author: GIBSON, Circuit Judge.

text:
    Anthony G. PIGNOTTI, as an Individual Member of Local #3 Sheet Metal Workers’ International Association, Appellee, v. LOCAL #3 SHEET METAL WORKERS’ INTERNATIONAL ASSOCIATION et al., Appellants.
    No. 72-1411.
    United States Court of Appeals, Eighth Circuit.
    Submitted Feb. 12, 1973.
    Decided April 20, 1973.

      Donald Fisher, Toledo, Ohio, for appellants.
    Edward F. Fogarty, Omaha, Neb., for appellee.
    Before GIBSON and ROSS, Circuit Judges, and BENSON, District Judge.

       United States District Judge for the District of North Dakota, sitting by designation.

   GIBSON, Circuit Judge.

This case concerns the merits and the applicability of §§ 411 and 501 of the Labor-Management Reporting and Disclosure Act of 1959, 29 U.S.C. §§ 501 and 411, (commonly referred to as the Landrum-Griffin Act) to an internal dispute between certain union members and certain of the officers of a Local and International Union. The District Court of Nebraska, Judge Robert Denney, granted relief in an opinion reported in 343 F.Supp. 236 (D.Neb.1972).

Plaintiff Anthony Pignotti is suing as an individual member of Local Union Number 3, Sheet Metal Workers’ International Association. There are six defendants; Local No. 3, Sheet-Metal Workers’ International Association (Local No. 3); Sheet Metal Workers’ International Association (International Association); Lester Foreman, Business Agent for Local No. 3; Walter Brader, President of Local No. 3; Edward J. Carlough, General President of the International Association; and David Todd, International Representative of the International Association and trustee of Local No. 3 under a trusteeship imposed by the International Association. The Omaha-Council Bluffs Sheet Metal Contractor Association and the Sheet Metal Workers’ National Pension Fund (National Fund) were named defendants in the complaint but have been subsequently dismissed.

Under the collective bargaining agreement entered into on July 26, 1969, and running to May 31, 1972, the Contractor Association agreed that upon 30 days notice by Local No. 3, its members would begin deducting a designated amount from wages and pay that amount into a pension fund. A Pension Committee was appointed by Local No. 3 to study the various alternative pension arrangements. The committee met at various times from February 19, 1970, until December 18, 1970. The original members of the committee were Robert Wild, James Pignotti, the brother of the plaintiff, James Newberger, and Robert Holtz. At a later date Robert Wild left the committee and was replaced by defendant Walter Brader (president of the Local) who appointed himself to the committee. The committee contacted a number of major ■ insurance companies and received proposals from at least two of them. In addition the committee heard proposals from a savings and loan association and from the National Fund.

The committee submitted a final report in January 1971. The members of the committee were not in agreement. Three pension plans, including the National Plan were sent by mail to the membership of Local No. 3 accompanied by letters of position by each of three of the four members of the pension committee. (James Pignotti for some reason was not included). A special meeting was called for March 25, 1971, “to vote for or against a pension plan,” and if approved, “the amount of money to be contributed and the month contributions will begin.” The motion put by defendant Lester Foreman, however, was to adopt the National Plan. On a standing vote the motion was defeated, 66 for to 93 against.

At the next regular meeting, April 1, 1971, a motion was made to have a special order of business at the next regular meeting to vote on the question “to have or not to have a pension plan.” That motion carried. In the interim on April 20, 1971, a petition was presented in proper form to President Brader requesting a special membership meeting to vote by secret ballot whether “to eommenee contributing 20^ to the [National Plan] on June 2, 1971.” Brader stated that he did not honor the petition at that time because of the special order of business which would vote on the plan at the next regular meeting.

That meeting was held on May 6. The motion was orally submitted to the members whether to have any plan. The vote was taken by secret ballot with the voters writing either yes or no on a blank piece of paper. There were 58 “no” votes and 43 “yes” votes. After this motion had been disposed of a motion was made by James Pignotti “to postpone indefinitely the pension plan and reference thereto (Rule 23).” The vote on this motion by show of hands was announced by Walter Brader as 24 “for” and 29 “against.” A division of the house was called for and the vote taken again with the result of 60 “for” and 30 “against” the motion. Thus the motion passed.

President Brader wrote to the International Association to inquire whether the procedure followed at this meeting was proper. He was answered by Lonnie Gaither, assistant to General President Carlough, and advised that the motion to postpone indefinitely was out of order because no main motion was pending at the time of the motion and that the vote by a division of the house was not proper because he had already declared the vote on the question before the vote by division of the house was called for under Rule 27 of the Ritual.

Brader then decided to honor the petition for the special meeting which had been presented to him on April 20. The announcement of the meeting was by post card and read:

“The purpose of this meeting will be to vote by secret ballot for Sheet Metal Workers No. 3 to commence contributing 200 to the Sheet Metal Workers National Pension Plan on June 2, 1971.”

After this meeting was called to order but before a vote could be taken on the pension plan,. Jess Steward raised a point of order challenging consideration of the pension plan on the grounds that “the issue was defeated at the last regular meeting, and this meeting constitutes a motion to reconsider and this is out of order.” President Brader overruled the point of order. The chair was challenged and the challenge upheld by a vote of 51-50. A motion to adjourn was made, a point of order raised against the adjournment and overruled by the chair, and the motion to adjourn passed. No vote on the pension plan was taken at this meeting. A protest against the adjournment was made to General President Carlough by a member present at the meeting. Brader also wrote to Car-lough and asked if the International Association could exercise its powers to call a special meeting to vote on the pension plan.

On June 11, 1971, the representative of the International Association, Eugene Edwards, notified the officers of Local No. 3 that he was calling a special membership meeting of the Local for June 21. On June 15, written notice of this meeting was mailed to the entire membership. The meeting took place and 151 members signed in. There were 77 votes for participation in the National Plan, 71 against participation and 3 votes were not counted as incorrectly marked. On June 29 President Brader gave notice to the Contractor Association that the plan was to be put into effect as of August 1.

A petition was then circulated by the anti-pension group and on July 15 it was presented to Brader. It was signed, as required, by more than 10 per cent of the membership of Local No. 3 and called for a special meeting “for the purpose of voting down the pension contributing plan previously passed on June 21, 1971.” Receiving no response to this petition, a complaint was filed on July 26, 1971, in the United States District Court for the District of Nebraska asking the Court to require a special meeting of Local No. 3. This suit was dismissed by the Court on August 31, 1971, for failure to state a claim.

A special membership meeting was called for October 22, 1971, pursuant to the petition. The members voted by secret ballot. The vote was 175 against retaining the National Plan and 119 in favor of the Plan.

On October 20, Brader sent a telegram to the Contractor Association requesting a meeting about the pension plan. No response was received to this communication. A second telegram was sent on November 17 and the Contractors responded agreeing to the meeting. The meeting was held on December 2. The Contractor Association agreed to reopen the contract to delete the pension plan but stated that they would require the Union to accept three conditions. Local No. 3 requested an opinion from its attorney on the contractors’ conditions and he submitted an opinion letter on January 3, 1972, in which he advised against agreeing to these conditions.

On January 4, 1972, Local No. 3 was placed under a trusteeship by General President Carlough. David Todd, an International Representative, was trustee. On March 23, 1972, the General Executive Council ratified and approved this action. There was no opposition to the trusteeship presented to the Council. David Todd has indicated that he will continue the Local’s participation in the pension plan.

The foregoing is a chronology of the events which led this dispute to the United States District Court. From these facts and the other findings of fact that Court found:

“. . . defendants, Carlough, Brader and Foreman, early in 1971 set out to obtain the participation of Local #3 in the National Plan, whether the majority of the Union wanted the Plan or not * * * that the purpose of the trusteeship was to prevent any further action of the members toward implementing the vote to discontinue the Plan.” Pignotti v. Local No. 3 Sheet Metal Workers Int. Ass’n, 343 F.Supp. 236, 242-243 (D.Neb.1972).

The Court further found that these activities constituted violation of both § 411 and § 501 and ordered relief as follows :

(1) The defendants are jointly and severally liable for damages in the amount deducted from the wages of the members of Local No. 3 since August 2, 1971, and paid to the Sheet Metal Workers’ National Pension Fund.

(2) Defendants are required to cease within 30 days participation on the part of the members of Local No. 3 in the Sheet Metal Workers’ National Pension Fund.

(3) Defendants are enjoined from negotiating into any new contract any pension provision more binding than the one contained in the contract of July 26, 1969.

(4) Defendants are enjoined from dissolving Local No. 3 in order to assign its members to locals that do participate in the National Plan.

