Opinion
01 Civ. 2289 (MBM).
July 7, 2004
THOMAS M. KENNEDY, ESQ. SUSAN M. JENNIK, ESQ. Kennedy Schwartz Cure, New York, NY, Attorneys for Individual Plaintiffs.
J. BRUCE MAFFEO, ESQ. ROLAND ACEVEDO, ESQ. New York, NY, Attorneys for Plaintiff Miranda.
MICHAEL B. HIMMEL, ESQ. ROBERT J. KIPNEES, ESQ. Greenbaum Rowe Smith Ravin Davis Himmel, Metro Corporate Campus One Woodbridge, NJ, Attorneys for Defendants George Barasch, Linda Barasch Glazer, Richard Glazer and Financial Administrators, Inc.
KATHERINE H. PARKER, ESQ. MYRON D. RUMELD, ESQ. NEAL SCHELBERG, ESQ. Proskauer Rose New York, NY, Attorneys for Defendants Trustees of the Allied Welfare Fund and Trustees of the Vacation Fringe Benefit Fund.
PETER ALTIERI, ESQ. JOHN HARRIS, ESQ. J. WILLIAM COOK, ESQ. Epstein Becker Green New York, NY, Attorneys for Defendants Trustees of the Union Mutual Fund Pension Plan.
DANIEL RIESEL, ESQ. STEVEN RUSSO, ESQ. HILARY SEMEL, ESQ. Sive Paget Riesel New York, NY, Attorneys for Defendants Stephen Barasch and Churchill Administrators, Inc.
JAY P. WARREN, ESQ. Bryan Cave New York, NY, Attorney for Defendants Allied Trades Council; John Morro, Individually and as President of ATC; and Jack Siebel, Reginald Rosado and James Crowley, as Officers of ATC.
OPINION ORDER
Plaintiffs Jose Martinez and Haywantie Singh ("Individual Plaintiffs") are former members of the Allied Trades Council ("ATC"). Individual Plaintiffs assert a claim for breach of fiduciary duties on behalf of ATC against defendants John Morro, Jack Siebel, Reginald Rosado and James Crowley (collectively "ATC Defendants") as officers of ATC. Individual Plaintiffs' claim arises under Section 501 of the Labor-Management Reporting and Disclosure Act ("LMDRA"), 29 U.S.C. § 501. This court has issued three prior opinions in this action, see Bona v. Barasch, No. 01 CIV. 2289, 2003 WL 1395932 (S.D.N.Y. March 20, 2003),Bona v. Barasch, No. 01 CIV. 2289, 2003 WL 21222531 (S.D.N.Y. May 27, 2003), and Martinez v. Barasch, No. 01 CIV. 2289, 2004 WL 1367445 (S.D.N.Y. June 16, 2004), in which the facts of this case are set forth more fully than they are below and with which familiarity is assumed. ATC Defendants have moved for reconsideration of the court's March 2003 ruling granting Individual Plaintiffs' Section 501(b) application, and to dismiss Individual Plaintiffs' Section 501 claim for lack of subject matter jurisdiction. For the reasons set forth below, ATC Defendants' motion for reconsideration is granted, Individual Plaintiffs' Section 501(b) application is denied, and ATC Defendants' motion to dismiss is granted.
I.
Individual Plaintiffs are residents of New York, and were "members," as that term is defined in Section 3(o) of the LMRDA, 29 U.S.C. § 402(o), of a labor organization, ATC. (4th Amended Complaint ("FAC") ¶¶ 4, 15, 16) Defendant John Morro is President of ATC, a "labor organization" as that term is defined in Sections 2(5) and 3(i) of the LMRDA, 29 U.S.C. § 152(5), 402(i). (Id. at ¶ 6) Defendants Jack Siebel, Reginald Rosado, and James Crowley are officers and members of the Executive Council of ATC. (Id.) Individual Plaintiffs sue for and on behalf of ATC as former "members" of ATC within the meaning of Section 501(b) of the LMRDA, 29 U.S.C. § 501(b). (Id. at ¶ 2; Prayer for Relief, ¶ 1) Jurisdiction is present pursuant to 28 U.S.C. § 1331 and 29 U.S.C. § 501(b) and 1132(a). (Id.) Venue lies in this court under 28 U.S.C. § 1391 because a substantial part of the events giving rise to this action occurred in this district. (Id. at ¶ 3)II.
