Kouba v. Flynn

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

JOSEPH KOUBA, )

)

Plaintiff, ) Case No. 15 C 11211

)

v. )

) Judge Robert W. Gettleman

PATRICK FLYNN; MICHAEL SWEENEY; )

GERALD PAULI; CHARLES DECOLA, LARRY )

ALEXANDER; ANTHONY LAMY; KEVIN )

WAGONER; FIDELITY AND DEPOSIT )

COMPANY OF MARYLAND, and LOCAL 701 )

INTERNATIONAL BROTHERHOOD OF )

TEAMSTERS, )

)

Defendants. )

MEMORANDUM OPINION AND ORDER

In a five count amended complaint plaintiff Joseph Kouba sued defendants Patrick Flynn,

Michael Sweeney, Gerald Pauli, Charles DeCola, Larry Alexander, Anthony Lamy, Kevin

Wagoner, Fidelity and Deposit Company of Maryland (“F&D”), and Local 710 (the “Local”),

International Brotherhood of Teamsters (“IBT”) seeking to recover the salaries paid to the

individual defendants while they were allegedly embezzling funds and concealing the poor

financial condition of the Local. The action is brought under § 501(b) of the Labor Management

Report Disclosure Act (“LMRDA”), 29 U.S.C. § 501(b), which authorizes a union member to sue

on behalf of the union any officer for breach of fiduciary duty, if the union or its governing board

has refused to so. Count I and II are brought against Flynn for violating § 501 of the LMRDA.

Count III is a claim against the other officer defendants for failing to stop Flynn’s alleged breaches.

Count IV is a state law claim for breach of fiduciary duty against Flynn. Count V is a claim

against F&D for recovery under a statutorily mandated insurance policy issued by F&D to the

Local to protect against loss as a result of fraud or dishonesty by the Local’s officers. No claims

are brought against the Local, which was named as a necessary party under Fed. R. Civ. P. 19. On

March 1, 2018, plaintiff dismissed his claims against defendants Lamy, Wagoner, Alexander, and

DeCola. Plaintiff has now moved for summary judgment against Flynn, Pauli and Sweeney (the

“individual defendants”) and against F&D. The individual defendants and F&D have moved for

summary judgment against plaintiff. For the reasons described below, the individual defendants

and F&D’s motions for summary judgment are granted and plaintiff’s motion is denied.

BACKGROUND

Plaintiff is a member of the Local. Flynn is the former Secretary-Treasurer and Chief

Executive Officer of the Local. He was the highest paid Local official in the IBT from 2010

through 2012, earning a salary of approximately $435,000 per year. Plaintiff’s complaint charges

that while he was employed by the Local, Flynn “embezzled” 1,383 gift cards purchased by the

Local, worth $58,325. The complaint contains detailed allegations as to how Flynn carried out

this “embezzlement,” most, if not all, of which are based on a July 18, 2014 report to IBT General

President James P. Hoffa from the Independent Review Board (“IRB”) recommending that the

Local be placed in Trusteeship to correct financial malpractices and corruption. The IRB is a

court-supervised investigatory body created by a consent decree between the IBT and the U.S.

Attorney General in an action pending in the Southern District of New York.

As a result of the IRB investigation, the IBT placed the Local under Trusteeship and

removed the individual defendants from their positions. The IBT brought internal disciplinary

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charges against each of the individual defendants and barred them from being employed by the

Local or and IBT-related entity.

Flynn settled the charges against him and was: (1) permanently barred from holding any

elected or appointed position with the Local or any IBT entity; (2) not allowed to seek or accept

any salary or payment from the Local or any IBT affiliated entity; and (3) suspended from

membership in the Local and the IBT for five years. In addition, he paid the Local $58,000, the

amount of gift cards that the IRB asserted was unaccounted for or “embezzled,” or not used for the

purposes authorized.

In March 2015, Sweeney settled the charges against him, agreeing: (1) permanently not to

seek or accept any elected or appointed office of the Local or any IBT related entity; and

(2) permanently not to accept any salary payments or benefits from the Local or any IBT entity.

Pauli went to a disciplinary hearing and IBT President Hoffa imposed a penalty: (1) permanently

disqualifying Pauli from seeking, accepting, or holding any office with the Local; (2) disqualifying

Pauli from employment with the Local or any IBT affiliated entity for three years; and (3) barring

Pauli from receiving any payments, salary or other monies from the Local.