Appellants claim that certain of the findings of fact by the trial court are clearly erroneous. Although appellants’ presentation of these issues lack specificity in some instances, we have reviewed the objections and think the District Court’s findings of fact have sufficient evidentiary support in the record. They are, therefore, not clearly erroneous.

Appellants’ legal arguments on this appeal can be divided into four areas. (1) The nature of the pension plan as the subject of collective bargaining brings it outside the scope of the Landrum-Griffin Act. (2) The appellants did not violate § 411. (3) The appellants did not violate § 501. (4) Some members of the Union may have now acquired vested rights in the pension plan which cannot be destroyed since they are not parties to this action.

COLLECTIVE BARGAINING

Appellants’ collective bargaining argument is that participation or non-participation in the pension plan is a collective bargaining issue rather than an internal union issue and that only internal union issues are the proper concern of the Landrum-Griffin Act. This argument is not well taken. The action seeks to preserve the democratic processes in Local No. 3, a proper subject of concern under the Landrum-Griffin Act. The issue raised is whether the method used by the Union officials to secure the Local’s participation in the plan, violated §§ 411 and 501 of the Act.

SECTION 411

Appellants argue that each and every step in the passage of the Pension Plan was in accord with the International’s Constitution and by-laws (including Robert's Rules of Order), and thus cannot constitute a violation of § 411. They argue that far from denying democratic participation in the union affairs to the members of the local that they actually preserved such rights by their actions. Appellants cite Vestal v. Hoffa, 451 F.2d 706, 709 (6th Cir. 1971), cert. denied, 406 U.S. 934, 92 S.Ct. 1768, 32 L.Ed.2d 135 (1972) for the proposition that the union officials and not the courts are the proper parties to interpret the union’s constitution. We agree generally with this proposition of law, provided, as recognized in Vestal, that the interpretations are fair and reasonable. But we also recognize, as did the Court in Sabolsky v. Budzanoski, 457 F.2d 1245 (3d Cir.), cert. denied, 409 U.S. 853, 93 S.Ct. 65, 34 L.Ed.2d 96 (1972) that “[C]ourts have not hesitated to strike down so-called ‘authorized’ union conduct, alleged to be based on a rule or by-laws fairly interpreted, where such conduct violates the provisions of the Landrum-Griffin Act.” 457 F.2d at 1252. In our own case of Johnson v. Nelson, 325 F.2d 646 (8th Cir. 1963) we cut past the question of whether the interpretation of the by-laws and constitution of a union was “authorized” to determine whether the conduct of the union officials, in refusing to act according to the majority vote of the membership, constituted a violation of their § 501 fiduciary duties. The Act does not permit the violation of rights guaranteed to union members under § 411 upon a showing that the violation was in accord with the union’s constitution and by-laws.

Appellants further argue that the allegation by the plaintiffs and the finding by the Court that the trusteeship was imposed for the purpose of preventing any further action by the members to implement the vote to withdraw from the National Plan was in effect an impermissible collateral attack on the trusteeship and not a direct attack as provided in § 464. Appellants contend that this deprived them of the benefit of the statutory presumption of validity which attaches to a trusteeship under § 464(c) for a period of 18 months, absent “clear and convincing proof” that the trusteeship was not established for a purpose allowable under the statute. Appellee correctly points out that the presumption is operative only in proceedings pursuant to that section of the Act attacking the validity of the trusteeship, and that Judge Denny did not invalidate the trusteeship but only found that it was established by Carlough for a purpose which was a violation of both § 411 and § 501. There was no finding that the ratification of the trusteeship by the International’s Executive Council was for a purpose other than one allowed by the Act and thus the trusteeship is still valid.

We also note 29 U.S.C. § 466 provides that the remedies provided by the subehapter of which it is a part, which includes § 464, are not exclusive. Thus the right to sue under § 412 is not affected by the right to attack trusteeships under § 464. The 18-month presumption of validity for trusteeships is available only in proceedings under § 462.

The District Court held that Trustee David Todd violated § 411 by refusing to take steps to implement the October 22 vote to withdraw from the National Plan and by his expressed intention to incorporate the National Plan into the next contract which would be negotiated while he was trustee and thus not be subject to ratification by the membership of Local No. 3. The Court recognized that a trusteeship suspends local autonomy for the duration of the trusteeship and that the trustee has no obligation to call meetings or allow the members to vote. However, the Court held that the trustee did have an obligation to carry out the vote which had been made prior to the imposition of the trusteeship. While we can find no cases on this issue, we believe that a trustee, as a fiduciary, has an obligation to correct the effects of past denials of rights guaranteed to union members by § 411, and his failure to correct these past injustices is in itself a violation of § 411 as well as being a violation of § 501. The Congressional impositions of fiduciary obligations upon agents and officers of unions would be meaningless if all of these duties could be abrogated by the mere device of imposing a trusteeship. Past wrongs call for a remedy, not technical objections.

SECTION 501

Initially all parties agree that neither the International Association nor Local No. 3 have violated § 501 as that section imposes liability only on the individual union officials. See, Sabolsky v. Budzanoski, 457 F.2d 1245, 1249 (3d Cir.), cert. denied, 409 U.S. 853, 93 S.Ct. 65, 34 L.Ed.2d 96 (1972).

We are invited by the appellants to reconsider our holdings in Johnson v. Nelson, 325 F.2d 646 (8th Cir. 1963), concerning the scope of § 501(a), on the basis of contrary decisions in the Second and Ninth Circuits. In Johnson v. Nelson we were concerned with a situation similar to the one in the instant case. The court there found that because of personal feelings the officials of a local union had refused to pay certain attorney’s fees that had been approved by a constitutional vote of the membership. Johnson viewed § 501 as imposing broad fiduciary duties on the officers, agents, shop stewards, and other representatives of a labor organization and that the officers by allowing their personal feelings to interfere with the performance of their duties “failed ‘to refrain from dealing with such organization [Local] as an adverse party or in behalf of an adverse party in any matter connected with his [their] duties’ [§ 501(a)].” 325 F.2d at 653. These acts constituted a breach of their fiduciary duties imposed by § 501(a). The Second Circuit in Gurton v. Arons, 339 F.2d 371 (2d Cir. 1964) and Coleman v. Brotherhood of Ry. & Steamship Clerks, Freight Handlers, Express & Station Employees, 340 F.2d 206 (2d Cir. 1965), has restricted the scope of § 501(a) only to situations involving “money and property” of the union. The Ninth Circuit appeared to follow Gurton in Phillips v. Osborne, 403 F.2d 826 (9th Cir. 1968). However, that Court in a recent case explicitly held this issue to be an open one in that Circuit, stating :

“The position of the court in Johnson v. Nelson that § 501 is not limited to breaches of trust directly involving officers’ handling of union money or property has been termed the ‘majority’ view. Cefalo v. Moffett, 1971 [146 U.S.App.D.C. 117], 449 F.2d 1193, 1198 n. 15. The question remains open in this circuit. Our citation of Gurton v. Arons, supra, in Phillips v. Osborne, 9 Cir. 1968, 403 F.2d 826, 830, does not commit us to follow Gurton. We cited Gurton as merely illustrative of a point of view.” Kerr v. Shanks, 466 F.2d 1271, 1275 n. 2 (9th Cir. 1972).

The reason for the difference in interpretation between Gurton and Johnson can be found in the interpretation of the legislative history of the Act as it was considered by each court.

The Second Circuit in Gurton, as to the legislative history of the Act, referred the reader to the opinion of the district court, Guarnaccia v. Kenin, 234 F.Supp. 429, 442 (S.D.N.Y.1964), which stated:

“The legislative history of the Section would appear to also be in accord with defendants’ position that the Section relates solely to questions of financial dealings. Thus during the course of debate, Senators McClellan and Ervin made it quite clear that the Section would relate solely to matters of money and property. See II Leg. History 1129-31 (1959).”

This debate concerned the fiduciary provision included as § 501 of S. 1555, the Kennedy-Ervin Bill.

Our court in Johnson v. Nelson, 325 F.2d at 650, made a careful analysis of Title V of the Landrum-Griffin Act and concluded the explicit language of § 501(a) imposed a broad fiduciary obligation on union officers and representatives and approved the thorough and detailed analysis of the legislative history contained in the district court opinion in Nelson v. Johnson, 212 F.Supp. 233, 284-296 (D.Minn.1963). Judge Larson’s analysis should be read for an in-depth understanding of the history of the Act. However, for the purpose of this opinion it will suffice to follow the Act from its introduction in the Senate to its ultimate passage.

