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AAA, INC. V. CAFESJIAN
Leagle.com
http://www.leagle.com/xmlResult.aspx?xmldoc=In+FDCO+20110509927.xml&docb ase=CSLWAR3-2007-CURR
May 10 2011
THE ARMENIAN ASSEMBLY OF AMERICA, INC., et al.,
Plaintiffs/Counter-Defendants,v.GERARD L. CAFESJIAN, et al.,
Defendants/Counter-Plaintiffs.
Civil Action No. 07-1259, No. 08-255., 08-1254 (CKK) United States
District Court, District of Columbia.
May 9, 2011.
MEMORANDUM OPINION COLLEEN KOLLAR-KOTELLY, District Judge.
The above-captioned consolidated actions involve a series of claims
and counterclaims relating to the parties' attempts to create a
museum and memorial in Washington, D.C. devoted to the Armenian
Genocide.1 Following a twelve-day bench trial in November 2010,
the Court issued a Memorandum Opinion setting forth its findings
of fact and conclusions of law on January 26, 2011. See [193]2
Mem. Op. (Jan. 26, 2011). The Court found that none of the parties'
substantive claims were meritorious and dismissed all of the claims
save one, holding that Defendants Gerard L. Cafesjian ("Cafesjian")
and John J. Waters ("Waters") were entitled to indemnification from
the Armenian Genocide Museum and Memorial, Inc. ("AGM&M") for legal
expenses incurred in defending claims asserted against them in their
capacities as former officers of AGM&M. The Court also upheld the
validity of a reversion clause in a Grant Agreement executed between
Defendants Cafesjian and the Cafesjian Family Foundation, Inc. ("CFF")
and Plaintiff Armenian Assembly of America, Inc. (the "Assembly"),
ruling that CFF and Cafesjian may exercise their rights under that
clause effective December 31, 2010. The Court asked the parties
to submit additional briefing regarding two issues left unresolved
by the Court's prior Memorandum Opinion: (1) whether CFF should be
required to reimburse AGM&M for part of the value of properties that
shall be transferred to CFF under the terms of the Grant Agreement;
and (2) the amount of legal expenses for which Cafesjian and Waters
are entitled to be indemnified. The parties have now completed the
additional briefing on these issues as ordered by the Court, and these
issues are ripe for the Court's resolution. This Memorandum Opinion
contains the Court's final findings of fact and conclusions of law
with respect to these issues. The parties have also filed a series
of papers with the Court regarding the terms on which the properties
must be transferred to CFF. The Court shall address these filings in
the context of addressing the reimbursement issue.
Pending also before the Court are several additional motions filed
by Defendants Cafesjian, Waters, and CFF (collectively, "Defendants").
First, Defendants have filed a [198] Petition for Involuntary
Dissolution asking the Court to initiate procedures to involuntarily
dissolve AGM&M under D.C. law. Second, Defendants have filed a [221]
Motion Requesting Attorneys' Fees for Vexatious Litigation. Third,
Defendants have filed a [214] Request for Order to Show Cause as to
Why Plaintiffs Should Not Be Held In Contempt for allegedly violating
one of this Court's orders. The Assembly and AGM&M (collectively,
"Plaintiffs") have filed oppositions to each of these motions, and
Defendants have filed replies. In addition, Plaintiffs' former counsel,
K&L Gates LLP, has intervened and filed a brief opposing Defendants'
motion for attorneys' fees for vexatious litigation.
Accordingly, these motions are all ripe for resolution.
For the reasons explained below, the Court finds that the Grant
Agreement does not impose any obligation on CFF to reimburse AGM&M
for the excess value of the properties over the amount of the funds
originally donated. Therefore, the Court shall enter final judgment on
this issue and order AGM&M to transfer the properties to CFF without
further delay. With respect to the amount of legal fees and expenses
subject to the indemnification clause covering Cafesjian and Waters,
the Court shall refer this issue to a magistrate judge for a report
and recommendation. The Court shall deny-in-part Defendants' motion
requesting attorneys' fees for vexatious litigation because Defendants
have mostly failed to demonstrate that Plaintiffs or their counsel
acted recklessly or in bad faith; however, the Court shall hold in
abeyance Defendants' motion with respect to Plaintiffs' untimely
production of documents on the eve of trial. The Court shall decline
to exercise supplemental jurisdiction over Defendants' petition for
involuntary dissolution of AGM&M, as this is a new claim asserted
after trial that is best left to be adjudicated by the Superior Court
of the District of Columbia. Finally, the Court shall deny Defendants'
request for a show cause order because Defendants have not shown that
Plaintiffs violated one of this Court's orders.
I. BACKGROUND The Court set out its factual findings thoroughly in
its Memorandum Opinion issued on January 26, 2011, and the Court
assumes familiarity with that opinion and incorporates it here. See
Armenian Assembly of Am., Inc. v. Cafesjian, ___ F. Supp. 2d ___,
2011 WL 229354 (D.D.C.
Jan. 26, 2011). The Court shall summarize the facts previously found
by the Court to the extent they are relevant to the issues remaining
to be decided.
A. Initial Interest in an Armenian Genocide Museum and the Acquisition
of the National Bank of Washington Building In the late 1990s,
Cafesjian and several individuals involved with the Assembly joined
forces in an effort to create a museum devoted to memorializing
the Armenian Genocide. On or about April 1, 1996, Hirair Hovnanian
("Hovnanian"), one of the Assembly's founders, made a pledge of
about $1.6 million to establish the Armenian National Institute
("ANI") for the study, research, and affirmation of the Armenian
Genocide. Dr. Rouben Adalian ("Adalian"), a historical researcher,
was hired to become the director of ANI. Inspired by Hovnanian's
pledge, Anoush Mathevosian ("Mathevosian") decided in 1996 to pledge $3
million to be used for the purpose of constructing a permanent museum
in Washington, D.C. dedicated to the victims and survivors of the
Armenian Genocide. In 1996, the Assembly began to explore properties in
Washington, D.C. that would be suitable for a museum. Around this same
time, Cafesjian was independently planning to build a memorial to the
Armenian Genocide. Through his trusted associate Waters, Cafesjian
contacted the Assembly and expressed an interest in potentially
associating his planned memorial with the Assembly's museum project.
Because Cafesjian had not been involved in the Assembly, he invited
Hovnanian, Adalian, and Robert Aram Kaloosdian ("Kaloosdian"),
another of the Assembly's founders, to meet with him and discuss
the museum project and the Assembly's advocacy efforts. Cafesjian
officially joined the Assembly as a trustee in August 1998. At that
point in time, Cafesjian and Waters continued to search separately
for a location for a memorial.
In or about late 1999, the Assembly identified the National Bank of
Washington, located at 619 14th Street, NW, Washington, D.C., as a
possible site for the museum. Although it was much larger than the
properties they had been looking at to date, everyone involved in the
search was impressed by the National Bank of Washington building (the
"Bank Building"). The Bank Building has a prime location~Wjust blocks
from the White House~Wand its exterior and part of the interior have
been designated as historic landmarks in the D.C. Inventory of Historic
Sites and the National Register of Historic Places. The property on
which the Bank Building is located also includes a vacant back lot
which would allow for the construction of an annex. Cafesjian was
very interested in the Bank Building, and he dispatched Waters to do
due diligence on the property. Because there was another interested
buyer, Cafesjian directed Waters to work quickly to arrange the
purchase. Cafesjian agreed to donate $3.5 million to the Assembly
to create a consolidated location at which the genocide museum,
the genocide memorial, and offices for ANI could be located. Anoush
Mathevosian agreed to increase her pledge to $3.5 million to acquire
the property.
The Assembly closed on the Bank Building on February 16, 2000,
purchasing the building for $7.25 million. The funds for the purchase
were comprised of a $3.5 million pledge from Mathevosian, a $2.5
million grant from CFF, and a $1 million grant from Cafesjian's
Vanguard Charitable Endowment Program ~W Cafesjian Family Foundation
Charitable Trust. Because Mathevosian could not access funds in
sufficient time to wire them to the Assembly prior to the closing, CFF
provided the Assembly with a $4 million interest-free bridge loan to
cover Mathevosian's pledge and to complete the transaction. On March 8,
2000, after the Assembly had received Mathevosian's pledged donation,
the Assembly repaid CFF $3.5 million by wire transfer. On March 17,
2000, the Assembly executed a promissory note produced by and for
the benefit of CFF for the remaining $500,000.
After the closing, on February 28, 2000, Anoush Mathevosian wrote a
letter to the Assembly restating the purpose of her pledge. The letter
stated that the purpose of her gift was to foster the development of
an Armenian Genocide museum with educational exhibits, and Mathevosian
expressed her desire that the Bank Building be used solely for the
Assembly, ANI, the museum, and the memorial. She wrote: To be certain
that future generations remain true to the intent of our donations,
it should be clear that no changes will be made to the purpose and
usage of the Museum; that no mortgages are taken against the property
and that the Museum's perpetuation is not jeopardized as such or
encumbered in any way; and that there will be no subsequent changes
to the name of the museum.
PX-110. At her deposition, Mathevosian explained that she wanted
to ensure that they paid for the property in full so that it would
not be mortgaged or sold in the future. Mathevosian asked that
these understandings be incorporated into the permanent records of
the organization. However, there is no evidence that Mathevosian's
expressed desires were ever formally incorporated by the Assembly
into a binding obligation. Mathevosian testified that Hovnanian
agreed to her conditions, but she did not recall whether he had done
so orally or in writing. John Waters testified that he did not see
Mathevosian's letter until several years later, in late 2003. In
any case, Mathevosian did not ask for a reversionary interest in her
donation, and therefore she does not have one.
The parties agreed that as a condition of Cafesjian's donation of funds
for the purchase of the Bank Building, the Assembly was required to
include a memorial named after Cafesjian as part of the project. On
March 30, 2000, the Assembly sent Cafesjian a letter confirming his
donations and its obligation to build a memorial. The Assembly agreed
to cooperate with the design firm or artist chosen by CFF to complete
the memorial. The anticipated completion date for the project was
March 2002, and CFF agreed to make contributions to the Assembly to
finance the memorial. Because of the size of the Bank Building (34,000
sq. ft) and the property on which it sits, it was contemplated that
the Assembly and ANI would move out of their existing offices when
their lease expired in March 2002 and occupy space on the new site.
Accordingly, it was agreed that the development of suitable office
space on the property would be a priority. Ross Vartian, then-Executive
Director for the Assembly, testified at trial that in retrospect,
they were naïve to think that the museum, the memorial, and offices
for the Assembly and ANI could all be housed within the Bank Building.
B. Acquisition of the Properties Adjacent to the Bank Building Once
the Bank Building was acquired by the Assembly, Cafesjian began
to acquire properties adjacent to the Bank Building. Ultimately,
Cafesjian decided to donate the properties to the Assembly for the
purpose of expanding the footprint of the museum project.
Cafesjian acquired four parcels adjacent to the Bank Building: (1)
1342 G Street, NW; (2) 1340 G Street, NW; (3) 1338 G Street, NW; and
(4) 1334-36 G Street, NW (collectively, the "Adjacent Properties").
Each of the properties was acquired in an arms-length transaction by
one of Cafesjian's entities, TomKat Limited Partnership ("TomKat").
TomKat executed an agreement to purchase 1338 G Street for $1.2 million
on March 10, 2000 and closed on May 15, 2000. TomKat purchased 1342
G Street for $1.2 million on March 16, 2000 and closed on September
30, 2000. On October 24, 2000, TomKat entered into an Installment
Purchase and Sale Agreement to purchase 1340 G Street for a total of
$3 million. Under the installment agreement, payments of $150,000 were
due each year for a period of ten years, with a final balloon payment
of $1.5 million due in March 2011.3 The final adjacent property,
1334-46 G Street, NW, also known as the "Families U.S.A."
building, was acquired later by TomKat, which purchased the building
from a third-party seller for $6.5 million in September 2003.