Under the Local’s constitution and bylaws, the principal officer’s compensation is set

every three years at a nomination meeting for the election of officers held in the September prior to

the beginning of their new terms of office in January. An officer’s compensation is comprised of

an annual base salary, which had remained between $80,000 and $85,000 for 2004 through 2014,

and a commission, based on a fixed percentage rate of the total annual dues collected from the

Local members. Prior to his first election as Secretary-Treasurer for the term beginning January

2014, Flynn requested that the commission rates for each of the officers be reduced by 1%. At the

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September 2012 nomination meeting he requested that the rates be dropped by .5%, leaving the

commission rates for the Secretary-Treasurer at 3.5%, President at 2.5% and Vice-President at

1.5%.

The Secretary is required to report on the financial condition of the Local at each January

membership meeting. Flynn’s practice was to read the two page preliminary summary of the

financial condition prepared by the Local’s outside auditors, Legacy Professional LLP (“Legacy”),

which conducted the annual audits of the Local. During the periods in question, Legacy would

complete the annual audit/financial statements and prepare the required LM-2 Report of the

Local’s financial condition, which was to be filed with the United States Department of Labor.

The financial statements and LM-2 Reports were completed in February or early March. The

LM-2 Report was filed at that time and was available on-line at the Department of Labor website.

LM-2 Reports were filed by Legacy for 2009, 2010, 2011, 2012 and 2013, and annual audits were

prepared and maintained by the Local for each year. The Local’s Comptroller prepared monthly

Trustee Reports that showed dues collected, expenses, liabilities and assets as required by the IBT.

These reports were reviewed by the Local’s Trustees and then submitted to the IBT. All LM-2s,

financial statements, and Trustee Reports were available to members upon request.

In May 2012, the IBT conducted a routine internal audit of the books and records of the

Local. That audit uncovered a number a discrepancies in the financial reporting records of the

Local, including: (1) failure to properly account for and itemize the dispersal of gift cards

purchased annually over a number of years; (2) failure to report deferred commissions owed to the

officers and employees in late-2011 and 2012; (3) failure to properly reflect the Local’s liability

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for build-out costs of the Local’s leased office space beginning in 2010; and (4) failure to properly

report certain amounts owed by the Local to its Employee Pension Fund.

DISCUSSION

The parties have filed cross motions for summary judgment. Summary judgment is

appropriate where there is no genuine issue of material fact and the movant is entitled to judgment

as a matter of law. Fed. R. Civ. P. 56. The movant bears the burden of establishing both

elements, Becker v. Tenenbaum-Hill Associates, Inc., 914 F.2d 107, 110 (7th Cir. 1990), and all

reasonable inferences are drawn in the non-movant’s favor. Fisher v. Transco

Services-Milwaukee, Inc., 979 F.2d 1239, 1242 (7th Cir. 1992). If the movant satisfies this

burden, then the non-movant must set forth specific facts showing that there is a genuine issue for

trial. Nitz v. Craig, 2013 WL 593851 at *2 (N.D. Ill. Feb. 12, 2013). In doing so, the

non-movant cannot simply show there is some metaphysical doubt as to the material facts.

Pignato v. Givaudan Flavors, Corp., 2013 WL 995157, at *2 (N.D. Ill. March. 13, 2013) (citing

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). “The mere

existence of a scintilla of evidence in support of the [non-movant’s] position will be insufficient;

there must be evidence on which the jury could reasonably find in favor of the [non-movant].”

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986).

Union officers are fiduciaries that “occupy positions of trust in relation to such

organization and its members as a group.” 29 U.S.C. § 501(a). The scope of this duty is “drawn

from the Restatement of Agency in an effort to incorporate the whole body of common law

precedent defining the fiduciary obligations of agents and trustees,” taking into account “the

special problems and functions of a labor organization.” Hood v. Journeymen Barbers, 454 F.2d

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1347, 1355 (7th Cir. 1972). Courts look to state common law to determine whether particular acts

violate § 501(a). Guzman v. Bevona, 90 F.3d 641, 649 (2d Cir. 1996) (“Courts fashion federal

law consistent with the aims of the statute, but taking guidance from state common law.”).

Section 501(a) of the LMRDA requires union officers “to hold [the Union’s] money and

property solely for the benefit of the organization and its members.” 29 U.S.C. § 501(a). Union

officers would generally be guilty of breach of trust under this Section, however, only when acting

beyond their authority. As the Seventh Circuit noted in McNamara v. Johnson, 522 F.2d 1157,

1163 (7th Cir. 1975):

Union officers will not be guilty of breach of trust under this section when their

expenditures are within the authority conferred upon them either by the constitution

and bylaws, or by a resolution of the executive board, convention or other

appropriate body including a general meeting of the members not in conflict with

the constitution and bylaws.