The original bill in the series was S. 1555 (the Kennedy-Ervin Bill). It was passed by the Senate containing a very narrow fiduciary provision, specifically pertaining to the handling of money and property of the labor organization by its officials. After passage by the Senate the bill was sent on April 25, 1959, to the House and referred to the Committee on Education and Labor.

Four separate bills were introduced in the House. (1) H.R. 7265 (the Kearns Bill) on May 20, (2) H.R. 8342 (the Elliot Bill) on July 23, (3) H.R. 8400 and H.R. 8401 (Identical bills introduced concurrently and known as the Landrum-Griffin Bill) on July 24 and (4) H.R. 8490 (the Skelly Bill) on August 3. These were all referred to the Committee on Education and Labor. The significant bills of this group were the Elliot Bill and the Landrum-Griffin Bill. The Elliot Bill contained a fiduciary provision as § 501 which was identical to the one in the present Act. The fiduciary provision in the Landrum-Griffin Bill was identical to the Elliot Bill. The Committee reported favorably the Elliot Bill on July 30. The Committee Report contained the following comments on § 501:

“The committee bill also contains provisions dealing with breaches of trust and other questionable transactions, which, although not seriously criminal nevertheless are incompatible with a strong and honestly run labor movement.” I Leg.Hist. 768.

In the Supplementary Views by Representative Elliot and four other Members of the House it was stated:

“Union officials occupy positions of trust. They hold property of the union and manage its affairs on behalf of the members. It is the duty of union officers just as it is the duty of all similar trustees to put their obligations to the union and its members ahead of any personal interest.
“The committee bill sets forth this principle unequivocally and declares that union officers and agents occupy positions of trust in relationship to labor organizations and their members. It then sets forth their duties in terms which the common law applies to all persons who undertake to act on behalf of others:
“ * * * 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 hereunder, to refrain from dealing with such organization as an adverse party in any matter connected with his duties and from holding or acquiring any pecuniary or personal interest which conflicts with the interests of 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.
“We affirm that the committee bill is broader and stronger than the provision of S. 1555 which relate to fiduciary responsibilities. S. 1555 applied the fiduciary principle to union officials only in their handling of ‘money or other property’ (See S. 1555, sec. 610), apparently leaving other questions to the common law of the several States. Although the common law covers the matter, we considered it important to write the fiduciary principle explicitly into Federal Labor legislation. Accordingly the committee bill extends the fiduciary principle to all the activities of union officials and other union agents or representatives.” I. Leg.Hist. 839 (emphasis added).

The additional Statement by Hon. Phil M. Landrum and Hon. Robert P. Griffin opposed the Elliot Bill in favor of their own substitute, the Landrum-Griffin Bill. But, of this substitute they said:

“In general, the substitute is framed on the bill reported by the committee; we have retained the committee’s technical amendments and many other features of the committee bill which make a contribution to an effective labor reform measure. There are no ‘strangers’ in our substitute bill; every provision was thoroughly considered by the full committee.” I Leg.Hist. 87.

On the floor of the House during debate, Representative Griffin made this statement concerning his bill:

“For a moment, I believe attention should be focused upon the similarities between the committee bill and the substitute, H.R. 8400. For example, in both bills, * * * title V— covering the fiduciary responsibility of union officers, bonding, loans, restrictions against the Communists and exeonvicts holding office — [is] identical without a word or a comma changed.” II Leg.Hist. 1566.

As previously stated the Committee reported the Elliot Bill favorably. When the committee approved Bill was considered by the House it was amended by substituting the Landrum-Griffin Bill in toto for the provisions of the committee approved Elliot Bill. II Leg.Hist. 1691. S. 1555 was then amended by substituting the Landrum-Griffin provisions (now number H.R. 8342 however) for its provisions. II Leg.Hist. 1701.. S. 1555, as thereby amended, was then passed by the House. II Leg.Hist. 1702. It went to a conference where § 501 survived unchanged and ultimately became § 501 of the Labor-Management Reporting and Disclosure Act of 1959.

From this outline it can be seen that consideration of the remarks of Senators McClellan and Ervin in regard to § 501 of S. 1555 would tell us nothing about the legislative history of § 501 as finally passed without further reference to the legislative history of the Elliot Bill which was incorporated in the Landrum-Griffin Bill and which became the law. The quoted material shows that the Elliot Bill strongly favored the broad scope application of the fiduciary provisions of § 501(a) and not the narrow provisions referred to in the remarks of Senators McClellan and Ervin.

Based on the history outlined above it appears clear that Gurton v. Arons, based as it was on the legislative history of the Kennedy-Ervin Bill which was amended out of existence, was unduly restrictive of the scope of the fiduciary duties of union officials commanded by § 501, and that Johnson v. Nelson, basing its decision on the legislative history of the Elliot Bill, was properly decided.

The Third Circuit has recently adopted the broad scope interpretation of § 501. The United States District Court for the Western District of Pennsylvania had dismissed an action brought under § 501 on the ground that the remedy was available only in actions dealing with money or property of a labor organization, citing Gurton and its progeny. Antal v. Budzanoski, 320 F.Supp. 161, 164 (W.D.Pa.1970). On appeal the court first found that the complaint did state a cause of action dealing with the holding and expenditure of union funds and further, citing with approval Johnson v. Nelson, the court disagreed with the district court's “reading” of § 501. Sabolsky v. Budzanoski, 457 F.2d 1245, 1250-1251 (3d Cir.), cert. denied, 409 U.S. 853, 93 S.Ct. 65, 34 L.Ed.2d 96 (1972).

The District of Columbia Circuit has recognized that it, at least impliedly, has adopted the broad scope view of § 501, Cefalo v. Moffett, 146 U.S.App.D.C. 117, 449 F.2d 1193, 1198 n. 15 (1971), “[by] approving] payment of counsel fees [in Bakery & Confectionary Workers Int. Union v. Ratner, 118 U.S.App.D.C. 269, 335 F.2d 691 (1964)] to an attorney who had successfully represented union members in a § 501 suit which sought relief for violations not involving property rights.”

Appellants have not advanced any substantial arguments which would cause us to change our position with regard to the scope of § 501(a) and we decline to do so. In fact our re-examination of Nelson v. Johnson convinces us that the broader view of fiduciaries’ responsibilities is correct, based on Congressional intent and the explicit language of § 501(a).

Appellants raise a second issue with regard to § 501. They argue that it gives jurisdiction for suits only for relief for the benefit of the labor organization. Appellants allege that this action falls outside the statute as it seeks relief for the individual members rather than relief for the benefit of the labor organization.

This position was adopted by the Ninth Circuit in Phillips v. Osborne, 403 F.2d 826, 832 (9th Cir. 1968). In Phillips the officers of Local 580, International Brotherhood of Pulp, Sulphite & Paper Mill Workers, AFL-CIO, fearing that the members of the local would soon disaffiliate the local from the International Brotherhood and associate with the Western Pulp & Paper Workers, a newly formed, rival labor organization, placed the assets of the local in an escrow account under the control of the International Brotherhood and beyond the reach of the local union. The next day the members sought to have the assets returned to the local but the officers refused. The membership then voted to disaffiliate and join the Western group. Plaintiff- Phillips was the president under the new organization. Defendants were the former officers of the local who had transferred the assets. The relief requested was a pro rata distribution of the transferred assets to the members of Local 580 at the time of the disaffiliation. The court held that such relief was “not for the benefit of the labor organization.”

We need not decide whether Phillips was correctly decided as the instant case is easily distinguishable as to the relief requested of the court. The restoration of orderly democratic processes to the local union is clearly a benefit to the labor organization, and a proper subject of concern to the entire membership. Bakery & Confectionary Workers Int. Union v. Ratner, 118 U.S.App.D.C. 269, 335 F.2d 691, 696 (1964); Retail Clerks Union Local 648 v. Retail Clerks Int. Ass’n, 299 F.Supp. 1012, 1022 (D.C.D.C. 1969). In Johnson v. Nelson the relief sought was a payment of fees owing to attorneys but the enforcement of such relief, as the enforcement of the mandate issued by the membership to its officers and disregarded in violation of their fiduciary duties, was clearly of benefit to the membership. Here the correction of the past violations of the rights of the members and the breaches of the fiduciary obligations by both the local and International officers will be a benefit to the Local even though the relief must necessarily include the restoration of the funds withheld as a result of the defendants’ wrongful acts.

The final point raised by appellants, that some members of Local No. 3 might have a vested right in the pension fund which cannot be destroyed since they are not parties to the suit, is without merit. Appellants have not shown that any such person exists although they were in a position to do so if they wished. Further, this objection cannot be used to thwart correction of past abuses of trust. If such a situation does arise, the defendants conceivably are responsible therefor however, the legal effects of a vested interest situation, if any, must await future resolution.