C. Initial Efforts to Develop the Museum and Memorial A planning
committee was formed to handle the task of developing the Bank Building
into a museum and memorial. The planning committee operated largely
by consensus, and there were about a dozen different individuals
who became involved to varying degrees in the planning for the
project. Although the committee held several meetings in the spring
of 2000 to discuss development plans and fundraising, there was no
dedicated staff to shepherd the project along, and the lack of a
central decision maker slowed the pace of progress considerably. In
2001, Ross Vartian took on the position of planning director for
the project, but the committee was unable to agree on critical
decisions such as how to go about hiring professionals to work on the
building and how to raise funds to cover the costs of construction
and operation. The biggest obstacle was disagreement over the size
and scope of the project, including uncertainty over how Cafesjian's
acquisition of the Adjacent Properties would affect the development
of the museum.
It was around late summer 2001 when Cafesjian agreed to donate the
Adjacent Properties to be used for the genocide museum project. No
official proposal was made to the Assembly until October 15, 2001,
when Cafesjian wrote a letter to Hovnanian outlining the terms of a
proposed grant of the three properties that had been acquired. This
letter was the first in a series of draft grant agreements that would
ultimately be exchanged between Cafesjian and the Assembly. The letter
proposed that Cafesjian and/or CFF donate $5.8 million to the Assembly
to purchase the properties from TomKat. The proposed grant agreement
would require the Assembly to use the properties solely as part of the
genocide museum project, subject to plans approved by the Assembly's
planning committee. The letter also proposed that if the Assembly
failed to develop the property according to those plans, CFF would
be entitled to a return of either the grant funds or the properties.
Cafesjian expressed his frustration with the lack of progress that had
been made, and he explained at trial that he wanted to make certain
that the museum was built during his lifetime.
Cafesjian's proposal was generally well received at the Assembly,
although the Assembly never responded in writing to Cafesjian's
letter. However, there was no meaningful progress throughout the rest
of 2001. In 2002, the parties continued to discuss various development
proposals and there was some progress. In March 2002, the Assembly
determined that an independent entity should be created to develop
and operate the museum project. CFF and the Assembly also agreed to
combine their conditions with prior gifting commitments, which the
newly-formed independent entity would be obliged to honor. CFF and the
Assembly agreed to jointly design and approve the governing documents
for the new entity, which would become known as the Armenian Genocide
Museum & Memorial, Inc. ("AGM&M"). It was agreed that AGM&M would be
incorporated as a 501(c)(3) organization as soon as it was possible to
do so responsibly and sustainably. The parties also decided that the
Assembly offices would not be housed within any portion of the museum
complex, in part to keep the museum independent from any advocacy
organization and in part because it was thought that there would not
be adequate space in the complex for the Assembly. To ensure that the
Assembly would get sufficient credit for launching the museum (and to
combat the perception that the Assembly was abandoning the project),
Cafesjian and Hovnanian agreed to channel their contributions through
the Assembly.
In August 2002, the planning committee met and discussed a revised
draft grant agreement letter from CFF. Like the previous draft grant
agreement sent in October 2001, it contained a reversion clause
stating that if the three adjacent properties were not developed
in accordance with a plan approved by the AGM&M (with the necessary
approval of CFF), CFF would be entitled to a return of either those
adjacent properties or the funds used to purchase them. There was
some discussion at the meeting that such an open-ended reversion
clause would not be appropriate.
The museum project was facing significant cash flow problems over the
course of 2002, and Cafesjian had agreed to advance funds necessary
for work to be completed in that year. In October 2002, the museum
planning committee convened a meeting in New York and engaged in an
extensive discussion about the finances for the project. Hovnanian
expressed his concern that they would be unable to raise enough
money to fund a project with a $100 million budget, and he raised the
possibility of phasing in the project, with later expansion tied to
better economic circumstances. Others also expressed concerns about
the operating deficit. Waters told the committee that Cafesjian was
optimistic that the funds could be raised from the community and
that, if necessary, Cafesjian was prepared to donate $50-75 million
to ensure that the project was completed. According to one draft
summary of the meeting, "[a]ll felt that G. Cafesjian's commitment,
characterized as a `safety net,' alleviated the fiscal concerns."
DX-67 at 2. The planning committee members did reach some agreements
about how best to move forward, but the committee remained focused
on consensus-based decision-making.
On January 22, 2003, CFF sent a revised draft grant letter to the
Assembly for review. As with the previous drafts, the letter contained
a reversion clause, but this time it contained a triggering date:
if the three donated adjacent properties were not developed according
to plans approved by AGM&M by December 31, 2008, then those properties
(or the cash used to acquire them) would revert to CFF. The letter also
provided that a new $500,000 promissory note would be issued to CFF
by the Assembly to replace the previous one, and that the obligation
may be transferred to AGM&M. The letter proposed that decisions of the
AGM&M Board of Trustees be decided by an 80% affirmative vote. This
draft letter was discussed at a meeting in Delray, Florida, where
Hovnanian, Vartian, Kaloosdian, and Adalian were present. The Assembly
Board of Trustees held another annual meeting in Boca Raton on March 1,
2003. By the time of this meeting, everyone agreed that AGM&M should be
launched as an independent entity with a budget of around $100 million
and a new building constructed on the Bank Building and the three
adjacent properties to be donated by Cafesjian. It was also agreed that
ANI would retain its status as an independent 501(c)(3) organization,
but that it would become a subsidiary of the new museum entity.
D. Final Negotiation of the Grant Agreements and the Creation of AGM&M
It took seven months following the March 2003 meeting to finalize the
agreements and governing documents that would create AGM&M. One reason
for the delay was the acquisition of the fourth adjacent property,
the Families U.S.A. building. Through TomKat, Cafesjian entered into
a purchase agreement to buy the property for $6.5 million on September
22, 2003. The closing date was scheduled for October 30, 2003.
The draft grant agreement from Cafesjian continued to be discussed
and negotiated. Because Cafesjian had agreed to channel his donations
to AGM&M through the Assembly, it was decided that Cafesjian would
enter a grant agreement with the Assembly (hereinafter, the "Grant
Agreement"), and the Assembly would transfer all of the museum-related
assets and obligations to AGM&M in a separate agreement, to be known
as the "Transfer Agreement." The law firm of Caplin & Drysdale was
hired to draft the Transfer Agreement as well as the organic documents
for AGM&M, including the Articles of Incorporation, the By-Laws, and
a Unanimous Written Consent agreement signed by all of the initial
trustees of AGM&M.
The record shows that the language in the Grant Agreement was reviewed
by most of the major figures involved in AGM&M during the months
leading up to its execution on November 1, 2003. On October 13, 2003,
Waters emailed an updated draft of the Grant Agreement, which included
the donation of the Families U.S.A. building, for review. The revised
draft also included a new trigger date of December 31, 2010 for the
reversion clause; it was felt that seven years was a reasonable
timeline for the completion of the project. The reversion clause
was also expanded to cover the Bank Building in addition to the four
Adjacent Properties. Because the Families U.S.A. building transaction
was scheduled to close on October 30, Waters urged everyone to act
expeditiously so that title to the building could be transferred
directly to AGM&M, eliminating the need to transfer the property
from TomKat to AGM&M and saving hundreds of thousands of dollars in
transfer and recordation fees. On October 28, 2003, a conference call
was held with, inter alia, Hovnanian, Cafesjian, Kaloosdian, Waters,
and Vartian to discuss the four key documents: the Grant Agreement,
the Articles of Incorporation for AGM&M, the AGM&M By-Laws, and the
Unanimous Written Consent agreement. During this meeting, Kaloosdian
suggested that the language in the reversion clause in the Grant
Agreement be clarified so as to avoid ambiguity about when the right
of reversion might be triggered. The final language of these documents
was approved shortly after this conference call.
The Court noted in its prior Memorandum Opinion that several
individuals involved in these discussions, including Kaloosdian
and Hovnanian, had a convenient lack of memory with respect to what
transpired. Therefore, the Court relied heavily on documents that were
submitted as exhibits to determine the events in question. The Court
also noted that it appeared as if these individuals did not take the
time to fully understand the terms and conditions of the agreements.
Any claim that these individuals had certain intentions with regard
to these documents is disingenuous and belied by the language of the
documents themselves.
The Articles of Incorporation for AGM&M were signed on October
29, 2003, and AGM&M officially became incorporated as a nonprofit
corporation in the District of Columbia. The Articles of Incorporation
and the By-Laws for AGM&M were ratified and adopted, respectively,
pursuant to the Unanimous Written Consent agreement, which was executed
on October 30, 2003. The Grant Agreement and Transfer Agreement were
signed on November 1, 2003 during an Assembly gala in Palm Desert,
California. Because the content of these documents is critically
important to disputed issues in this litigation, the Court shall
review each of these documents in some detail.
1. The Grant Agreement The Grant Agreement was signed by Cafesjian
on behalf of himself and CFF and by Hovnanian and Peter Vosbikian on
behalf of the Assembly.
See DX-2 (hereinafter, "Grant Agreement").4 The eleven-page document
sets forth the terms and conditions of the grants made by Cafesjian
and CFF to the Assembly for the museum project and obligates the
Assembly to comply with those terms and conditions.
Pursuant to the Grant Agreement, Cafesjian and/or CFF (jointly defined
as the "Grantor") agreed to donate $10.3 million for the purchase of
the Adjacent Properties from TomKat and any related transaction costs.
In addition, Cafesjian and/or CFF agreed to make the annual $150,000
payments under the installment agreement for 1340 G Street and the
final balloon payment of $1.5 million due in March 2011. See Grant
Agreement §§ 2(D)-(E). The amounts paid under the Grant Agreement
were calculated based on the purchase price paid by TomKat for the
Adjacent Properties, plus the holding costs paid by TomKat pending
transfer minus any rents earned during this period, plus the legal
costs associated with the transfer.
For purposes of this litigation, the most critical feature of the Grant
Agreement is the reversion clause. Under § 3.1 of the Grant Agreement,
the "Grant Property"~Wdefined as the Bank Building and the Adjacent
Properties~W"may only be used as part of the AGM&M,5 subject to
plans for the AGM&M approved by the Board of Trustees of the American
Genocide Museum & Memorial, Inc. (the `Plans'). . . ." Grant Agreement
§ 3.1(A). The next section reads as follows: If the Grant Property is
not developed prior to December 31, 2010 in accordance with the Plans,
or if the Grant Property is not developed in substantial compliance
with the Plans including with respect to the deadlines for completion
of the construction, renovation, installation and other phases detailed
in the Plans, then: (i) in the event any portion of the Grants has not
been funded, this Agreement terminates; (ii) to the degree any portion
of the Grants has been funded, at the Grantor's sole discretion, the
Assembly shall return to the Grantor the Grant funds or transfer to
the Grantor the Grant Property.
Id. § 3.1(B). The phrase "Grant funds" as referenced in the reversion
clause includes both the initial grant of $4 million that was used
to acquire the Bank Building as well as the $12.85 million pledged to
acquire the Adjacent Properties. Cafesjian testified that the purpose
of the reversion clause was to provide an incentive to complete the
museum expeditiously, so that it might be built before Cafesjian died.
Waters testified that the reversion clause was most likely his idea;
he explained that CFF often inserted reversion clauses into its grant
agreements. Section 3.3 of the Grant Agreement requires the Assembly to
use the "Grant funds only for purposes described in Section 501(c)(3)
of the Internal Revenue Code of 1986, as amended." Id. § 3.3.