As discussed in the three prior opinions, herein cited above, this action comprises three claims by multiple plaintiffs against multiple defendants, but the instant motion relates only to the third claim, brought by Individual Plaintiffs against ATC Defendants. This third claim is for breach of fiduciary duties for and on behalf of ATC against defendants Morro, Siebel, Rosado and Crowley as officers of ATC. (FAC ¶¶ 63-77) Individual Plaintiffs claim that ATC Defendants had a duty under Section 501(a) of the LMRDA not to take action adverse to ATC, not to have any interest in conflict with the interest of ATC, and to account to the organization for any profit received in connection with transactions conducted on behalf of ATC. (Id. at ¶ 63) Individual Plaintiffs allege that ATC Defendants breached these fiduciary duties.
Individual Plaintiffs allege that ATC Defendants caused ATC to contribute large sums to the Barasch family. Between 1995 and 1999, ATC gave $1 million to the Allied Educational Foundation ("AEF"), which purportedly is used by the Barasch Family to divert money to themselves. (Id. at ¶¶ 50-52, 64) ATC Defendants also caused ATC to enter into a long-term administrative services contract with Barton, Babcock Blair, Inc. ("BBB"), another corporation purportedly used by the Barasch Family to divert money to themselves, to which ATC paid $232,247 in fees between 1995 and 1999. (Id. at ¶¶ 46, 48, 49, 66, 67) AEF paid BBB another $506,781 during the same time period. (Id. at ¶ 67) Individual Plaintiffs contend that the payments to AEF and BBB resulted from the Barasch Family's dominance of ATC, and that ATC Defendants knew or should have known that these payments were not for legitimate union purposes. (Id. at ¶¶ 64, 68) Further, Individual Plaintiffs allege that ATC Defendants received benefits from AEF by taking trips paid for or heavily subsidized by AEF. (Id. at ¶¶ 69-70) In sum, Individual Plaintiffs claim that ATC Defendants had interests in AEF and BBB that conflict with the interests of ATC, and that they have not accounted to ATC for any profits received by them in connection with payments made by ATC to BBB or AEF. (Id. at ¶ 71)
Individual Plaintiffs further allege that on March 2, 2001, they asked ATC Defendants to seek damages for breaches of fiduciary duties. (Id. at ¶ 74) However, ATC Defendants responded on April 6, 2001, in a letter from defendant Morro, that they had found no evidence of wrongdoing and that they would not try to recover the payments made to BBB or AEF. (Id. at ¶ 75) Individual Plaintiffs filed this action on March 19, 2001 — before receiving ATC defendants' response to their request for action on April 6 — and amended their complaint on June 29, 2001 to include a claim under Section 501 of the LMRDA against ATC Defendants for damages in the amount of money transferred by ATC to BBB and AEF. (Id. at ¶¶ 75, 77)
III.
ATC Defendants have moved to dismiss Individual Plaintiffs' claim against them under Fed.R.Civ.P. Rule 12(b)(1), arguing that Individual Plaintiffs lack standing, and therefore that the court lacks subject matter jurisdiction. See Moore v. PaineWebber, Inc., 189 F.3d 165, 169 n. 3 (2d Cir. 1999). In deciding a motion to dismiss under Rule 12(b)(1), the court must construe all ambiguities and draw all inferences in the plaintiff's favor, but the court must dismiss the action "when the district court lacks the statutory or constitutional power to adjudicate it." Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000) The court "may refer to evidence outside the pleadings," and the plaintiff has the burden of proving subject matter jurisdiction by a preponderance of the evidence. Id.