Judgment affirmed.

      . 29 U.S.C.A. § 411(a)(1) provides that:
      “Equal rights. — Every member of a labor organization shall have equal rights and privileges within such organization to nominate candidates, to vote in elections or referendums of the labor organization, to attend membership meetings, and to participate in the deliberations and voting upon the business of such meetings, subject to reasonable rules and regulations in such organization’s constitution and bylaws.”
      29 U.S.C.A. § 501 provides in part:
      “(a) 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 thereunder, to refrain from dealing with such organization as an adverse party or in behalf of an adverse party or in any manner connected with his duties and from holding or acquiring any pecuniary or personal interest which conflicts with the interests of 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 or in behalf of the organization. . . ”

      . The reference to “Rule 23” is a reference to Rule 23 of the Ritual of the International Association which reads: “When a question is postponed indefinitely, it shall not come up again except by two-thirds vote.”

      . The Union cites Robert’s Rules of Order as authority for this ruling. Robert’s Rules are made applicable to the Local under Rule 5 of the Ritual.

      . The conditions were:
      “1. It [the request] is made in writing and in such a manner that it needs no further union ratification to complete the re-opening and execution of all necessary documents. -
      “2. The pension trustees release the contractor's association from all liability for the deletion and the union agrees to hold the association and it’s [sic] members harmless from any liability from deletion of the pension trust.
      “3. In the event agreement is reached to delete the pension provision as requested it will be conditioned that the pension cannot be reinstated during the remainder of this contract.”

      . The Court held that if the defendants could legally recover the amount of this judgment that had been paid into the Pension Fund, such amount could be used to satisfy this judgment. The funds are to be put into an escrow account. Following the new contract, if the parties can agree to a new and final vote on the question of participation in a pension fund such shall be held. If the vote favors participation the funds are to be paid from the escrow account to the particular fund chosen. If the vote opposes participation or if no agreement can be reached on having a vote the money is to be paid pro rata to the members of Local No. 3 from whose paychecks the funds were deducted.

      . Nevertheless it appears that the District Court’s finding that plaintiff and the anti-pension group were unfairly treated by the Union’s procedural decisions is correct. An example of this is the Union’s position that the vote favorable to the plaintiff on the motion to postpone indefinitely was improper because the chair had already announced the vote, The primary purpose of a call for a division of the house is to test the chair’s announcement of the vote in situations such as this where the chair’s announcement was obviously incorrect.

      . The legislative history of the Labor-Management Reporting and Disclosure Act of 1959 has been compiled by the National Labor Relations Board and published as a two volume set entitled Legislative History of the Labor Management Reporting and Disclosure Act of 1959. Citations relevant to legislative background will be to this set.

      . Section 501(b) reads in pertinent 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 ... [a] member may sue such officer ... to recover damages or secure an accounting or other appropriate relief for the benefit of the labor organization.”


source: Caselaw Access Project

author: WINTER, Circuit Judge:

license: Public Domain

text:
    INLAND TERMINALS, INC., Appellant, v. UNITED STATES of America, Appellee.
    No. 72-2116.
    United States Court of Appeals, Fourth Circuit.
    Argued Feb. 6, 1973.
    Decided April 26, 1973.
    Shale D. Stiller, Baltimore, Md. (Frank, Bernstein, Conaway & Goldman, Baltimore, Md., on brief), for appellant.
    Ann Belanger, Atty., Tax Div., U. S. Dept. of Justice (Scott P. Cramption, Asst. Atty. Gen., Meyer Rothwacks and Thomas L. Stapleton, Attys., Tax Div., U. S. Dept. of Justice, and George Beall, U. S. Atty., on brief), for appellee.
    Before WINTER and CRAVEN, Circuit Judges, and BRYAN, District Judge.
   WINTER, Circuit Judge:

When the Internal Revenue Service assessed accumulated earnings taxes and interest against Inland Oil and Chemical Corporation (Inland Oil) and its wholly-owned subsidiary, Inland Terminals, Inc. (Terminals), for the taxable years ended December 31, 1965, and August 31, 1965, respectively, both paid the respective assessments and both sued for a refund. The district court gave judgment for Inland Oil for the amounts paid by it, because the court found that Inland Oil had proven reasonably anticipated business needs sufficient to justify its accumulated earnings. No appeal was taken from this ruling. In Terminals’ suit, the district court found that the subsidiary, Terminals, failed to prove that its reasonably anticipated business needs-justified its accumulation of earnings and gave judgment for the government. In arriving at this conclusion, the district court ruled that “ [ajlthough a parent corporation may under appropriate circumstances accumulate earnings for the reasonable needs of a subsidiary, a subsidiary may not ordinarily accumulate earnings for the needs of its parent.” 338 F.Supp. at 1335-1336. We disagree, and in Terminals’ appeal, we reverse and remand for further proceedings.

I.

Terminals is the wholly owned subsidiary of Inland Oil which, in turn, is owned by Alfred R. Himmelrich, Sr. and his sons, and they are the directors and officers of both corporations. Until the early 1960’s, Inland Oil’s business was primarily the resale of petroleum solvents to the paint and dry cleaning industries. Inland Oil purchased the raw materials, processed them, and distributed them. The subsidiary, Terminals, owned the land, storage facilities, and automotive equipment used in the business, and leased them to Inland Oil. The rentals paid by Inland Oil were Terminals’ sole source of income.

Inland Oil competed with its suppliers, the major oil companies, in the sale of petroleum solvents. Its business activities were profitable only because the major oil companies granted it a “voluntary allowance” or discount. By 1965, the directors were concerned with the precarious nature of this arrangement. In the early 1960’s, changes in the paint and dry cleaning industries augured a decline in sales of petroleum solvents. As a result, the directors of Inland Oil by 1965 were considering two alternative courses. As found by the district court, these alternatives were: “(A) Diversification and expansion into the chemical solvent business, which would require a substantial outlay of cash, primarily because these products cost ten times more than petroleum solvents, and sales would generate a much higher total of accounts receivable; (B) Purchase of another property, preferably on the waterfront, to relieve the overcrowding at the existing plant . . . with the added possibility of opening of marine terminal facility at such new location.” 338 F.Supp. at 1332. The directors estimated that the latter course would cost $500,000. With a policy of only short term borrowing, the companies’ financial situation would not permit them to do both. The directors explored the relocation alternative with a real estate firm, but ultimately chose diversification into chemical solvents. During the ensuing years, Inland Oil increased its purchases of chemical solvents from $500,000 to $1,600,000. At the same time, Inland Oil’s cash and Treasury Bill accumulations decreased, while its accounts receivable increased. The increased purchases of more expensive chemical solvents and normal business growth contributed to the decline in cash and Treasury Bills, while the increased resale price of chemical solvents augmented the accounts receivable. Collectively, these factors required greater amounts of working capital.

During the same period, Terminals was contemplating these expenditures: (i) replacement of its truck fleet with trucks equipped to transport chemical solvents, costing about $100,000; (ii) improvements to the existing plant and office facilities, costing about $40,000; (iii) purchase of another storage tank, costing about $35,000; and (iv) purchase of the necessary land and equipment if the directors chose the ultimately rejected relocation alternative, costing about $500,000. Terminals did ultimately make expenditures (i)-(iii), financing them wholly from current rental income. It abandoned plan (iv) when the directors opted for diversification. As was true with regard to Inland Oil, Terminals required greater working capital during this period.

In 1965, Inland Oil had taxable income of $92,187.90. It paid $39,250.19 in federal income tax and $14,000 in dividends, leaving $38,937.71 in undistributed earnings to be added to its previously accumulated earnings of $247,525.36. The total accumulation at the end of 1965 was $286,463.07. In fiscal 1965, Terminals had taxable income of $30,755.93. It paid $4,781.65 in federal income tax, but ño dividends to Inland Oil, its sole shareholder, leaving $24,525.23 in undistributed earnings to be added to its previously accumulated earnings of $98,729.02. Terminals’ total accumulation at the end of 1965 was $123,254.25. The parent and the subsidiary together accumulated $63,462.94 in 1965 and at the end of the year, the accumulations of both parent and subsidiary totaled $410,717.32.

II.

An “accumulated earnings tax” is imposed on the “accumulated taxable income” IRC § 531, 26 U.S.C. § 531 (1967), of “every corporation . formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.” IRC § 532(a), 26 U.S.C. § 532(a) (1967). If a wholly owned subsidiary accumulates income for the purpose of avoiding the imposition of the individual income tax upon the individual shareholders of its parent, the accumulated taxable income of the subsidiary is subject to the tax. Treas.Reg. § 1.532-1(a)(2).