The Grant Agreement provides that the Assembly shall make available
a space for a memorial to be named the "Gerard L. Cafesjian Memorial"
or another name approved by CFF, which shall be operated and maintained
in perpetuity by the Assembly at its own cost. Grant Agreement § 3.2.
The Grant Agreement also provides that neither CFF nor Cafesjian have
any obligation to provide additional funding to the Assembly or to
AGM&M. Id. § 3.8. The Grant Agreement also contains a breach clause:
(A) If the Assembly fails to use the Grants solely for the purposes
set out in this Agreement or if the Assembly fails to satisfy any
of the conditions of this Agreement, Grantor is released from any
remaining obligation under this Agreement to provide funds or property
to the Assembly.
(B) If the Assembly uses any portion of the Grants either for a purpose
other than those set out in this Agreement or for a purpose other
than those described in Section 501(c)(3) of the [Internal Revenue]
Code, as amended, the Assembly shall repay the portion of the Grants
so spent to Grantor, plus interest.
(C) The remedies set out in this Section 3.9 are in addition to any
other remedies that may be available to the Grantor at law or equity.
Grant Agreement § 3.9.
The Grant Agreement also required the Assembly to enter into a Transfer
Agreement with AGM&M to transfer all of its interest in all cash,
pledges, property, and other assets being held by the Assembly for the
museum project. Id. § 5.3(A). The Transfer Agreement would obligate
AGM&M to honor all existing donor requirements at the time of transfer
and to assume all obligations in the Grant Agreement relating to the
Memorial. Id. § 5.3(B)-(C). The Grant Agreement also provided that
the Assembly would assign its right to appoint the Trustees of the
Armenian National Institute to AGM&M. Id. § 5.5.
2. The Transfer Agreement The Transfer Agreement was executed
on November 1, 2003 by the Assembly and the newly-incorporated
AGM&M. See PX-114 (hereinafter, the "Transfer Agreement"). The
Transfer Agreement requires the Assembly to contribute to AGM&M "all
of its rights, title and interest in and to all cash, pledges, real
property, tangible property, intangible property, and other assets
contributed to the [Assembly] and/or held by the [Assembly] for the
development, renovation, and construction of the AGM&M." Id. § 1.1. The
approximate aggregate value of the grant was listed as $27.8 million,
including $7.25 million in property, over $19 million in pledges,
and approximately $670,000 in cash and other assets. Id. § 1.1(C).
Pursuant to § 1.2 of the Transfer Agreement, "AGM&M, Inc. must
honor all of the [Assembly]'s donor requirements existing at time of
transfer, or in the alternative, obtain donor consent to the transfer
and any modification of donor terms." Transfer Agreement § 1.2(A). The
agreement also explicitly requires AGM&M to comply with the obligation
to construct a memorial as set out in the Grant Agreement. Id. §
1.2(B). The Transfer Agreement also requires AGM&M to use the funds
and property transferred "solely to develop, construct and operate"
the Armenian Genocide Museum & Memorial. Id. § 1.3. The agreement also
contains an arbitration clause. See Transfer Agreement § 5.3. However,
as the Court noted in its prior Memorandum Opinion, none of the
parties is presently seeking to enforce that arbitration clause.
3. The AGM&M Articles of Incorporation The Articles of Incorporation
for AGM&M were executed on October 29, 2003. See PX-121. The
Articles provide that AGM&M is a nonprofit corporation organized for
charitable purposes within the meaning of § 501(c)(3) of the Internal
Revenue Code. Id., Art. IV(A). The purpose of the corporation is
defined as, inter alia, "to own, operate, and maintain a permanent
museum and memorial to the victims and survivors of the Armenian
Genocide." Id. The Articles provide that AGM&M has no members and that
the board of directors for the corporation shall be referred to as
the Board of Trustees. See id., Arts. V-VI. The manner of election
or appointment to the Board of Trustees is to be set forth in the
By-Laws of the corporation. Id., Art. VI. The Board of Trustees must
have at least three trustees at all times, and the initial trustees
are defined to be Gerard L. Cafesjian, Hirair Hovnanian, Anoush
Mathevosian, and Robert Kaloosdian. Id., Art. IX. The Articles also
provide that "[n]o part of the net earnings of the Corporation shall
inure to the benefit of or be distributed to any trustee, employee
or other individual, partnership, estate, trust or corporation having
a personal or private interest in the Corporation."
Id., Art. IV(C).
4. The AGM&M By-Laws The By-Laws of AGM&M set out rules that govern
the operation of the Board of Trustees. See PX-122 (hereinafter,
"By-Laws"). The By-Laws provide that the term of office of each
of the initial trustees (i.e., Cafesjian, Mathevosian, Hovnanian,
and Kaloosdian) "shall be perpetual." By-Laws § 2.4. Each donor
that elected an initial trustee (CFF, Mathevosian, Hovnanian,
and the Assembly) is entitled to appoint a successor trustee
in the event that the initial trustee is unable to serve for any
reason. Id. Additional trustees may be elected to the Board of Trustees
by making a contribution of $5 million to AGM&M, provided that the
Board of Trustees has accepted the contribution by an 80% affirmative
vote and the donor has appointed a successor. Id. § 2.5. Each donor
(including initial donors) is entitled to one vote on the Board of
Trustees for each $5 million contributed. Id. §§ 2.4-2.5.
The By-Laws prohibit AGM&M from engaging in any activities or conduct
that would not be permitted to a corporation exempt from federal
income tax under Section 501(c)(3) of the Internal Revenue Code. See
By-Laws § 3.3. Similarly, the By-Laws provide that "[n]o part of
the net earnings shall inure to the benefit of, or be distributable
to, the Trustees, officers or others except that the Trustees shall
be authorized and empowered, if they so elect, to pay to Trustees,
officers or others reasonable compensation for service rendered and
to make payments and distribution in furtherance of the purposes set
forth in these By-Laws." Id.
Pursuant to § 4.1 of the By-Laws, Unless otherwise prohibited by
law or sections 4.3 and 4.4 of these By-Laws, the Corporation shall
indemnify any Trustee or officer of the Corporation, any former
Trustee or officer of the Corporation, or any person who may have
served at its request as a trustee, director or officer of another
corporation or entity, whether for profit or not for profit, and may,
by resolution of the Board of Trustees, indemnify any employee or
agent of the Corporation against any and all expenses and liabilities
actually and necessarily incurred by him or her or imposed on him
or her in connection with any claim, action, suit or proceeding
(whether actual or threatened, civil, criminal, administrative or
investigative, including appeals) in which he or she is or may be
made a party by reason of having been such Trustee, officer, person,
employee or agent, subject to the limitation, however, that there
shall be no indemnification in relation to matters as to which he
or she shall be adjudged in such claim, action, suit or proceeding
to be guilty of a criminal offense or liable to the Corporation for
damages arising out of his or her own negligence or misconduct in
the performance of a duty to the Corporation.
The By-Laws provide that indemnification shall include, but not be
limited to, counsel fees and other costs. Section 4.3 of the By-Laws
provides that if AGM&M is ever deemed a private foundation within the
meaning of Section 509 of the Internal Revenue Code, no indemnification
shall be paid if such payment would constitute an act of self-dealing
or a taxable expenditure as defined in Sections 4941(d) or 4945(d)
of the Internal Revenue Code, respectively. Id. § 4.3.
5. The Unanimous Written Consent Agreement On October 30, 2003, each of
the four initial trustees of AGM&M signed a document titled Unanimous
Written Consent in Lieu of the Organization Meeting of the Board of
Trustees of AGM&M. See DX-1 (hereinafter, "UWC"). By unanimous written
consent, the Board of Trustees adopted a series of resolutions. First,
the actions of the incorporators were ratified and the By-Laws were
approved. Second, the initial donors (and their appointed trustees)
were recognized to be CFF (Cafesjian), Hirair Hovnanian (himself),
Anoush Mathevosian (herself), and the Assembly (Kaloosdian). Cafesjian
was appointed Chairman and President, Hovnanian was appointed Vice
Chairman, and John Waters was appointed Secretary and Treasurer.
Through the Unanimous Written Consent agreement, the AGM&M Board of
Trustees authorized the officers to pay all of the organizational
expenses of the corporation. The actions of the Chairman (Cafesjian)
and the Secretary/Treasurer (Waters) in negotiating the purchase
of the Adjacent Properties were ratified and approved, and the
Secretary/Treasurer was authorized "to enter into and execute any
and all documents necessary to effect the purchase" of the Adjacent
Properties and "to take such other action as deemed necessary or
desired to effect such transactions." UWC at 3. The AGM&M Board
also approved and ratified the negotiation of grant agreements with
donors and the Assembly, and the Secretary/Treasurer was authorized
to negotiate further grant agreements with donors. The Board also
accepted from the Assembly its power to appoint trustees for the
Armenian National Institute.
E. Efforts to Develop An Armenian Genocide Museum Through AGM&M The
facts surrounding what happened after AGM&M was formally created
were thoroughly discussed in the Court's prior Memorandum Opinion
and need not be repeated herein. The AGM&M Board of Trustees was
unable to reach consensus on the proper size and scope of the project,
and tensions between Cafesjian and Hovnanian increased over a series
of disagreements about the museum project and other policies of the
Assembly. By 2006, relations between the parties had completely broken
down, prompting Cafesjian to propose that AGM&M be dissolved.
Cafesjian ultimately resigned from the AGM&M Board of Trustees,
designating Waters as his successor. After Cafesjian sued the Assembly
for payment on the promissory note, the other AGM&M Trustees voted
to exclude Waters from participation on all matters relating to the
museum project. This resulted in a series of lawsuits filed by the
parties fighting for control of AGM&M and alleging mismanagement of
the corporation. The three other AGM&M trustees attempted to move
forward with the project without Waters's involvement, but they were
unable to raise the funds necessary to implement a development plan.
Accordingly, the museum was not developed by December 31, 2010,
thus triggering the reversion clause in the Grant Agreement.
II. DISCUSSION A. Findings of Fact and Conclusions of Law Regarding
CFF's Obligation to Reimburse AGM&M for the Value of Properties
that Revert Under the Grant Agreement The Court ruled in its prior
Memorandum Opinion that the reversion clause in the Grant Agreement
was valid and enforceable and that CFF and Cafesjian may exercise
their rights under that clause effective December 31, 2010. Cafesjian
informed the Court that only CFF will exercise its rights under
the reversion clause and that CFF will elect to have the properties
transferred in lieu of the grant funds. The Court indicated, however,
that Plaintiffs had raised questions about whether returning the
properties to CFF violates the rule~Wstated in the AGM&M By-Laws and
Articles of Incorporation~Wthat no part of AGM&M's net earnings shall
inure to the benefit of any trustee. The Court asked the parties to
address in further briefing whether it would be inequitable to enforce
the reversion clause without requiring CFF to reimburse AGM&M for any
potential increased value over the amount of funds originally donated
by CFF or Cafesjian, and to address whether it was the original intent
of the contracting parties that the reversion would be a nonprofit
transaction. Through supplemental briefing, the parties have clarified
their positions on these issues.
Plaintiffs argue that the reversion clause in the Grant Agreement,
when read in context with the other provisions of the Grant Agreement
and the terms of the AGM&M By-Laws and Articles of Incorporation,
should be construed as requiring that CFF not realize a profit from the
reversion. Plaintiffs contend that CFF will profit from the reversion
because the value of the properties being transferred exceeds the
value of the donation that CFF and Cafesjian made as part of the Grant
Agreement. Furthermore, Plaintiffs argue that a reversion without
some form of reimbursement would violate federal tax laws applicable
to nonprofit organizations under § 501(c)(3) of the Internal Revenue
Code. Defendants, by contrast, claim that the language in the Grant
Agreement is unambiguous and places no restrictions on the right
of CFF to elect a reversion of the properties rather than the grant
funds. They also dispute Plaintiffs' claim that the reversion runs
afoul of the tax laws. The Court shall address these arguments below.
