Petition for Writ of Certiorari — Skirlick v. Fidelity & Deposit Co.
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IN THE
Supreme Court of the Hnited Statggen.
OCTOBER TERM, I988
ANTHONY SKIRLICK. ef ai..
Petitioners.
FIDELITY & DEPOSIT COMPANY OF MARYLAND, ef al.
Respondents.
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR THE
DISTRICT OF COLUMBIA CIRCUIT and APPENDIX
GLENN H. CARLSON, Esquire
Carlson, Cafferty & Ferris, P.C.
Suite 411
1910 K Street, N.W.
Washington, D.C. 20006
(202) 452-0004
Attorney of Record for
Petitioners
Of Counsel:
EDWIN VIEIRA, JR. Esquire
13877 Napa Drive
Independent Hill, Virginia 22111
(703) 791-6780
November 2, 1988
QUESTIONS PRESENTED
|. Does it frustrate the policy of the Labor-Manage-
ment Reporting and Disclosure Act, 29 U.S.C. §§ 401 er
seg., tO grant sureties an absolute immunity under
LMRDA § 502(a) simply because the union officials
those sureties bonded have not concealed acts of inten-
tional and flagrant “fraud or dishonesty” that have
caused loss of union funds?
2. Does a consistent national labor policy require a
Federal standard for “acts of fraud or dishonesty” which
excludes the notoriousness of such acts as a defense to
liability under LMRDA §& 502(a) for union officials who
commit such acts or the sureties who have bonded them?
-ji-
CERTIFICATE OF COUNSEL REQUIRED BY RULE
21(b) OF THE GENERAL RULES OF THE
UNITED STATES SUPREME COURT
The undersigned counsel of record for the petitioners
certifies that the following listed parties appeared upon
the pleadings below:
I.
Il.
As plaintiffs (petitioners) herein:
Anthony Skirlick, and
John Hough.
As individuals and as representatives of a class.
As defendants (respondents) herein:
Professional Air Traffic Controllers Organization
(PATCO);*
Robert E. Poli, as President of PATCO and individually:
Robert E. Meyer, as Executive Vice President of
PATCO and individually;
Michael Fermon, as a Regional Vice President ot
PATCO and individually;
Gary W. Eads, as a Regional Vice President, and
President of PATCO and individually;
Domenic V. Torchia, as a Regional Vice President,
and Executive Vice President of PATCO and
individually;
George W. Brandon, as a Regional Vice President
of Patco and individually;
David Siegel, as a Regional Vice President of
PATCO and individually;
* PATCO was dismissed from this action: service was
never obtained on Teresa E. Green and Cecilia Kessler.
Charles Campbell, as a Regional Vice President of
PATCO and individually;
William Lawrence Phillips, as a Regional Vice Pres-
ident of PATCO and individually:
David Trick, as Director of Labor Relations of
PATCO and individually;
Dennis Reardon, as Director of Labor Relations of
PATCO and individually:
David M. Duren, as Comptroller of PATCO and
individually:
Teresa E. Green, as a Bookkeeper of PATCO*:
Cecilia Kessler, as a Bookkeeper of PATCO*: and
Fidelity & Deposit Company of Maryland.
Ss
Glenn H. Carlson, Esquire
Attorney of Record for Petitioners
-iV-
TABLE OF CONTENTS
Page
Questions Presented ........---..605seeeeeee nese sree: i
Certificate Regarding Parties to the Proceeding ..... il
Table of Contents .............c cece eee eee eee eeeeees iV
Table of Appendices .............-.02seeeseeeeeeesees Vil
Table of Authorities .......200ccccccccccscccccscccces Vill
ee oo os kad cncnosvandsacdsensascrersudeass |
Opinions Below ............202222eeceeeeeeeeeeer ness |
GertePiCtGO . noc vac ccccccccscccsscencececessacunesedes 2
Statutes and Regulations Involved ......--..---.++-- 2
Statement of the Case ........-2.-- 0 ee eee ee eeeeeeee 2
Reasons for Granting the Writ ........-...--0-.2+05- 1]
1. A requirement that actionable “fraud or dis-
honesty” under LMRDA § 502(a) must involve
concealment eviscerates the deterrent-effect of
that section in precisely the most egregious
cases of betrayal of trust by bonded union
GUNES... cc cncccncccdsctvucaveeesunenrennnusses 1]
———————
I].
III.
IV.
-\-
TABLE OF CONTENTS—continued
Page
That a majority of the membership of a union
may condone “acts of fraud or dishonesty” on
the part of union officials bonded under
LMRDA §& 502(a) does not absolve those offi-
cials, or the sureties who bonded them, from
habisty for (O0P GONG. oc isickdci alae ee
Whether the handling of union funds by
PATCO officers constitutes “acts of fraud or
dishonesty” which bring those acts within
LMRDA § 502(a) is a mixed question of fact
and law which must take into account the
“dut[ies]” of union officials and the “special
problems and functions of a labor organiza-
tion” under LMRDA § SOI (a). ................
Although claiming that LMRDA § 502(a)
adopts standards of state law for determining
what “acts” constitute “fraud or dishonesty.”
the Court of Appéals failed to apply the con-
cededly controlling law of Maryland or the
District of Columbia, under which the lack of
concealment of such acts is no defense. ........
Although explicitly denying that LMRDA
§ 502(a) embodies a Federal standard for
bonds relating to “acts of fraud or dishonesty,”
the Court of Appeals jury-rigged just such a
standard—albeit an erroneous and unworkable
one—from general “hornbook” authorities.
13
17
22
-Vi-
TABLE OF CONTENTS—continued
Page
VI. The aberrant decision of the Court of Appeals
demonstrates that the goal of the LMRDA to
require union officials to “adhere to the high-
est standards of responsibility and ethical con-
duct in administering the affairs of their
organizations” cannot be achieved on a nation-
al basis under LMRDA § 502(a) without
recognition of a uniform Federal policy for
construing “acts of fraud or dishonesty” under
local law that presumptively disallows noncon-
cealment of such acts as a defense for union
officials or the sureties who bond them. ....... 24
Comet oocccccccccenceceescusssennet ee 28
~vii-
TABLE OF APPENDICES
Page
Appendix A: Opinion of the U.S. Court of Appeals
for the District of Columbia Circuit .............. la
Appendix B: Memorandum Opinion of the U.S.
District Court for the District of Columbia ....... lla
Appendix C: Plaintiffs’ Answers to Defendant
Fidelity & Deposit Company of Maryland’s First
ee Gy I Scacdsibinsencdacsoscscneues, 20a
Appendix D: Plaintiffs’ Supplemental Answers to
Defendant Fidelity & Deposit Company of Mary-
land's First Set of Interrogatories ................. 28a
Appendix E: Statutes and Regulations .............. 43a
-Vill-
TABLE OF AUTHORITIES
Cases
Page
Air Transportation Association v. PATCO, 313 F.
Supp. IST (E.D.N.Y. 1970) ....ccccccccscscscesess 5
Air Transportation Association v. PATCO, 453 F.
Supp. 1287 (E.D.N.Y.), aff'd, 594 F.2d 851 (2d
27 | Cay ee ren yr tr re EPP rr rer 5
Air Transportation Association v. PATCO, 516 F.
Supp. 1108 (E.D.N.Y.), aff'd, 667 F.2d 316 (2d
ee IER cnn ides cantavudcduneckuavarchuvecsn ass 5
Blakenship v. Boyle, 329 F. Supp. 1089 (D.D.C.
1971), aff'd. 167 U.S. App. D.C. 209, 511 F.2d
UP RUPEE a iussuhanedcccrdasesccteccersasapacacates 18
Colby v. Riggs National Bank, 67 U.S. App. D.C.
yo eg, Be we Bh.) rere ere rrr ye yy 17
First National Bank v. United States Fidelity and
Guaranty Co., 275 Md 400, 340 A.2d 275
PUP cc cceseckcccassesrasduneenevavenpeeatenid 19, 20
Graham v. PATCO, 524 F. Supp. 160 (D.D.C.
RE EA Age MON Paap a ete ROA E ON re MER 6
Henson v. United States, 321 F. Supp. 122 (E.D.
EM SR csc cady sacar baekeunecneekeneenraeaceteewant 5
Herriges v. United States, 314 F. Supp. 1352
Ce SEU on cacracuvescerarestruskedauner nes 5
-ix-
TABLE OF AUTHORITIES—continued
Highway Truck Drivers and Helpers, Local 107 v.
Cohen, 182 F. Supp. 608 (E.D. Pa. 1960), aff'd,
284 F.2d 162 (3d Cir. 1961), cert. denied, 365
ey EOP CCE Pn ener Sa rrae
Highway Truck Drivers and Heipers, Local 107 v.
Cohen, 215 F. Supp. 938 (E.D. Pa. 1963), aff'd,
334 F.2d 378 (3d Cir. 1964), cert. denied, 379
Shas Ie I ic op us no oes baaennchnaieeanderees
Home Indemnity Company v. Reynolds & Co., 38
Ill. App. 2d 358, 187 N.E.2d 274 (1962) .........
Imperial Insurance, Inc. v. Employers’ Liability
Assurance Co., 442 F.2d 1197 (D.C. Cir.
og , EP e PEP ETE eT ETE Tere PPP Ee CET ee
POE haha hed var Ceekaa crak taaek yee sadae erie ses
London & Lancashire Indemnity Co. v. Peoples
National Bank & Trust Co., 59 F.2d 149 (7th
Se ED REMent ry She aia aha) SN ree Alp Our oes
Miller v. Bond, 641 F.2d 997 (D.C. Cir. 1981)
National Savings & Trust Co. v. Rosendorf, 559
Fe ee Cea ls TED cis cncnduc vie dcuckiness
Ogden v. Department of Transportation, 430 F.2d
II PE hoe Kivccaeiascauuevacosnerar:
PATCO vy. Department of Transportation, 529 F.
oe, ee
Page
13
13
14
16, 20
22
15
-X-
TABLE OF AUTHORITIES continued
Page
PATCO vy. Federal Labor Relations Authority,
GES Fae S67 CHAK... Git: FO hos cadeseacdatoees 5.6. 7
R.A. Weaver & Assoc., Inc. v. Haas & Haynie
Corp.. 663 F.2d 168 (D.C. Cir. 1980) ........... 19
Rock Island Bank v. Aetna Casualty and Surety
Co., 766 F.26 219 (7th Cir. 96S) nc rccccsscsces 16
Sade v. National Surety Corp.. 203 F. Supp. 680
(D.D.C. 1962), aff'd, 314 F.2d 286 (1963) ....... 16. 20
Skirlick v. Fidelity & Deposit Co., 852 F.2d 1376
[ec Gate RUE xs sonessaskacsnsensbouenewieers |
Skirlick v. PATCO. 659 F. Supp. 104 (D.D.C.
PURE D i sssssaseuxsetasehsaveedécssereanvensaeweans |
Smith vy. Whitehead, 436 A.2d 339 (D.C. 1982) ... 18-19
Union Bank & Trust Co. vy. Girard Trust Co., 307
yX 8 i’ errr Pry errr rrereer 17-18
United States v. Haggerty. 528 F. Supp. 1286 (D.
CR SnD a ok Soe bdasadas shen ubesapesseansaaces 15, 22
United States v. PATCO, 312 F. Supp. 189 (D.
PO SUPE. dn scsuckentesuukarenedewkaeeedaseeas 5
United States v. PATCO, 653 F.2d 1134 (7th Cir.
PED acecevancindadinpccdwebacescands barvaneeharns 5
United States v. PATCO, 524 F. Supp. 160
GRR WEED 6 cdaxecacses cies cdkeukadsssckionses 6
oXi-
TABLE OF AUTHORITIES—continued
Page
United States v. PATCO, 107 L.R.R.M. 3210
MEE Tl ecsesdecasncasnaceiesvinedeakssss 6
United States v. Phillips, 527 F. Supp. 1361 (N.D.
ee SEEN pen UlG tn Zi cnwerccnsnapedenns¥e<ns 6
United States v. Restor, 529 F. Supp. 579 (W.D.
Wee, SUE ds vanbdascnusbateens ens ae senknsaueean. 6
Federal Statutes and Rule :
9 USC.
EGU cicncdyacpsshnsncs boaGd ba aeanneehen isan 4
PE hae aad can dad sannesaneuned danas oaduemsemen 4
3... tj Peer rerrepeerrrr rear 13, 16, 19
I he inks s 6 seek rad cenhaited tes tnsaaerd 4,19
Tits ile cashen seicameraranieades eihent eens 4
9 | OP ry ne eee ee AOE SRP PPO PET yrs 4
18 U.S.C. .
MEE (nscaddsnveebuerksindneaniacecatsraeneenweede 21, 22
Di, Nencseudedicusdnad) <aaunwsaveabaeaeieeneaters 4
28 U.S.C
RMN sshd acndocuseers EME KAATRL EN banded ae dedadtie 2
MEE ts Sec eesadstelns ued cares Clananeteeeibencaae eeel 2
| BORER REP ee ne ew terete Spe Pep Ley pate appr 2
29 U.S.C.
en OM Sun a eed or ens dela wuauaawuee neve sn aia as 2
sus Cova cavaeeri uated aeons 13, 25
DEE Ta Lau k bad cccevenkareseserinan ek ianenanes passim
-Xll-
TABLE OF AUTHORITIES—continued
Page
Labor-Management Relations Act of 1947, ch.
eee SG ES rere ee tras, 4
Rule 20.2, Rules of the Supreme Court of the
SE CREE i. aoN is cactr ei ucscrskeeeli re 2
Federal Rules of Evidence
NS EE Scan ai chvedcean kn rae nese tee eee 21
District of Columbia Code
Roe | 8) errr errr pr rr res oi pkor sat 21
OME EMIND 5c ccc xs ca kkadau sea akeoearcrte oa 22
DL SID © on cicdn aguas ees xk adie eeeeel 22
i aeee ee Oe | i ics sess dsccduwes seuss 17
REEL abcckces ei kaa ca<onek asekeaa eee 22
IPI 5s Sen ch acah shee cece cunaee ieee 20
PEW sob nan hv'b ud cas pues bo nee ee 19
Regulations
27 FR.
RF” Pe eeereT eee rrr eer Toe Fo ee tee! 2
7 8 8» Serr an ern rT er Or Rb h cc ti. 21
Executive Orders
No. 10,988, § 2, 27 Fed. Reg. 551 (1962) .............. 4
No. 11,491, § 19 (b)(4), 34 Fed. Reg. 17,605 (1969) .... 4
Miscellaneous Authorities
oo Peak, FOR.2E 2S CIOS?) © kkk ce vicstecccanteneeee 1]
-xiii-
TABLE OF AUTHORITIES— continued
Page
Appleman, /nsurance Law and Practice, § 5670
ened aa sbsdccnsccccsscccccccccces 11
Couch on Insurance § 46:54 (2d ed. 1982) ......... 1]
Conference Report, Joint Explanatory Statement
of the Committee of Conference, 93d Cong..,
2d Sess., reprinted in 28 U.S.C.S., FEDERAL
PUM MMORPG, AAD ic sccccccccscsccccccecs 21
Legislative History of the Labor-Management
Reporting and Disclosure Act of 1959 .......... 12
S. REP. NO. 698, 89th Cong., Ist Sess., reprinted
in 1965 U.S. CODE CONG. & ADMIN. NEWS
ada cchebnccccccccscccsccccces 3
“sig
tensa a:
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No. 88-____
P IN THE
Supreme Court of the United States
OCTOBER TERM, 1988
ANTHONY SKIRLICK., ef ai..
Petitioners,
FIDELITY & DEPOSIT COMPANY OF MARYLAND, et al.
Respondents.
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR THE
DISTRICT OF COLUMBIA CIRCUIT
INTRODUCTION
Anthony J. Skirlick, ef a/., individually and as repre-
sentatives of a class, hereby petition this Court for a writ
of certiorari to the Court of Appeals for the District of
Columbia Circuit.
OPINIONS BELOW
The opinion of the Court of Appeals, entered on
August 5, 1988, is reported at 852 F.2d 1376 (D.C. Cir.
ies
1988), and appears in the Appendix hereto (Aj) at la.
The opinion of the District Court for the District of
Columbia, which the Court of Appeals affirmed, is
reported at 659 F. Supp. 104 (D.D.C. 1987), and appears
in A at lla.
JURISDICTION
Jurisdiction over this petition obtains under Rule 20.2
of the Rules of this Court. Jurisdiction of the District
Court was predicated upon 28 U.S.C. §§ 1331 and 1337
and in the Circuit Court, 28 U.S.C. § 1352 was added to
the jurisdictional bases at oral argument.
STATUTES AND REGULATIONS INVOLVED
Petitioners’ claims arise under the Labor-Manage-
ment Reporting and Disclosure Act (LMRDA), 29
U.S.C. §§ 401 ef seg., as the provisions thereof are
made applicable to Federal employees by the regulations
found at 29 C.F.R. §§ 207.1 et seg. (1981). The relevant
texts of these appear in A at 43a ef seqg., and 46a ef seq.,
respectively.
STATEMENT OF THE CASE
This case arises from an illegal strike against the Fed-
eral Aviation Administration (FAA) instituted by the
leadership of the Professional Air Traffic Controllers
Organization (PATCO) and a majority of its members,
not including petitioners and the class of non-striking air
traffic controllers they represent. Respondent Fidelity
and Deposit Company of Maryland (F&D) is the
underwriter of certain fidelity bonds issued to PATCO
pursuant to LMRDA § 502(a) to insure PATCO against
-3-
losses caused by its officers’ “acts of fraud or dishonesty.”