Individual Plaintiffs have brought their individual claims against ATC Defendants under Section 501(b) of the LMRDA. (FAC ¶ 2) According to ATC Defendants, however, that section permits only current members of ATC to bring an action on behalf of ATC against ATC's officers, and Individual Plaintiffs are no longer members of ATC. Individual Plaintiffs argue that in order to have standing in this action, they need only have been members when the transactions of which they complain took place and when they filed the complaint. ATC Defendants, on the other hand, argue that Individual Plaintiffs must remain members of ATC throughout the pendency of this action in order to maintain standing.
Section 501(b) of the LMRDA states, in relevant part:
When any officer, agent, shop steward, or representative of any labor organization is alleged to have violated the duties declared in subsection (a) of this section 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 reasonable 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 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.29 U.S.C. § 501(b). Section 501(b) explicitly confers standing to sue on behalf of a labor organization only upon "members" of that organization. Therefore, only members of the organization have standing to seek leave from the court to bring such a suit.
The status of Individual Plaintiffs' membership in ATC seems to be the subject of some confusion. Individual Plaintiffs alleged in their original complaint, filed in March 2001, that both Martinez and Singh remained members of ATC at that time. (Compl. ¶¶ 17-18) Individual Plaintiffs filed their First Amended Complaint in June 2001 and alleged that Martinez and Singh remained members of ATC at that time. (1st Am. Compl. ¶¶ 19-20) Individual Plaintiffs filed their Second Amended Complaint in September 2001 and alleged that Martinez and Singh remained members of ATC at that time. (2nd Am. Compl. ¶¶ 19-20) Individual Plaintiffs amended their complaint a third time in April 2003 — one month after the court granted their application to bring this action on behalf of ATC — and alleged that Martinez and Singh continued to be members of ATC at that time. (3rd Am. Compl. ¶¶ 15-16) However, one month later, Individual Plaintiffs amended their complaint a fourth time and alleged only that Martinez was still a member of ATC at that time, but that Singh had ceased to be a member of ATC in March 2001, which contradicted the allegations in all three amended complaints concerning Singh's membership status in ATC. (FAC ¶¶ 15-16) The Fourth Amended Complaint precedes by two years the court's March 2003 ruling granting Individual Plaintiffs' Section 501(b) application.
In their papers opposing the instant motion, Individual Plaintiffs have revised their account yet again. Now Singh is alleged to have been a member of ATC through July 2001 and Martinez a member of ATC through August 2001. (Plaintiffs' Memorandum of Law in Opposition to Motion of ATC Defendants to Dismiss Claims Arising under 29 U.S.C. § 501 ("Pl. Mem.") 4) Individual Plaintiffs base these latest allegations on the declaration of Linda Glazer, an office manager for a company that provides administrative services to ATC, including keeping track of membership status and the receipt of monthly dues. (Glazer Dec. ¶ 1) According to Glazer, Singh has not paid membership dues to ATC since July 2001 and Martinez has not paid membership dues to ATC since August 2001. (Id. at ¶¶ 3-4)
However, Individual Plaintiffs' own sworn deposition testimony tells yet another story. Singh admitted at her deposition that her membership in ATC terminated in May 2001 (Singh Depo. Tr. 53:15-16, 55:5-10), and Martinez admitted at his deposition that his membership in ATC terminated after an election held in September 2001 to elect either ATC or UNITE as the representative union, (Martinez Depo. Tr. 25:21-25, 26:1-25, 27:1; Morro Dec. ¶ 11).