All of plaintiff’s claims are based on his allegations that Flynn breached his fiduciary

duties to the Local. He raises three distinct claims. First, plaintiff argues that for the years 2010

through 2012, Flynn paid himself compensation in excess of a salary cap the membership had

imposed at a 2009 meeting.

In addition to his position with the Local, from 1997 until January 2010 Flynn served as an

IBT Vice-President. Under Article 5, § 1(a) of the IBT Constitution, as a Vice-President Flynn’s

combined salary from the IBT and the Local could not exceed the IBT’s General President’s

salary, which was approximately $295,000. Flynn’s total compensation, salary and commissions

from the Local for the years 2003 through 2009 was always less than $200,000.

In the September 2009 meeting, Flynn made a motion to place a limit on salaries. The

minutes reflect:

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SECRETARY-TREASURER PATRICK FLYNN MOVED THAT WHILE

ARTICLE V (5) § 1(A) OF THE INTERNATIONAL CONSTITUTION

IMPOSES A SALARY CAP ON INTERNATIONAL EMPLOYEES THIS DOES

NOT APPLY TO LOCAL 710 EMPLOYEES, THAT NONE THE LESS THIS

PROVISION SHALL APPLY TO ALL OFFICERS AND BUSINESS AGENTS

OF LOCAL 710.

At the time he made the motion, Flynn was still an International Vice-President and was

subject to the limit imposed by the International Constitution. The obvious intent of the motion

was to ensure that the Local’s lower officers, who were not subject to the International

Constitution limit, would not make more than the senior officer.

Flynn resigned from his IBT position in approximately January 2010. In October 2010 he

sought advice from the Local’s legal counsel, Marvin Gittler, as to whether the salary motion

approved at the September 2009 nomination meeting continued to subject him to the International

salary cap.

On October 21, 2010, Gittler responded, concluding that because Flynn was no longer an

IBT Vice-President the salary cap imposed by the International Constitution no longer applied to

him. He further opined that:

After review and consideration, I am of the opinion that the language of the motion

applied only while you held the position of International Vice-President. The

salary cap does not now apply to any officers or business agents of Local 710.

Gittler further informed Flynn that although not required, Gittler believed that it would be

appropriate for Flynn to advise the Local’s Executive Board of Gittler’s conclusions. He

concluded his letter by stating, “[a]bsent any disagreement by the elected officials of the Local, the

International employee salary cap should not be interpreted as now or in the future applying to any

local union officer or business agent.”

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Taking Gittler’s advice, Flynn raised the issue at the October 29, 2010, Executive Board

meeting. The minutes of that meeting indicate that the board discussed the issue at length and

finally adopted Gittler’s recommendation relating to the salary structure for the Local’s officers.

The court agrees with Flynn that based on these undisputed facts there was no breach of fiduciary

duty. Flynn’s salary was approved by the members at the September 2009 meeting and later

construed by the Executive Board after the advice of counsel. Certainly, these facts do not

support a conclusion of a willful and deliberate breach that would support disgorgement of his

salary. See Kerr v. Shanks, 466 F.2d 1271, 1276-77 (9th Cir. 1972) (disgorgement appropriate

relief for willful and deliberate breach).1

Next, plaintiff claims that Flynn breached his fiduciary duty by “repeatedly and

egregiously” failing to inform the membership of the Local’s financial condition. According to

plaintiff, Flynn filed false LM-2 Reports with the Department of Labor, failed to disclose that the

Local was hundreds of thousands of dollars in arrears to its Officers, willfully refused to follow t

his auditors’ advice to report debts, and never told the members how much he was actually

making. The facts, however, do not support plaintiff’s claims.

First, it is undisputed that the LM-2s were prepared by Legacy, the Local’s outside

auditors. Despite all the rhetoric in plaintiff’s brief, he makes no claim that Legacy and Flynn

where in some sort of agreement to hide the Local’s true financial condition from the members.

As noted, at each January membership meeting Flynn provided an oral report to the membership

on the financial condition of the Local. He did this by reading the summary of the conditions

1 Plaintiff complains that the individual defendants did not produce the letter in discovery, but

admits that it was produced by the Local, and there is no dispute as to the authenticity of the letter.

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provided by Legacy. His reports are reflected in the minutes and a copy of the Legacy summary

was filed with the minutes. Legacy prepared audited financial statements which were available to

all members.