1. The Grant Agreement Ultimately, the issue before the Court is a
straightforward question of contract interpretation: does the Grant
Agreement require CFF to reimburse AGM&M for the extent to which the
value of the properties to be transferred exceeds the value of the
grant funds donated to acquire them?
The District of Columbia adheres to an "objective" law of contracts,
meaning that "the written language embodying the terms of an agreement
will govern the rights and liabilities of the parties [regardless] of
the intent of the parties at the time they entered into the contract,
unless the written language is not susceptible of a clear and definite
undertaking, or unless there is fraud, duress, or mutual mistake."
Dyer v. Bilaal, 983 A.2d 349, 354-55 (D.C. 2009) (citation omitted;
brackets in original). "If the court finds that the contract has more
than one reasonable interpretation and therefore is ambiguous, then the
court-after admitting probative extrinsic evidence-must determine what
a reasonable person in the position of the parties would have thought
the disputed language meant." Tillery v. D.C. Contract Appeals Bd.,
912 A.2d 1169, 1176 (D.C. 2006) (quoting In re Bailey, 883 A.2d 106,
118 (D.C. 2005)). "Ambiguity exists only if the court determines
that the proper interpretation of the contract cannot be derived from
the contractual language exclusively, and requires consideration of
evidence outside the contract itself." Steele Foundations, Inc. v.
Clark Constr. Grp., Inc., 937 A.2d 148, 153 (D.C. 2007). "[C]ontracts
are not rendered ambiguous by the mere fact that the parties do not
agree upon their proper construction." Id. In determining whether a
contract is ambiguous, courts examine the document on its face and
give the language its plain meaning. Tillery, 912 A.2d at 1176.
The first step in interpreting a contract is to determine "what a
reasonable person in the position of the parties would have thought the
disputed language meant." Steele Foundations, 937 A.2d at 154 (quoting
Dodek v. CF 16 Corp., 537 A.2d 1086, 1092 (D.C. 1988)). "The meaning
must be ascertained in light of all the circumstances surrounding the
parties at the time the contract was made," and "[t]he writing must
be interpreted as a whole, giving a reasonable, lawful, and effective
meaning to all its terms." 1010 Potomac Assocs. v.
Grocery Mfrs. of Am., Inc., 485 A.2d 199, 205 (D.C. 1984) (internal
citations omitted).
The language in the Grant Agreement is unambiguous: if the conditions
triggering the reversion are met, "at the Grantor's sole discretion,
the Assembly shall return to the Grantor the Grant funds or transfer to
the Grantor the Grant Property." It is clear from this language that
the Grantor (CFF and Cafesjian) may choose between a return of the
funds donated and a transfer of the properties. There is no language
in the reversion clause or anywhere else in the Grant Agreement that
restricts the Grantor's right to receive the Grant Property. The Court
presumes that if the parties had intended to place any restrictions of
the Grantor's right to elect a transfer of the Grant Property, they
would have memorialized that intent in the Grant Agreement itself,
particularly in light of the fact that the Grant Agreement contains
an integration clause. See Luther Williams, Jr., Inc. v. Johnson,
229 A.2d 163, 165 (D.C. 1967) ("[I]t has always been presumed that
a written contract is the final repository of the agreement of
the parties. . . . [A]n integration clause merely strengthens this
presumption.") (internal citation omitted).
Plaintiffs argue that the two options in the reversion clause, "when
read together and with the balance of the Grant Agreement, signify
that the exercise of the reversion would be a nonprofit transaction."
See Pls.' Br. Regarding Reimbursement at 3. However, that is not a
natural construction of the plain language of the Grant Agreement. All
parties knew at the time they entered into the agreement that the
value of the Grant Property, which included the Bank Building and
the Adjacent Properties, would be potentially much greater than the
value of the Grant funds, which covered the purchase of the Adjacent
Properties and only about half the cost of the Bank Building (the
other half being covered by Anoush Mathevosian). Therefore, even at
the outset, the Grantor's choice was not between two options that
were equal in value. It is implausible that the parties would have
intended the options to be equal seven years later on the reversion
date of December 31, 2010, for this would effectively eliminate the
Grantor's right to elect the most valuable remedy.
It is even more inconceivable that the parties would have intended
for the transfer of the Grant Property to be a nonprofit transaction
without specifying any provisions for determining the value of
the Grant Property at the time of transfer. Valuing property in the
absence of an arms-length market transaction is inherently uncertain,
and the record at trial indicated that there were widely varying
appraisals of the properties depending on whether they would be used
to build a museum or sold to a commercial developer, with no definite
valuation. See Trial Tr. (11/16 PM) at 85-87; DX-513N. Any valuation
offered by the parties at this time would be speculative. Since the
Court has determined that there are no "strings" attached to CFF's
use of the properties once transferred, how would the Court decide
what method of valuation was appropriate to ensure that CFF did not
realize a profit? Such uncertainty over how to implement a "nonprofit"
transfer is a significant reason to assume that this was not what
the parties intended.
Plaintiffs argue that their interpretation of the options as equal
in value is supported by the limiting phrase in the reversion clause:
"to the degree any portion of the Grants has been funded. . . ." They
argue that this phrase must be read as limiting the Grantor's right of
reversion to the extent that the Grants have actually been funded, and
they argue that Defendants' construction "would allow the grantors to
take back the entire grant properties even if they had not fulfilled
their payment obligations under the pledge." Pl.'s Br. Regarding
Reimbursement at 7. But Plaintiffs overlook the fact that under the
Grant Agreement, the Grant funds had to be used to purchase the Grant
Property, meaning that if Cafesjian and CFF had not fulfilled their
pledges, AGM&M would never have acquired all of the properties that
now must be transferred. Therefore, there was never any risk that
Cafesjian and CFF would receive a windfall, for example, by paying
for the acquisition of only one of the Adjacent Properties and then
receiving all four of them under the reversion clause. Ultimately,
the Court is not persuaded that the phrase "to the degree any portion
of the Grants has been funded" places any restriction on the Grantor's
right to elect a transfer of the Grant Property, particularly where
the record demonstrates that Cafesjian and CFF have fulfilled their
obligations under the Grant Agreement.6 Plaintiffs also argue that
the requirement in § 3.3 of the Grant Agreement that the Grant
funds be used "only for purposes described in Section 501(c)(3) of
the Internal Revenue Code" supports their position. By its own terms,
this provision acts as a limitation only on the use of the Grant funds;
it says nothing about transferring the Grant Property. Even assuming
that § 3.3 applied to the transfer of the Grant Property, the general
language in § 3.3 cannot be fairly read to implicitly restrict the more
specific language contained in the reversion clause. Therefore, the
Court finds that § 3.3 does not impose any reimbursement requirement
on the transfer of the Grant Property.
Plaintiffs complain that without a reimbursement requirement, CFF
will be allowed to retain the benefit of the appreciated value of the
properties, Anoush Mathevosian's $3.5 million donation, and more than
seven years of carrying costs, taxes, and insurance that were paid
for the properties, with the result being that AGM&M is stripped of
nearly all its assets. Plaintiffs argue that the parties could not
have intended such an inequitable result. But this was a foreseeable
consequence at the time the parties entered into the agreement. The
reversion clause in the Grant Agreement was intended to create a
meaningful incentive for the parties to substantially complete the
museum project by December 31, 2010. Since the parties failed to
reach that milestone, Plaintiffs must live with the consequences of
their bargained-for agreement. The Court cannot reform the plain terms
of the Grant Agreement simply because Plaintiffs belatedly realized
how dire those consequences would be. 2007, and there was no other
evidence at trial suggesting that CFF and Cafesjian did not perform
their funding obligations under the Grant Agreement.
2. The AGM&M By-Laws and Articles of Incorporation Plaintiffs argue
that the Court should look beyond the four corners of the Grant
Agreement to the AGM&M By-Laws and Articles of Incorporation in
determining the meaning of the reversion clause. However, the Court
has no occasion to search beyond the text of the Grant Agreement
because the terms of the reversion clause are clear and unambiguous.
See 1010 Potomac Assocs., 485 A.2d at 205 ("Extrinsic evidence of the
parties' subjective intent may be resorted to only if the document is
ambiguous."). Although the Court may consider these documents as part
of the circumstances surrounding the formation of the Grant Agreement,
see id., the execution of these documents does not alter the Court's
interpretation of the Grant Agreement. Plaintiffs contend that the
adoption of the AGM&M Articles of Incorporation and By-Laws around the
same time as the Grant Agreement and Transfer Agreement demonstrates
that the parties intended for the private inurement restrictions
contained in the By-Laws and the Articles to apply to the Grant
Agreement. Again, however, the specific and direct language in the
reversion clause is the best evidence of the parties' intent. The
Court is not persuaded that the parties would have intended to
restrict the Grantor's reversion rights through more general language
contained in entirely separate documents. See Washington Automotive
Co. v. 1828 L Street Assocs., 906 A.2d 869, 880 (D.C. 2006) ("[It is]
a familiar principle of contract interpretation[] that `specific terms
and exact terms are given greater weight than general language.'")
(quoting Restatement (Second) of Contracts § 203(c) (1981)). The lack
of any explicit restriction on the transfer in the Grant Agreement
strongly suggests that the parties did not intend to subject the
transfer to any private inurement regulations.
Plaintiffs argue that the Court should not construe the reversion
clause in a manner that could result in adverse tax consequences
for AGM&M, suggesting that the parties would not have intended such
a result. However, there is no reason to assume that the parties
expected AGM&M to survive if the reversion clause was exercised; to
the contrary, it is reasonable to assume that the parties expected
the reversion of either the Grant funds or the Grant Property to be
the death knell for the organization. The parties in this litigation
created AGM&M for the express purpose of creating a museum and memorial
devoted to the Armenian Genocide on the site of the Bank Building
and the Adjacent Properties. Without those properties, it is unclear
how AGM&M could be expected to fulfill its mission and survive as an
organization. Therefore, the Court is not persuaded that the parties
intended to spare AGM&M from any adverse tax consequences that might
result from the transfer of the Grant Property.
Plaintiffs claim that construing the reversion clause as requiring
no reimbursement for appreciated value would create "a vehicle for
tax fraud" because it would allow wealthy donors to put cash into
a charity for the acquisition of real estate, wait for the value of
that real estate to increase over time, and then seek the return of
the appreciated real estate pursuant to some unmet condition, thereby
gaining the appreciated property without any consequence. See Pls.'
Br. Regarding Reimbursement at 7. It is unclear why Plaintiffs believe
there would be no tax consequences to the donor in this hypothetical,
and Plaintiffs cite no authority to explain their theory of this
"vehicle for tax fraud." In any event, the collection and recovery
of federal taxes is the sole responsibility of the United States
government; Plaintiffs cannot compel Defendants to comply with the tax
code through this litigation. See 26 U.S.C. § 7401 ("No civil action
for the collection or recovery of taxes, or of any fine, penalty, or
forfeiture, shall be commenced unless the Secretary [of the Treasury]
authorizes or sanctions the proceedings and the Attorney General or
his delegate directs that the action be commenced."). Furthermore,
the Court has no power to change the terms of the Grant Agreement
merely because enforcing the reversion clause can be expected to have
adverse tax consequences for the parties.