Petitioners contend that in the course of knowingly insti-
gating and perpetrating a strike illegal under Federal law,
PATCO’s officers committed “acts of fraud or dishonesty”
against non-striking members of PATCO. and that that
intentional breach of fiduciary duty triggered the liability
of F&D to petitioners on the bond. The District Court and
Court of Appeals, however, held that the acts of which
complaint was made in respect to fomenting and conduct-
ing the illegal strike did not constitute “acts of fraud or
dishonesty”-under LMRDA § 502(a). Petitioners seek re-
versal of this erroneous construction of that section.
I. The Fidelity Bond. On its face, the surety bonds
F&D wrote for PATCO are “fraud or dishonesty” bonds
within LMRDA § 502(a):
The Underwriter * * * agrees to indemnify the
Insured * * * against any loss of funds or other
property * * * through any fraudulent or dishonest
acts committed by any Employees, acting alone or
in collusion with others * * *.!
Bonds containing this language were in force when
PATCO’s renegade officers and members launched their
illegal strike on August 3, 1981.
- Quoted in A at 4a. The Court of Appeals suggested that petitioners
are attempting to construe the bond as covering “faithful performance”
of duties by PATCO officers rather than insuring against “acts of fraud
or dishonesty.” See id. at 10a. This suggestion assumes, wrongly, that
the two standards are different for the purposes of this case. In fact.
when Congress amended LMRDA § 502 in 1965, replacing the original
“faithful discharge” language with the new term “fraud or dishonesty,”
then Secretary of Labor Wirtz made clear that “there is no difference
between the two standards.” S.REP. NO, 698. 89th Cong.. Ist Sess..
Supplemental Views. reprinted in 1965 U.S. CODE CONG. & ADMIN
NEWS 3248. 3254.
7
*
Il. The Illegal Strike And Its Consequences. Since at
least 1947, strikes by Federal employees have been com-
prehensively banned.? The current law prohibits any per-
son who “participates in a strike * * * against the Gov-
ernment of the United States” from accepting or holding
Federal employment.* Newly hired Federal employees
must execute an affidavit attesting that they will not
strike against the government.* Since 1962, when formal
collective bargaining began between the government and
Federal emplovee unions, the latter have been required
to disavow strikes.5 Since 1969, striking has been an
unfair labor practice.® In 1978, Congress further empow-
ered the Federal Labor Relations Authority (FLRA) to
“revoke the exclusive recognition status” of a Federal
employee union that calls, participates in, or condones a
strike, work stoppage, or slow-down against a Federal
agency.’ At the time PATCO’s outlaw officials and
members called their 1981 strike, the illegality of that
action and the serious consequences it entailed both for
PATCO and individual strikers were clear. In fact, they
were foreseeable at least as early as June of that year
when a slow-down was illegally conducted after negotia-
tions On a new contract reached an impasse.
Labor-Management Relations Act of 1947, Act of 23 June 1947. ch.
120. § 305. 61 Stat. 136, 160. In 1955. Congress repiaced § 305 with the
predecessors to the current law. Act of 9 August 1955, ch. 690. 69 Stat.
624. now § U.S.C. §§ 118p-118r.
5 U.S.C. § 7311. Violation of this section is a criminal offense. 18
U.S.C. § 1918(3).
* § U.S.C. § 3333(a).
' Exec. Order No. 10,988, § 2. 27 Fed. Reg. 551. 552 (1962).
" Exec. Order No. 11.491, § 19(b)(4). 34 Fed. Reg. 17.605, 17.613
(1969). See § U.S.C. § 7301 note.
§ U.S.C. § 7120(f).
..
Notwithstanding the explicit and consistent Congres-
sional and Executive policy against Federal employee
strikes, PATCO has been “a repeat offender that has
willfully ignored statutory proscriptions and judicial
injunctions. It has shown little or no likelihood of abiding
by the legal requirements of labor-management relations
in the Federal sector.”* In 1970, PATCO instigated a so-
called “sick out” that resulted in “[e]xtensive disruptions
of air service.”? In 1978, PATCO threatened a nation-
wide air-traffic “slow-down,” and was held in contempt
for its actions.'® In 1980, PATCO members engaged in a
“slow-down”™ in Chicago.'! Moreover, all of these actions
after 1970 occurred while PATCO was subject to an
injunction resulting from its 1970 “sick out,”!? an injunc-
tion that PATCO unsuccessfully petitioned to vacate in
June of 1981, immediately before its latest strike.'3
That strike began on August 3, 1981, after PATCO
and the FAA failed to reach a mutually satisfactory
accord on a new collective-bargaining agreement for the
air-traffic controllers PATCO represented. The govern-
’ PATCO vy. Federal Labor Relations Authority, 685 F.2d 547, 586
(D.C. Cir. 1982).
’ Miller v. Bond, 641 F.2d 997, 999 (D.C. Cir. 1981). See, e.g.. Ogden
\v. Department of Transportation, 430 F.2d 660 (6th Cir. 1970); Henson
v. United States, 32! F. Supp. 122 (E.D. La. 1970): Herriges v. United
States. 314 F. Supp. 1352 (D. Mont. 1970); United States v. PATCOQO,
312 F. Supp. 189 (D. Minn. 1970); Air Transp. Ass'n v. PATCO, 313 F.
Supp. 181 (E.D.N.Y. 1970).
Air Transp. Ass'n v. PATCO, 453 F. Supp. 1287 (E.D.N.Y.), aff'd
mem., 594 F.2d 851 (2d Cir. 1978).
United States v. PATCO, 653 F.2d 1134, 1136 (7th Cir. 1981).
See Air Transp. Ass’n v. PATCO, supra.
Air Transp. Ass'n v. PATCO, 516 F. Supp. 1108 (E.D.N.Y.). aff'd.
667 F.2d 316 (2d Cir. 1981).
-6-
ment quickly obtained restraining orders against the
strike.'* followed by citations for civil and criminal con-
tempt when the orders went unheeded.'* In addition,
some 11,000 striking controllers who did not return to
work were fired.'®
The FAA immediately filed unfair labor practice
charges with the FLRA. PATCO offered no testimony
or other evidence to support a specific defense to the
charges, to show that “it had in any way attempted to
comply with the statutory ban on strikes” or that “it
even attempted to end the strike.” or to demonstrate
“mitigating circumstances.”'’ On this record, the FLRA
revoked PATCO’s status as exclusive representative for
Federal air-traffic controllers.
Affirming the FLRA’s decision, the Court of Appeals
for the District of Columbia Circuit described the strike
as “arguably the most serious unfair labor practice in the
Federal sector since the enactment of the 1978 Civil Ser-
vice Reform Act,” and characterized
PATCO’s actions before and after August 3, 1981,
* * * as defiant. The union threatened its strike.
then wilfully and intentionally called and participated
in it. After the strike commenced, PATCO made no
FE.g.. United States v. PATCO, 524 F. Supp. 160 (D.D.C_ 1981)
Graham v. PATCO, $24 F. Supp. 160 (D.D.C. 1981)
E.g.. United States v. PATCO, 107 L.R.R.M. 3210 (D.D.C. 1981).
United States v. Phillips, 527 F. Supp. 1361 (N.D. Ill. E.D. 1981); Unit-
ed States v. Restor, 529 F. Supp. 579 (W.D. Pa. 1982)
See PATCO v. Department of Transportation, 529 F. Supp. 614 (D
Minn. 1982)
PATCO vy. Federal Labor Relations Authority. 685 F.2d 547, §53-54.
$7. §5K7 (D.C. Cir. 1982)
A, 3
attempt to end it: indeed. PATCO condoned and
encouraged it. * * * If the extreme remedy [of revo-
cation of exclusive-representational status] cannot
properly be applied in this case. we doubt that it
could ever properly be invoked.'*
Concurring, Judge MacKinnon denounced “the irre-
sponsibility of [PATCO]” for not having some kind of
“substantiation * * * immediately available, to defend
such a monstrous attempt to paralyze the entire nation’s
principal means of transporting its citizens and its mail.”
For the strike, Judge MacKinnon explained,
was really against the United States, and the prin-
cipal victims were the citizens of the United States.
Such was clearly the intention of [PATCO]. The
scheme of the strike was that the convenience of
the nation’s 265 million citizens would be held hos-
tage to [PATCO’s] demands. * * * PATCO
obviously velieved that its strike would effectively
bring the nation to its knees and force the govern-
ment to give in to its demands. It was a flagrant
attempt to misuse the exclusive control over the
nation’s airways that government has established to
serve its citizens.'®
This “flagrant attempt to misuse * * * exclusive con-
trol over the nation’s airways” not only cost PATCO its
Status as exclusive representative of Federal air-traffic
controllers, but also bankrupted the organization, caus-
ing the loss of millions of dollars to those members who
did not strike.?°
Id. at S88. S86
Id. at 622 (separate opinion)
ld
EE
-8-
Ill. Petitioners’ Allegations of “Acts of Fraud or Dis-
honesty.” On behalf of themselves and a class of sim-
ilarly situated air-traffic controllers who did not partici-
pate in the 1981 strike, petitioners filed suit, alleging
breach by PATCO officers of their fiduciary duties under
the LMRDA. and the consequent liability of F&D under
the § 502(a) surety bonds.
Specifying their charges in response to an interroga-
tory from F&D, petitioners included in alleged “acts of
fraud and dishonesty” that:
PATCO, through [certain individuals named in the
complaint], acting individually and as the board of
directors of PATCO, its agents, officers, and employ-
ees, planned and executed an illegal strike against the
United States. PATCO used its funds to organize the
strike, to solicit the membership to participate in * * *
and to execute the strike. * * * [T]he PATCO leader-
ship made certain private representations to the mem-
bership about the consequences (or lack of conse-
quences) of such a strike, knowing those representa-
tions to be false at the time they were made. Further
union funds were utilized to pay lawyers to defend
numerous strikers * * * against criminal charges aris-
ing from the strike. The total sums of monies spent on
those efforts is * * * believed to be in the millions of
dollars. Such actions contravened the laws of the
United States and were against the terms and policies
set forth in the PATCO constitution.
In addition, PATCO through its board, officers,
agents, and employees, improperly spent union
funds to obtain political assurances that a strike
would not precipitate loss of jobs.
PATCO improperly established a subsistence fund
which ultimately became a “strike fund.” The pavy-
-9-
ments to this fund were assessed against the union
membership. The fund was utilized in contravention
of the laws of the United States, which fund
(approximately $4.5 million) was lost to the union,
as in substantial part it was awarded to the Air
Transport Association (“ATA”) in payment of dam-
ages owed by PATCO to ATA for the strike.?!
Moreover, petitioners charged, certain officers of
PATCO
[d]id alter and modify, in violation of law and the
PATCO constitution, the list of individuals whose
votes would be counted in the “strike vote” which
was taken on August 2, and August 3, 1981. On
June 24, 1981, what [petitioners] viewed to be a
“strike vote” was taken; in that vote an eighty (80%)
percent affirmative vote was required to ratify a
“strike,” and said percentage was not obtained on
that date. In order to obtain the eighty (80%) per-
cent figure in the August 2-3 vote, the officers and
directors of PATCO * * * intentionally failed to
count, and did knowingly reject from the tally, the
votes of those PATCO members who were, inier
alia, (i) near retirement, (11) were in training, (111)
were on sick leave, or (iv) were disabled. And that,
said acts were dishonest and fraudulent.
Further, following the strike of August 3, 1981,
[officers of PATCO] instituted or caused to be insti-
tuted litigations against certain of PATCO’s mem-
bers to force them to pay PATCO dues and fees,
and that such claims were, under the circumstances,
* * * fraudulently and dishonestly made.??
A at 40a-4la.
A at 37a-4la.
-10-
Notwithstanding these allegations, the District Court
granted summary judgment for F&D, on the ground that
a fidelity bond insuring against “acts of fraud or dishon-
esty” does not cover what PATCO’s officials did in this
case.*5
IV. The Court of Appeals’ Opinion. The Court of
Appeals affirmed the District Court’s entry of summary
judgment. In determining the meaning of the term “acts
of fraud or dishonesty” under LMRDA § 502(a), the
Court of Appeals first adopted the working-principle
that “‘[t]here is no Federal legislative standard for bonds
“executed under any law of the United States” so we
look to state law bond provisions and construction for
guidance.’”?* But then, having concluded that the “sim-
ilar standards of interpretation and construction of insur-
ance contracts” of the District of Columbia or of Mary-
land applied to the F&D bond,** and having acknowledged
the Department of Labor’s regulation that: .
fa]s usually applied under state laws, the term
“fraud or dishonesty” encompasses such matters as
iarceny, thefi, embezzlement. forgery, misappropria-
tion, wrongful abstraction, wrongful conversion,
willful misapplication or any other fraudulent or
dishonest acts resulting in financial loss[,]?*
the court eschewed reliance on the law of the District of
Columbia or Maryland, and instead created its own,
A at 15a-19a. This was one of several grounds on which the District
Court ruled in favor of F&D, but the sole one reached by the Court of
Appeals’ affirmance. A at 2a-3a & n.2.
* A at 3a
ld
’ A at 9a. $$a
ott.
eclectic Federal common-law standard out of whole cloth
from such diverse secondary authorities as Couch on
Insurance, AMERICAN JURISPRUDENCE 2D, and Apple-
man’s Jnsurance Law and Practice,?’ with no reference to
Maryland or District statute or case law.
Under this new standard, opined the Court of Appeals:
the words “fraud” and “dishonesty” in the context
of a fidelity bond * * * refe[r] to acts which “show a
breach of trust or of financial integrity, coupled
with deceit and concealment exercised in a position
of trust and confidence and causing financial loss.”
The actions of PATCO officials in appropriating
funds for the 1981 strike, which was supported by
most of the union membership, do not reflect a cor-
rupt intent to deceive or defraud the membership;
nor do they reveal a breach of financial integrity, as
would be the case if larceny, theft, or embezzlement
of PATCO funds was involved. Therefore, the bond
does not protect PATCO against the kind of con-
duct of which [petitioners] complain.
Petitioners now seek this Court’s disapproval of the
essentially absolute immunity the Court of Appeals has
thus given to sureties under LMRDA § 502(a) where
bonded union officials open/y engage in “acts of fraud or
dishonesty” that result in serious financial losses to hon-
est union members.
REASONS FOR GRANTING THE WRIT
I. A requirement that actionable “fraud or dishonesty”
under LMRDA § 502(a) must involve concealment
eviscerates the deterrent-effect of that section in pre-
A at 6a. 9a-10a.
* A at 6a.
$4.
cisely the most egregious cases of betrayal of trust
by bonded union officers.
The import of the Circuit Court’s opinion upon the
enforcement of LMRDA § 502(a) is sweeping and
serious: The decision wholly removes from the ambit of
bond coverage under that section all open and notorious
“acts of fraud and dishonesty” by labor leaders for both
Federal-employee and private-sector unions. Thus, all
law-abiding union members are deprived of any right to
reimbursement under their unions’ LMRDA bonds for
the most egregiously wrongful misapplications of union
funds. Such a construction of LMRDA § 502(a) flies in
the face of the Congressional statutory intent to protect
individual union members from bonded union Officials’
spending union monies for non-union—indeed, notor-
iously illegal—purposes.2? The decision thus vitiates
LMRDA §& 502(a) by immunizing and thereby encourag-
ing, if not rewarding, open and notorious misappropria-
tions of union funds.
II. That a majority of the membership of a union may
condone “acts of fraud or dishonesty” on the part
of union officials bonded under LMRDA § 502(a)
does not absolve those officials, or the sureties who
bonded them, from liability for those acts.
The District Court erroneously attached significance to
the acquiescence by the “vast majority of the [PATCO]
union membership” in the illegal strike.3° By grounding
its decision in the open nature of the alleged violative
* LEGISLATIVE HISTORY OF THE LABOR-MANAGEMENT REPORTING
AND DISCLOSURE ACT OF 1959, United States Government Printing
Office, (Washington. 1959) (Legislative History), pp. 398, 408-12: and
see, pp. 260 ef seq.
* A at 19a.
itt.
acts, so too, did the Circuit Court. +! But even a vote,
unless it were unanimous and untainted by fraud, which
it was not here, could not validly authorize the expendi-
ture of union funds for illegal purposes. Here, the
PATCO strike vote was itself illegal. 5 U.S.C. §
7116(b)(7). Thus, the “openness” and condonation of the
strike are of no consequence.
These propositions receive support from the two
related Cohen cases.*? There it was held, inter alia, that
payment of attorneys’ fees could not be authorized by a
less-than-unanimous vote of the union membership,
where the fees were for the criminal defense of union
leaders.33 Many other cases in accord could be cited; but
the principle should be self-evident: It is beyond the
power of a mere majority of union members to authorize
ultra vires expenditures by their union or its officers.
Ili. Whether the handling of union funds by PATCO
officers constitutes “acts of fraud or dishonesty”
which bring those acts within LMRDA § 502(a) is
a mixed question of fact and law which must take
into account the “dut[ies]” of union officials and
the “special problems and functions of a labor
organization” under LMRDA § 501(a). .