Much of plaintiff’s claim revolves around Flynn’s alleged failure to inform the

membership about his decision to defer the officers’ and employees’ commission payments for

2011 and 2012. It is undisputed that 2011 was a difficult year for the Local. Flynn

acknowledged this at the January 2012 meeting. Beginning in the fourth quarter of 2011, Flynn

exercised his express authority as Chief Financial Officer to defer the payment of the commission

portion of the officers’ and employees’ salaries so that the Local could pay other obligations.

Legacy determined that these “deferred commission obligations” did not need to be reported as a

line item on the balance sheet under the “modified cash basis of accounting that it believed was

required under the Department of Labor published guidelines. Legacy also determined that these

deferred commissions would not be reported on the LM-2s. Legacy did conclude, however, that

if the amount of deferred commissions became material they would be noted in a footnote on the

financial statements, but not as a line item on the balance sheet. As a result, the 2011 financial

statement prepared by Legacy contains no reference to deferred commissions, even in a footnote,

because as of December 31, 2011, those deferred commissions totaled only $68,559. In the 2012

Legacy financial statement, when the year-end deferred commissions totaled $599,234, Legacy

disclosed them in a footnote but not as a separate liability on the balance sheet because they had

not become due and would not become due until Flynn decided they had to be paid.

The result of Legacy’s method of disclosing the deferred commissions in a footnote, rather

than as a line item, meant that the commissions were not part of the summary that Flynn read to the

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members at the January meetings and thus the membership was unaware of the true financial

condition when it approved the Officers’ salaries at the 2012 nomination meeting. Plaintiff

claims that this amounts to a willful breach of fiduciary duty by Flynn. But Flynn simply reported

the finances as prepared by Legacy. The IRB report suggests that the Legacy auditor and Flynn

were aware of the requirement to report the deferred commission regardless of the method of

accounting used, but Legacy fought that conclusion and no action was ever taken against it. Thus,

it is clear from the record that Flynn relied on Legacy to determine how and to what extent the

deferred commissions should be reported.

The same is true for plaintiff’s claims, again based entirely on the IRB report, that

defendants concealed a loan between the Pension Fund and the Local for the furniture and

furnishings at the Local’s leased office at the Fund’s new Mokena facility, and that defendants

concealed payments owed by the Local to its employee pension plan. It is undisputed that Legacy

improperly included the cost of the build-out for the Local’s leased space in the lump sum monthly

lease payments, and improperly characterized the build-out costs as a loan to be repaid over the

course of the lease. But Legacy corrected this error in the 2011 and 2012 financial statements and

in the LM-2 Reports, characterizing the outstanding liabilities and corresponding assets as

leasehold improvements.

As to the payments owed to the Pension Plan, which were calculated at year end 2011, the

IRB concluded that this should have been included as an outstanding liability on the Local’s 2012

Trustee Reports, the 2011 Financial Statements, and the LM-2 Reports prepared in 2012. Legacy

was of the opinion that the pension calculations did not become liabilities until they were not paid

when due, which for calendar year 2011 was September 15, 2012. Thus, Legacy reported the

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potential liability in footnotes in each of the relevant years’ financial statements. It did so based

on its view that that was the proper method for reporting when using the modified cash basis

method of accounting.

As the undisputed facts above demonstrate, Flynn relied on Legacy to make decisions as to

how any potential liabilities were to be disclosed on the financial statements and LM-2s. Whether

Legacy’s decisions were correct, or complied with generally accepted standards, or complied with

how the IRB concluded they should be reported, is largely irrelevant. Flynn was entitled to rely

on Legacy’s professional advice. Absent any evidence that Flynn was lying to Legacy or that

Legacy for some reason was in cahoots with Flynn to hide from the members information they

needed to make informed decisions, plaintiff’s claims do not demonstrate a breach of fiduciary

duty and do not support a claim for disgorgement of Flynn’s (or the other individual defendants’)

salaries.

Plaintiff’s last claim in Count I is that Flynn “embezzled” $58,000 in gift cards. Again,

this claim is based on the IRB Report, which details how Flynn “caused” the Local to purchase gift

cards that where then given to Flynn to distribute for authorized purposes. According to the

report, between October 2008 and December 2012 the Local purchased $267,500 worth of gift

cards in denominations of $150 and $25. The Executive Board authorized purchases for each

year to be given to the stewards. In some years the cards ($150) were given as Christmas gifts.

The Executive Board also authorized the purchase of $25 gift cards to be given to members

attending the membership meetings. The IRB Report charged Flynn with “causing” on several

occasions the purchase of substantially more cards than necessary for the authorized purposes.