3. Tax Regulations Prohibiting Private Benefit Plaintiffs have
presented the Court with a rather complicated set of arguments as
to why they believe that allowing CFF to profit from the transfer
of the Grant Property will violate federal tax laws pertaining to
tax-exempt organizations. As the Court has explained, these arguments
are essentially irrelevant because the Grant Agreement clearly and
unambiguously requires AGM&M to transfer the properties without regard
to the tax consequences of the transfer. In any event, the Court is
not persuaded that the transfer of the properties to CFF violates
the tax laws as Plaintiffs claim.
Plaintiffs' central argument is that by transferring the
Grant Property to CFF, AGM&M will be violating regulations that
require § 501(c)(3) organizations to be operated exclusively for
tax-exempt purposes. Pursuant to 26 C.F.R. § 1.501(c)(3)-1(c)(2),
"[a]n organization is not operated exclusively for one or more
exempt purposes if its net earnings inure in whole or in part
to the benefit of private shareholders or individuals." A private
shareholder or individual is defined as a person having a personal and
private interest in the activities of the organization. 26 C.F.R. §
1.501(a)-1(c). The purpose of the inurement provision is "to prevent
the siphoning of charitable receipts to insiders of the charity."
United Cancer Council, Inc. v. Comm'r, 165 F.3d 1173, 1176 (7th Cir.
1999); see also I.R.S. Priv. Ltr. Rul. 201047033 (Nov. 3, 2010)
("Inurement is any transfer of charitable assets to the organization's
insiders for which the organization does not receive adequate
consideration. Inurement can take many forms.").
Defendants argue that there can be no violation of the inurement
provision because the property is being transferred to CFF, another
501(c)(3) organization which is neither a shareholder of AGM&M nor a
private individual. Because CFF itself must operate exclusively for
tax-exempt purposes, Defendants argue that there will be no "private"
benefit from the transfer of property that would frustrate the purposes
of § 501(c)(3). Plaintiffs do not directly respond to this argument in
their briefing, and they have cited no cases in which it was determined
that a 501(c)(3) organization was a private shareholder or individual
for purposes of the inurement provision. In fact, Plaintiffs' counsel
essentially conceded the point during a Status Hearing on February 24,
2011, noting that "by designating the actual acquiring entity as CFF,
that . . . avoids some of the limitations in the private inurement
law." 2/24/11 Hr'g Tr. at 16. Accordingly, the Court is not persuaded
that the transfer of the properties to CFF will violate the prohibition
on private inurement as stated in the federal tax laws and incorporated
into the By-Laws and Articles of Incorporation of AGM&M.7 Moreover,
based on a review of the substance of the transaction as a whole,
the Court is not persuaded that the transfer of the property under the
Grant Agreement qualifies as private inurement. Contrary to Plaintiffs'
characterization, this is not a case where a wealthy donor gave money
to an organization to buy property and then the corporation gave the
property back to the donor after it had substantially appreciated. This
is a case where a donor made a conditional gift of funds to be used
for a specific purpose, and after AGM&M was unable to fulfill the
required conditions, it was compelled to allow the donor to recover
the properties acquired with the gifted funds. Defendants rely heavily
on Underwood v. United States, 461 F.Supp. 1382 (N.D.
Tex. 1978), which also involved the return of a conditional gift. In
Underwood, the plaintiff had agreed to donate $1 million to the
Southern Methodist University School of Law through a charitable
foundation with the understanding that all of his donations would be
deductible for federal income tax purposes. See id. at 1384. After
the IRS disallowed some of Underwood's deductions to the charitable
foundation, Underwood reached an agreement with the foundation to
return his donations so that he could give the money directly to the
law school. Id. at 1385. The IRS determined that the return of funds
from the foundation amounted to self-dealing in violation of 26 U.S.C.
§ 4941, which imposes a tax on any act of self-dealing between a
private foundation and any "disqualified person" such as a substantial
contributor to the foundation. See 26 U.S.C. §§ 4941, 4946(a)(1).8
However, the Underwood court held that the return of funds by the
foundation was not an act of self-dealing because it was simply the
return of a conditional gift. 461 F. Supp. at 1389.
Underwood is distinguishable from this case, primarily because the
donor in that case received an exact refund of the amount he had
donated. By contrast, CFF is going to receive properties that were
purchased for $3.5 million more than CFF and Cafesjian donated to
acquire them (the amount of Mathevosian's contribution) and that may
or may not have appreciated in value since then. Therefore, it could
be argued that CFF will "profit" from the transfer of the properties.
However, pecuniary gain does not automatically equate to inurement;
the question is whether the profit is reasonable in light of the
benefits to AGM&M. Cf. Church By Mail, Inc. v. Comm'r, 765 F.2d 1387,
1392-93 (9th Cir. 1985) (noting that payment of excessive salaries
to employees may constitute inurement to the benefit of a private
person). The circumstances surrounding the Grant Agreement and the
formation of AGM&M demonstrate that the reversion clause was an
essential part of the bargain that enabled AGM&M to obtain the funds
necessary to acquire the properties. Cafesjian and CFF were unwilling
to donate additional millions of dollars to the genocide museum and
memorial project unless they could be reasonably assured that the
project would be substantially completed in a timely manner.
Therefore, they demanded a reversion clause that would enable them to
get control of the properties in case AGM&M was unsuccessful. This was
not a sham transaction for AGM&M to shelter assets for Cafesjian and
CFF; it was an agreement that gave AGM&M a financial incentive to be
successful with the money donated by Cafesjian and CFF. The Court has
already found that Cafesjian and the CFF-designated trustees of AGM&M
acted in good faith to try to develop the genocide museum and memorial
before the reversion date of December 31, 2010. In that regard, it
is unfair and without support to characterize the Grant Agreement as
an act of self-dealing or to state that AGM&M was operating for the
private benefit of Cafesjian or CFF.9 4. Implementing the Transfer
For all of the aforementioned reasons, the Court finds that the Grant
Agreement clearly and unambiguously requires AGM&M to transfer the
Grant Property to CFF without regard to any tax consequences that
flow therefrom. To date, AGM&M has failed to transfer the Grant
Property, citing concerns about the tax consequences of the transfer
and demanding that several restrictions be placed on the transfer.10
Now that the Court has addressed Plaintiffs' arguments relating to
the tax consequences of the transfer, there should be no reason for
further delaying the transfer of the properties. Defendants have asked
the Court to order the trustees of AGM&M to sign certain documents
prepared by Defendants to complete the transfer. The Court declines
at this time to order the trustees to sign the specific documents
drafted by Defendants' counsel. Instead, the Court shall order the
AGM&M trustees to transfer the property to CFF in accordance with
D.C. law by no later than May 23, 2011.
B. Findings of Fact and Conclusions of Law Regarding AGM&M's
Indemnification of Cafesjian and Waters The Court ruled in its prior
Memorandum Opinion that Defendants Cafesjian and Waters were entitled
to indemnification under § 4.1 of the AGM&M By-Laws for expenses
actually and necessarily incurred by them in defense of claims brought
against them by Plaintiffs. The indemnification requirement extends
only to claims that arose out of Cafesjian's or Waters's duties as
officers or directors of AGM&M, which are asserted in Count One of
the Consolidated Complaint.
Expenses relating to the Assembly's claims against Cafesjian and
Waters for breach of fiduciary duty or misappropriation of trade
secrets are not covered by the indemnification clause in the AGM&M
By-Laws. The Court previously indicated that it would determine the
amount of indemnification in post-trial proceedings. Cafesjian and
Waters have submitted a brief with supporting documentation that
sets forth the amount of their expenses. Plaintiffs have filed an
opposition contesting the reasonableness and validity of those
expenses, and Defendants have filed a reply. Plaintiffs raise a
series of objections to Defendants' request for indemnification,
and the Court shall address each below.
"[O]nce a contractual entitlement to attorney's fees has been
ascertained, the determination of a reasonable fee award is for the
trial court in light of the relevant circumstances." Ideal Electronic
Sec. Co. v. Int'l Fid. Ins. Co., 129 F.3d 143, 150 (D.C. Cir. 1997).
"[T]he reasonableness of an attorney's fees award is within the
sound discretion of the trial court and is reviewed only for abuse of
discretion." Id. The Court has discretion to determine the nature and
amount of proof necessary to determine reasonableness and may fix the
amount of the fee without hearing any evidence at all. FDIC v. Bender,
127 F.3d 58, 64 (D.C. Cir. 1997).
1. Self-Dealing Although they did not raise this argument before the
Court issued its Memorandum Opinion, Plaintiffs now contend that
indemnification is not required under the By-Laws because AGM&M
has been deemed a private foundation within the meaning of § 509
of the Internal Revenue Code and the payment of legal expenses to
Cafesjian and Waters would amount to an act of self-dealing under
§ 4941(d) of the Internal Revenue Code. See By-Laws § 4.3 ("[I]f
at any time the Corporation is deemed to be a private foundation
within the meaning of Section 509 of the Code then, during such
time, no payment shall be made under this Article if such payment
would constitute an act of self-dealing or a taxable expenditure,
as defined in Section 4941(d) or Section 4945(d), respectively, of
the Code."). Defendants dispute whether AGM&M has been "deemed to be
a private foundation," since there is no evidence that the IRS has
yet made such a determination. Plaintiffs have submitted financial
documents to the Court under seal purportedly showing that AGM&M
lost its status as a public charity in fiscal year 2010, when its
public support fraction dropped below the level required to maintain
public charity status. See [217] Pls.' Status Report to the Court at
3-5. However, there is no evidence before the Court indicating that
the IRS has made any determination that AGM&M qualifies as a private
foundation. Section 4.3 provides that indemnification shall not be
paid "during such time" that "the Corporation is deemed to be private
foundation," suggesting that until a determination is made by the IRS,
indemnification must be paid.
Even assuming that AGM&M is deemed a private foundation, however,
Treasury regulations provide that indemnification of former officers
does not amount to an act of self-dealing for purposes of § 4941(d).
Pursuant to 26 C.F.R. § 53.4941(d)-2(f)(3), section 4941(d)(1)
shall not apply to the indemnification by a private foundation of
a foundation manager, with respect to the manager's defense in any
civil judicial or civil administrative proceeding arising out of the
manager's performance of services (or failure to perform services)
on behalf of the foundation, against all expenses (other than taxes,
including taxes imposed by chapter 42, penalties, or expenses of
correction) including attorneys' fees, judgments and settlement
expenditures if~W (A) Such expenses are reasonably incurred by the
manager in connection with such proceeding; and (B) The manager has
not acted willfully and without reasonable cause with respect to the
act or failure to act which led to such proceeding or to liability
for tax under chapter 42.
Therefore, the By-Laws provision precluding payment of indemnification
where it constitutes self-dealing does not preclude the Court from
ordering AGM&M to pay Cafesjian and Waters for the reasonable expenses
they incurred in defending their claims.
2. Arbitration Plaintiffs next argue that the Court should reject
Defendants' request for indemnification because the legal expenses
associated with this litigation could have been avoided had Cafesjian
and Waters agreed to arbitrate this dispute. Plaintiffs had filed a
demand for arbitration with the American Arbitration Association on
September 13, 2007 relating to the first lawsuit filed by Cafesjian
and CFF against the Assembly in Minnesota. On October 10, 2007,
Cafesjian and Waters, inter alia, filed a lawsuit in Minnesota to
enjoin the arbitration.
The parties ultimately stipulated to the dismissal of that lawsuit in
September 2007. Therefore, Plaintiffs have long since abandoned any
attempt to compel arbitration of the issues contested in these actions,
and there is nothing in the arbitration provisions of the AGM&M By-Laws
that requires Cafesjian and Waters to agree to arbitration. Most
significantly, the indemnification provision in the AGM&M By-Laws does
not require Cafesjian or Waters to submit to arbitration. Accordingly,
there is no basis for concluding that Cafesjian's and Waters's legal
expenses are unreasonable or unnecessary based on their decision
to litigate in federal court. The Court also notes that Plaintiffs
did not include this argument in their proposed conclusions of law
or otherwise present this argument to the Court during the trial;
this is an independent reason for rejecting Plaintiffs' argument.