There is a presumption that a tax avoidance motive exists where “the earnings and profits of a corporation are permitted to accumulate beyond the reasonable needs of the business.” IRC § 533(a), 26 U.S.C. § 533(a) (1967). See United States v. Donruss, 393 U.S. 297, 89 S.Ct. 501, 21 L.Ed.2d 495 (1969); Bahan Textile Machinery Co. v. United States, 453 F.2d 1100, 1101 (4 Cir. 1972). Inquiry, therefore, focuses on “the reasonable needs of the business.” “[T]he term . . . includes the reasonably anticipated needs of the business.” IRC § 537(a)(1), 26 U.S.C. § 537(a)(1) (1972). The Regulations establish that the reasonableness of the accumulation should be measured by the judgment of a “prudent businessman.” Treas.Reg. § 1.537- 1. Moreover, “[i]n order for a corporation to justify an accumulation of earnings and profits for reasonably anticipated future needs of the business, . the corporation must have specific, definite, and feasible plans for the use of such accumulation.” Treas.Reg. § 1.537- 1(b)(1). Bahan Textile, 453 F.2d at 1101; Oklahoma Press Publishing Co. v. United States, 437 F.2d 1275 (10 Cir. 1971). In applying this test to “projected expansion or investment plans,” the court shall review the plans “in the light of the facts during each year and as they exist as of the close of the taxable year.” Treas.Reg. § 1.537-1(b)(2).

III.

Both the appellant, Terminals, and its parent, Inland Oil, contended, in the district court, that their accumulations were necessary to finance their contemplated relocation or diversification. The district court found that Inland Oil’s plans to relocate or diversify were sufficiently concrete and reasonable in 1965 to justify its accumulated earnings. With respect to Terminals, the district court found that although it had generally contemplated in 1965 the expenditures referred to above, its plans were not sufficiently specific and definite to justify its accumulations. Treas.Reg. § 1.537-1(b)(1). The district court further relied on Terminals’ subsequent use of current income to finance these projects, its failure to consider funding the purchase of automotive equipment and its failure to offer evidence as “to depreciation, rentals, or purchase arrangements, contemplated or actual.” Finally, the district court held as we have earlier quoted, that Terminals could not accumulate earnings for the reasonably anticipated business needs of its parent, and therefore, the parent’s business needs could not be used to justify the subsidiary’s accumulation. For these reasons, the district court concluded that Terminals failed to rebut the presumption that it had accumulated earnings above its reasonable needs for the proscribed purpose of avoiding individual shareholder income tax. IRC § 533(a). See Donruss.

The district court’s finding that Terminals’ plans contemplated in 1965 for its capital expenditures were not sufficiently specific and definite to justify its accumulation, standing alone, seems neither clearly erroneous nor legally incorrect. It is, therefore, to Inland Oil’s plans that we turn. In concluding that Terminals might not accumulate earnings for Inland Oil, the district court relied on Treas.Reg. § 1.537-3(b). It provides that if one corporation substantially controls and operates another, the business of the controlled corporation may be considered the business of the controlling corporation for the purposes of determining the reasonable business needs of the controlling corporation. In short, a parent can justify its accumulated earnings by reference to its subsidiary’s reasonable business needs. The district court apparently concluded that Treas.Reg. § 1.537-3(b) forbids the converse situation because it fails to mention it.

We cannot agree with the district court’s conclusion that a wholly owned subsidiary cannot justify its accumulated earnings by reference to its parent’s reasonably anticipated business needs. First, we note that no other authority or commentator has suggested this conclusion. The sparse commentary supports the opposite conclusion. It reasons that the imposition of an accumulated earnings tax on a wholly owned subsidiary would be too harsh an incentive to pay dividends which, if distributed, would be subject only to a maximum effective tax rate of 7.2 per cent. Furthermore, Treas.Reg. § 1,-537-3(b) does not compel the district court’s conclusion. The government urges that since the regulation focuses on control, it implies that it is permissible for one corporation to justify its accumulated earnings by reference to the reasonable needs of another corporation only if it controls the other corporation. But this argument loses force when applied in a case where one family controls both corporations. Where a closely held family corporation wholly owns a subsidiary corporation, it would only indulge a fiction to say that control flowed in one direction rather than the other. Since the very purpose of § 1.537-3 (b) is to insure that substance prevails over form in the consideration of a corporate family’s reasonable business needs, we reject the government’s interpretation of § 1.537-3(b) as applied in these circumstances.

The government relies on several cases to support the proposition that § 1.537-3 (b) should be strictly construed to forbid one corporation from accumulating earnings for another where it does not control the other. Latehis Theatres of Keene v. C.I.R., 214 F.2d 834 (1 Cir. 1954); Crawford County Printing & Publishing Co. v. C.I.R., 17 T.C. 1404 (1952); Stanton Corp. v. C.I.R., 44 B.T.A. 56 (1941). But these cases are distinguishable from the instant ease because they involve brother-sister, rather than parent-subsidiary corporations. Where brother-sister corporations are involved, earnings can be transferred between them only through the common shareholder or shareholders, who will be subject to a progressive individual income tax. Thus, if § 1.537-3(b) were not construed to bar justification of the accumulated earnings of one corporation by reference to the business purposes of its sister corporation, it would frustrate one of the major purposes of the accumulated earnings tax, which is to force earnings out of a corporation to its individual shareholders so that they can be taxed a second time at graduated individual income tax rates. On the other hand, a wholly owned subsidiary can transfer accumulated earnings directly to its parent, who will be taxed at most only at the relatively minimal rate for intercorporate dividends. IRC § 243, 26 U.S.C. § 243 (1967). Thus, it would not subvert the major purpose of the accumulated earnings tax to permit a wholly owned subsidiary to justify its accumulated earnings by reference to its parent’s reasonably anticipated business needs.

We conclude, therefore, that in assessing the reasonable needs of a wholly owned subsidiary, it is permissible to consider the reasonable business needs of its parent, to the extent that the business needs of its parent have not already been cited pro tanto to justify the parent’s accumulation of earnings.

IV.

Under the district court’s view of the case, there was no occasion to determine whether Inland Oil’s reasonably anticipated business needs could justify both its and all or some part of Terminals’ accumulated earnings in 1965. Under our view, this determination must be made, and it should be made in the first instance by the district court. The record indicates a significant likelihood that Terminals can prove that the addition of its 1965 undistributed earnings (less the intercorporate dividend tax, if any) to Inland Oil’s accumulated earnings would not produce an amount which exceeded Inland Oil’s reasonably anticipated business needs for that year. Therefore, we do not reach Terminals’ further argument that the accumulated earnings tax is applicable solely where the subsidiary’s accumulation of earnings has the effect of avoiding individual rather than intercorporate income taxes.

Accordingly, we reverse and remand this case for a determination of whether Terminals’ accumulated earnings can be justified by Inland Oil’s reasonably anticipated business needs which Inland Oil cannot itself satisfy, and for further proceedings not inconsistent with this opinion.

Reversed and remanded.

      . 338 F.Supp. 1330 (D.Md.1972).

      . Inland Oil Balance Sheets for the calendar years 1965-1969 show the shift:
      Cash and Treasury Bills Accounts Receivable
      12/31/65 $360,000 $268,000
      12/31/66 300.000 309.000
      12/31/67 234.000 444.000
      12/31/68 112.000 580.000
      12/31/69 118,000 603.000

      . Terminals Balance Sheets:
      Cash and Treasury, Bills Cost of Autos, Trucks and Trailers Cost of Bulk Storage Equipment Cost of Building
      8/31/65 $58,000 $109,000 $ 76,000 $23,000
      8/31/66 81,000 127.000 76.000 23.000
      8/31/67 74.000 167.000 80.000 23.000
      8/31/68 45.000 206.000 111,000 38.000
      8/31/69 25.000 218,000 111,000 70.000
      These figures do not include the rentals due from Inland Oil, which were treated as accounts receivable.

      . Treas.Reg. 1.537-3(b) provides in pertinent part:
      If one corporation owns the stock of another corporation and, in effect, operates the other corporation, the business of the latter corporation may be considered in substance, although not in legal form, the business of the first corporation . . . . Thus, the business of one corporation may be regarded as including the business of another corporation if such other corporation is a mere instrumentality of the first corporation; that may be established by showing that the first corporation owns at least 80 percent of the voting stock of the second corporation. If the taxpayer’s ownership of stock is less than 80 percent in the other corporation, the determination of whether the funds were employed in a business operated by the taxpayer will depend upon the particular circumstances of the case . . ..