Not only have courts consistently held that the terms
“fraud” and “dishonesty” must be given a broad interpre-
"A at 6a & n.5.
* Highway Truck Drivers and Helpers, Local 107 v. Cohen, 182 F.
Supp. 608 (E.D. Pa. 1960), affd, 284 F.2d 162 (3d Cir. 1961), cert.
denied, 365 U.S. 833 (1961) (“Cohen I), Highway Truck Drivers and
Helpers, Local 107 v. Cohen, 215 F. Supp. 938 (E.D. Pa. 1963), 334
F.2d 378 (3d Cir. 1964), cert. denied, 379 U.S. 921 (1964) (“Cohen IT’).
* Cohen | at 620
-14-
tation in the context of fidelity bonds, they have held
that whether specific acts alleged constitute fraud or dis-
honesty is a question for the jury.34 As the court in
Home Indemnity Company v. Reynolds & Co. stated:
* * * If reasonable men can differ whether the acts
were dishonest, within the wide scope of that word,
the question is one fact for the jury. London &
Lancashire Indemnity Co. of America v. Peoples
Nat. Bank & Trust Co., 59 F.2d 149 (C.A. 7): Irvin
Jacobs & Co. v. Fidelity Deposit Co. of Marvland,
202 F.2d 794 (C.A. 7); Mortgage Corp. of N.J. v.
Aetna Casualty & Surety Co., 19 N.J. 30, 115 A.2d
43. The evidence favorable to Reynolds [defendant-
appellee] brings this case within the authority of
these decisions. As an employer Reynolds had the
right to expect that its employees would perform
their work with honesty and fidelity. It paid insur-
ance premiums to protect itself against loss caused
by the lack of these qualities. The acts of the sales-
men were detrimental to the firm, disregarded its
best interests and subjected it to heavy losses. Since
the acts complained of could be held to be both
criminal and dishonest, the court on this phase of
the case, properly refused to direct a verdict.**
Similarly, here, the non-striking PATCO membership
had the right to expect that its officers would perform
their jobs with honesty and fidelity, particularly in light
of LMRDA. It paid insurance premiums to protect itself
against losses resulting from a lack of these qualities.
The acts of the officers were detrimental to the union
(particularly to the non-striking members), demonstrated
“ See below, pp. 21-22.
“ 38 Ill. App. 2d 358, 187 N.E.2d 274, 282 (1962).
th.
a disregard for the best interests of the union, and sub-
jected it to heavy, irreparable losses. Additionally, the
acts complained of supported the charge of criminal
contempt.**
Moreover, as the court in London & Lancashire
Indemnity Co. v. Peoples National Bank & Trust Co.
pointed out, a dishonest act under a fidelity bond need
not involve criminal liability. Rather,
{ijf it [the bonded individual’s conduct] indicates a
reckless, willful and wanton disregard for the inter-
est of the employer—if it be an act manifestly unfair
to the employer and palpably subjects him to likeli-
hood of loss, a fact question of liability for loss
thereby ensuing, as from a dishonest act, is fairly
raised.
With this positive knowledge on Maple’s [the
bonded individual’s] part that Bolinger and his bank
were wholly unworthy of credit for any amount
whatsoever, in our judgment the evidence fairly
raised a jury question as to whether Maple had
acted honestly toward his bank in _ consenting,
directly or indirectly, to this further credit to Bolin-
ger or his bank.?’
The positive knowledge on the part of the PATCO offi-
cers that it was against the law and violative of their
sworn Oaths to strike against the United States govern-
ment, and their knowledge of the inevitable consequences
arising therefrom (i.e., criminal penalties, decertification,
bankruptcy) fairly raises a factual question as to whether
" See. e.g.. United States v. Haggerty. 528 F. Supp. 1286 (D. Colo.
1981).
’ §9 F.2d at 152.
-16-
these officers acted “dishonestly” with respect to the
union. Again, it is the characterization of the bonded
union leaders’ conduct that raises a question of fact.**
Thus, this matter was not ripe for summary judgment: A
factual issue for trial exists.
This conclusion receives further support from cases in
the District of Columbia which have held that the phrase
“fraud or dishonesty” as contained within fidelity bonds
contemplates a compelling sense of conscious wrong, and
not merely a negligent act or omission, on the part of the
bonded individual.3? Each PATCO member, upon com-
mencement of his employment by the FAA, executed a
sworn affidavit, stating that he is not participating in, nor
will he in the future participate in a strike against the
United States. Moreover, each member was charged with
the knowledge that 5 U.S.C. § 7116(b)(7) made and makes
it illegal, in fact criminal, for employees of the Federal
government to strike. In addition, the PATCO strikers
were given a seventy-two (72) hour grace period within
which to rectify their illegal activity.4° Thus, there can be
no serious contention that the strikers, including the
bonded individuals, lacked the requisite conscious aware-
ness of the wrong in which they were participating.
Neither can there be any serious contention that the
bonded officials lacked such awareness in authorizing the
expenditures of monies in contemplation of and in con-
nection with this illegal activity. That they acted fraudu-
“ See Rock Island Bank v. Aetna Casualty and Surety Co., 706 F.2d 219
(7th Cir. 1983).
* Imperial Insurance, Inc. v. Employers* Liability Assurance Corp., 143
U.S. App. D.C. 173, 442 F.2d 1197 (1970); Sade v. National Surety
Corp.. 203 F. Supp. 680 (D.D.C. 1962). affd, 314 F.2d 286 (1963)
* A at Ilan.l.
rs
lently and dishonestly as that phrase is used in LMRDA
§ 502(a) and in the bonds issued thereunder, if not
apparent on the face of their behavior, at least requires a
factual determination. Summary judgment here was
inappropriate.
IV. Although claiming that LMRDA § 502(a) adopts
standards of state law for determining what “acts”
constitute “fraud or dishonesty,” the Court of
Appeals failed to apply the concededly controlling
law of Maryland or the District of Columbia,
under which the lack of concealment of such acts is
no defense.
Not only did the Circuit Court fail to address the need
for a factual determination under District of Columbia
law, it neglected District of Columbia law on what types
of acts fall within the scope of the words “fraud” and
“dishonesty.” Yet, supposedly, state law is to govern.
The regulations issued by the United States Depart-
ment of Labor (DOL) include within the list of the types
of behavior that constitute fraud or dishonesty the con-
cept “misappropriation.”*! It is without cavil that the
term “misappropriation” has been held to mean, within
the context of the Uniform Fiduciaries Act of the Dis-
trict of Columbia, D.C. Code §§ 21-1701 et seq., “wrong
appropriation, or the use of a fund to a different purpose
from that for which it was created; but not necessarily a
dishonest purpose.’*? In reaching this definition the
Colby court cited with approval the language of Union
Bank & Trust Co. v. Girard Trust Co., that “actual
“A at 9a. 5Sa.
* Colby v. Riggs National Bank. 67 U.S. App. D.C. 259. 270, 92 F.2d
183, 194 (1937).
EE
-18-
knowledge of breach of . . . [one’s] obligation as fidu-
ciliary” is tantamount to “misappropriation.”*? These
definitions were followed in Blankenship v. Boyle (inter-
preting other aspects of LMRDAA in establishing a bank’s
liability where large amounts of cash were left in non-
interest bearing accounts in violation of the fiduciary
duties of a labor organization’s welfare fund trustee).*4
“Conversion,” another concept listed by DOL, has
been defined by the District of Columbia courts. In
Smith v. Whitehead, the court held that:
‘The conversion is complete when the defendant takes,
detains or disposes of the chattel.” DeKine v. District
of Columbia, D.C. App., 422 A.2d 981, 986 (1980)
(quoting W. Prosser, supra section 15, at 97) (empha-
sis added). Prosser states, ‘Perhaps the most common
way in which conversion is committed is by an
unauthorized transfer or disposal of the goods to one
who is not entitled to them.’ W. Prosser, supra section
15, at 87. It is not a necessary element of the tort that
the convertor benefit from his act. Harrell v. Ander-
son, 294 F. Supp. 405, 407 (S.D. Ga. 1968); W. Pros-
ser, supra section 15 at 84 n.16; 89 C.J.S. Trover and
Conversion section 3 (1955): cf. Pan American Petro-
leum Corp. v. Long, 340 F.2d 21i, 220 (Sth Cir. 1964),
cert. denied, 381 U.S. 926 (1965) (‘The convertor may
either have actual or constructive-possession of the
property.) (Emphasis added; footnote omitted.)
* * *
‘The essence of conversion is an interference with
another’s property that is so substantial as to justify
* 307 Pa. 488. 161 A. 865, 867 (1932). .
“329 F. Supp. 1089, 1103 (D.D.C. 1971), aff'd. 167 U.S. App. D.C.
209. 511 F.2d 447 (1975).
-19-
treatment as a forced sale of the property.’ Horne v.
Francis I. DuPont & Co., 428 F. Supp. 1271, 1275
(D.D.C. 1977).4
D.C. Code § 45-1949 speaks, also, of conversion of
trust monies in the context of real estate transactions
and allows for recovery of monies so converted from a
guarantee fund established to protect the public, much as
an LMRDA fidelity bond protects the union members
from conversion. PATCO officers and leaders, those per-
sons bonded, wrongfully converted and misappropriated
union funds to the strike.
Further, “[t]he words ‘fraud’ and ‘dishonesty’ as used
in [any] fidelity bond include any act showing a want of
integrity or a breach of trust.” First National Bank of
Southern Maryland vy. United States Fidelity and Guar-
anty Co.*®
In conducting an illegal strike, and then refusing to
obey court orders directing them back to work, the indi-
vidually named defendants, who were bonded by F&D,
willfully disregarded PATCO’s interests. These union
officers knowingly violated 5 U.S.C. § 7116(b)(7) which
prohibits strikes by Federal employees and, thus, trig-
gered against their own union § 7120(f) of the statute,
which calls for the decertification of labor organizations
that conduct illegal strikes. Additionally, these officers
spent union funds in furtherance of such illegal conduct.
* 436 A.2d 339, 351 (D.C. 1982). And see, National Savings and Trust
Co. v. Rosendorf, 182 U.S. App. D.C. 216, 559 F.2d 837 (D.C. Cir. 1977);
and R.A. Weaver & Associates, Inc. v. Haas & Haynie Corporation,
213 U.S.App. D.C. 404, 663 F.2d 168, 173 (1980).
* 275 Md. 400, 412, 340 A.2d 275, 284 (1975). The Court of Appeals
sanctioned the use of Maryland law as that law and the law of the Dis-
trict of Columbia are “similar.” A at 3a-4a.
-20-
In doing so, they subjected the union to a significant
likelihood of loss: In light of both the strike prohibition
and decertification provision, it was practically a fore-
gone conclusion that the strikers would be fired and the
union decertified. Thus, the monies spent in furtherance
of the strike would never be recouped; this the PATCO
bankruptcy confirmed and the LMRDA bond was pur-
chased to avoid.
That the strike itself was conducted in brazen violation
of a Federal statute must be considered when determin-
ing whether such activity may be characterized as fraudu-
lent or dishonest. In contrast to its head-in-the-sand
attitude in this case, the Circuit Court has recognized
elsewhere that “a failure on the part of [the bonded
employee] to comply with the requirements of [D.C.
Code § 35-103] could well be considered by the jury in
determining whether or not he engaged in fraudulent or
dishonest conduct. . . .”*’ Significant with regard to the
question of fraud or dishonesty in the instant case is that
the strike was an intentional, willful, and undisputable
violation of Federal law, a flagrantly illegal activity con-
ducted by the defendant officers with a “compelling sense
of conscious wrong.”** Additionally “relevant to the
charge [of fraud or dishonesty] against . . . [the bonded
employee] is the fact that an unsuccessful attempt was
made to initiate prosecution against him [the bonded
employee] by the United States Attorney's Office.”**
Therefore, compellingly material to the issue of “fraud or
* Imperial Insurance. Inc., supra, 442 F.2d at 1203.
” Sade, supra, 203 F. Supp. at 684; see also, First National Bank of
Southern Marviand v. United States Fidelity and Guaranty Co., supra
” Sade. supra, 203 F. Supp. at 684; emphasis supplied
21
dishonesty” here is that many of the defendants were
actually found to be in criminal contempt as a result of
participation in the illegal! strike.
Also instructive as to the local law the Circuit Court
held to be controlling—but refused to follow—on the
scope of “fraud or dishonesty” is D.C. Code § 14-
305(b\( 1). This statute allows impeachment of a witness
by showing a prior conviction of a criminal offense for
which the punishment is in excess of one year or which
crime “involved dishonesty or false statement.” Herein
the strikers violated 18 U.S.C. § 1918, which allows
imprisonment for one year and a day. More importantly,
the District of Columbia statute became the model for
Federal Rule of Evidence 609. The Conference Report
on that Rule discussed “dishonesty or false statement”:
By the phrase “dishonesty and false statement” the
Conference means crimes such as perjury or subor-
nation of perjury. false statement, criminal fraud,
embezziement. or false pretense. or any other
offense in the nature of crimen falsi, the commission
of which involves some element of deceit, untruth-
fulness. or falsification bearing on the accused's
propensity to testify truthfully.
Violation of 18 U.S.C. § 1918 by government employees
carries a second implication. Each air-traffic controller,
upon employment by the FAA was and to this day is
still required to execute an affidavit in which he swears
to uphold the Constitution of the United States and not
to strike against the United States or any of its agencies.
Conterence Report. Joint Explanatory Statement of the Committee
ot Conterence. 93d Cong.. 2d Sess.. reprinted in 28 U.S.C.S.. Federal
Rules of Evidence. p. 227: and compare 29 C.F.R. § 453.12
heeeeenrnenmeennimeatll
-_.
Thus, by striking, the majority of PATCO’s members not
only violated 18 U.S.C. § 1918 but also abjured their
affidavits of appointment. This is “dishonesty” plain and
simple, and would be recognized as such in any other
context.5!' A conviction under 18 U.S.C. § 1918 would,
therefore, be a crime acceptable for use in impeachment
under either D.C. Code § 14-305(b)(1)(A) or (B).°?
V. Although explicitly denying that LMRDA § 502(a)
embodies a Federal standard for bonds relating to
“acts of fraud or dishonesty,” the Court of Appeals
jury-rigged just such a standard—albeit an errone-
ous and unworkable one—from general “horn-
book” authorities.
Against this background of District of Columbia and
Maryland law on the issue of what constitutes “acts of
fraud or dishonesty,” the Circuit Court’s opinion is per-
versely paradoxical. On the one hand, the Court ruled
that no general Federal standard of “fraud or dishon-
esty” applies to LMRDA § 502(a) bonds and that
“either Maryland or the District of Columbia law gov-
erns construction of the bond” involved here.*? Yet, on
the other hand, rather than applying, attempting to
apply, or even attempting to ascertain the controlling
It is not unlike the debtor who has been determined to have an obli-
gation to a creditor and after that determination transfers his assets to
the detriment of his creditor. Without the pre-existing obligation the
transfer would not be dishonest; the pre-existing obligation condemns
such a transfer as fraudulent or dishonest, renders it voidable. D.C.
Code § 28-3101, /n re Estate of Wall, 142 U.S. App. D.C. 187, 440 F.2d
215 (1971). Here the pre-existing affidavit renders the later act of strik-
ing dishonest—the strikers did not keep their word, their sworn word.
’ And see. United States v. Haggerty. supra
A at 3a-4a.
ee
=99.
Maryland or District of Columbia law, the court created
its own idiosyncratic “Federal” standard out of the whole
cloth of certain secondary “hornbook” authorities.
The Circuit Court’s actual approach here simply belied
the course of analysis it held was required: Having
determined that “there apparently is no decision by the
District of Columbia Court of Appeals in which the
meaning of ‘fraud’ and ‘dishonesty’ in the context of a
fidelity bond is discussed,”*4 the court then eschewed all
consideration of other relevant District of Columbia or
Maryland authorities, which the foregoing discussion
shows are substantial, and turned to secondary sources.
These sources were not, however, secondary sources of
District of Columbia or Maryland \aw; rather, they were
secondary sources of some species of “general” or “con-
sensus” law on the meaning of “fraud” or “dishonesty.”
This, perhaps, is a proper form of analysis where a
determination of Federal common law is involved; but
such a determination the court explicitly held to be out
of bounds.®> Thus, the court’s opinion is analytically
incoherent, violates what the court itself held was the
choice-of-law rule applicable here, and creates (in this
case) a precedent that promises to inject disarray into the
jurisprudence of LMRDA § 502(a), not only in the Dis-
trict of Columbia Circuit, but also in any other jurisdic-
tion in which there may be some arguable lacuna in the
local law as to “acts of fraud or dishonesty.”
Simply stated. if local law controls the definition of
“acts of fraud or dishonesty” under LMRDA § 502(a),
then local law should be ascertained and applied as
* A at 6a (emphasis added).
A at 3a.
-24-
rigorously as possible, and recourse to secondary, “horn-
book” sources should be strictly limited to aspects of the
definitional issues that cannot be addressed by reference
to local statutes, regulations, and case law. The inferior
Federal courts cannot be licensed to invent a new body
of Federal common law under LMRDA § 502(a), as the
Circuit Court has done here sotio voce, without: first,
frustrating the will of Congress, which determined that
local law should control the substantive issue of what
constitutes “acts of fraud or dishonesty”: and, second,
creating the potential for chaos in the administration of
§ 502(a) as new Federal common law principles begin to
emerge, pretending to reflect but in fact supplanting sub
silentio the standards of local law.