While it is unclear when precisely Individual Plaintiffs' membership in ATC ended, it is nevertheless quite clear that their membership did indeed end around the summer of 2001, nearly two years before the court granted leave in March 2003 for Individual Plaintiffs to bring this action on behalf of ATC,see Bona 2003 WL 1395932. Individual Plaintiffs neglected to inform the court of the termination of their membership during the two years after their application was filed, although they submitted numerous papers to the court during that time. InBoard of License Commissioners of Tiverton v. Pastore, 469 U.S. 238, 240 (1985), the Supreme Court held: "It is appropriate to remind counsel that they have a 'continuing duty to inform the Court of any development which may conceivably affect the outcome' of the litigation. When a development after this Court . . . notes probable jurisdiction could have the effect of depriving the Court of jurisdiction due to the absence of a continuing case or controversy, that development should be called to the attention of the Court without delay." Id. (emphasis in original). Individual Plaintiffs filed an amended complaint that was verified by Martinez and yet misstated their membership status in ATC. (2nd Am. Compl., Verification; Martinez Depo. Tr. 19:15-25, 20:1-25, 21:1-6) The court granted Individual Plaintiffs' application for leave to sue on behalf of ATC upon these inaccurate allegations made by Individual Plaintiffs. However, because Individual Plaintiffs ceased to be members of ATC before the court granted their application, they lost standing to maintain their application.
ATC Defendants have moved to reconsider the court's March 2003 ruling granting Individual Plaintiffs' Section 501(b) application in light of the new allegation concerning their membership status in ATC. Individual Plaintiffs object to the motion as time-barred under Local Civil Rule 6.3, which states, in relevant part: "A notice of motion for reconsideration or reargument shall be served within ten (10) days after the docketing of the court's determination of the original motion." U.S. Dist. Ct. Rules S.E.D.N.Y., Civil Rule 6.3. The court's ruling granting Individual Plaintiffs' Section 501(b) application was docketed March 21, 2003, yet ATC Defendants filed the instant motion to reconsider that ruling nearly one year later on February 13, 2004. Nevertheless, ATC Defendants argue that the court should not apply Local Rule 6.3 here because key facts concerning Individual Plaintiffs' membership in ATC — and thus bearing directly on Individual Plaintiffs' standing and the subject matter jurisdiction of the court in this action — were not disclosed until May and June 2003.
Local Rule 6.3 is prudential. See Padilla v. Rumsfeld, 243 F. Supp.2d 42, 48 (S.D.N.Y. 2003), rev'd on other grounds, 352 F.3d 695 (2d Cir. 2003), rev'd on other grounds, ___ S.Ct. ___, 2004 WL 1432135 (U.S. June 28, 2004). "It describes what a court may do to protect itself and parties generally from obstructive litigation practices, not what a court must do in every case." Id. Indeed, "there have been occasions when courts in this district have overlooked failure to comply with the rule when there were good reasons to do so." Id.; see, e.g., Dinko v. Wall, 531 F.2d 68, 71 (2d Cir. 1976) (district court first granted application for leave to sue under Section 501(b) of the LMRDA, but then reconsidered the ruling more than four months later and denied the application). The delay here can hardly be deemed "obstructive litigation practices" in view of the shifting and inconsistent allegations concerning the status of Individual Plaintiffs' membership in ATC. Further, the issue here goes directly to the court's subject matter jurisdiction, which overrides any prudential concerns.
Further, Rule 6 of the Federal Rules of Civil Procedure permits the court to enlarge a time period specified in the Rules, such as the ten-day period under Local Rule 6.3, "upon motion made after the expiration of the specified period . . . where the failure to act was the result of excusable neglect." Fed.R.Civ.P. 6. The Supreme Court has defined "excusable neglect" as "simple, faultless omissions to act and, more commonly, omissions caused by carelessness." Pioneer Investment Services Co. v. Brunswick Associates Ltd. Partnership, 507 U.S. 380, 388 (1993). The Court held in Pioneer that the "excusable neglect" standard indicates that "Congress plainly contemplated that the courts would be permitted, where appropriate, to accept late filings caused by inadvertence, mistake, or carelessness, as well as by intervening circumstances beyond the party's control." Id. "Although thePioneer Court's examination of 'excusable neglect' arose in the context of a dispute over the proper interpretation of Bankruptcy Rule 9006(b)(1), . . . nothing in Pioneer limits its interpretation of 'excusable neglect' to the Bankruptcy Rules."United States v. Hooper, 9 F.3d 257, 259 (2d Cir. 1993).