3. Expenses Incurred by CFF Plaintiffs next claim that CFF has
paid the legal expenses for this litigation on behalf of Cafesjian
and Waters, and since CFF is not subject to indemnification under
the AGM&M By-Laws, they claim that no indemnification is owed. In
response to Plaintiffs' claim, Defendants state that they have removed
any expenses paid by CFF from their request for indemnification,
leaving only expenses paid by Cafesjian.11 Defendants have produced a
declaration with supporting documentation demonstrating that Cafesjian
personally paid for the legal expenses that were not covered by
CFF. See Defs.' Reply in Support of Br. Quantifying Attorneys'
Fees for Indemnification, Ex. E (Suppl. Decl. of William G. Laxton,
Jr.). Accordingly, the Court shall consider only these expenses that
were incurred by Cafesjian in determining the amount of indemnification
required under the AGM&M By-Laws.
4. Identification of Expenses Subject to Indemnification Because the
scope of indemnification under the AGM&M By-Laws is limited to the
expenses incurred by Cafesjian and Waters in defending the claims
asserted against them as former officers and trustees of AGM&M,
Defendants must identify which expenses are related to these claims
and separate any expenses that they incurred asserting counterclaims
against Plaintiffs or defending against separate claims asserted by the
Assembly. In order to accomplish this task, Defendants have identified
three categories of expenses: (1) those that are clearly related to
the defense of claims asserted against Waters and Cafesjian in their
capacities as fiduciaries of AGM&M; (2) those that are clearly related
to other claims asserted in the litigation; and (3) those expenses
that cannot easily be separated between these two categories of claims
("blended expenses"). Defendants seek indemnity for the amount of
expenses in the first category and 67% of the blended expenses, based
on Defendants' estimate of the proportion of those expenses that
can be fairly attributed to the defense of claims that are subject
to indemnification. Plaintiffs do not take issue with Defendants'
decisions about which expenses belong in each category.
However, Plaintiffs argue that none of the blended expenses should
be awarded because they cannot clearly be linked to the claims that
must be indemnified. Alternatively, Plaintiffs argue that Defendants'
proposed percentage is too high and should be greatly reduced to 19%.
The parties have cited only a few cases to support their arguments
regarding the proper allocation of attorneys' fees, all of which
involve application of a fee-shifting statute rather than a contractual
indemnification clause. In Hensley v. Eckerhart, 461 U.S.
424 (1983), the Supreme Court addressed how fees should be awarded
to a prevailing party where the party prevailed on only some of the
claims asserted in the litigation. The Court noted that in such cases,
"[m]uch of counsel's time will be devoted generally to the litigation
as a whole, making it difficult to divide the hours expended on a
claim-by-claim basis," and therefore courts "should focus on the
significance of the overall relief obtained by the plaintiff in
relation to the hours reasonably expended on the litigation." 461 U.S.
at 435; accord Thomas v. Nat'l Football League Players Ass'n, 273
F.3d 1124, 1128-29 (D.C. Cir. 2001). The most analogous case cited
by the parties is Alpo Petfoods, Inc. v. Ralson Purina Co., No. Civ. A.
86-2728, 1991 WL 1292963 (D.D.C. Dec. 4, 1991), in which the court
awarded attorneys' fees that were limited to the costs of prosecuting
successful aspects of the prevailing party's case-in-chief. See
id. at *12-13. In that case, the party seeking an award undertook
a three-step methodology to calculate the time attributable to its
successful counterclaim: first, it excluded time clearly unrelated to
the successful claim; then, it segregated the remaining legal fees
into various subject matter categories based on the nature of the
relationship to the successful claim; and finally it estimated the
percentage of time in each category that could fairly be attributed to
a successful result. Id. at *12. The court accepted this methodology
as a valid means of proving the amount of fees that should be awarded.
Id.
These cases are somewhat in tension with the D.C. Court of Appeals's
decision in Safeway Stores, Inc. v. Chamberlain Protective Services,
Inc., 451 A.2d 66 (D.C. 1982). In that case, the court affirmed the
denial of attorneys' fees and expenses to a party where the court
determined that it was impossible to allocate the fees and expenses
among three claims, only one of which was subject to indemnity. Id. at
72-73. However, in that case, the party's right to indemnification
was based on the limited exception to the American Rule that allows a
party wrongfully involved in litigation with a third party to recover
the expenses of such litigation from the wrongdoer. See id. at 68-69.
It is therefore unclear whether Safeway Stores controls beyond its core
holding that "an indemnitee may be denied recovery of attorney's fees
from his codefendant indemnitor where the fees incurred in establishing
his right to indemnity are considered inseparable from those incurred
in defending the alleged negligence." Id. at 73.
The Court finds that it is unnecessary to resolve this issue at
this time because Defendants may be able to break down many of their
"blended" expenses in a manner that more clearly identifies whether
the costs incurred or the work performed were actually related to
the claims subject to indemnification. Moreover, beyond criticizing
Defendants' approach to calculating a percentage for the blended
expenses, Plaintiffs also contend that many of the expenses claimed
by Defendants are unreasonable. Plaintiffs complain that Defendants'
legal bills are bloated by excessive time devoted to ordinary tasks,
appearances by multiple attorneys where only one was necessary, and
other unnecessary expenses. In order to expedite resolution of these
disputes over the necessity of particular expenses, the Court shall
refer this issue to a magistrate judge for a report and recommendation
pursuant to Federal Rule of Civil Procedure 72(b) and Local Civil Rule
72.3(a). The magistrate judge may review Defendants' categorization of
"blended" expenses and determine whether there is a more appropriate
methodology for separating which expenses should be indemnified and
which should not. The magistrate judge may also review Plaintiffs'
objections to particular expenses and make decisions about which
expenses were "actually and necessarily incurred" within the meaning
of the indemnification provision of the AGM&M By-Laws. Upon review
of the magistrate judge's report and recommendation, the Court shall
determine, if necessary, whether Defendants' proposed blended expenses
approach is appropriate and what percentage should be applied to
those expenses.
C. Defendants' Motion for Attorneys' Fees for Vexatious Litigation
Apart from their claim for indemnification, Defendants have filed a
[221] Motion Requesting Attorneys' Fees for Vexatious Litigation.
Defendants argue that the Court should award attorneys' fees under
its inherent authority to sanction parties for vexatious conduct or,
alternatively, under 28 U.S.C. § 1927, which provides that "[a]ny
attorney or other person . . . who so multiplies the proceedings
in any case unreasonably and vexatiously may be required to satisfy
personally the excess costs, expenses, and attorneys' fees reasonably
incurred because of such conduct." Defendants contend that they should
be awarded attorneys' fees based on: (1) Plaintiffs' pursuit of a
claim for equitable disgorgement of Cafesjian's investments in Armenia
that was ultimately withdrawn before trial; (2) Plaintiffs' refusal
to disclose its theories of damages during discovery; (3) Plaintiffs'
use of allegedly obstructive tactics during discovery; (4) Plaintiffs'
filing unnecessary motions in the course of the litigation; and (5)
Plaintiffs' failure to produce a substantial number of documents until
the eve of trial. Plaintiffs have filed an opposition to Defendants'
motion, and Plaintiffs' trial counsel, K&L Gates LLP, have intervened
for the purpose of filing an opposition to Defendants' motion.
Defendants have responded to both of these oppositions, and the motion
is now ripe for adjudication.
Although the American Rule generally provides that each party must
bears its own legal costs, the federal courts have inherent power
to assess attorneys' fees when a party has "acted in bad faith,
vexatiously, wantonly, or for oppressive reasons." Chambers v. NASCO,
Inc., 501 U.S. 32, 45-46 (1991) (quoting Alyeska Pipeline Serv. Co. v.
Wilderness Soc'y, 421 U.S. 240, 258-59 (1975)). "As old as the
judiciary itself, the inherent power enables courts to protect their
institutional integrity and to guard against abuses of the judicial
process with contempt citations, fines, awards of attorneys' fees, and
such other orders and sanctions as they find necessary." Shepherd v.
Am. Broad. Cos., 62 F.3d 1469, 1472 (D.C. Cir. 1995). To support
a sanction under this inherent authority, "the court must make a
finding by clear and convincing evidence that [the [sanctioned party]
committed sanctionable misconduct that is tantamount to bad faith."
Ali v. Tolbert, ___ F.3d ____, 2011 WL 691364, at *5 (D.C. Cir. Mar.
1, 2011).
The Court may also award attorneys' fees based on vexatious conduct
pursuant to 28 U.S.C. § 1927. The purpose of § 1927 is to allow the
Court "to assess attorney's fees against an attorney who frustrates
the progress of judicial proceedings." United States v. Wallace,
964 F.2d 1214, 1218 (D.C. Cir. 1992). Before imposing sanctions on an
attorney, the Court must evaluate whether the attorney's conduct was
"at least reckless[.]" Id. at 1217. Recklessness is a "high threshold
. . . and in general requires deliberate action in the face of a
known risk, the likelihood or impact of which the actor inexcusably
ignores." Id. at 1219-20. "The power to assess costs on the attorney
involved is a power which the courts should exercise only in instances
of serious and studied disregard for the orderly process of justice."
Id. at 1220 (quotation marks and citations omitted). "[U]nintended,
inadvertent, and negligent acts will not support an imposition of
sanctions under section 1927." Id. at 1219 (quoting Cruz v. Savage,
896 F.2d 626, 631 (1st Cir. 1990)).
The Court notes at the outset that the majority of Defendants'
requests for fees relate to disputes that arose in the course
of discovery over what evidence should be produced in relation to
particular claims asserted by Plaintiffs. The Federal Rules of Civil
Procedure provide a mechanism for awarding expenses to parties who
incur expenses as a result of unnecessary discovery, and that is the
preferred approach for awarding expenses as a result of misconduct
during discovery. See Fed. R. Civ. P. 26(c)(3) & 37(a)(5). Defendants
did not seek expenses during the course of discovery, and Defendants
do not rely on the Federal Rules in asking the Court to award fees
for vexatious litigation.
1. Plaintiffs' Pursuit of a Claim for Disgorgement of Cafesjian's
Investments Defendants argue that they should be awarded the fees
they incurred in defending a claim asserted by the Assembly for
disgorgement of Cafesjian's business interests based on his failure
to disclose those interests to the Assembly under its conflicts
of interest policy. The Assembly did not explicitly assert such a
claim in its original complaint in Civil Action No. 08-255. However,
the Assembly did pursue discovery based on a disgorgement theory of
damages in connection with its claims for breach of fiduciary duty
and violation of the conflicts of interest policy. Defendants refused
to respond to the Assembly's requests for discovery on relevancy
grounds, and the Court denied the Assembly's motion to compel this
discovery. The Assembly ultimately dropped this claim prior to
trial. Defendants complain that they were forced to investigate the
Assembly's disgorgement theory and devote resources to defeating it
during the course of the litigation.
Defendants essentially argue that the disgorgement claim was frivolous
and that Plaintiffs were asserting it for the improper purpose of
harassing Cafesjian with improper discovery requests.
Although the legal basis for the Assembly's disgorgement claim has
never been clear to the Court and the claim was ultimately dropped as
lacking merit, the Court is not persuaded that Plaintiffs' pursuit
of that theory demonstrates recklessness or bad faith. It is often
the case that the contours of a party's claims evolve throughout the
discovery process, particularly with respect to damages and remedies.