VI. The aberrant decision of the Court of Appeals
demonstrates that the goal of the LMRDA to
require union _officials to “adhere to the highest
standards of responsibility and ethical conduct in
administering the affairs of their organizations”
cannot be achieved on a national basis under
LMRDA § 502(a) without recognition of a uni-
form Federal policy for construing “acts of fraud
or dishonesty” under local law that presumptively
disallows nonconcealment of such acts as a defense
for union officials or the sureties who bond them.
The Circuit Court’s approach in this case does point
up a serious problem in the administration of LMRDA
§ 502(a) that cannot be resolved by mechanical reliance
on the local law of “fraud or dishonesty” as those terms
relate to fidelity bonds. Clearly, in this case, District of
Columbia and Maryland law do provide rather direct
guidance in construing those words, contrary to the Cir-
cuit Court’s view. Still, even assuming arguendo that the
a.
Circuit Court correctly found no applicable local law on
the subject, the result it reached on the basis of its read-
ing of selected secondary sources should be rejected,
because that result palpably conflicts with the fundamen-
tal purpose of LMRDA §§ 501] and 502: namely, to
require union officials to “adhere to the highest stan-
dards of responsibility and ethical conduct in administer-
ing the affairs of their organizations.”%¢
Where the local law is completely silent on the defini-
tion of “fraud” or “dishonesty” (as the Circuit Court,
albeit wrongly, held the law was here), a decision as to
what that law ought to hold (which, after all, is the exer-
cise the Circuit Court purported to perform) must ex
necessitate consult some overarching standard that sub-
serves the goals of the LMRDA. Given a choice of pos-
sible standards to apply to the bonding of union offi-
cials, a court should be constrained to adopt “the highest
standards of responsibility and ethical conduct” consis-
tent with the extant body of local law. That is, where
local law must be “found,” the court must look in the
right place. It must look up—in the direction indicated
by Congress, not down to some lowest common denomi-
nator of responsibility and ethical conduct.
Petitioners submit that this analytical approach itself
constitutes a Federal standard, at least as to the tech-
nique for construction of “acts of fraud or dishonesty”
under LMRDA § 502(a) that this Court should hold is
required by the LMRDA taken as a whole. For the
aberrant result the Circuit Court reached in this case,
and which other courts could reach under imaginative
interpretations of local laws that were supposedly silent
SA
A at 4a.
i.
on the meaning of “fraud” or “dishonesty,” eviscerates
the very protections that LMRDA § 502(a) was enacted
to provide to unions and their members. If, as did the
Circuit Court here, courts can immunize the acis of
union officials, and absolve bonding companies from
their liabilities, because those acts—no matter how
illegal—are open, notorious, and supposedly condoned
by a majority of the unions’ members, then § 502(a) will
be emasculated in precisely those situations where it
should be strongest. Thus, the more irresponsible the
acts of union officials, the /ower their standards of ethi-
cal conduct, the greater their defiance of the law—in all,
the worse they behave, the /ess their liability or the liabil-
ity of the parties that bond them. The union officials
least qualified to be bonded wiil become the best risks
for bonding companies, because the very likelihood of
outrageously fraudulent or dishonest conduct on the part
of those officials will increase the probability that the
bondsmen will be held immune from liability on the
fidelity bonds they issue. Rather than generating a deter-
rent to irresponsible conduct by union officials, the
bonding process will create positive incentives for such
conduct, and positive incentives for bonding companies
to “look the other way,” secure in the knowledge that
their own liability will be inversely proportional to their
own irresponsibility in bonding the most_ notorious
scofflaws.
Tn enacting LMRDA § 502(a) and incorporating there-
in local law standards of “acts of fraud or dishonesty,”
Congress surely did nor intend to license courts, under
the guise of “interpreting” unsettled local law, to fashion
unnecessary qualifications, limitations, and other imped-
iments to the enforcement of “the highest standards of
a.
responsibility and ethical conduct” possibly applicable
under local law. To the contrary, Congress’ intent was to
make union officials, in each jurisdiction, conform to the
most exacting ethical standards reasonably applicable
under the law of that jurisdiction. In this case, the Cir-
cuit Court faced no requirement in the law of the Dis-
trict of Columbia or Maryland to limit liability on
LMRDA §& 502(a) bonds to “acts of fraud or dishonesty”
that were committed in secret. Even if the local law did
not absolutely preclude a construction of “acts of fraud
or dishonesty” that are committed in secret, local law did
not mandate, or even encourage, such a construction.
Nothing prevented the Circuit Court from finding that
the notorious nature of the “acts” did not negate their
character as “fraudulent or dishonest.” That being so, the
Court should have been constrained by the unmistakable
Congressional policy embodied in the entire LMRDA to
adopt a construction that imposed on the defendants in
this case the maximum ethical constraints compatible
with the extant local! law.
In sum, this Court should fashion a strong Federal
presumption under LMRDA § 502(a) that local law dis-
allows as a defense to the enforcement of fidelity bonds,
the open and notorious nature of certain acts of fraud
and dishonesty.
-28-
CONCLUSION
For these reasons, the petition for a writ of certiorari |
should be granted.
Respectfully submitted,
GLENN H. CARLSON, Esquire |
Carlson, Cafferty & Ferris, P.C. |
Suite 411 |
1910 K Street, N.W. |
Washington, D.C. 20006 |
(202) 452-0004
Counsel of Record
EDWIN VIEIRA, JR., Esquire
13877 Napa Drive
Independent Hill, Virginia 22111
(703) 791-6780
Of Counsel
re Se en Pee wert ee. ee eee
APPENDIX A
Opinion of the
U.S. Court of Appeals
for the District of Columbia Circuit
August 5, 1988
|
United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 17, 1988 Decided August 5, 1988
No. 87-7154
ANTHONY SKIRLICK, as an Individual and as a
Representative of a Class, et al., APPELLANTS
FIDELITY & DEPOSIT COMPANY OF MARYLAND.
APPELLEE
Appeal from the United States District Court
for the District of Columbia
(Civil Action No. 84-02371)
Glen H. Carlson for appellants.
Mitchell H. Stabbe for appellee.
Gary W. Eads, Domenic V. Torchia and Dennis M.
Reardon respectively entered appearances pro se.
Before ROBINSON 2nd DOUGLAS H. GINSBURG, Cir-
cuit Judges, and KAUFMAN, * Senior District Judge.
* Of the United States District Court for the District of Maryland, sit-
ting by designation pursuant to 28 U.S.C. § 294(d).
a
~~
[2] Opinion for the Court filed by Senior District
Judge KAUFMAN.
KAUFMAN, Senior United States District Judge: Appel-
lants are former air traffic controllers who seek damages
allegedly sustained as a result of the 1981 strike by
members of the Professional Air Traffic Controllers
Organization (PATCO).! Appellee is the Fidelity & De-
posit Company of Maryland (F & D), the underwriter of
a fidelity bond issued to PATCO to insure the union
against losses caused by fraudulent or dishonest acts of
its officers. Appellants essentially contend that the
PATCO officers who organized and directed the strike
violated their fiduciary duty to the union members, and
that that breach of duty entitles appellants to prevail
against F & D. In granting summary judgments to F &
D, the district court concluded that appellants did not
meet two conditions precedent specified in the bond: (1)
appellants did not file a proof of loss within four months
of the discovery of the loss, and (2) appellants failed to
initiate this case within one year of the discovery of the
~ loss. The district court also ruled that the fidelity bond
did not cover the actions of the PATCO officials.? Since
' The strike commenced on August 3, 1981 after PATCO and the Federal
Aviation Administration failed to agree with regard to a new collective
bargaining agreement. At that time, over seventy percent of the federally
employed air traffic controllers walked off the job. After the strikers
refused to obey a court order to return to work, President Reagan fired
approximately 11,500 PATCO members who remained on the picket lines
as of August 5, 1981. The appellants did not participate in the strike.
* F & D also moved for summary judgment on two additional grounds
which the district court did not reach: (1) appellants lacked standing to sue
on the bond and (2) appellants’ prior knowledge of PATCO strike proce-
dures and prior strikes barred any claim on the bond. The parties do not
raise either issue in this appeal. Indeed, the only issue stated in this appeal
is the liability of F & D.
-3a-
we agree with the district court regard-[3]ing bond cov-
erage, we reach only that issue in this appeal.?
[.
“There is no federal legislative standard for bonds ‘exe-
cuted under any law of the United States’ so we look to
state law bond provisions and construction for guid-
ance.” United States ex rel. Mississippi Road Supply Co.
v. H.R. Morgan, Inc., 542 F.2d 262, 267 (Sth Cir. 1976),
cert. denied, 434 U.S. 828 (1977) (quoting 28 U.S.C.
§ 1352). The parties agreed at oral argument that (1)
PATCO is an unincorporated association governed by
the laws of the District of Columbia and (2) the bond in
question was executed in Baltimore, Maryland and was
delivered to PATCO in Washington, D.C. Thus, either
Maryland or District of Columbia law governs construc-
tion of the bond. See Fowler v. A & A Co., 262 A.2d
344, 348 (D.C. 1970). Because both jurisdictions apply
similar standards of interpretation and construction of
insurance contracts, we need not determine which law
Appellants initially asserted subject matter jurisdiction under 28
U.S.C. § 1331. However, appellants have since invoked jurisdiction
granted in 28 U.S.C. § 1352, which provides:
The district courts shall have original jurisdiction, concurrent
with State courts. of any action on a bond executed under any
law of the United States, except matters within the jurisdiction
of the Court of International Trade under section 1582 of this
title.
PATCO, as a labor organization, was required by 29 U.S.C. § 502(a) to
obtain the fidelity bond at issue in this case.
Because subject matter jurisdiction exists under 28 U.S.C. § 1352, we
need not reach the question of whether jurisdiction also is present pursu-
ant to 28 U.S.C. §§ 1331 or 1337 and the Labor-Management Reporting
and Disclosure Act, 29 U.S.C. § 401, et seq. See Gully v. First National
Bank, 229 U.S. 109 (1936) (re the “arising under” requirement).
C—O
applies. Compare Watson v. U.S.F. & G. Co., 231 Md
266, 271, 189 A.2d 625, 627 (1962): Govern-[4|ment
Employees Ins. Co. v. DeJames, 256 Md. 717, 720, 261
A.2d 747, 749 (1970) with American Ins. Co. v. Tutt. 314
A.2d 481, 485 (D.C. 1974); Dryer v. Liberty Mut. Ins
Co., 248 A.2d 504, 505 (D.C. 1968).
If.
Congress enacted the Labor-Management Reporting
and Disclosure Act, 29 U.S.C. § 401 et seg., in 1959 to
ensure, inter alia, “that labor organizations, employers,
and their officials adhere to the highest standards of
responsibility and ethical conduct in administering the
affairs of their organizations.” 29 U.S.C. § 401(a). Union
officials “occupy positions of trust in relation to [the
union] and its members as a group. It is therefore, the
duty of each such person . . . to hold [the union's]
money and property solely for the benefit of the [union]
and its members.” 29 U.S.C. § 50I(a). Congress has pro-
vided that each official who handles money of a union
with “property and annual financial receipts” of more
than $5,000 in value “shall be bonded to provide protec-
tion against loss by reason of acts of fraud or dishonesty
on his part directly or through connivance with others.”
29 U.S.C. § 502(a).
The surety bond written by F & D for PATCO pro-
vides, in relevant part:
The Underwriter agrees to indemnify the
Insured . . . against any Joss of funds or other prop-
erty... through any fraudulent or dishonest acts
committed by any Emplovees, acting alone or in
collusion with others ....
-Sa-
J.A. 251, 257, 278, 281 (emphasis added).
Appellants have not specifically identified which of
two surety bonds written by F & D for PATCO is sued
upon in this case. Bond number 596-06-43-A became
effective on September 22, 1977 and was cancelled and
replaced on September 22, 1981 by Bond number 596-06-
43-B. [5] PATCO went on strike on August 3, 1981; pre-
sumably preparations for the strike occurred prior to
that date. In any case, both bonds contain the same lan-
guage regarding coverage for fraudulent and dishonest
acts, and differ only with regard to indemnification
amounts and names of union officers insured. Those dif-
ferences are not relevant in this appeal.‘
But what is most relevant is that riders attached to
each bond, as issued, specifically deleted faithful perform-
ance coverage and substituted fraud and dishonesty
language, J.A. 257, 281, and that PATCO was aware
that it was not purchasing faithful performance coverage.
See J.A. 285-87.
Appellants contend that the words “fraudulent and
dishonest acts” should be broadly read so as to include
the actions of PATCO’s officers in planning and execut-
ing the 1981 strike, which led to the firing of all striking
PATCO members and the decertification and bankruptcy
of PATCO. In support of that contention, appellants
assert that PATCO’s officers knowingly violated 5 U.S.C.
§ 7116(b)(7), which prohibits certain strikes by feder-
al employees, disobeyed a court order directing the strik-
ers to return to work, and caused union funds to be expend-
ed in support of an illegal action. Appellants also claim
* However, it would appear that the earlier issued bond, 596-06-43-A, is
the one in issue in this case.
-6a-
that some of the individual officers engaged in vote fraud
in an effort to assure that enough PATCO members
voted to authorize the strike.
Ill.
os
An insurance policy, as a contract between the insurer
and insured, Anderson v. Group Hospitalization, Inc.,
203 A.2d 421, 423 (D.C. 1964), is to be construed to
reflect “the understanding of the ordinary person, that is
to say . . . the meaning that common speech imparts.”
[6] American Ins. Co. v. Tutt, 314 A.2d 481, 485 (D.C.
1974). While there apparently is no decision by the Dis-
trict of Columbia Court of Appeals in which the mean-
ing of the words “fraud” and “dishonesty” in the context
of a fidelity bond is discussed, the ordinary meaning of
the words “fraud” and “dishonesty” refers to acts which
“show a breach of trust or of financial integrity, coupled
with deceit and concealment exercised in a position of
trust and confidence and causing financial loss.” COUCH
ON INSURANCE § 46:54 (2d ed. 1982) (emphasis
added).* The actions of PATCO officials in appropriat-
ing funds for the 1981 strike, which was supported by
most of the union membership, do not reflect a corrupt
intent to deceive or to defraud the membership; nor do
they reveal a breach of financial integrity, as would be
* Couch further defines “‘{dJishonesty,’ in general terms, [as] ‘a want of
integrity in principle; a want of fairness and straightforwardness; a dis-
position to defraud, deceive, or betray; faithlessness, or a course of con-
duct generally characterized in the common speech of men as lacking in
principle’.” Jd. (quoting American Surety Co. v. Joy Lodge F. & A.M..,
102 Ind. App. 82, 196 N.E. 356 (i935)). See also 35 AM. JUR. 2d Fidel-
ity Bonds and Insurance § 23 (1967) (“The words ‘fraud’ and ‘dishon-
esty’, in this connection, are deemed to include any act showing a want
of integrity or a breach of trust, or an abstraction of funds, together
with deceit and concealment.”) (footnote omitted).
0 0 OOOO)
-Ja-
the case if larceny, theft or embezzlement of PATCO
funds was involved. Therefore, the bond does not protect
PATCO against the kind of conduct of which appellants
complain.
IV.
The legislative history of the Labor-Management
Reporting and Disclosure Act (LMRDA) demonstrates
that § 502(a)’s bonding requirement covers only fraudu-
lent or dishonest behavior relating to the handling of
union funds. When LMRDA was first enacted in 1959,
§ 502(a) required that union officials be bonded for
faithful dis-{7]charge of duty. However, in 1965, Con-
gress, by amendment, removed the faithful discharge of
duty language and inserted language requiring a bond to
protect against loss by “fraud or dishonesty.” Both the
House and Senate Reports relating to these amendments
state:
The question has been raised as to whether or not
the proposed substitution would dilute the protec-
tions afforded to union funds, and whether or not
the fraud or dishonesty bond would adequately
cover the violations of section 501(a) of the act.
Solicitor of Labor Charles Donahue [in a letter to
the Chairman of the General Subcommittee on
Labor] states that it is and has been the position of
the Department that the bond required by section
502(a) need not cover all-_violations of section
501(a). This position is expressed in an interpreta-
tive [sic] bulletin promulgated by then Secretary of
Labor Mitchell shortly after the Labor-Management
Reporting and Disclosure Act was enacted which
states in part:
-a-
“The bonding requirement in section 502(a) relates
only to duties of the specified personnel in connec-
tion with their handling of funds or other property to
which this section refers. It does not have reference
to the special duties imposed upon representatives of
labor organizations by virtue of the position of trust
which they occupy, which are dealt with in section
501(a), and for which civil remedies for breach of the
duties are provided in section 501(b). The fact that
the bonding requirement is limited to personnel who
handle funds or other property indicates the correct-
ness of these conclusions. They find further support
in the differences between sections 501(a) and 502(a)
of the act which sufficiently indicate that the scope of
the two sections is not coextensive.”