After cards where distributed for authorized purposes, the remaining cards stayed in Flynn’s

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control. No one but Flynn knew exactly how many cards remained in his control. The surplus

cards were never included in statements of the Local’s assets or reflected in expenditures.

According to the IRB report, from 2008 through 2012 there were 190 surplus $150 cards and 1,193

surplus $25 cards, worth a total of $58,329 that where under Flynn’s control. Flynn had no

documentation to demonstrate how those cards were used.

The IRB Report characterized Flynn’s “use” of the excess gift cards as a “slush fund” or

“embezzlement,” a term that plaintiff repeats religiously. Yet, as defendants point out, there is no

evidence Flynn converted any of these cards for his own personal use or to the personal use of

others. Indeed, the only actual evidence is that Flynn distributed some of the “unaccounted for”

cards for other Union business, such as purchasing meals for negotiating teams during contract

negotiations.

Nonetheless, as noted above, Flynn settled the disciplinary charges against him by

admitting that he failed to keep accurate records of the distribution of these cards which, as

plaintiff argues, amounts to a breach of fiduciary duty. That breach, however, does not warrant

disgorgement of his salary, or the salaries of the other individual defendants. Flynn has already

paid for his failures. He has repaid the entire $58,000 in restitution, reimbursing the Local for any

unaccounted for cards. He also lost his job. Requiring disgorgement of his salary would be

totally punitive in nature. As noted by the Illinois Supreme Court in In re Marriage of Pagano,

154 Ill.2d 174, 190 (1992) (emphasis in original):

When one breaches a fiduciary duty to a principle the appropriate remedy in within

the equitable discretion of the court. While the breach may be so egregious as to

require the forfeiture of compensation by the fiduciary as a matter of public policy,

such will not always be the case. Punitive damages are permissible where a duty

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based on a relationship of trust is violated, the fraud is gross, or malice or

willfulness are shown; such an award is not automatic.

Because there is no evidence that Flynn appropriated the cards for his own personal use,

but instead used the cards for Union business, albeit unauthorized, the court concludes that Flynn’s

breach was not willful and deliberate such as to require complete forfeiture of his compensation.

The purpose of forfeiture of a fiduciary’s compensation earned during the period of a breach is

“not to compensate the injured party but rather to deprive the wrongdoer of the gains from the

breach of duty and to deter disloyalty.” Tully v. McLean, 409 Ill.App.3d 659, 681 (1st Dist.

2011). In the instant case, there is no evidence that Flynn profited from the breach, and any

disloyalty has already been deterred by the resolution of the disciplinary charges. Consequently,

the court grants summary judgment to Flynn on Count I.

In Count II, plaintiff alleges that Flynn’s salary was unreasonable as a matter of law. The

court rejects this claim outright. First, Flynn’s and the other officers’ salaries were set according

to the Local’s Constitution and bylaws. Size alone of an officer’s salary is not “good cause”

under § 501(b) to file a § 501(a) action. See e.g., Kausler v. Campey, 788 F.Supp. 423, 425 (E.D.

Mo. 1992). As defendants point out, Flynn’s predecessor as Secretary-Treasurer of the Local

received a significantly ($150,000) higher salary than Flynn, at a time when the Local’s dues

where approximately $1 million less annually. Additionally, the Local’s method of

compensating its officers (salary, plus commission based on percentage of dues collected) has

never been questioned by the IBT or the International General Treasurer. Under the International

Constitution the General Secretary Treasurer can unilaterally reduce an officer’s salary when there

is an adverse change in the financial condition of the Local. Yet, the International has never taken

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such action. Because there is no evidence that Flynn’s salary was unreasonable as a matter of

law, the court grants summary judgment to Flynn on Count II.

Because the claims against the other individual defendants are based entirely on their

alleged failure to protect the Local from Flynn and the same alleged failures of reporting on the

LM-2 Reports, the court grants summary judgment to the individual defendants on Count III.

Because Count IV is essentially the same claim against Flynn as Count I, but brought under

Illinois law, the court grants summary judgment to Flynn on Count IV. Finally, because

plaintiff’s claims against F&D are based on a failure to pay the bond as a result of the individual

defendants’ fraud, the court grants summary judgment to F&D on Count V.

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CONCLUSION

For the reasons stated above plaintiff's motion for summary judgment [Doc 145] is denied,

the individual defendants’ motion for summary judgment [Doc 142] is granted, and F&D’s motion

for summary judgment [Doc. 138] is granted.

ENTER: March 27, 2019

| es W. Gettleman .

United States District Judge

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