      . Cf. Proposed Treas.Reg. § 1.533-1(a)(3), 33 Fed.Reg. 9830-31 (1968) (proposing assessment of accumulated earnings tax on subsidiary where parent relies upon underlying value of its investment in the subsidiary to obtain funds for distributions to the parent’s shareholders, rather than cause the subsidiary to distribute its earnings and profits).

      . Greer, The Accumulated Earnings Tax-— New Decisions Focus Attention on an Old Problem, 51 Taxes 13, 16 (Jan. 1973) specifically criticizing the district court’s conclusions. See CCH, The Tax on Accumulated Earnings (1968). Cf. Treas. Regs. 1.1502-31(a)(18)(vi) and 1.1502-31(a)(19)(i).

      . Greer, supra n. 6, at 16.

      . “Brother-sister” corporations, as we use the term, are two or more corporations, owned and effectively controlled by one or more individuals. See United States v. Collins, 300 F.2d 821, 822 (1 Cir. 1962).

      . See Donruss, 393 U.S. at 303, 89 S.Ct. 501, 21 L.Ed.2d 495; Electric Regulator Corp. v. C.I.R., 336 F.2d 339, 346 (2 Cir. 1964); 7 Mertens, Law of Federal Income Taxation § 39.04 (1967 rev.).


author: SEITZ, Chief Judge.

text:
    In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor. Appeal of BETHLEHEM STEEL CORPORATION, a Delaware corporation in No. 72-1292. Appeal of REPUBLIC STEEL CORPORATION, Cleveland, Ohio in No. 72-1293. Appeal of BLUEBIRD FOOD PRODUCTS COMPANY in No. 72-1294. Appeal of HARRY R. DEFLER CORPORATION in No. 72-1305. Appeal of UNITED STATES STEEL CORPORATION in No. 72-1306. Appeal of THOMAS J. HOLT CO., INC., in No. 72-1307. Appeal of MILLER LUMBER CO., INC., Montross, Virginia in No. 72-1308.
    Nos. 72-1292 to 72-1294 and 72-1305 to 72-1308.
    United States Court of Appeals, Third Circuit.
    Argued Jan. 29, 1973.
    Decided April 27, 1973.

      W. Bradley Ward, Samuel D. Slade, Schnader, Harrison, Segal & Lewis, Philadelphia, Pa., for Bethlehem Steel Corp.
    John S. Estey, William R. Dimeling, Montgomery, McCracken, Walker & Rhoads, Philadelphia, Pa., for Republic Steel Corp. and Miller Lumber.
    Robert C. Cohen, Meltzer & Schiffrin, Philadelphia, Pa., for Blue Bird Food Products Co.
    Henry T. Reath, Reeder R. Fox, Duane, Morris & Heckscher, Philadelphia, Pa., for H. R. Defler Corp. and U. S. Steel Corp.
    Ned Stein, Comanor & Stein, Philadelphia, Pa., for Thomas J. Holt Co., Inc.
    Marvin Comisky, Goncer M. Krestal, Blank, Rome, Klaus & Comisky, Paul R. Duke, Philadelphia, Pa., for appellee.
    Before SEITZ, Chief Judge, ALDI-SERT, Circuit Judge, and LACEY, District Judge.
   OPINION OF THE COURT

SEITZ, Chief Judge.

The basic issue presented on this appeal is whether a reorganization court in a § 77 proceeding has summary jurisdiction to enjoin a non-judicial set-off of claims for goods, services, and shipping losses and damages against freight charges, where such set-offs were effected prior to the Debtor’s filing for reorganization.

The dispute arises out of a petition filed by the railroad trustees. The petition requested the court to issue an order- directing certain shippers, including appellants, to pay bills still outstanding for pre-reorganization freight services, i.e., for charges incurred prior to June 21, 1970. Appellants filed answers and briefs asserting the right of set-off against these charges; these set-offs involved claims on charges for supplies and freight loss and damage claims arising during the period prior to the commencement of the reorganization proceedings. Appellants contend that the amount of these set-offs exceeded the amounts owed for freight charges.

Although an affidavit was filed by the trustees alleging the amounts due them, the hearing below focused relatively little upon the validity of these amounts. Rather, it consisted almost entirely of oral argument on whether the reorganization court’s summary jurisdiction as to these claims was defeated by the presence of appellant shippers’ competing claims. After hearing argument on this latter point, the court determined it had summary jurisdiction and entered an order enjoining any set-off by appellants against monies owed by them for pre-reorganization freight charges. However, it deferred ruling on the amount of those charges still outstanding. This appeal followed.

Two conclusions were basic to the court’s determination that it had summary jurisdiction over this controversy. First, it concluded that a regulated carrier’s freight charges constitute a chose in action. Secondly, it concluded that under §§ 3(1) and 6(7) of the Interstate Commerce Act [49 U.S.C. §§ 3(1) & 6(7)(1971)], a shipper’s claims against the carrier are not a defense to the carrier’s claim for freight charges due. Therefore, since appellant shippers did not assert colorable adverse claims to the Debtor’s choses in action, the court determined that it had the right to exercise summary jurisdiction with respect to the carrier’s claims for freight charges.

The court’s determination was based upon the holding of this circuit in Matter of Penn Central Transportation Company, 453 F.2d 520 (1972). There we held that where there is no bona fide dispute concerning the Debtor’s right in a chose in action at the time reorganization proceedings are instituted, the reorganization court can exercise summary jurisdiction under the statute with respect to the enforcement of that chose. Therefore, assuming the freight charges owed can be conclusively established on remand, the issue for our resolution becomes whether the pre-reorganization set-offs effected by appellants in settle-* ment of their claims created a bona fide dispute as to the Debtor’s legal entitlement to the freight charges previous to the filing of the reorganization petition.

Under the Interstate Commerce Act, freight charges incurred pursuant to a filed tariff are accorded a legally superior status: that of a law. The only defense which can be raised to a carrier’s suit for these legal charges is that the services have been paid for, that the services were not rendered, that the services were charged under an inapplicable tariff schedule, or that the rates were unreasonable.

The purpose of this limitation on defenses to an action by a carrier was to prevent secret kickbacks and preferences between large shippers and carriers. Thus, a set-off for damages incurred in shipment is not considered a defense since the potential for effecting preferences under such a guise seemed manifest. Similarly, a shipper and carrier cannot make provision for the supplying of goods and/or services in exchange for carriage. See, e.g., Northeast Airlines v. CAB, 345 F.2d 662 (1st Cir. 1965). Complementing this statutory scheme was a provision mandating that freight was not to be delivered until paid for in order to prevent the giving of preferences through the extension of credit. 49 U.S.C. § 2(1971). Present Interstate Commerce Commission regulations in fact require a carrier to institute suit promptly if payment for freight charges is not made within ten days. Therefore, freight tariffs are accorded a special legal status which make inapplicable analogy to normal rules of commercial law.

Appellants rely principally upon the Supreme Court’s opinion in Chicago & N.W. Ry. v. Lindell, 281 U.S. 14, 50 S.Ct. 200, 74 L.Ed. 670 (1930). There, as here, a carrier sued to collect freight charges; the shipper counterclaimed, asserting a loss due to the carrier’s failure to perform under the shipping contract. The Court allowed the counterclaim to be asserted against the carrier in the same action, stating:

The adjudication in one suit of the respective claims of plaintiff and defendant is the practical equivalent of charging a judgment obtained in one action against that secured in another. Neither is to be distinguished from payment in money.

281 U.S. at 17, 50 S.Ct. at 201. The Court justified its position as not being in contravention of the Interstate Commerce Act by concluding that it would be a matter of judicial economy to allow the suit: having both parties before the court, it would be most economical to have the court adjudicate the various controversies between those parties in one proceeding. The court would serve to ensure that in fact such suits were not products of collusive agreements designed to thwart the prohibitions of the Interstate Commerce Act.

Although it is clear from Lindell that a counterclaim can be asserted against a carrier’s suit for freight charges, our court has reiterated that under the Interstate Commerce Act, the subject matter of the counterclaim is not a defense to the carrier’s claim for freight charges. Rather, it constitutes an independent claim. Southern Pacific Co. v. Miller Abattoir Co., 454 F.2d 357 (3d Cir. 1972). Its assertion by means of counterclaim is justified because the court can ensure that it does not result in circumvention of the Act and because it does further the administration of justice.