The fact that Plaintiffs propounded overbroad discovery requests
related to this claim does not warrant imposition of sanctions
for vexatious litigation, even though it may have been sufficient
to justify an award of expenses under Rule 26(c) if Defendants
had moved for a protective order. See Fed. R. Civ. P. 26(c)(3) &
37(a)(5) (providing that expenses may be awarded if a motion for
protective order is granted). The fact that Defendants did not move
for discovery sanctions suggests that Plaintiffs' efforts to pursue
their disgorgement claim were not more vexatious than their pursuit
of other claims that were ultimately found to be meritless. In fact,
the record shows that Plaintiffs' attempts to litigate a disgorgement
claim were limited to identifying disgorgement as a potential remedy
in their answers to interrogatories, requesting discovery relating
to Cafesjian's business interests (which the Court denied), and
asserting this argument during the deposition of Edele Hovnanian. While
Defendants complain that they were forced to conduct legal research
to determine the viability of Plaintiffs' theory, that is part of the
ordinary costs of civil litigation. Accordingly, the Court declines
to exercise its discretion to award legal expenses to Defendants
based on Plaintiffs' attempts to pursue a disgorgement claim.
2. Plaintiffs' Failure to Disclose Theories of Damages During
Discovery Defendants contend that they should be awarded expenses
as a result of Plaintiffs' failure to disclose various theories of
damages during discovery. The Court previously granted Defendants'
motion to strike any theories of damages that were not sufficiently
disclosed during discovery. See Pretrial Conference Mem. Op. &
Order (Oct. 22, 2010) at 13-27. However, Defendants ask for the
additional sanction of attorneys' fees, arguing that Plaintiffs
vexatiously avoided their obligations to disclose their theories
of damages. Defendants rely on the fact that Plaintiffs failed to
provide a computation of their damages at the outset of discovery as
required by Rule 26(a)(1)(A)(iii), instructed Dr. Rouben Adalian not
to answer questions relating to damages during his deposition, and
provided incomplete or vague responses to Defendants' interrogatories
about damages. Defendants also rely on the fact that Plaintiffs'
Rule 30(b)(6) witness, Van Krikorian, was unable to answer questions
relating to the calculation of damages during his deposition.
Krikorian testified during that deposition that Plaintiffs would
produce an expert witness to address the subject of damages, but
Plaintiffs never designated any expert witnesses.
It is clear from the record that Plaintiffs were less than forthcoming
about their theories of damages during discovery, and that is the
basis upon which the Court granted Defendants' motion to strike
those claims. However, the Court is not persuaded that Plaintiffs'
conduct amounts to recklessness or bad faith sufficient to justify a
sanction under § 1927 or the Court's inherent authority. The record
indicates that Plaintiffs did supplement their disclosures with
estimates of their damages, and it appears that they may have had a
good faith basis for asserting those claims at the time. Ultimately,
Plaintiffs were unable to come up with evidence in support of those
claims, and therefore they were unable to give satisfactory responses
to Defendants' discovery demands. The Court is not convinced that
Plaintiffs were acting vexatiously by asserting their damages claims
during discovery and then being caught without evidence to support
them. Therefore, the Court finds that its pretrial sanction precluding
Plaintiffs from proceeding based on undisclosed damages was sufficient,
and it declines to award attorneys' fees based on this conduct.
3. Plaintiffs' Alleged Gamesmanship During Discovery Defendants next
argue that they should be awarded fees as a result of what they call
"unnecessary discovery and obstructive tactics" by Plaintiffs relating
to two depositions taken during discovery. First, Defendants complain
about the fact that Plaintiffs' counsel instructed Adalian not to
answer questions about damages during his deposition, since this was
not a proper instruction. See Fed. R. Civ. P. 30(c)(2) ("A person may
instruct a deponent not to answer only when necessary to preserve
a privilege, to enforce a limitation ordered by the court, or to
present a motion under Rule 30(d)(3).") Second, Defendants complain
about the fact that two days prior to Anoush Mathevosian's scheduled
deposition, Plaintiffs filed an emergency motion for a protective
order to proceed with the deposition by written questions in lieu of
an oral examination pursuant to Rule 31. Although Plaintiffs based
their motion on Mathevosian's poor health, Defendants argue that
it was made for purely strategic reasons because Plaintiffs needed
additional time to prepare Mathevosian to testify regarding the May 7,
2007 meeting of the AGM&M Board of Trustees.
With respect to deposition of Adalian, the Court granted Defendants'
motion to compel his testimony on the subject of damages. See [59]
Order (May 7, 2009). Plaintiffs' counsel had instructed Adalian not
to answer questions about damages because a Rule 30(b)(6) witness
was being designated for that purpose. During a telephone conference
on the record with the Court, Plaintiffs' counsel agreed that this
was an inappropriate basis upon which to instruct Adalian not to
answer questions. Accordingly, the Court ordered that Dr. Adalian's
deposition be continued so that Defendants could ask him questions
relating to damages. Defendants did not request any sanctions at the
time, and the Court did not award any sanctions.
With respect to the deposition of Mathevosian, the Court denied
Plaintiffs' emergency motion to proceed upon written questions rather
than by oral examination. See [64] Order (June 23, 2009). The Court
held that Defendants had established that it was important to depose
her and that Plaintiffs had not substantiated their claims that she
was too ill to be deposed. Defendants ultimately deposed Mathevosian
at her home, and the videotape of that deposition was presented to
the Court as part of the record at trial. It is apparent from that
video that she was in poor health, and given the limited scope of the
questioning from Defendants during that deposition, it was reasonable
for Plaintiffs to ask the Court to limit the method of questioning.
Defendants have seized upon these two incidents during discovery
as evidence of Plaintiffs' vexatiousness. However, the Court is not
persuaded that Plaintiffs' counsel acted recklessly or in bad faith
in taking these actions. Accordingly, the Court declines to award a
sanction of attorneys' fees based on this conduct.
4. Unnecessary Motions Practice Defendants next argue that they should
be awarded expenses because Plaintiffs filed several unnecessary
"motions" during the course of the litigation. First, Defendants
complain about a request for entry of default that was filed 35
days after Defendants failed to file an answer to Plaintiffs' Second
Amended Complaint in Civil Action No.
07-1259. The Court denied Plaintiffs' request for entry of default,
agreeing with Defendants that default was inappropriate in light of
their participation in the lawsuit and the related actions pending
before the Court. Defendants argue that Plaintiffs filed their request
only for the purpose of delay and harassment, but they concede that
Plaintiffs' action was allowed by Rule 55. The Court declines to
sanction Plaintiffs for taking an action that is explicitly authorized
by the Federal Rules of Civil Procedure.
Defendants next complain about Plaintiffs' reference to Rule 11 in
a footnote of their reply brief in support of summary judgment. See
[79] Pls.' Reply Mem. at 5 n.5. In that footnote, Plaintiffs suggested
that Defendants had improperly cited Delaware case law and secondary
sources in support of their breach of fiduciary duty claims. With leave
of the Court, Defendants filed a surreply to respond to Plaintiffs'
suggestion. See [82] Defs.' Surreply. The Court agrees with Defendants
that the reference to Rule 11 was unnecessary, but Defendants also
did not need to file a surreply to respond to Plaintiffs' footnote.12
The Court shall not sanction Plaintiffs for asserting a legal argument
that Defendants' cited sources are not controlling authority.
Finally, Defendants complain about a motion filed by Plaintiffs
on the eve of trial asking Defendants to certify that they had
complied with certain discovery obligations. See [152] Pls.' Mot. for
Order Requiring Defs.' Confirmation of Compliance with Discovery
Obligations. Plaintiffs were seeking confirmation that Defendants
had searched all of Cafesjian's email addresses for discoverable
information in light of new evidence of additional email accounts
that surfaced before trial. Defendants argue that Plaintiffs' motion
was unnecessary and vexatious because the parties were engaged in
discussion about producing any outstanding materials before trial. The
Court ultimately denied the motion without prejudice after the parties
appeared to have resolved the dispute through negotiation. While
Plaintiffs should have been able to resolve their disagreement with
Defendants before filing a motion with the Court, the Court does
not find that Plaintiffs' motion was vexatious. The parties had
legitimate disputes about last-minute discovery obligations, and
Plaintiffs' decision to file a motion with the Court was not clearly
inappropriate. Therefore, the Court shall not sanction Plaintiffs
based on this conduct.
5. Production of Documents on the Eve of Trial Defendants' final
request for attorneys' fees is based on the fact that Plaintiffs
produced a large number of documents~Wsome 12,000 pages of emails~Wless
than two weeks before the start of the trial.
Plaintiffs' late production is troubling because these emails~Wmany
of which were ultimately used by Defendants as important exhibits
at trial~Wshould have been produced prior to the close of discovery
pursuant to the Court's scheduling order and prior rulings relating
to the consolidated discovery in these actions. By producing these
documents on the eve of trial, Plaintiffs forced Defendants to spend
a significant amount of time and resources reviewing these materials
instead of preparing their witnesses, rehearsing their arguments,
and otherwise preparing for a lengthy bench trial. Ultimately, it is
unclear what impact Plaintiffs' late production had on Defendants'
ability to prepare for trial. Defendants did not ask for a continuance
based on Plaintiffs' late production, but it was not in Defendants'
interest to delay the trial, so the Court cannot assume that Defendants
were not prejudiced by the untimely disclosures.
Based on the damning contents of many of the documents, Defendants
speculate that Plaintiffs acted in bad faith and abused the discovery
process by waiting until before trial to produce them. Plaintiffs
indicated to the Court that a computer problem had inadvertently
caused these documents to be omitted from its prior production of
documents during discovery. See [170] Pls.' Resp. to Defs.' Mot. to
Amend the Joint Pretrial Stmt. at 2. Plaintiffs' former counsel has
presented the Court with a declaration indicating that he was unaware
until October 2010 that additional emails existed that had not been
produced. See Decl. of Arnold E. Rosenfeld ¶ 11. While the Court
is willing to accept the declaration of Plaintiffs' former counsel
as an officer of the Court that documents were not deliberately
withheld until the eve of trial by legal counsel, it is unclear
whether Plaintiffs acted recklessly or otherwise breached their
obligation to timely supplement their discovery responses. Therefore,
the Court shall require Plaintiffs to provide the Court with a more
specific explanation as to why they did not produce these documents
during discovery. The Court may order payment of reasonable expenses
caused by Plaintiffs' untimely production pursuant to Rule 26(c)(1)
if the Court is not satisfied with Plaintiffs' response. The Court
shall hold in abeyance Defendants' motion for attorneys' fees with
respect to the untimely production of these documents.
D. Defendants' Petition for Involuntarily Dissolution On February 16,
2011, Defendants filed a [198] Petition for Involuntary Dissolution
asking this Court to begin the involuntarily dissolution of AGM&M
pursuant to the procedures in the District of Columbia Nonprofit
Corporation Act, D.C. Code §§ 29-301.01 to 301.114.
Pursuant to D.C. Code § 29-301.55, the Act provides in pertinent part:
The court shall have full power to liquidate the assets and affairs
of a corporation: (1) In any action by a member or director when it is
made to appear: (A) That the directors are deadlocked in the management
of the corporate affairs and that irreparable injury to the corporation
is being suffered or is threatened by reason thereof, and either that
the members are unable to break the deadlock or there are no members
having voting rights; (B) That the acts of the directors or those in
control of the corporation are illegal, oppressive, or fraudulent;
(C) That the corporate assets are being misapplied or wasted; or (D)
That the corporation is unable to carry out its purposes[.] D.C. Code
§ 29-301.55(a). The Nonprofit Corporation Act sets out specific
procedures for liquidation proceedings. See id. §§ 29-301.55 to 301.60.