The circumstances here certainly constitute "excusable neglect" as defined by the Supreme Court. The delay arises from the belated revelation of the termination of Individual Plaintiffs' membership in ATC before the court granted their Section 501(b) application, and thus the delay is the product of inadvertence, mistake, carelessness, or intervening circumstances beyond ATC Defendants' control. Individual Plaintiffs' own counsel seems uncertain as to precisely when Individual Plaintiffs left ATC, and ATC Defendants are not responsible for this uncertainty.
Additionally, even if Local Rule 6.3 were not prudential or the court could not enlarge the ten-day period, ATC Defendants' motion for reconsideration could be treated as a Rule 60(b) motion. See United States v. Clark, 984 F.2d 31, 32 (2d Cir. 1993). In Clark, the Court considered a motion to reconsider an order denying a motion to vacate a sentence pursuant to 28 U.S.C. § 2255. Id. The Court held that a motion to reconsider "is to be treated as a Rule 59(e) motion if filed within 10 days of entry of the challenged order and as a Rule 60(b) motion if filed thereafter." Id.; see also Browder v. Director, Dep't of Corrections of Illinois, 434 U.S. 257, 272 (1978) (Blackmun, J., with whom Rehnquist, J., joins, concurring) (arguing that motion to reconsider filed after 10 days could be treated as Rule 60(b) motion). Just as a motion to reconsider a ruling under Section 2254 could be considered a Rule 60(b) motion, ATC Defendants' motion to reconsider the court's ruling under Section 501(b) can be considered a Rule 60(b) motion.
Rule 60(b) of the Federal Rules of Civil Procedure states, in relevant part:
On motion and upon such terms as are just, the court may relieve a party or a party's legal representative from a final judgment, order, or proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b); (3) fraud (whether heretofore denominated intrinsic or extrinsic), misrepresentation, or other misconduct of an adverse party; . . . or (6) any other reason justifying relief from the operation of the judgment. The motion shall be made within a reasonable time, and for reasons (1), (2), and (3) not more than one year after the judgment, order, or proceeding was entered or taken.
As already discussed above, the circumstances here certainly constitute "excusable neglect" as defined by the Supreme Court, and the instant motion was filed February 2004, within one year of the court's March 2003 ruling. Therefore, Rule 60(b)(1) is satisfied.
Rule 60(b)(2) also may be satisfied because the new allegations — that Individual Plaintiffs' membership in ATC terminated during the summer of 2001 — were not asserted until months after the court's March 2003 ruling granting Individual Plaintiffs' Section 501(b) application. That the status of their membership in ATC remains to this day the subject of confusion and inconsistent allegations by Individual Plaintiffs suggests that no reasonable due diligence by ATC Defendants would have unearthed the truth before the court's March 2003 decision.
Finally, because Individual Plaintiffs should certainly be aware of when their membership in ATC terminated, and at least one of them verified the Second Amended Complaint, which contained the inaccurate allegations upon which the court's March 2003 decision was based, those allegations may constitute misrepresentations under Rule 60(b)(3).
All these facts show that application of Rule 6.3 in this case would be arbitrary and unjust, and therefore ATC Defendants' motion to reconsider the court's March 2003 ruling granting Individual Plaintiffs' application for leave to bring this action on behalf of ATC is granted. As discussed above, Individual Plaintiffs lacked standing to pursue their application as of the summer of 2001, nearly two years before the court's March 2003 ruling. Accordingly, their application under Section 501(b) of the LMRDA is denied and the corresponding claim is dismissed.
Individual Plaintiffs emphasize that the court's decision granting their application for leave to bring a claim on behalf of ATC was issued nunc pro tunc, meaning that the decision was effectively issued as of the date the application was made. Therefore, the relevant date for determining standing to file their application under Section 501(b) should be June 2001, when Individual Plaintiffs filed the First Amended Complaint seeking leave from the court to bring a claim on behalf of ATC and when Individual Plaintiffs were still members of ATC. ATC Defendants argue, on the other hand, that even if Individual Plaintiffs are correct, Individual Plaintiffs must remain members of ATC throughout the pendency of this action in order to maintain standing, and thus they lost standing to prosecute this action when their membership in ATC terminated. ATC Defendants are correct. Accepting Individual Plaintiffs' argument arguendo, their Section 501 claim must be dismissed nevertheless.