The committee endorses the soundness of that inter-
pretation. [8] H. REP. No. 182, 89th Cong., Ist Sess. 4;
S. Rep. No. 698, 89th Cong., Ist Sess. 4, reprinted in
1965 U.S. CoDE CONG. & AD. NEws 3248, 3250-51
(emphasis added).°®
The Depariment of Labor regulations interpreting 29
U.S.C. § 502 provide:
The bonding requirement in section 502(a) relates
only to duties of the specified personnel in connec-
* The House and Senate Committee Reports contain the “supplemental
views” of three members who conditioned their support for the amend-
ment on the understanding that the new language reflected “a clarifica-
tion, not a change, in the bonding requirements under the act.” 1965
U.S. CODE CONG. & AD. NEWS at 3254. Those “supplemental views”
were not included in the body of the Committee Reports and were not
adopted by the Committees. The Committee Reports indicate that a
motivating factor behind the change was avoidance of the higher premi-
ums charged for a bond which included the faithful discharge language.
Id. at 3249.
-9Ja-
tion with their handling of funds or other property
to which this section refers. It does not have refer-
ence to the special duties imposed upon representa-
tives of labor organizations by virtue of the posi-
tions of trust which they occupy, which are dealt
with in section S50l(a), and for which civil remedies
for breach of the duties are provided in section
501(b).
29 C.F.R. § 453.11 (1986).
The regulations also discuss the meaning of “fraud or
dishonesty” as follows:
The term “fraud or dishonesty” shall be deemed
to encompass all those risks of loss that might arise
through dishonest or fraudulent acts in handling of
funds. .. . As such, the bond must provide recovery
for loss occasioned by such acts . . . provided that
within the law of the state in which the act is com-
mitted, a court would afford recovery under a bond
providing protection against fraud or dishonesty. As
usually applied under state laws, the term “fraud or
[9] dishonesty” encompasses such matters as lar-
ceny, theft, embezzlement, forgery, misappropria-
tion, wrongful abstraction, wrongful conversion,
willful misapplication or any other fraudulent or
dishonest acts resulting in financial loss.
29 C.F.R. § 453.12 (1986).
Appellants suggest that the words “abstraction,” “mis-
appropriation” and “misapplication” in the regulations
are sufficiently broad to reach a union officer’s expendi-
tures of PATCO funds for the strike. However,
; the terms “wrongful abstraction” and “wilful misap-
plication” are [generally] used in association with
elaine cence emia einr ieee
-10a-
such terms as “fraud,” “dishonesty,” “larceny” or
“embezzlement”. As a consequence, such terms have
been deemed to supplement the other terms describ-
ing various types of corrupt conduct by employees,
rather than to establish a new class of acts covered
by the bond.
9A Applernan, INSURANCE LAW AND PRACTICE § 5670
(1981) (footnotes omitted). Appleman also notes that
while
[s]ome courts have intimated that any violation of
duty or breach of instructions in the handling of the
employer’s funds or property would constitute a
wrongful abstraction or misapplication, regardless of
the employee’s intent . . . it is generally held that the
employee’s misappropriation or misapplication must
be done with a dishonest or fraudulent intent... .
Id. (footnotes omitted).
In essence, appellants are seeking to equate the
honesty bond which PATCO purchased from F & D
with a faithful performance of duty bond. But in the
light of the bond language and the legislative history of
the LMRDA, appellants may not prevail pursuant to
that approach. Accordingly, the judgment below is
Affirmed.
eect ho te ee ie a eel BA
APPENDIX B
Memorandum Opinion of the
U.S. District Court
for the District of Columbia
April 7, 1987
Stee Ae <a. a —
Ee
-
-lla-
[104] Anthony SKIRLICK, et al., Plaintiffs,
v.
PATCO, et al., Defendants.
Civ. A. No. 84-2371.
United States District Court,
District of Columbia.
April 7, 1987.
[105] MEMORANDUM OPINION
SPORKIN, District Judge.
I. Introduction
This is an action on a bond. Plaintiffs are air traffic
controllers who did not join their fellow Professional Air
Traffic Controllers Organization (“PATCO”) members in
the 1981 air traffic controllers strike.! They are suing to
recover on a surety bond carried on their union leaders.
Their theory is that by conducting an illegal strike, the
' Over seventy percent of the federally employed air traffic controllers
walked off the job on August 3, 1981 after PATCO and the Federal
Aviation Administration (“FAA”) failed to agree on a new collective
bargaining agreement. See PATCO v. FLRA, 685 F.2d 547, 551
(D.C.Cir.1982). Although the government obtained restraining orders
against the strike, see e.g., United States v. PATCO, 524 F.Supp. 160
(D.D.C.1981), Graham v. PATCO, 524 F.Supp. 160 (D.D.C.1981), and
contempt citations when these restraining orders were not followed, see
e.g., Air Transport Assn. of America v. PATCO, 516 F.Supp. 1108
(D.C.N.Y.1981), United States v. Phillips, 527 F.Supp. 1361 (N.D.II.1981),
the strikers refused to return to work. President Reagan then fired some
11,500 who did not return to work by an August 5, 1981 deadline. See
PATCO vy. United States Department of Transportation, 529 F.Supp.
614 (D.Minn. 1982).
-12a-
union leaders engaged in activity covered by the bond?
and that therefore, the bonding company must honor its
commitment.
The bonding company—the only defendant left in the
case—interposes four defenses as a matter of law: first,
that plaintiffs have no standing since only the union’s
trustee in bankruptcy can bring a claim on the bond;
second, that plaintiffs have failed to fulfill the conditions
precedent on the bond; third, that the acts complained of
do not constitute “fraud or dishonesty” in the handling
of funds, which is what the bond covers; and fourth, that
plaintiffs knew of similar behavior by the PATCO offi-
cers in the past—that is, an earlier strike engaged in by
' those leaders—about which they did not inform the
defendant, and thus they are now barred from bringing
this claim. Because I find that the plaintiffs’ action was
not timely filed and that the bond at issue was not
intended to cover the actions complained of, I grant
defendant’s motion for summary judgment and need not
reach the other issues raised by the defendants.
* The activities complained of which plaintiffs believe are covered by the
bond are generally set forth in paragraph 73 of the Complaint filed in
this action. Paragraph 11 of a prior Complaint filed by plaintiff in the
United States Bankruptcy Court for the District of Columbia sets forth
these actions with greater specificity:
11. Union funds have been made available for, inter alia, the pay-
ment of salaries to perform illegal acts, travel expenses to perform
illegal acts, publication of materials to engender illegal acts, and~
counsel fees to defend the defendants charged with civil contempt
and violations of 5 U.S.C. § 7311; such acts were detrimental to the
union and its lawful membership and a breach of the fiduciary
duties of the defendants.
Memorandum of Points and Authorities in Support of Defendant Fidel-
. ity & Deposit Company of Maryland’s Motion for Summary Judgment
(“Def.Br.”) at 24 (citing Bankruptcy Complaint, § 11).
-l3a-
[106] II. Timeliness
Defendant alleges that the plaintiffs have failed to
comply with two provisions in the bond agreement relat-
ing to the time for bringing an action on the bond. First,
the bond requires that the insured file a detailed proof of
loss, duly sworn to, with defendant, within four months
after the discovery of loss. Second, the bond provides that
no action shali lie against the defendant “at all unless
commenced within one year from the date when the
Insured discovers the loss.” The plaintiffs’ loss was dis-
coverable in August of 1981, at the time of the strike, so a
proof of loss should have been filed by the end of 1981,
and an action should have been commenced by August of
1982. Neither of these deadlines was met.?
Plaintiffs ask the Court to excuse their delay for several
reasons. First, they argue:
Until April of 1982 [the plaintiffs] did not know to whom to
give notice. That information was in the control of PATCO’s
“leaders,” the wrongdoers. Not knowing to whom to provide
the information rendered is not only impracticable but
impossible to do so. Secondly, the overtime demands on
these controllers during the period before April of 1982 left
little time for them to pursue their claim, or at least impeded
that ability and made it impracticable to do so.
’ Plaintiffs appear to argue that because the air traffic controllers strike
was so well known, the defendant had notice of a pending claim from the
time of the strike. This argument misses the point. While defendant cer-
tainly can be held to have had knowledge of the strike itself, it would be
inequitable to hold that defendant had any idea this type of claim would
be filed pursuant to the strike. This is a novel reading of a surety bond. If
anything, in bringing an action as unique as this one, the plaintiffs should
be more strictly bound by the time limitations of the contract. Otherwise,
potential plaintiffs could spend years thinking up new actions under a
bond and the company would have no protection whatsoever.
ll
-14a-
Opposition to Defendant Fidelity & Deposit Company
of Maryland’s Motion for Summary Judgment (“P1.Br.”)
at 32. (Plaintiffs go so far as to suggest that the defend-
ant acted in concert with the striking union members to
deprive the non-striking members of any information
concerning the bond. PI1.Br. at 30-31, 44.) But, even if I
accept this. April, 1982 date as the time at which to start
the clock, the plaintiffs still failed to give the defendant a
proper proof of claim within four months and still failed
to bring this action within one year.
Plaintiffs then fall back on a second argument to
explain their delay from April of 1982—they claim they
were relying on the union’s trustee in bankruptcy, and
could not bring this action until the trustee allowed
them to. See e.g., Pl.Br. at 28-30 citing Hough v.
FATCO, Case No. 81-00656, Adv. No. 82-0093,
(Bankr.D.D.C., Dec. 20, 1983) (“the trustee is the only
party in interest to pursue any such causes of action
.”) This argument is also misplaced though, because,
although the bankruptcy case stayed actions against the
union, it in no way impeded the plaintiffs from pursuing
this claim against the bonding company. Moreover, to
the extent plaintiffs believed only the trustee could bring
this case against the bonding company, plaintiffs could
have brought an action against the trustee forcing him
to give them the claim before the limitations pericd ran.
What they should not have done was sit on the claim
and then attempt to argue that their delay should be
excused.
Failing in these two arguments, plaintiffs finally con-
tend that the notice provisions of the bond conflict with
a union member’s right to sue their unions, as guaran-
- teed by the Labor-Management Reporting and Disclo-
-15a-
sure Act of 1959 (““LMRDA”), Section 101(a)(4), as
amended, 29 U.S.C. § 411(a)(4),4 and therefore that such
notice requirements are unenforceable. P1.Br. at 35-44.
I do not believe that enforcement of these contractual pro-
visions conflicts ii any manner with the union member’s
right to sue as guaranteed by § 101(a)(4). First, I note that
this type of bond provision has been .approved by the
[107] Department of Labor. Second, unlike the plaintiffs,
I fail to see any significant relationship between the bond-
ing requirements of § 502 and the Bill of Rights guaran-
tees of § 101(a)(4) and thus cannot see how enforcing the
notice provisions of this union contract will undercut the
union members statutorily guaranteed rights.
Plaintiffs have failed to come forward with any com-
pelling reason why they should be excused from the
contractually-agreed to time limitations on bringing an
action against the bond company. Accordingly, the case
must be dismissed as untimely. But, even if the action
were not dismissed as untimely, it would have to be dis-
missed because the parties did not bargain for a bond to
cover the actions complained of here.
III. Fraud or Dishonesty
PATCO’s leaders were bonded by defendants to protect
the union against acts by these officials amounting to
“fraud or dishonesty.” The fact pattern in this case does
not involve any of the usual characteristics of fraud or
dishonesty; rather, plaintiffs would have the Court under-
take a uniquely broad reading of the “fraud or dishon-
* The pertinent language reads, “No labor organization shall limit the
right of any member thereof to institute an action in any court. .
29 U.S.C. § 411(a)(4).
a
-l6a-
esty” provision so as to cover actions taken by the
PATCO leaders in furtherance of their illegal strike
against the federal government.
In their most succinct statement of how the union offi-
cials who led this strike violated the fraud or dishonesty
provision of the bond, plaintiffs argue:
In conducting an illegal strike, and then refusing to obey
the court order directing them back to work, the individu-
ally named defendants, who were bonded by defendant F.
& D., clearly acted in disregard of PATCO’s interest. These
union officers knowingly violated 5 U.S.C. § 7116(b)(7)
which prohibits strikes by Federal employees and, thus,
triggered § 7120(f) of the statute which calls for the decerti-
fication of labor organizations that conduct illegal strikes.
Additionally, these officers caused jointly owned union
funds to be spent in furtherance of such illegal conduct. In
doing so, these defendants subjected the union to a signifi-
cant “likelihood of loss;” in light of both the strike prohibi-
tion and decertification provision, it was practically a fore-
gone conclusion that the strikers would be fired and the
union decertified. Thus, the monies spent in furtherance of
the strike would never be recouped.
.P1.Br. at 48-49. See also footnote 2, supra.
While the plaintiffs’ case has surface appeal, it is clear
that the acts for which they wish to recover are neither
— the type of activity for which the LMRDA, 29 U.S.C.
§ 502(a), requires union leaders to be bonded, nor the type
intended to be covered by the parties (the union and
the defendant) to the specific bonding agreement at issue
here. This is so for five reasons. First, the language and
legislative history of the LMRDA—and its implementing
regulations—are clear that Congress intended to require
|
-17a-
the simple type of surety bonds normally utilized by
banks and other institutions; nothing in either the legisla-
tive history or the implementing regulations supports the
expansive reading plaintiffs would have the Court adopt.
The LMRDA requires union leaders to be bonded to
protect the union against fraudulent and dishonest acts
by those handling the union funds. Specifically, the
LMRDA provides as follows:
Every officer, agent, shop steward, or other representa-
tive or employee of any labor organization (other than a
labor organization whose property and annual financial
receipts do not exceed $5,000 in value), or of a trust in
which a labor organization is interested, who handles
funds or other property thereof shall be bonded to pro-
vide protection against loss by reason of acts of fraud or
dishonesty on his part directly or through connivance
with others... . Any person who is not covered by such
bonds shall not be permitted to receive, handle, disburse,
or otherwise exercise custody or control of the funds or
other property of a labor organization or of a trust in
which a labor organization is interested.
29 U.S.C. § 502(a) (emphasis supplied). The United
States Department of Labor [108] issues regulations
which implement the bonding requirements of the
LMRDA. These Labor Department regulations delineate
what is meant to be covered by the “fraud or dishonesty”
terms of the Act:
The term “fraud or dishonesty” shall be deemed to
encompass all those risks of loss that might arise through
dishonest or fraudulent acts in handling of funds as deli-
neated in §§ 453.8 and 453.9. As such, the bond must
provide recovery for loss occasioned by such acts. . .
provided that within the law of the state in which the act
betaine cael
-18a-
is committed, a court would afford recovery under a bond
providing protection against fraud or dishonesty. As usually
applied under state laws, the term “fraud or dishonesty —
encompasses such matters as larceny, theft, embezzlement,
forgery, misappropriation, wrongful abstraction, wrongful
conversion, willful misapplication or any other fraudulent or
dishonest acts resulting in financial loss.
29 C.F.R. § 453.12 (emphasis supplied). Nothing, there-
fore, in the statute itself nor in its implementing regula-
tions supports a broad reading of “fraud or dishonesty”
to cover the actions of union leaders in engaging in a
strike, even though the strike was illegal.
Second, the state law and state court interpretations of
surety bonds referenced by the Labor Department regu-
lations do not support plaintiffs’ novel theory of recov-
ery. Indeed, the plaintiffs cannot point to—nor was the
Court able to find—any cases in the District of Colum-
bia, or in any state, in which acts comparable to those
complained of here have been held to trigger recovery
under an surety bond.
Third, the acts the plaintiffs complain of are also not
the type the parties to the bond agreement intended to
be a part of that agreement. In the area of bonding as in
other insurance areas, there must be a clear understand-
ing of the parties as to coverage. There was no agree-
ment that this type of activity would be covered. The
union deliberately chose to be covered by a “fraud or
dishonesty” bond, not by a broader bond for the faithful
discharge of duty. See Def.Br. at 45. In so doing, it
limited the liability of the defendants to instances com-
monly contemplated within the meaning of “fraud or
dishonesty.” The actions complained of here simply do
not fall within that definition.
|
-19a-
Fourth, | find that there are compelling policy reasons
for not reading this bond as plaintiffs suggest. Extending
the definition of what is covered by LMRDA-required
bonds might well make the costs of simple surety bonds
prohibitive, thereby creating an atmosphere in which
unions would not be able to get the kind of protection
which is contemplated by the statute.
Fifth, | am also concerned that the prohibitive acts
complained of in this case were not secretive and could
not have been implemented without the acquiescence of
a vast majority of the union membership. The union
membership, which is the party to be protected by this
bond, could have prevented the illegal strike if the
members had so desired.
IV. Conclusion
Plaintiffs did not file this case within the time limita-
tions established in the bond contract. Further, they have
been unable to support their contentions that they are
entitled to collect under the union’s surety bond. While I
can appreciate the plaintiffs’ plight following the disas-
trous consequences of this clearly misguided strike with
which they disagreed, there is no legal basis on which to
grant them the novel relief they seek in this action.
APPENDIX C
Plaintiffs’ Answers to Defendant
Fidelity & Deposit Company of Maryland’s
First Set of Interrogatories
-20a-
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
ANTHONY SKIRLICK, ef al.,
Plaintiffs,
Civil Action No. 84-237]
Hogan, J.
V.
PATCO, et al.,
Defendants.
PLAINTIFFS’ ANSWERS TO DEFENDANT
| FIDELITY & DEPOSIT COMPANY OF
MARYLAND'S FIRST SET OF INTERROGATORIES
Come now the plaintiffs, Anthony Skirlick, et a/., and
by Anthony Skirlick do hereby respond to the first set of
interrogatories propounded to the plaintiffs by the
defendant Fidelity & Deposit Company of Maryland
(hereinafter “Fidelity”).
