because the member alleged no breach of fiduciary duty, he had not shown just cause. Id. at 62. Instead, the court suggested that a member who simply wanted further information about an unusual transaction reflected on the LM-2 report satisfied Morley. Id. On the other hand, in Flaherty v. Warehousemen, Garage & Service Station Employees' Local Union No. 334, 574 F.2d 484 (9th Cir.1978) (per curiam), the court rejected a union member's comprehensive request for a complete accounting of all union records. The court commented that the union member never has contended that he desired to examine [the union's] books in order to verify its LM-2 reports and never raised any question concerning those reports.... While access to union records might indeed result in more intelligent voting ... that is not the purpose of section [201(c) ].... Id. at 486. The court also stated that the purpose for the inquiry into the union's records must be to examine the basis for the union's financial report. Id. 45 Flaherty concerned a blanket request for examination of union financial records, with no reason offered except political opposition to union officials. The Flaherty per curiam opinion explicitly relied on Morley, which recognized that the reporting and disclosure provisions of the LMRDA were enacted so that union members could exercise informed control over union affairs. See Flaherty, 574 F.2d at 486 (citing Morley, 378 F.2d at 744). In our view, Flaherty is basically consistent with that purpose: it simply determined that political opposition to union officials, unaccompanied by any specific concern with transactions summarized on the LM-2 report, does not constitute just cause for rummaging through all the union records. 24 46 The language of these decisions, and that of others interpreting subsection 201(c), 25 does not always fall into a neat pattern. But their rejection of the theory that a subsection 201(c) claimant must show outright error or grossly suspicious items on the LM-2 report is clear enough. They thus support our view that at least when a union member demonstrates a sudden, apparently significant, and unexplained change in an LM-2 item, he has satisfied any connection the necessary to verify provision may require between the LM-2 report and the underlying records. 47 Mallick has clearly satisfied this principle. As we note above, the 8% change in the balance of the Defense Fund was far greater than changes in preceding years, and the significance of the change was entirely unclear. Litigation expenses were reported in such broadly inclusive and vaguely defined categories that union members could not have intelligently determined what meaning, if any, this abrupt change had. The IBEW argues that this change might reflect expenditures unconnected with Boswell, and that the Boswell figures alone could not verify the Defense Fund balance. But where a union member has some notion of what may account for a changed item and therefore does not ask for all the records underlying that item, we think it would be hypertechnical to deny examination on the ground that the member asked to see too few records. C 48 The IBEW argues that even if Mallick is otherwise entitled to inspect the records reflecting the Boswell costs, disclosure of the settlement terms would seriously damage the union's interests. Specifically, the union claims that disclosure would encourage nuisance suits against the IBEW, and would establish a target amount at which subsequent litigants against the IBEW will aim. We think that whether these concerns are enough to defeat Mallick's request for examination should be addressed in the first instance by the district court in deciding whether just cause for examination exists. 26 However, we add a few words for its guidance. 49 As we have already suggested, we believe that just cause calls for application of fiduciary principles, 27 adapted to recognize the special characteristics of unions. 28 The burden of proof in demonstrating just cause is on the union member, Gabauer v. Woodcock, 594 F.2d 662, 665 (8th Cir.) (en banc), cert. denied, 444 U.S. 841, 100 S.Ct. 80, 62 L.Ed.2d 52 (1979), and he may not inquire into union records out of idle curiosity. 29 But when, as here, a union member makes the showing that we have assumed is required by the necessary to verify provision, he has gone a very long way to proving just cause. 30 There is presumably good reason to inquire into disquieting financial changes of the kind we have identified. 50 Nonetheless, other principles may limit the right of examination. Hostility to the policies of union officials is not, however, one of these limitations. Traditionally, a shareholder's opposition to corporate management was not an improper purpose for examining corporate records. 31 The pervasive support for union democracy that undergirds the LMRDA leads us to reach a parallel result here: an otherwise sufficient showing under subsection 201(c) cannot be attacked because the union member opposes union policies. 32 51 The threat of actual damage to the financial interests of the union involves different considerations. A shareholder often cannot obtain highly confidential information, particularly when he is likely to release the information publicly. 33 Mallick intends to disclose the Boswell costs to the union membership, which means public disclosure. 52 On these facts, the question of just cause requires balancing the IBEW's financial interest in nondisclosure against the injury to the interest of Mallick and other union members in determining how funds held in trust for them are being spent. In our opinion, this question cannot be answered by broad generalizations about the desirability of encouraging confidential settlements, although that general policy will be part of the backdrop. Nor should the district court look into the wisdom of current union policies or those advocated by Mallick: the LMRDA leaves those controversies to the union and its membership. Instead, the district court must decide whether the genuine harm to the IBEW, pragmatically viewed, outweighs the strong policy favoring access for union members who have otherwise satisfied the statutory requirements for examination. 34 Since [t]he just cause requirement must be read in a narrow sense when invoked to resist an examination which is admittedly not for harassment, Morley, 378 F.2d at 738, the harm to the union must be significant. If the IBEW demonstrates that disclosure of this information would be comparable to, for example, a corporation's disclosure of trade secrets, confidential earnings projections, or the like, or a union's disclosure of organizing strategy, negotiating plans, or other secrets, then examination should be refused. If, however, the IBEW's fears prove speculative and remote, Mallick's request should be granted.