The remaining question posed is whether the intervention of reorganization proceedings creates a different situation. The district court implicitly assumed that while a counterclaim or set-off can be asserted against the carrier in a suit for collection of outstanding freight charges, it cannot be similarly recognized when a carrier seeks enforcement of its claim in a reorganization proceeding. We agree. Because the subject matter of the set-off or counterclaim does not constitute a defense to the carrier’s freight claim, the intervention of reorganization proceedings forces analysis of different considerations. Since the Bankruptcy Act sets up a different process for disposition of creditor’s claims, we do not believe these shippers’ claims, which do not have the status of legal defenses, can defeat the right of the railroad to collect absolutely all legal charges for freight services outstanding and unpaid. Thus, at the inception of these proceedings, the carrier’s choses in action arising out of freight charges had the same status as the carrier’s deposits in the Bank Cases and were therefore not subject to a bona fide dispute because of the presence of other disputes between the Debtor and the holder of Debtor’s chose in action. Appellants merely had an independent claim against the Debtor which could have been litigated in the railroad’s suit for charges had not the supervening structure of the Bankruptcy Act intervened.

One final issue raised by one of the appellants remains for disposition. It contends that under applicable Pennsylvania law, it extinguished its debt to the railroad by the non judicial set-off of a debt owed to it by the carrier, citing 12 P.S. § 601(1953). Even assuming the validity of appellant’s contention under Pennsylvania law, such a set-off would have been in express contravention of the Interstate Commerce Act. Indeed, the Act was so designed to prevent the kind of secret kickbacks which this type of practice could lead to. We believe our conclusion not only comports with the Supremacy Clause of the Constitution but in so doing, does not conflict with any other constitutional provision nor results in the granting of an unwarranted preference to other creditors.

Therefore, we conclude the district court correctly determined in the first instance that it had summary jurisdiction over these disputes and had the power to enjoin their set-off. However, on remand, the court must require the Debtor to attempt to establish the amounts owing by clear and convincing evidence. Maggio v. Zeitz, 333 U.S. 56, 68 S.Ct. 401, 92 L.Ed. 476 (1948). The court must then afford appellants an opportunity to challenge those amounts. Only then will the reorganization court be able to determine whether there is such a bona fide dispute and defense to Debtor’s claim for freight charges as will defeat its exercise of summary jurisdiction.

Given our conclusion that the reorganization court will have the right to exercise summary jurisdiction if the proper showing is made on remand, it follows that it can also exercise its sound discretion, once again, in determining whether or not to permit set-off or counterclaim against the Debtor’s charges. This procedure was approved by this court in the Bank Cases. Our disposition of this case renders it unnecessary to decide the other contentions raised by the parties.

The order of the district court will be affirmed and the matter remanded to the district court for further proceedings consistent with this opinion.

      . One appellant’s answer does not assert a pre-reorganization set-off. Another’s answer does not clearly indicate that an attempted set-off was made before the filing of the reorganization petition. In view of our disposition of this appeal, we need not consider the effect of these variations.

      . Hereinafter cited as Bank Cases.

      . One appellant argues that because there was allegedly an effective nonjudicial set-off before these proceedings were instituted, there was no property of the Debtor in that appellant’s possession at the inception of the reorganization proceedings. We view that argument as but another formulation of the basic issue posed as to the reorganization status of the appellants’ claims.

      . We do not necessarily approve all the authority cited in this opinion.


author: PER CURIAM:

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Noah Willis ALTIZER, aka Robert Van Horn, Defendant-Appellant.
    No. 72-3680
    Summary Calendar.

    United States Court of Appeals, Fifth Circuit.
    May 8, 1973.
    James A. Robbins, Jr., Rome, Ga. (Court-appointed), for defendant-appellant.
    John W. Stokes, Jr., Robert L. Smith, Asst. U. S. Atty., Atlanta, Ga., for plaintiff-appellee.
    Before BELL, GODBOLD and IN-GRAHAM, Circuit Judges.

       Rule 18, 5 Cir., see Isbell Enterprises, Inc. v. Citizens Casualty Co. of New York et al., 5 Cir., 1970 481 F.2d 409.

   PER CURIAM:

Appellant attacks the basis of a search warrant. His ground for attack is that the affidavit supporting the warrant was based on information obtained from his purported wife after her arrest without probable cause. He asserts the fruit of the poisonous tree doctrine. The search was of a trailer-home occupied by appellant and his purported wife. The district court held that appellant lacked standing to assert in his own defense the defalcation of the officers toward the wife. We agree. See Alderman v. United States (1969) 394 U.S. 165, 174, 89 S.Ct. 961, 22 L.Ed.2d 176, 187; Wong Sun v. United States (1963) 371 U.S. 471, 491-492, 83 S.Ct. 407, 9 L.Ed.2d 441, 458.

The assignments of error based on the alleged illegal arrest of appellant and the search of his automobile are without merit. No product of the arrest was used against appellant in connection with his trial and conviction. The evidence obtained from the search of appel-) lant’s automobile was not improperly admitted. The automobile was not searched at the time of appellant’s illegal arrest, but only upon a search war-, rant which was issued on information also obtained from appellant’s purported wife.

Affirmed.

      . The district court found that the purported wife was not in fact appellant’s wife but that they were occupying the trailer-home together.


author: GOLDBERG, Circuit Judge:

text:
    Roy Alton LANE, Petitioner-Appellant, v. ATTORNEY GENERAL OF the UNITED STATES, Respondent-Appellee.
    No. 72-1747.
    United States Court of Appeals, Fifth Circuit.
    April 26, 1973.
    William A. Clineburg, Atlanta, Ga., Court-appointed for petitioner-appellant.
    John W. Stokes, Jr., U. S. Atty., P. Bruce Kirwan, William P. Gaffney, Asst. U. S. Attys., Atlanta, Ga., for respondent-appellee.
    Before RIVES, THORNBERRY and GOLDBERG, Circuit Judges.
   GOLDBERG, Circuit Judge:

Appellant, Roy Alton Lane, is currently an inmate of the Atlanta Federal Penitentiary. On February 1, 1963, he was sentenced by the United States District Court for the Northern District of Georgia to serve ten years imprisonment for bank robbery. After serving approximately one-third of his sentence, appellant was paroled on May 11, 1966.

On July 2, 1970, after appellant had been on parole for more than four years, the United States Board of Parole issued a warrant charging him with violating certain conditions of his parole. Specifically, he was charged with (1) public drunkenness, (2) leaving his district without obtaining permission from his parole officer, (3) driving while under the influence of alcohol, (4) using alcoholic beverages excessively and failing to work regularly, and (5) failing to report to his probation officer as directed. On July 6, 1970, appellant was arrested pursuant to the warrant and imprisoned in the Fulton County, Georgia, jail.

On July 13, 1970, appellant was interviewed in the Fulton County Jail by a United States Probation Officer. During the course of this interview, appellant signed an “Attorney-Witness Election Form” admitting that he had violated one or more of the conditions of his release on parole and stating that he wished to be given his revocation hearing upon his return to a federal institution. On July 29, 1970, appellant was transferred to the Atlanta Federal Penitentiary where he was interviewed by a caseworker on August 6, 1970. During the course of that interview appellant sipned a second “Attorney-Witness Election Form,” which indicated that he wished to waive the right to retain counsel. He alleges that he waived that “right” because he had no money with which to pay an attorney.

On August 10, 1970, appellant’s parole revocation hearing was conducted at the Atlanta Federal Penitentiary. On September 21, 1970, the United States Board of Parole ordered that appellant’s parole be revoked and that he resume serving the remainder of his sentence.

On December 14, 1971, appellant filed a petition for a writ of habeas corpus in the United States District Court for the Northern District of Georgia. Appellant alleged that the procedure followed at his parole revocation hearing violated his constitutional rights in that he was not afforded the assistance of counsel even though he was an indigent and could not pay for counsel himself. After receiving a response from the United States but without conducting an evidentiary hearing, the court below denied the petition. The court’s order makes clear that the learned judge based his decision on an understanding that the due process clause of the Constitution does not require that counsel be afforded parolees at parole revocation hearings. The judge below further found that appellant had voluntarily waived counsel. Appellant shortly thereafter filed a motion with the district court asking it to vacate its earlier order. Appellant urged several grounds in support of his motion, but his principal emphasis was on a claim that his “waiver” of counsel was neither voluntarily nor knowingly made. The district court adhered to its denial of habeas relief and found that the entire waiver issue was immaterial if the Constitution does not require counsel in the first place.

Appellant brings this appeal from the denial of habeas relief. He urges reversal on two distinct grounds. First, he insists that the due process clause of the Constitution demands that parolees be represented by counsel at parole revocation proceedings. Secondly, appellant argues that if the government allows parolees who can afford it to furnish their own retained counsel at parole revocation proceedings, the equal protection clause of the Constitution is violated by the government’s refusal to furnish counsel to those who cannot afford to pay for their own attorneys.