INTERROGATORIES.
Interrogatory |. State the name, address, residence and
business address and telephone number, and date of
birth of the person answering these interrogatories.
Answer |. Anthony J. Skirlick, Jr.
25775 Parada Drive
Valencia, California 91355
(805) 259-4997
Interrogatory 2. Identify the bond or bonds upon
which you base your claim which is the subject of this
action against Fidelity & Deposit Company of Mary-
land, including the date, bond number, number of pages,
and number and caption of riders thereof or thereto.
eT
-2la-
Answer 2. The policy(ies) of insurance or bond(s)
upon which suit is brought in this matter are all of the
policies, or bonds issued by Fidelity to or for PATCO
for the years 1980, 1981 and/or 1982. Other than this
general description, plaintiffs are not now in a position
to further identify said policy(ies) of insurance or bond(s)
or the riders thereto. And see response to defendant
Fidelity’s requests for admission numbered one, two,
three, four and five, simultaneoulsy filed herewith.
Interrogatory 3. State whether the bond or bonds on
which you base your claim against Fidelity & Deposit
Company of Maryland (hereinafter “Bond”) only names
as the Insured the “Professional Air Traffic Controllers
Organization” and/or “Local Nos. 103, 291, 304, 316,
352, 503, and 541.” If not, state all reasons and facts in
support of your denial.
Answer 3. As to this litigation, this interrogatory is
both irrelevant and immaterial and, further, by its own
terms said interrogatory is not designed to lead to infor-
mation or data which are relevant and/or material. And
see plaintiffs’ response to Defendant Fidelity’s request for
admission numbered one, simultaneously filed herewith,
which response by this reference is incorporated as a part
of this answer.
Interrogatory 4. State whether the Bond names Fidel-
ity & Deposit Company of Maryland (hereinafter “Fidel-
ity & Deposit”) as Underwriter. If not, state all reasons
and facts in support of your denial.
Answer 4. As to this litigation, this interrogatory is
both irrelevant and immaterial and, further, by its own
terms said interrogatory is not designed to lead to infor-
-22a-
mation or data which are relevant and/or material. And
see response to defendant Fidelity’s request for admission
‘numbered two, simultaneously filed herewith, which
response, by this reference, is made a part of this answer.
Interrogatory 5. State whether Section | of the Insur-
ing Agreement in the Bond states, “Loss is covered under
this bond only if discovered not later than one year from
the end of the Bond Period.” If not, state all reasons and
facts in support of your denial.
Answer 5. As to this litigation, this interrogatory is
both irrelevant and immaterial and, further, by its own
terms said interrogatory is not designed to lead to infor-
mation or data which are relevant and/or material. And
see response to defendant Fidelity’s request for admission
numbered three, simultaenously filed herewith, which
response, by this reference, is made a part of this answer.
Interrogatory 6. State whether Section 5 of the Insur-
ing Agreement of the Bond states: -
Upon knowledge or discovery of loss under this
bond, the Insured shall: (a) give notice thereof as
soon as practicable to the Underwriter and (b) file
detailed proof of loss, duly sworn to, with the
Uncerwriter within four months after the discovery
of loss.
No action shali lie against the Underwriter unless,
as a condition precedent thereto, there shall have
been full compliance with all the terms of this bond,
nor until ninety days after the required proofs of
loss have been filed with the Underwriter, nor at all
-23a-
unless commenced within one year from the date
when the Insured discovers the loss. If any limita-
tion of time for notice of loss or any legal proceed-
ing herein contained is shorter than that permitted
to bae fixed by agreement under any statute control-
ling the construction of this bond, the shortest per-
missable statutory limitation of time shall govern
and shall supersede the time limitation herein stated.
If not, state all reasons and facts in support of your
denial.
Answer 6. As to this litigation, this interrogatory,
excepting perhaps as to the last sentence of the quoted
material, is both irrelevant and immaterial and, further,
by its own terms said interrogatory is not designed to
lead to information or data which are relevant and/or
material. And see response to request for admission
numbered four, simultaneously filed herewith, which
response, by this reference, is made a part of this answer.
Interrogatory 7. State whether the liability of the
Underwriter was, at all times relevant to your claim, sub-
ject to Rider F 1691, such that the Insuring Agreement
of the Bond provides:
The Underwriter, in consideration of the payment
of the premium, and subject to the Declarations
made a part hereof, the General Agreements, Condi-
tions and Limitations, and other terms of this bond
agrees to indemnify the Insured in accordance with
such of the Schedules as are specifically designated
by the insertion of an amount of indemnity in Item
3 of the Declarations against the loss of funds or
other property which the Insured shall sustain and
discover as provided in Section | through any
fraudulent or dishonest acts committed by any Em-
-24a-
ployees, acting alone or in collusion with others, the
amount of indemnity on each of such Employees
being the amount or amounts stated in Schedule A,
B and C, respectively, whichever is applicable to
such Employees as provided in Section 7.
If not, state all reasons and facts in support of your
denial.
Answer 7. For the reasons set forth in respomse to
Defendant Fidelity’s request for admission numbered
five, simultaneously filed herewith, plaintiffs cannot now
respond to this interrogatory; said response, by this ref-
erence, is made a part of this answer. .
Interrogatory 8. State whether Plaintiffs have even
been recognized or certified as consituting the Profes-
sional Air Traffic Controllers Organization (or any affil-
iated organization) by any court or Government agency.
If so, identify the court or agency, the date and circum-
stances of such action, and and all documents evidencing
such action.
Answer 8. Yes. See records of certification before the
Federal Labor Relations Authority.
Interrogatory 9. State when you discovered the loss
which is the subject of this action.
Answer 9. At or about August of 1981; the full extent
of the losses suffered, however, remains to be ascertained.
Interrogatory 10. State whether you filed a detailed
proof of loss, duly sworn to, with Fidelity & Deposit,
within four months of the date given in response to
Interrogatory No. 9. If so, identify the date of the notice,
to whom it was delivered, and its contents (in lieu of
-2Sa-
identifying the contents of such document, at your option,
‘tach a copy to your answers to these interrogatories).
Answer 10. As to this litigation, this interrogatory is
both irrelevant and immaterial and, further, by its own
terms, said interrogatory is not designed to lead to infor-
mation or data which are relevant and/or material.
Interrogatory 11. State when you first became aware of
any loss of PATCO assets and/or of any member benefits
as a result of the PATCO strike action.
Answer 11. See answer to interrogatory numbered nine
(9), supra, the answer to which interrogatory is hereby
adopted as the answer to this interrogatory.
Interrogatory 12. State whether you filed a detailed
proof of loss, duly sworn to, with Fidelity & Deposit,
within four months of the date given in response to Inter-
rogatory No. 11. If so, identify the date of the notice, to
whom it was delivered, and its contents (in lieu of identi-
fying the contents of such document, at your option, at-
tach a copy to your answers to these interrogatories).
Answer 12. As to this litigation, this interrogatory is
both irrelevant and immaterial and, further, by its own
terms, said interrogatory is not designed to lead to infor-
mation or data which are relevant and/or material.
Interrogatory 13. State whether you ever filed any
detailed proof of loss, duly sworn to, with Fidelity &
Deposit. If so, identify the date of the notice, the method
and date of delivery, to whom it was delivered, and its
contents (in lieu of identifying the contents of such docu-
ment, at your option, attach a copy to your answers to
these interrogatories).
-26a-
Answer 13. As to this litigation, this interrogatory is
both irrelevant and immaterial and, further, by its own
terms, said interrogatory is not designed to lead to infor-
mation or data which are relevant and/or material.
Interrogatory 14. State whether an action was filed
against Fidelity & Deposit for the loss which is the subject
of this action within one year from the date given in
response to Interrogatory No. 9. If so, identify the date of
filing, the plaintiffs, the court of jurisdiction, the case cap-
tion and action number, the date a Summons against
Fidelity & Deposit was issued, and the date and method
of service.
Answer 14. See plaintiffs’ response to defendant Fideli-
ty’s requests for production of documents numbered
three, four and five, simultaneously submitted herewith,
which responses are hereby adopted as the answer to this
interrogatory.
Interrogatory 15. State whether any other action was
filed alainst Fidelity & Deposit for the loss which is the
subject of this action. If so, identify the date of filing, the
plaintiffs, the court of jurisdiction, the case caption and
action number, the date a Summons against Fidelity &
Deposit was issued, and the date and method of service.
Answer 15. See answer to interrogatory numbered
fourteen (14), supra, which answer is adopted as the
answer to this interrogatory.
Interrogatory 16. If you contend that any employees
[sic] of PATCO committed any fraudulent or dishonest
acts resulting in the loss of funds or other porperty by you
and/or PATCO, identify with specificity the nature and
circumstances of such acts and the participating parties.
-27a-
Answer 16. Plaintiffs do so contend, and the full
answer to this interrogatory will be provided pursuant to
the stipulation filed this date.
S
Anthony Skirlick
County of Los Angeles )
) §s:
State of California )
On this 2nd day of April, 1985, before me, a notary in
and for aforesaid jurisdiction personally appeared
Anthony Skirlick, who is personally known to me and
who after taking oath in due form, swore that the
answers to the foregoing interrogatories subscribed by
him are true to the best of his knowledge, information
and belief.
S
Notary Public
“> .
My commission expires: __2-5-88 Ss (SEAL)
APPENDIX D
Plaintiffs’ Supplemental Answers to
Defendant Fidelity & Deposit Company of
Maryland's First Set of Interrogatories
-28a-
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
eee i aetian a Ones
ANTHONY SKIRLICK, ef al., )
Plaintiffs, )
Vv. Civil Action No. 84-2371
PATCO, et al., ) Hogan, J.
Defendants. )
)
PLAINTIFFS’ SUPPLEMENTAL ANSWERS TO
DEFENDANT FIDELITY & DEPOSIT COMPANY OF
MARYLAND'S FIRST SET OF INTERROGATORIES
FILED PURSUANT ORDER OF COURT
Come now the plaintiffs, Anthony Skirlick, et a/., and
by Anthony Skirlick do hereby supplementally respond
to the first set of interrogatories propounded to the
plaintiffs by the defendant Fidelity & Deposit Company
of Maryland (hereinafter “Fidelity”), in accordance with
the order of this court filed May 2, 1985.
THE INTERROGATORIES.
I. Preface.
The original of the bonds have still not been located.
During their depositions, Mrs. McGuire and Mr. Burke,
employees of Fidelity, compiled the bond numbered 596-
06-43-A. Mrs. McGuire also compiled the bond num-
bered 596-06-43-B. Plaintiffs have no reason to doubt the
credibility of these witnesses and, therefore, and for the
purpose of these supplemental answers to interrogatories,
will utilize said bonds as compiled by them. Records
relating to Bond numbered 606-98-81, for the “PATCO
Sussistence Fund” were subject to systematic destruction
ir ce
-29a-
by Fidelity. No answer below refers to this bond. As
always, in the event the plaintiffs discover other, differ-
ent or supplemental information in this respect, they
reserve their right to further supplement their answers to
these, and in fact all, interrogatories. With these caveats
the following supplamental answers are provided:
Interrogatory 3. State whether the bond or bonds on
which you base your claim against Fidelity & Deposit
Company of Maryland (hereinafter “Bond”) oniy names
as the Insured the “Professional Air Traffic Controllers
Organization” and/or “Local Nos. 103, 291, 304, 316,
352, 503, and 541.” If not, state all reasons and facts in
support of your denial.
Original Answer 3. As to this litigation, this interroga-
tory is both irrelevant and immaterial and, further, by its
own terms said interrogatory is net designed to lead to
information or data which are relevant and/or material.
And see plaintiffs’ response to Defendant Fidelity’s
request for admission numbered one, simultaneously
filed herewith, which response by this reference is incor-
porated as a part of this answer.
Supplemental Answer. Although page one of the
Labor Organization Bond numbered 596-06-43-A iden-
tifies the insured as “Professional Air Traffic Controllers
Organization and its Subordinate Units listed as Joint
Insureds in Rider ‘A’,” and an undated Rider under said
bond identifies PATCO and Locals 103, 291, 304, 316,
352, 503 and 541 and “Rider A,” dated September 22,
1977, lists said Locals as “joint insureds,” other riders
expand or reduce coverage: Rider 5 removes Local 541,
effective July 30, 1978, and adds Locals 132 and 502:
Rider 7 adds Local 245; Rider 8 adds Local 110; Rider 9
-30a-
adds Locals 102 and 303; Rider 10 adds Local 133; Rider
11 adds Local 258, Rider 13 adds Local 131; Rider 14
adds Locai 403; Rider 17 adds Local 501; Rider 18 adds
Locals 160 and 514; Rider 19 adds Local 204; and Rider
20 adds Local 215. All said changes were made on or
before November 1, 1980. Bond numbered 596-04-43-B
identifies no Locals, but does identify PATCO as the
insured.
Interrogatory 4. State whether the Bond names Fidel-
ity & Deposit Company of Maryland (hereinafter “Fidel-
ity & Deposit”) as Underwriter. If not, state all reasons
and facts in support of your denial.
Original Answer 4. As to this litigation, this interroga-
tory is both irrelevant and immaterial and, further, by its
own terms said interrogatory is not designed to lead to
information or data which are relevant and/or material.
And see response to defendant Fidelity’s request for
admission numbered two, simultaneously filed herewith,
which response, by this reference, is made a part of this
answer.
Supplemental Answer 4. Yes, both bonds.
Interrogatory 5. State whether Section | of the Insur-
ing Agreement in the Bond states, “Loss is covered under
this bond only if discovered not later than one year from
the end of the Bond Period.” If not, state all reasons and
facts in support of your denial.
Original Answer 5. As to this litigation, this interroga-
tory is both irrelevant and immaterial and, further, by its
own terms said interrogatory is not designed to lead to
information or data which are relevant and/or material.
And see response to defendant Fidelity’s request for
-3la-
admission numbered three, simultaenously filed herewith,
which response, by this reference, is made a part of this
answer.
Supplemental Answer 5. Yes, both bonds.
Interrogatory 6. State whether Section 5 of the Insur-
ing Agreement of the Bond states:
Upon knowledge or discovery of loss under this
bond, the Insured shall: (a) give notice thereof as
soon as practicable to the Underwriter and (b) file
detailed proof of loss, duly sworn to, with the
Underwriter within four months after ihe discovery
of loss.
No action shall lie against the Underwriter unless,
as a condition precedent thereto, there shall have
been full compliance with all the terms of this bond,
nor until ninety days after the required proofs of
loss have been filed with the Underwriter, nor at all
unless commenced within one year from the date
when the Insured discovers the loss. If any limita-
tion of time for notice of loss or any legal proceed-
ing herein contained is shorter than that permitted
to bae fixed by agreement under any statute control-
ling the construction of this bond, the shortest per-
missable statutory limitation of time shall govern
and shall supersede the time limitation herein stated.
If not, state all reasons and facts in support of your
denial.
Original Answer 6. As to this litigation, this interroga-
tory, excepting perhaps as to the last sentence of the
quoted material, is both irrelevant and immaterial and,
——————————
-32a-
further, by its own terms said interrogatory is not
designed to lead to information or data which are relevant
and/or material. Amd see response to request for admis-
sion numbered four, simultaneously filed herewith, which
response, by this reference, is made a part of this answer.
Supplemental Answer 6. Yes, both bonds.
Interrogatory 7. State whether the liability of the
Underwriter was, at all times relevant to your claim, sub-
ject to Rider F 1691, such that the Insuring Agreement
of the Bond provides:
The Underwriter, in consideration of the payment of
the premium, and subject to the Declarations made a
part hereof, the General Agreements, Conditions and
Limitations, and other terms of this bond agrees to
indemnify the Insured in accordance with such of the
Schedules as are specifically designated by the inser-
tion of an amount of indemnity in Item 3 of the Dec-
larations against the loss of funds or other property
which the Insured shall sustain and discover as pro-
vided in Section | through any fraudulent or dishon-
est acts committed by any Employees, acting alone or
in collusion with others, the amount of indemnity on
each of such Employees being the amount or amounts
stated in Schedule A, B and C, respectively, which-
ever is applicable to such Employees as provided in
Section 7.
If not, state all reasons and facts in support of your
denial.
Original Answer 7. For the reasons set forth in response
to Defendant Fidelity’s request for admission numbered
five, simultaneously filed herewith, plaintiffs cannot now
respond to this interrogatory; said response, by this ref-
erence, is made a part of this answer.
a
-33a-
Supplemental Answer 7. Rider F 6624 changes each
bond from a “faithful discharge of duties bond” to a
“fraud or dishonest” bond, and the quoted language as
modified by said Rider, appears. Still, the language “sub-
ject to Rider F 1691” appearing in this interrogatory
renders the question vague and imprecise as “F 1691”
only relates to “dues collectors, shop stewards or shop
chairmen,” while Rider F 6624 relates to specific provi-
sions of the insuring agreements.
Interrogatory 8. State whether Plaintiffs have even
been recognized or certified asconstituting the Profes-
sional Air Traffic Controllers Organization (or any affil-
iated organization) by any court or Government agency.
If so, identify the court or agency, the date and
circumstances of such action, and and all documents evi-
dencing such action.