Rule 23.1 of the Federal Rules of Civil Procedure states, in relevant part:
In a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall be verified and shall allege (1) that the plaintiff was a shareholder or member at the time of the transaction of which the plaintiff complains or that the plaintiff's share or membership thereafter devolved on the plaintiff by operation of law, and (2) that the action is not a collusive one to confer jurisdiction on a court of the United States which it would not otherwise have.
In Diduck v. Kaszycki Sons Contractors, Inc., 974 F.2d 270 (2d Cir. 1992), the Court of Appeals held that "Rule 23.1 is applicable to derivative actions under § 502(g)(2)" of ERISA because such an action "is brought 'for or on behalf of a plan' and may only be maintained by an individual beneficiary derivatively." Id. at 287. The same is true for an action brought under Section 501(b) of the LMRDA, which states that any such action is brought "for the benefit of the labor organization." 29 U.S.C. § 501(b). Further, ATC is an unincorporated association, (Morro Dec. ¶ 1), and Individual Plaintiffs have brought their Section 501 claim as "members" of and on behalf of ATC, (FAC ¶¶ 4, 17). Therefore, Rule 23.1 applies to this action.
Rule 23.1 implicitly requires that a plaintiff in a derivative action maintain his status as a shareholder or member throughout the pendency of the action. See Fischer v. CF I Steel Corp., 599 F. Supp. 340, 344 (S.D.N.Y. 1984); Rothenberg v.United Brands Co., 1977 WL 1014, *3 (S.D.N.Y. 1977);Orenstein v. Compusamp, Inc., 1974 WL 455, *3 (S.D.N.Y. 1974); Werfel v. Kramarsky, 61 F.R.D. 674, 679 (S.D.N.Y. 1974); cf. Button v. Hodapp, 1999 WL 46635, *2 (S.D.N.Y. 1999) (holding that if plaintiff sells shares in corporation, "he will no longer be a shareholder of [the corporation], thereby rendering this action moot"); Snyder v. Pleasant Valley Finishing Co., Inc., 756 F. Supp. 725, (S.D.N.Y. 1990) (holding that plaintiff in a derivative action "must maintain her shareholder status throughout the pendency of the action or the action will abate as a derivative suit"). In Rothenberg, the Court held:
The continuous stock ownership requirement limits the right to sue to those with a proprietary interest in the corporate enterprise. Since the shareholders will receive at least an indirect benefit (in terms of increased shareholder equity) from any corporate recovery, they are protecting their own interests as well as those of the corporation. Conversely, a non-shareholder, or one who loses his status as a shareholder during the course of the litigation, can gain no possible advantage, either directly or indirectly, from a corporate recovery. . . . Thus one who loses his proprietary interest in the corporation cannot be said to be a proper representative of the corporation in whose name he sues. Nor can he be said to adequately represent the interests of the actual shareholders, who, unlike him, will benefit at least indirectly from any corporate recovery.1977 WL 1014 at *4.
The reasoning in Rothenberg applies equally to membership in an unincorporated association. Only members of the association have any proprietary interest in a derivative action brought on behalf of the association because the benefits of the action inure solely to the association, directly, and its members, indirectly. Therefore, Individual Plaintiffs, as non-members of ATC, lack any proprietary interest in their Section 501 claim brought on behalf of ATC, and thus by terminating their membership in ATC they lost standing to press this claim. Accordingly, ATC Defendants' motion to dismiss Individual Plaintiffs' Section 501 claim is granted for lack of subject matter jurisdiction.
* * *
For the reasons set forth above, ATC Defendants' motion for reconsideration is granted, Individual Plaintiffs' Section 501(b) application is denied, and ATC Defendants' motion to dismiss is granted.
SO ORDERED: