# Petition for Writ of Certiorari — Skirlick v. Fidelity & Deposit Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385002_0377%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1989 - **Citation:** 488 U.S. 1007 ## Text &8 a 39 } 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 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 . 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 -58a- 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. -59a- 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. -60a- (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) -6la- 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). --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385002_0377%3A1. Public record. Not legal advice.