Original Answer 8. Yes. See records of certification
before the Federal Labor Relations Authority.
Supplemental Answer 8. See copy of certificate
annexed as Exhibit 1, and copy of PATCO Constitution
annexed as Exhibit 2.
Interrogatory 10. State whether you filed a detailed
proof of loss, duly sworn to, with Fidelity and Deposit,
within four months of the date given in response to
Interrogatory No. . If so, identify the date of the notice,
to whom it was delivered, and its contents (in lieu of
identifying the contents of such document, at your
option, attach a copy to your answers to these interroga-
tories.
Original Answer 10. As to this litigation, this interro-
gatory is both irrelevant and immaterial and, further, by
-34a-
its own terms, said interrogatory is not designed to lead to
information or data which are relevant and/or material.
Supplemental Answer 10. Neither of the named plain-
tiffs did so.
Interrogatory 12. State whether you filed a detailed
proof of loss, duly sworn to, with Fidelity & Deposit,
within four months of the date given in response to Inter-
rogatory No. 11. If so, identify the date of the notice, to
whom it was delivered, and its contents (in lieu of identi-
fying the contents of such document, at your option, at-
tach a copy to your answers to these interrogatories).
Original Answer 12. As to this litigation, this interro-
gatory is both irrelevant and immaterial and, further, by
its own terms, said interrogatory is not designed to lead
to information or data which are relevant and/or mate-
rial.
Supplemental Answer 12. Neither of the named plain-
tiffs did so.
Interrogatory 13. State whether you ever filed any
detailed proof of loss, duly sworn to, with Fidelity &
Deposit. If so, identify the date of the notice, the method
and date of delivery, to whom it was delivered, and its
contents (in lieu of identifying the contents of such doc-
ument, at your option, attach a copy to your answers to
these interrogatories).
Original Answer 13. As to this litigation, this interro-
gatory is both irrelevant and immaterial and, further, by
its own terms, said interrogatory is not designed to lead
to information or data which are relevant and/or
material.
-35a-
Supplemental Answer 13. Yes. After a telephone con-
versation on April 27, 1982 with John R. Pinkett, Inc.,
counsel for the plaintiffs delivered to the defendant,
Fidelity, through John R. Pinkett, Inc., a copy of the
proposed complaint of certain nonstriking members of
PATCO as filed in the United States Bankruptcy Court
for the District of Columbia. Said complaint specifically
identifies (411) certain acts which plaintiffs then, and
here, aver to constitute acts within the ambit of Fidelity’s
bond. See Speicher Deposition Exhibits 3 and 6, and
Deposition, pp. 18-20. See u/so Rule 911, Bankruptcy
Rules (1981).
Anthony Skirlick
County of )
) ss:
State of California )
On this day of June, 1985, before me, a notary in
and for aforesaid jurisdiction personally appeared
Anthony Skirlick, who is personally known to me and
who after taking oath in due form, swore that the
answers to the foregoing interrogatories subscribed by
him are true to the best of his knowledge, information
and belief.
Notary Public
My commission expires:
-36a-
Respectfully submitted,
Ls
Glenn H. Carlson, Esquire
Henney, Carlson & Warren, P.C.
Suite 209
2600 Virginia Avenue, N.W.
Washington, D.C. 20037
(202) 965-7040
Ls/
Stephen A. Weitzman, Esquire
Suite 300
818 Connecticut Avenue, N.W.
Washington, D.C. 20036
(202) 887-9190
Counsel to Plaintiffs
-37a-
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
ANTHONY SKIRLICK, et al.,
~~ ~—" s
Plaintiffs,
V. ) Civil Action No. 84-2371
PATCO, et al., Jy Hogan, J.
Defendants. )
)
PLAINTIFFS’ SUPPLEMENTAL ANSWERS TO
DEFENDANT FIDELITY & DEPOSIT COMPANY OF
MARYLAND'S FIRST SET OF INTERROGATORIES
Come now the plaintiffs, Anthony Skirlick, ef al., and
by Anthony Skirlick do hereby supplementally respond
to interrogatory numbered sixteen (16) of the first set of
interrogatories propounded to the plaintiffs by the
defendant Fidelity & Deposit Company of Maryland
(hereinafter “Fidelity”).
INTERROGATORY
Interrogatory 16. If you contend that any employees
[sic] of PATCO committed any fraudulent or dishonest
acts resulting in the loss of funds or other property by you
and/or PATCO, identify with specificity the nature and
circumstances of such acts and the participating parties.
Supplemental Answer 16. And further, upon informa-
tion and belief, the individual defendants, excluding
Teresa E. Green and Cecilia Kessler, individually, and in
conjunction with each other, did alter and modify, in
violation of law and the PATCO constitution, the list of
individuals whose votes would be counted in the “strike
-38a-
vote” which was taken on August 2, and August 3, 1981.
On June 24, 1981, what your deponent viewed to be a
“strike vote” was taken; in that vote an eighty (80%) per-
cent affirmative vote was required to ratify a “strike,”
and said percentage was not obtained on that date. In
order to obtain the eighty (80%) percent figure in the
August 2-3 vote the officers and directors of PATCO,
including the named defendants and each of them,
excepting Ms. Green and Ms. Kessler. conspired to
obtain the eighty (80%) percent vote required to ratify a
strike at all cost; specifically said defendants intentionally
failed to count, and did knowingly reject from the tally,
the votes of those PATCO members who were, inter alia,
(i) near retirerent, (11) were in training, (iii) were on sick
leave. or (iv) were disabled. And that, said acts were dis-
honest and fraudulent.
Further, following the strike of August 3, 1981, the de-
fendants and each of them, acting alone and in conspir-
acy one with another, instituted or caused to be insti-
tuted litigations against certain of PATCO’s members to
force them to pay PATCO dues and fees, and that such
claims were, under the circumstances, and in the view of
your deponent, fraudulently and. dishonestly made.
S
Anthony Skirlick
County of Los Angeles )
) ss:
State of California )
On this 3lst day of May, 1985, before me, a notary in
and for the aforesaid jurisdiction personally appeared
-39a-
Anthony Skirlick, who is personally known to me and
who after taking oath in due form, swore that the
answers to the foregoing interrogatories subscribed by
him are ture to the best of his knowledge, information
and belief.
S
Notary Public
My commission expires: July 9, 1985
(SEAL) Respectfully submitted,
Glenn H. Carlson, Esquire
Henney, Carlson & Warren, P.C.
Suite 209
2600 Virginia Avenue, N.W.
Washington, D.C. 20037
(202) 965-7040
Stephen A. Weitzman, Esquire
Suite 300
8 8 Connecticut Avenue, N.W.
Washington, D.C. 20036
(202) 887-9190
Counsel to Plaintiffs
-4(0a-
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
ANTHONY SKIRLICK, ef al., )
Plaintiffs,
Vv. Civil Action No. 84-237]
PATCO, et al., ) Hogan, J.
Defendants. ;
PLAINTIFFS’ SUPPLEMENTAL ANSWERS TO
DEFENDANT FIDELITY & DEPOSIT COMPANY OF
MARYLAND'S FIRST SET OF INTERROGATORIES
Come now the plaintiffs, Anthony Skirlick, et a/., and
by Anthony Skirlick do hereby respond to interrogatory
numbered sixteen (16) of the first set of interrogatories
propounded to the plaintiffs by the defendant Fidelity &
Deposit Company of Maryland (hereinafter “Fidelity”).
INTERROGATORIES
Interrogatory 16. If you contend that any employees [sic]
of PATCO committed any fraudulent or dishonest acts
resulting in the loss of funds or other property by you
and/or PATCO, identify with specificity the nature and
circumstances of such acts and the participating parties.
Answer 16. PATCO, through the named individual
defendants, acting individually and as the board of direc-
tors of PATCO, its agents, officers and employees,
planned and executed an illegal strike against the United
States. PATCO used its funds to organize the strike, to
solicit the membership to participate in the illegal strike
and to execute the strike. That in the course of those
ee
-4la-
acts, the PATCO leadership made certain private repre-
sentations to the membership about the consequences (or
lack of consequences) of such a strike, knowing those
representations to be false at the time they were made.
Further union funds were utilized to pay lawyers to
defend numerous strikers in numerous courts against
criminal charges arising from the strike. The total sums
of monies spent on these efforts is unknown, but
believed to be in the millions of dollars. Such actions
contravened the laws of the United States and were
against the terms and policies set forth in the PATCO
constitution.
In addition, PATCO through its board, officers,
agents, and employees improperly spent union funds to
obtain political assurances that a strike would not precip-
itate loss of jobs.
PATCO improperly established a subsistance fund
which ultimately became a “strike fund.” The payments
to this fund were assessed against the union membership.
The fund was utilized in contravention of the laws of the
United States, which fund (approximately $4.5 million)
was lost to the union, as in substantial part it was
awarded to the Air Transport Association (“ATA”) in
payment of damages owed by PATCO to ATA for the
strike.
All the above acts were done in violation of the trust
and fiduciary responsibilities of PATCO’s board, and
officers and its,agents and were of themselves dishonest
and fraudulent within the meaning of those terms, as
utilized in L.M.R.D.A. 29 U.S.C. § 502.
This answer will be updated with specific instances and
references as same become apparent to the plaintiffs in the
' -42a-
course of their review of PATCO documents and other
discovery.
S
Anthony Skirlick
County of Los Angeles )
) SS:
State of California )
On this 9th day of May, 1985, before me, a notary in
and for the aforesaid jurisdiction personally appeared
Anthony Skirlick, who is personally known to me and
who after taking oath in due form, swore that the answers
to the foregoing interrogatories subscribed by him are
true to the best of his knowledge, information and belief.
S
Notary Public
My commission expires: 2-5-88
(SEAL) Respectfully submitted,
S
Glenn H. Carlson, Esauire
Henney, Carlson & Warren, P.C.
Suite 209
2600 Virginia Avenue, N.W.
Washington, D.C. 20037
(202) 965-7040
———————
APPENDIX E
STATUTES AND REGULATIONS
-43a-
Labor-Management Reporting and Disclosure Act
SAFEGUARDS FOR LABOR ORGANIZATIONS
29 U.S.C. § 501. Fiduciary responsibility of officers of
labor organizations.
(a) Duties of officers; exculpatory provisions and
resolutions void. The officers, agents, shop stewards,
and other representatives of a labor organization occupy
positions of trust in relation to such organization and its
members as a group. It is, therefore, the duty of each
such person, taking into account the special problems
and functions of a labor organization, to hold its money
and property solely for the benefit of the organization
and its members and to manage, invest, and expend the
Same in accordance with its constitution and bylaws and
any resolutions of the governing bodies adopted there-
under, to refrain from dealing with such organization,
and to account to the organization for any profit
received by him in whatever capacity in connection with
transactions conducted by him or under his direction on
behalf of the organization. A general exculpatory provi-
sion in the constitution and bylaws of such a labor
Organization or a general exculpatory resolution of a
governing body purporting to relieve any such person of
liability for breach of the duties declared by this section
shall be void as against public policy.
(b) Violation of duties; action by member after refusal
or failure by labor organization to commence proceed-
ings: jurisdiction: leave of court; counsel fees and ex-
-444-
penses. When any officer. agent. shop steward. or repre-
sentative of any labor organization is alleged to have
violated the duties declared in subsection (a) and the
labor organization or its governing board or officers
refuse or fail to sue or recover damages or secure an
accounting or other appropriate relief within a reasona-
ble time after being requested to do so by any member
of the labor organization, such member may sue such
officer, agent, shop steward. or representative in any
district court of the United States or in any State court
of competent jurisdiction to recover damages or secure
an accounting or other appropriate relief for the benefit
of the labor organization. No such proceeding shall be
brought except upon leave of the court obtained upon
verified application and for good cause shown, which
application may be made ex parte. The trial judge may
allot a reasonable part of the recovery in any action
under this subsection to pay the fees of counsel prose-
cuting the suit at the instance of the member of the
labor organization and to compensate such member for
any expenses necessarily paid or incurred by him in
connection with the litigation.
(c) Embezzlement of assets: penalty. Any person who
embezzies, steals, or unlawfully and willfully abstracts
or converts to his own use, or the use of another, any of
the monies, funds, securities, property, or other assets of
a labor organization of which he is an officer, or by
which he is employed, directly or indirectly, shall be
fined not more than $10,000.00 or imprisoned for not
more than five years, or both. (Sept. 14, 1959, P.L. 86-
257, Title V. section 501, 73 Stat. 535.)
-4Sa-
29 U.S.C. § 502. Bonding of officers and employees of
labor organizations; amount, form, and placement of
bonds; penalty for violation.
(a) Every officer, agent, shop steward, or other repre-
sentative or employee of any labor organization (other
than a labor organization whose property and annual
financial receipts do not exceed $5,000.00 in value), or of
a trust in which a labor organization is interested, who
handles funds or other property thereof shall be bonded
to provide protection against loss by reason of acts of
fraud or dishonesty on his part directly or through con-
nivance with others. The bond of each such person shall
be fixed at the beginning of the organization’s fiscal year
and shall be in an amount not less than ten (10%) per-
cent of the funds handled by him_or his predecessor or
predecessors, if any, during the preceding fiscal vear, but
in no case more than $500,000.00. If the labor organiza-
tion or the trust in which a labor organization is inter-
ested does not have a preceding fiscal year, the amount
of the bond shall be, in the case of a local labor organi-
zation, not less than $1.000.00, and in the case of any
other labor organization or of a trust in which a labor
Organization is interested, not less than $10,000.00. Such
bonds shall be individual or schedule in form, and shail
have a corporate surety company as surety thereon. Any
person who is not covered by such bonds shall not be
permitted to receive, handle, disburse, or otherwise exer-
cise custody or control of the funds or other property of
a labor organization or of a trust in which a labor organ-
ization is interested. No such bond shall be placed
through an agent or broker or with a surety company in
which any labor organization or any officer, agent, shop
steward, or other representative of a labor organization
-46a-
has any direct or indirect interest. Such surety company
shall be a corporate surety which holds a grant of
authority from the Secretary of the Treasury under the
Act of July 30, 1947 (6 U.S.C., sections 6-13), as an
acceptable surety on Federal bonds: Provided, That
when in the opinion of the Secretary a labor organiza-
tion has made other bonding arrangements which would
provide the protection required by this section at com-
parable cost or less, he may exempt such labor organiza-
tion from placing a bond through a surety company
holding such grant of authority.
(b) Any person who willfully violates this section shall
be fined not more than $10,000.00 or imprisoned for not
more than one year, or both. (Sept. 14, 1959, P.L. 86-
527, Title V, section 502, 73 Stat. 536; Sept. 29, 1965,
P.L. 89-216, section 1, 79 Stat. 888.)
CODE OF FEDERAL REGULATIONS (1981)
a> C.F mt
Part 453—GENERAL STATEMENT CONCERNING
BONDING REQUIREMENTS OF THE LABOR-MANAGE-
MENT REPORTING AND DISCLOSURE ACT OF 1959.
INTRODUCTION
Section 453.1 Scope and significance of this part.
(a) Functions of the Department of Labor. This part
discusses the meaning and scope of section 502 of the
Labor-Management Reporting and Disclosure Act of
1959! (hereinafter referred to as the Act), which requires
73 Stat. 536: 29 U.S.C... section 502.
-47a-
the bonding of certain officials, representatives, and
emplovees of labor organizations and of trusts in which
labor organizations are interested. The provisions of sec-
tion 502 are subject to the general investigatory authority
of the director, Office of Labor-Management Standards
Enforcement, embodied in section 60! of the Act which
empowers him to investigate whenever he believes it
necessary in order to determine whether any person has
violated or is about to violate any provisions of the Act
(except Title | or amendments to other statutes made by
section 505 or Title VII). The Department of Labor 1s
also authorized, under the general provisions of section
607. to forward to the Attorney General, for appropriate
action, any evidence of violations of section 502 devel-
oped in such investigations, as may be found to warrant
criminal prosecution under the Act or other Federal law.
(b) Purpose and effect of interpretations. \nterpreta-
tions of the Labor-Management Services Administrator
with respect to the bonding provisions are set forth in
this part to provide those affected by these provisions of
the Act with “a practical guide *** as to how the office
representing the public interest in its enforcement will
seek to apply it.”? The correctness of an interpretation
can be determined finally and authoritatively only by the
courts. It is necessary, however, for the Labor-Manage-
ment Services Administrator to reach informed conclu-
sions as to the meaning of the law to enable him to carry
out his statutory duties of administration and enforce-
ment. The interpretations of the Labor-Management
Services Administrator contained in this part, which are
issued upon the advice of the Solicitor of Labor, indi-
cate the construction of the law which will guide him in
~ Skidmore v. Switt & Co.. 323 U.S. 134, 138.
-48a-
performing his duties unless and until he is directed oth-
erwise by authoritative rulings of the courts or unless
and until he subsequently decides that a prior inter-
pretation is incorrect. However, the omission to discuss a
particular problem in this part or in interpretations sup-
plementing it. should not be taken to indicate the adop-
tion of any position by the Labor-Management Services
Administrator with respect to such problem or to consti-
tute an administrative interpretation or practice.
(c) Earlier interpretations superseded. To the extent
that prior opinions and interpretations under the Act.
relating to the bonding of certain officials. representa-
tives, and employees of labor organizations and of trusts
in which labor organizations are interested, are inconsis-
tent or in conflict with the principles stated in this part,
they are hereby rescinded and withdrawn.