Although it has perhaps been heretofore supposed that resolving these issues required Sisyphean judicial labors, our task is eased by a rare but equally fortunate occurrence. We are guided to our decision by the sagacious words of an opinion in our own Circuit that is itself going to press as we write this opinion, Cottle v. Wainwright, 5 Cir. 1973, 477 F.2d 269.

I. DUE PROCESS

Appellant persuasively insists that Morrissey v. Brewer, 1972, 408 U.S. 471, 92 S.Ct. 2593, 33 L.Ed.2d 484, when read with the Supreme Court eases developing the right to counsel, e. g., Powell v. Alabama, 1932, 287 U.S. 45, 53 S.Ct. 55, 77 L.Ed. 158; Gideon v. Wainwright, 1963, 372 U.S. 335, 83 S.Ct. 792, 9 L.Ed.2d 799; In re Gault, 1967, 387 U.S. 1, 87 S.Ct. 1428, 18 L.Ed.2d 527; Argersinger v. Hamlin, 1972, 407 U.S. 25, 92 S.Ct. 2006, 32 L.Ed.2d 530, requires us to hold that due process of law is violated when a person’s parole is revoked without his having had the assistance of counsel. We need not and do not decide that issue. As did the Supreme Court in Morrissey v. Brewer, supra, 408 U.S. at 489, 92 S.Ct. at 2604, 33 L.Ed.2d at 499, and as did this Court in a very recent case regarding state parole revocation proceedings, Cottle v. Wainwright, 5 Cir. 1973, 477 F.2d 269, we expressly pretermit any discussion of the question of whether due process requires the appointment of counsel for indigents facing revocation of their parole.

We do not reach the “due process” argument because we find that a different constitutional principle, that of “equal protection of the laws,” mandates the appointment of counsel for indigent parolees where, as here, the authority revoking parole permits more affluent parolees to appear with retained counsel. Of course, the Equal Protection clause appears in the Fourteenth Amendment, which is applicable only to the states. But Bolling v. Sharpe, 1954, 347 U.S. 497, 74 S.Ct. 693, 98 L.Ed. 884, made clear that the federal government cannot, consistent with the due process required by the Fifth Amendment, which is applicable to the federal government, do that which the states are forbidden to do by the Equal Protection clause. See also Van Blaricom v. Forscht, 5 Cir. 1973, 473 F.2d 1323 (slip op. no. 72-1374, Feb. 21, 1973).

II. EQUAL PROTECTION

The equal protection issue was only recently before us for the first time in Cottle v. Wainwright, supra. There, this Court held that Florida, “once having provided for retained counsel . . . cannot constitutionally deny the same opportunity to indigents.” Here, the federal government unquestionably allows the appearance of retained counsel, 28 C.F.R. § 2.41. The question now before us is whether the federal government may constitutionally deny the assistance of counsel to those unable to pay attorney’s fees. In Cottle, supra, we agreed with the Tenth Circuit’s position as expressed in Earnest v. Willingham, 1969, 10 Cir., 406 F.2d 681, 683:

“But at issue here is the question whether an agency of the Federal government can administratively afford counsel at revocation hearings to those financially able to retain one while refusing appointed counsel to those financially unable. To pose the question is to answer it, for Griffin [Griffin v. Illinois, 1956, 351 U.S. 12, 76 S.Ct. 585, 100 L.Ed. 891] and its progeny have made it clear beyond doubt that where liberty is at stake a State may not grant to one even a non-constitutional, statutory right such as here involved and deny it to another because of poverty. And it goes without saying that a Federal agency may not, consistently with Fifth Amendment due process, do that which a State is forbidden to do by Fourteenth Amendment due process.”

The Cottle case controls and is dispositive of the case now before us. Judge Tuttle’s well-reasoned opinion in Cottle amply discusses the relevant legal issues, and there is little we can add to it. We note that Cottle’s recognition that the assistance of counsel cannot be said to be “an empty ritual” is particularly true on the facts of the instant case. The second “charge” against appellant, for example, alleged that he had travelled outside his district without permission. 28 C.F.R. § 2.28, however, specifically authorizes certain travel even without prior approval, and had appellant been afforded counsel, the regulation might have been found and utilized as a “defense” to the charge. Thus, even though appellant may have “admitted” the facts charged, a legal question may well have been controlling.

Lastly, we note that virtually all of the commentators agree that the result reached in Cottle, which we reiterate today, is not only constitutionally required but is extremely desirable from a policy standpoint. See Comment, The Emerging Right to Counsel at Parole Revocation Hearings, 9 Houston L.Rev. 290 (1971). See also ABA Project on Minimum Standards for Criminal Justice, Standards Relating to Probation § 5.-4(a)(ii) (approved draft 1970); ABA Project on Minimum Standards Relating to Providing Defense Services § 4.2 (approved draft 1968); Cohen, Due Process, Equal Protection and State Parole Revocation Proceedings, 42 U.Colo.L. Rev. 197 (1970); Dyke, Parole Revocation Hearings in California: The Right to Counsel, 59 Calif.L.Rev. 1215 (1971); Model Penal Code § 305.15(1) (proposed official draft 1962); President’s Commission on Law Enforcement and the Administration of Justice: Report: The Challenge of Crime in a Free Society 150, Task Force Report: The Courts 54, and Task Force Report: Corrections 86-88 (1967); Sklar, Law and Practice in Probation and Parole Revocation Hearings, 55 Crim.L.C. & P.S. 175 (1964); Note, Parole Revocation in the Federal System, 56 Geo.L.J. 705, 719-726 (1968); Note, Parole: Rights and Revocation, 37 Brooklyn L.Rev. 550 (1971); Comment, Procedural Safeguards in Federal Parole Revocation Hearings, 57 N.W.U.L.Rev. 737, 758-760 (1963).

III.

Before appellant may obtain relief under our holding, he must first show (1) that he was in fact an indigent, and (2) that he has not willingly, knowingly, and voluntarily waived the right to have counsel appointed to represent him at the parole revocation hearing. Because the signed “Attorney-Witness Election Forms” state on their face that appellant waived only the “right” to retain counsel, the forms are not dispositive. A factual inquiry into these two questions must be had, and the case must therefore be remanded to the district court for further proceedings in accordance with this opinion.

We leave to the district court in the first instance the task of fashioning an appropriate remedy should appellant show himself to be qualified for relief. It appears that the burden of that task may be considerably lightened by use of 18 U.S.C. § 3006A, which was not in effect in its current form at the time appellant’s parole was revoked. Although it has been suggested that § 3006A does not authorize use of federal funds to appoint counsel at revocation proceedings, 45 Comp.Gen. 780 (1966), that holding was made before the current version was enacted. Section 3006A(a) now specifically mentions “furnishing representation for any person financially unable to obtain adequate representation (3) who is subject to revocation of parole ...” and § 3006A(g) captioned “Discretionary appointments,” provides that, “Any person subject to revocation of parole . . . may be furnished representation whenever the United States magistrate or the court determines that the interests of justice so require and such person is financially unable to obtain representation.” It would be a jurisprudential anomaly if the act providing compensation for attorneys appointed to represent a person “who is subject to revocation of parole” did not contemplate such appointments.

Modern jurisprudence cannot tolerate the denial of even a non-constitutional right to counsel solely because of indigency. Wealth as a classifier of rights is suspect in the embrace of the equal protection clause of the Constitution. The unconstitutionality of government-sanctioned inequality between indigents and non-indigents in the granting or withholding of human rights has been confronted and discussed in many contexts and with many aspects. In the right to counsel-bailiwick, however, we can find no room for equivocation or ambivalence or apologetics. If representation by counsel is a matter of right, be it constitutional, statutory, or even administrative, it can neither rise nor fall by counting-house standards.

The constitutional road has been long, rugged, and sometimes tortuous in establishing that principle, and we find neither reason nor precedent to stray even a step from that revered path. To hold otherwise would travesty the hallowed concept of equal protection under the law that our Constitution demands. Granting the right to counsel affords a mighty and not a “ritualistic” protection, and the equality of that protection can be assured only if the indigent are furnished that which their more economically fortunate brothers can procure. No subtlety of constitutional law can be summoned to deny unto those who have not, while granting unto those who have, that which the Nation has vouchsafed.

The district court is directed to determine whether appellant can qualify for relief. If so, the court is further directed to investigate the available facilities, procedures, and resources and to fashion a remedy for assuring that despite the fact that he is an indigent appellant may obtain representation of counsel at any federal parole revocation hearing.

Reversed and remanded.