*x *x *
Section 453.3 Labor organizations within the coverage
of section 502(a).
Any labor organization as defined in sections 3(i) and
3(j)_of the Act® is a labor organization within the cover-
age of section 502(a) unless its property and annual
financial receipts do not exceed $5,000.00 in value. The
determination as to whether a particular labor organiza-
tion is excepted from the application of section 502(a) is
to be made at the beginning of each of its fiscal years on
the basis of the total value of all its property at the
beginning of, and its total financial receipts during, the
preceding fiscal year of the organization.
See Part 451 of this chapter.
-49a-
Section 453.7 “Funds or other property” of a labor
organization or of a trust in which a labor organization
is interested.
The affirmative requirement for bonding the specified
personnel is applicable only if they handle “funds or
other property” of the labor organization or trust con-
cerned. A consideration of the purpose of section 502
and a reading of the section as a whole, including provi-
sions for fixing the amount of bonds, suffice to show
that the term “funds or other property,” as used in this
section of the Act, encompasses more than cash alone
but that it does not embrace all of the property of a
labor organization or of a trust in which a labor organi-
zation is interested. The term does not include property
of a relatively permanent nature, such as land, buildings,
furniture, fixtures and office and delivery equipment
used in the operations of a labor organization or trust. It
does. however. include items in the nature of quick
assets, such as checks and other negotiable instruments,
government obligations and marketable securities as well
as cash, and other property held, not for use, but for
conversion into cash or for similar purposes making it
substantially equivalent to funds.
Section 453.8 Personnel who “handle” funds or other
property.
(a) General considerations. Section 502(a) requires
“every” person specified in its bonding requirement “who
handles” funds or other property of the labor organiza-
tion or trust to be bonded. It does not contain any
exemption based on the amount of the funds or other
property handled by particular personnel. Therefore, if
the bonding requirement is otherwise applicable to such
-S0a-
persons, the amount of the funds or the value of the
property handled by them does not affect such applica-
bility. In determining whether a person “handles” funds
or other property within the meaning of section 502(a).
however, it is important to consider the term “handles”
in the light of the basic purpose which Congress sought
to achieve by the bonding requirement and the language
chosen to make that purpose effective. Thus. while it ts
clear that section 502(a) should be considered as repre-
senting the minimum requirements which Congress deemed
necessary in order to insure the reasonable protection of
the funds and other property of labor organizations and
trusts within the coverage of the section, it is equally
clear from the legislative history and the language used
that Congress was aware of cost considerations and did
not intend to require unreasonable, unnecessary or
duplicative bonding. In terms of these general considera-
tions, more specific content may be assigned to the term
“handles” by reference to the prohibition in Section
502(a) against permitting any person not covered by an
appropriate bond “to receive. handle, disburse. or other-
wise exercise custody or control” of the funds or other
property of a labor organization or of a trust in which a
labor organization is interested. The phrase “receive.
handle, disburse, or otherwise exercise custody or con-
trol” is not to be considered as expanding the scope of
the term “handles” but rather as indicating facets of
“handles” which in a_ specific prohibition, Congress
believed should be clearly set forth.
(b) Persons included generally. The basic objective of
secuon 502(a) is to provide reasonable protection of
funds or other property rather than to insure against
every conceivable possibility of loss. Accordingly. a per-
-Sla-
son shall be deemed to be “handling” funds or other
property, so as to require bonding under that section,
whenever his duties or activities with respect to given
funds or other property are such that there is a signifi-
cant risk of loss by reason of fraud or dishonesty on the
part of such person, acting either alone or in collusion
with others.
(c) Physical contact as criterion of handling. Physical
dealing with funds or other property is, under the princi-
ples above stated, not necessarily a controlling criterion
in every case for determining the persons who “handle”
within the meaning of section 502(a). Physical contact
with cash, checks or similar property generally consti-
tutes “handling.” On the other hand, bonding may not
be required for office personnel who from time to time
perform counting, packaging, tabulating or similar duties
which involve physical contact with checks, securities, or
other funds or property but which are performed under
conditions that cannot reasonably be said to give rise to
significant risks with respect to the receipt, safekeeping
or disbursement of funds or property. This may be the
case where significant risks of fraud or dishonesty in the
performance of duties of an essentially clerical character
are precluded by the closeness of the supervision pro-
vided or by the nature of the funds or other property
handled.
(d) “Handling” funds or other property without physi-
cal contact. Personnel who do not physically handle
funds or property may nevertheless “handle” within the
meaning of section 502(a) where they have or perform
significant duties with respect to the receipt, safekeeping
or disbursement of funds or other property. For exam-
ple. persons who have access to a safe deposit box or
-S2a-
similar depository for the purpose of adding to, withdraw-
ing. checking or otherwise dealing with its contents may
be said to “handle” those contents within the meaning of
section 502(a) even though they do not at any time during
the year actually secure such access for such purposes.
Similarly, those charged with general responsibility for
the safekeeping of funds or other property such as the
treasurer of a labor organization, should be considered as
handling funds or other property. It should also be noted
that the extent of actual authority to deal with funds or
property may be immaterial where custody or other func-
tions have been granted which create a substantial risk of
fraud or dishonesty. Thus, if a bank account were main-
tained in the name of a particular officer or employee
whose signature the bank were authorized to honor, it
could not be contended that he did not “handle” funds
merely because he had been forbidden by the organization
or by his superiors to make deposits or withdrawals.
(e) Disbursement of funds or other property. \t is clear
from both the purpose and language of section 502(a)
that personnel described in the section who actually dis-
burse funds or other property, such as officers or trustees
authorized to sign checks or persons who make cash dis-
bursements must be considered as handling such funds
and property. Whether others who may influence, author-
ize or direct disbursements must also be considered to
handle funds or other property can be determined only
by reference to the specific duties or responsibilities of
these persons in a particular labor organization or trust.
[28 F.R. 14394, Dec. 27, 1963, as amended at 30 F.R.
14925, Dec. 2, 1965]
Section 453.9 “Handling” of funds or other property
by personnel functioning as a governing body
~ -53a-
(a) (1) General considerations. For many labor organi-
zations and trusts special problems involving disburse-
ments will be presented by those who, as trustees or
members of an executive board or similar governing
body, are, as a group, charged with general responsibility
for the conduct of the business and affairs of the organi-
zation or trust. Often such bodies may approve con-
tracts, authorize disbursements, audit accounts and exer-
cise similar responsibilities.
(2) It is difficult to formulate any general rule for such
cases. The mere fact that a board of trustees, executive
board or similar governing body has general supervision
of the affairs of a trust or labor organization, including
investment policy and the establishment of fiscal control,
would not necessarily mean that the members of this
body “handle” the funds or other property of the organi-
zation. On the other hand, the facts may indicate that
the board or other body exercises such close, day-to-day
supervision of those directly charged with the handling
of funds or other property that it might be unreasonable
to conclude that the members of such board were not, as
a group, also participating in the handling of such funds
and property.’ Also, whether or not the members of a
particular board of trustees or executive board handle
funds or other property in their capacity as such, certain
of these members may hold other offices or have other
functions involving duties directly related to the receipt,
safekeeping or disbursement of the funds or other prop-
erty of the organization so that it would be necessary
that they be bonded irrespective of their board member-
ship.
’ As to group coverage, see section 453.16.
-54a-
(b) Nature of responsibilities as affecting “handling.”
With respect to particular responsibilities of boards of
trustees, executive boards and similar bodies in disbursing
funds or other property, much would depend upon the
system of fiscal controls provided in a particular trust or
labor organization. The allocation of funds or authoriza-
tion of disbursements for a particular purpose is not
necessarily handling of funds within the meaning of the
section. If the allocation or authorization merely permits
expenditures by a disbursing officer who has responsibil-
itv for determining the validity or propriety of particular
expenditures, then the action of the disbursing officer and
not that of the board would constitute handling. But if
pursuant to a direction of the board, the disbursing officer
performed only ministerial acts without responsibility to
determine whether the expenditures were valid or appro-
priate, then the board’s action would constitute handling.
In such a case, the absence of fraud or dishonesty in the
acts of the disbursing officer alone would not necessarily
prevent fraudulent or dishonest disbursements. The per-
son or persons who are charged with or exercise responsi-
bility for determining whether specific disbursements are
hona fide, regular, and in accordance with the applicable
constitution, trust instrument, resolution or other laws or
documents governing the disbursement of funds or other
property should be considered to handle such funds and
property and be bonded accordingly.
[28 F.R. 14394, Dec. 27. 1963, as amended at 30 F.R.
14926, Dec. 2. 1965]
Section 453.11 The nature of the “duties” to which the
bonding requirement relates.
-55a-
The bonding requirement in section 502(a) relates only
to duties of the specified personnel in connection with
their handling of funds or other property to which this
section refers. It does not have reference to the special
duties imposed upon representatives of labor organiza-
tions by virtue of the positions of trust which they
occupy. which are dealt with in section 50I(a), and for
which civil remedies for breach of the duties are pro-
vided in section S5O0I(b). The fact that the bonding
requirement is limited to personnel who handle funds or
other property indicates the correctness of these conclu-
sions. They find further support in the differences
between sections 501(a) and 502(a) of the Act which suf-
ficiently indicate that the scope of the two sections is not
coextensive.
Section 453.12 Meaning of fraud or dishonesty.
The term “fraud or dishonesty” shall be deemed to
encompass all those risks of loss that might arise through
dishonest or fraudulent acts in handling of funds as delin-
eated in sections 453.8 and 453.9. As such, the bond
must provide recovery for loss occasioned by such acts
even though no personal gain accrues to the person
committing the act and the act is not subject to punish-
ment as a crime or misdemeanor, provided that within
the law of the state in which the act is committed, a
court would afford recovery under a bond providing pro-
tection against fraud or dishonesty. As usually applied
under state laws, the term “fraud or dishonesty” encom-
passes such matters as larceny, theft, embezzlement,
forgery. misappropriation, wrongful abstraction, wrong-
ful conversion, willful misapplication or any other fraud-
ulent or dishonest acts resulting in financial loss. [30 F.R.
14926, Dec. 2. 1965]
-56a-
AMOUNT OF BONDS
Section 453.13 The statutory provision.
Section 502(a) of the Act requires that the bond of
each “person” handling “funds or other property” who
must be bonded be fixed “at the beginning of the organi-
zation’s fiscal year *** in an amount not less than 10
percentum of the funds handled by him and his prede-
cessor or predecessors, if any, during the preceding fiscal
vear, but in no case more than $500,000.00.” If there is
no preceding fiscal year, the amount of each required
bond is set at not less than $1,000.00 for local labor
organizations and at not less than $10,000.00 for other
labor organizations or for trusts in which a labor organi-
zation is interested.
Section 453.14 The meaning of “funds.”
While the protection of bonds required under the Act
must extend to any actual loss from the acts of fraud or
dishonesty in the handling of “funds or other property”
(section 453.7), the amount of the bond depends upon
the “funds” handled by the personnel bonded and their
predecessors, if any. “Funds” as here used is not defined
in the Act. As in the case of “funds or other property”
discussed earlier in section 453.7, the term would not
include property of a relatively permanent nature such as
land, buildings, furniture, fixtures, or property similarly
held for use in the operations of the labor organization
or trust rather than as quick assets. In its normal mean-
ing. however, “funds” would include, in addition to cash,
items such as bills and notes, government obligations
and marketable securities, and in a particular case might
well include all the “funds or other property” handled
-S7a-
during the vear in the positions occupied by the particu-
lar personnel for whom the bonding is required. In any
event, it 1s clear that bonds fixed in the amount of ten
(10) percent or more of the-total “funds or other prop-
erty’ handled by the occupants of such positions during
the preceding fiscal year would be in amounts sufficient
to meet the statutory requirement. Of course, in situa-
tions where a significant saving in bonding costs might
result from computing separately the amounts of “funds”
and of “other property” handled. criteria for distinguish-
ing particular items to be included in the quoted terms
would prove useful. While the criteria to be applied in a
particular case would depend on all the relevant facts
concerning the specific items handled, it may be assumed
as a general principle that at least those items which may
be handled in a manner similar to cash and which
involve a like risk of loss should be included in comput-
ing the amount of “funds” handled. [30 F.R. 14926, Dec.
2, 1965]
FORMS OF BONDS
Section 453.18 Bonds “individual or schedule in form.”
(a) General consideration. \n addition to such substan-
tive matters as the personnel who must be bonded and
the scope and the amount of the prescribed bonds, which
have been discussed previously, the form of the bonds is
the subject of a specific provision of section 502(a).
Under this provision, a bond meeting the substantive
requirements of the section may be either “individual or
schedule in form.” These terms are not specially defined
and could be descriptive of a variety of possible forms of
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bonds. According to trade usage. an individual bond is a
single bond covering a single named individual to a
designated amount. and bonds “schedule in form” may
include either name schedule or position schedule bonds.
A name schedule bond is typically a single bond covering
a series or list of named individuals, each of whom is
bonded separately to a designated amount. A position
schedule bond is typically a single bond providing cover-
age with respect to any occupant or holder of one or
more specified positions during the term of the bond,
each office or position being covered to a designated
amount. In a statute relating to trade or commerce, it 1s
frequently helpful to consider whatever trade or com-
mercial usages may have developed with respect to the
statutory terms.’ References to individual, schedule and
position schedule bonds may be found in other acts of
Congress and indicate a clear awareness of trade usages
and terminology in this field.'”
(b) Particular forms of bonds. lf the phrase “individual
or schedule in form” is considered in light of the trade
usages, section 502(a) at least permits bonds which are
individual, name schedule or position schedule in form.
Of course, section 502(a) does not require any particular
tvpe of individual or schedule bonds where different
types exist or may be developed. It could not be said, for
example, that a bond which schedules positions accord-
ing to similarities in duties, risks, or required amounts of
coverage is not “schedule in form” within the meaning of
section 502(a) merely because the particular form of
scheduling invotved was not employed in bonds current
* See 2 Sutherland. Statutory Construction (3d ed. 1943). section 4919.
Act of August 24, 1954. 6&8 Stat. 335. 12 U.S.C.. section 1766 (g): Act
of August 9, 1955. 69 Stat. 618. 6 U.S.C... section 14.
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at the time the section became law. A more specific illus-
tration would be a bond scheduling shop stewards as a
group because of the similar duties they perform in col-
lecting dues. or members of an executive board as a group
because of the fact that duties are imposed upon the
board as such. A bond of this type would be “schedule in
form™ within the meaning of section 502(a) and assuming
adequacy of amount and coverage of all persons whom it
is necessary to bond, such a bond would be in conformity
with the statute. Also, a bond scheduling positions or
groups of positions according to amounts of funds
handled by occupants of the positions could be viewed as
“schedule in form.”
(c) Additional bonding. Section 502(a) neither prevents
additional bonding beyond that required by its terms nor
prescribes the form in which such additional coverage
may be taken. Thus, so long as a particular bond is sched-
ule in form as to the personnel required to be bonded
and schedules coverage of these persons in at least the
minimum required amount, additional coverage either as
to personnel or amount may be taken in any form either
in the same or in separate bonds. A bond which provided
name or position schedule coverage for all persons
required to be bonded under section S502(a), each sched-
uled person or position being bonded in at least the
required minimum amount, would clearly be “schedule in
form” within the meaning of section 502(a) regardless of
the extent or form of additional schedule or blanket cov-
erage provided in the same bond.
ok * *
MISCELLANEOUS PROVISIONS
Section 453.22 Prohibition of certain activities by un-
bonded persons.
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(a) Section 502(a) provides that persons who are not
covered by bonds as required by that section shall not be
permitted to receive, handle, disburse, or otherwise exer-
cise custody or control of the funds or other property of
a labor organization or of a trust in which a labor organ-
ization is interested. This prohibits personnel who are
required to be bonded, as explained in section 453.8
from performing any of these acts without being covered
by the required bonds. In addition, this provision makes
it unlawful for any person with power to do so to dele-
gate or assign the duties of receiving, handling. disburs-
ing, or otherwise exercising custody or control of such
funds or property to any person who is not bonded in
accordance with the provisions of section 502(a).
(b) The legislative history of the Act indicates. how-
ever, that it was not the intent of Congress to make
compliance with the bonding requirements of section
502(a) a condition on the right of banks or other finan-
cial institutions to serve as the depository of the funds of
labor organizations or trusts. Similarly, it appears that
the provisions of that section do not require the bonding
of brokers or their independent contractors who have
contracted with labor organizations or trusts for the per-
formance of functions which are normally not carried
out by such labor organizations’ or trusts’ own officials
or employees, such as the buying of securities, the per-
formance of other investment functions, or the transpor-
tation of funds by armored truck.!?
Section 453.23 Persons becoming subject to bonding
requirements during fiscal year.
~ See section 453.6(b)
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Considering the purpose of section 502, the language
of the prohibition should be considered to apply to per-
sons who because of election, employment or change in
duties begin to handle funds or other property during the
course of a particular fiscal year. Bonds should be
secured for such persons, in an amount based on the
funds handled by their predecessors during the preceding
fiscal year, before they are permitted to engage in any of
the fund-handling activities referred to in the prohibition,
unless coverage with respect to such persons is already
provided by bonds in force meeting the requirements of
section 502(a).
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.