As the Court explained in a Memorandum Opinion and Order issued on
February 17, 2011, following passage of the District of Columbia Court
Reform and Criminal Procedure Act, Pub. L. No. 91-358, 84 Stat. 473
(1970), all powers over nonprofit corporation liquidation are vested
in the Superior Court of the District of Columbia. See [202] Mem. Op.
& Order at 5-6. The Court suggested, however, that it might be
appropriate to exercise supplemental jurisdiction over Defendants'
petition for involuntary dissolution, and the Court asked the parties
to submit briefing on this issue. Defendants filed a response to the
Court's order addressing the issue of jurisdiction, and Plaintiffs
have filed an opposition to Defendants' petition, to which Defendants
filed a reply. Therefore, the issue is ripe for the Court's resolution.
The supplemental jurisdiction statute, 28 U.S.C. § 1367, provides
that "the district courts shall have supplemental jurisdiction over
all other claims that are so related to claims in the action within
[the courts'] original jurisdiction that they form part of the
same case or controversy under Article III of the United States
Constitution." 28 U.S.C. § 1367(a). However, the statute provides
that a court may decline to exercise supplemental jurisdiction where
(1) the claim raises a novel or complex issue of state law; (2)
the claim substantially predominates over the claim or claims over
which the district court has original jurisdiction; (3) the court has
dismissed all claims over which it has original jurisdiction; or (4)
in exceptional circumstances, there are other compelling reasons for
declining jurisdiction. Id. § 1367(c).
Many federal courts have recognized that claims for corporate
dissolution involve special state interests that may be disrupted or
frustrated by the exercise of federal jurisdiction, and the existence
of state procedures for dissolution may require federal courts to
abstain from exercising jurisdiction. See, e.g., Pennsylvania v.
Williams, 294 U.S. 176, 185 (1935) ("It has long been accepted practice
for the federal courts to relinquish their jurisdiction in favor of
the state courts, where its exercise would involve control of or
interference with the internal affairs of a domestic corporation
of the state."); Caudill v. Eubanks Farms, Inc., 301 F.3d 658,
661-65 (6th Cir. 2002) (affirming district court's abstention from
jurisdiction over corporate dissolution claim under Burford v. Sun Oil
Co., 319 U.S. 315 (1943)); Friedman v. Revenue Mgmt. of N.Y., Inc.,
38 F.3d 668, 671 (2d Cir. 1994) (recognizing that the comprehensive
regulation of corporate governance and existence by the state may
warrant abstention under Burford); In re English Seafood (USA) Inc.,
743 F.Supp. 281, 288-89 (D. Del. 1990) ("We find that abstention is
required in this case. The state of Delaware has a strong interest
in the formation and termination of corporations under its laws and
in the uniform development and application of the statutory scheme
that the state legislature and courts have created to regulate those
corporations."); see also Kermanshah v. Kermanshah, 580 F.Supp.2d 247,
271 (S.D.N.Y. 2008) (citing cases). Although there is some question
whether similar principles should apply to the District of Columbia,
see Silverman v. Barry, 727 F.2d 1121, 1123 n.4 (D.C. Cir. 1984),
there is some basis for considering the Superior Court's expertise in
resolving these local issues, see Handy v. Shaw, Bransford, Veilleux &
Roth, 325 F.3d 346, 351-52 (D.C. Cir. 2003). Accordingly, the Court is
reluctant to assert jurisdiction over a matter that is nearly always
handled exclusively by the local courts of the District of Columbia.
Defendants argue that the Court should exercise supplemental
jurisdiction over the petition because the Court has already invested
a substantial amount of time in this litigation and is familiar with
the problems facing AGM&M. However, while the Court may be familiar
with some of the facts that are relevant to Defendants' petition,
Defendants did not assert this claim for relief in their Streamlined
Counterclaims or any of their pretrial briefs, and this claim was not
litigated by the parties at trial.13 Resolution of Defendants' petition
would require additional findings of fact by the Court following "a
hearing had upon such notice as the court may direct to be given to
all parties to the proceedings and to any other parties in interest
designated by the court."14 D.C. Code § 29-301.56(b). Such proceedings
would likely occur after the Court has finally disposed of the parties'
original claims, which is an additional reason to decline the exercise
of supplemental jurisdiction. See 28 U.S.C. § 1367(c)(3).
It is one thing to have the Court exercise supplemental jurisdiction
over a claim in the interest of judicial economy; it is another
thing entirely to seek to extend the Court's jurisdiction by adding
a completely new claim after the trial has been held.
For the foregoing reasons, the Court declines to exercise supplemental
jurisdiction over Defendants' [198] Petition for Involuntary
Dissolution. Defendants should seek appropriate relief from the
Superior Court for the District of Columbia.
E. Defendants' Motion for Order to Show Cause as to Why Plaintiffs
Should Not Be Held in Comtempt On March 21, 2011, Defendants filed a
[214] Request for Order to Show Cause as to Why Plaintiffs Should Not
Be Held in Contempt. Defendants contend that Plaintiffs have violated
one of this Court's orders by relocating certain materials maintained
by the Armenian National Institute ("ANI") off the premises of the
Families U.S.A. building.
Plaintiffs do not dispute that ANI has moved its materials out of the
Families U.S.A. building, but they contend that they should not be
held in contempt because ANI is a separate legal entity that is not a
party to this litigation and the Court did not expressly order it to
keep its belongings in the Families U.S.A. building. The Court agrees
with Plaintiffs that there is no basis for finding them in contempt.
Following the completion of closing arguments at trial, the Court asked
the parties if they would agree not to take any actions with respect
to the properties pending the Court's ruling. Because the reversion
date of December 31, 2010 was approaching soon after trial, the Court
wanted assurances that the parties would not attempt to enforce the
Grant Agreement or change the status quo while the Court was in the
process of deciding the case. Plaintiffs agreed that they would wait
until the Court's ruling before taking action. Defendants also agreed
that they would not take any actions with respect to the buildings,
but they raised a concern about "the ANI situation," referring to
the materials being stored in the Families U.S.A.
building and the staff working there. See Trial Tr. (11/29) at 168. In
response, the Court stated: I would hope that while we await my
decisions that nothing happens to them or they get moved or anything
else. I'd prefer not to enter an order because I'm sure~Wunless you
can reach an agreement about what both sides need to do. If you can
reach some stipulation or some sort of consent order, I'd be happy
to sign something until I make a decision.
Id. at 168-69. Defendants complained about the lack of an enforcement
mechanism and asked for a right of inspection. See id. at 170-71. The
Court then inquired as to whether there was inventory of the materials
kept by ANI, and Plaintiffs' counsel informed the Court (after
conferring with Dr. Rouben Adalian, who was present in the courtroom),
that there was not a precise inventory. Id. at 171. Plaintiffs'
counsel told the Court that nothing had happened to the materials for
a long time since the litigation began, and Plaintiffs agreed that
nothing should happen to them pending the Court's decision. The Court
then told the parties several times that they should try to reach an
agreement about this issue before asking the Court to enter an order:
Let me make the suggestion, in order to enter some sort of order you
either have to agree to it or you need to file something in terms of
what my authority would be. ANI, technically, is not a party, although
they are under you, it's under the umbrella of [AGM&M], I'd have to
take a look at that more carefully. So, I'm just saying that this is
not something I would do off the top of my head. If you can reach
some agreement that just simply says nothing gets moved by anybody
that relates to this until I make this decision, that would be helpful.
Once I make a decision, I will bring you back to have some discussion
further.
. . .
[I]f you can agree to something, that would be most helpful. Just
leave everybody with nobody moving or doing anything, that would be
helpful. If you can't do that and you still feel strongly, then file
something and then I'll take a look at it. I prefer not to put my
resources into that. But why don't you have a discussion about it.
. . .
As I said, I would prefer that you have discussion about it, see if
you can resolve something. If you want me to sign something, fine.
Reach a stipulation, however you want to do it. If you can't, then
you need to file something. I'm not going to do it today without your
filing something in writing.
. . .
[W]hat I'm asking is nobody move anything. I mean, in other words,
we've been~Wyou've been on pause while we've been waiting for this
for at least~Wat least for a couple of years at the end [of the]
year. So, don't change anything. I mean, you can accept new donations,
but don't move the property or make changes to the thing. To the extent
that you want to put something~Wstipulate that nobody~Weither side is
going to do anything, then that would be helpful. But I'll do this
as fast as I can. But if you're not satisfied, then file something
in writing and I'll litigate it. But I would suggest that you talk
and see whether you can do it on a more amicable basis.
Id. at 171-75. The parties did not present any stipulation or agreement
to the Court for ratification, nor did the parties file any motions
asking the Court to enter an Order.
Defendants argue that the removal of the ANI materials from the
Families U.S.A. building, which apparently occurred after the Court
issued its Memorandum Opinion on January 26, 2011, violated the Court's
oral admonition that "nobody move anything." However, as should have
been clear from the context, the Court's statement was not intended to
constitute a binding order on ANI.15 Even if the Court had intended to
impose a binding obligation, ANI's actions would not justify a finding
of contempt. The record presented by Plaintiffs demonstrates that ANI
waited until after the Court issued its January 26, 2011 Memorandum
Opinion before moving its materials to an offsite storage facility,
where they remain under the supervision of Dr.
Adalian. See Decl. of Dr. Rouben Adalian ¶¶ 3-6, 11, 14. Therefore,
there is no basis to conclude that ANI's assets have been wasted.
For these reasons, the Court finds that there is no basis for holding
Plaintiffs in contempt, and the Court shall deny Defendants' request
for a show cause order.
III. CONCLUSION For the foregoing reasons, the Court finds that the
Grant Agreement clearly and unambiguously requires AGM&M to transfer
the Bank Building and the Adjacent Properties to CFF without any
reimbursement requirement and without regard to any tax consequences
that might result from the transfer. Therefore, the Court shall order
AGM&M to effect the transfer of the properties without further delay
in compliance with D.C. law. The Court reaffirms its ruling that
Cafesjian and Waters are entitled to indemnification from AGM&M for
their attorneys' fees in defending the claims asserted against them
for breaching their fiduciary duty to AGM&M, but the Court shall refer
this issue to a magistrate judge for a report and recommendation. The
magistrate judge shall review the expenses submitted by Defendants
and make recommendations as to which of the claimed expenses should
be subject to indemnification; the Court shall review the magistrate
judge's report and recommendation and make a final ruling as to the
amount of the indemnification. The Court shall also deny-in-part
Defendants' [221] Motion Requesting Attorneys' Fees for Vexatious
Litigation because Defendants have mostly failed to demonstrate that
Plaintiffs or their counsel acted recklessly or in bad faith. However,
the Court shall hold in abeyance Defendants' motion with respect to
Plaintiffs' untimely production of documents on the eve of trial and
require Plaintiffs to more clearly explain why they did not produce
these documents during discovery.
The Court shall decline to exercise supplemental jurisdiction over
Defendants' [198] Petition for Involuntary Dissolution of AGM&M,
as this is a new claim asserted after trial that is best left to be
adjudicated by the Superior Court of the District of Columbia.
Finally, the Court shall deny Defendants' [214] Request for Order
to Show Cause as to Why Plaintiffs Should Not Be Held In Contempt
because Defendants have not shown that Plaintiffs violated one of
this Court's orders.
Because the Court has now finally disposed of all the parties'
claims except for determining the amount of indemnification, the
Court shall direct entry of final judgment pursuant to Rule 54(b)
as to all claims except for Defendants' claim for legal fees and
expenses under the indemnification provision of the AGM&M By-Laws
(Count VII of their Streamlined Counterclaims). An appropriate Order
accompanies this Memorandum Opinion.
--------------------------------------------------------------------------------
Footnotes
--------------------------------------------------------------------------------
1. As the Court has previously noted, the use of the term "genocide"
to describe the atrocities that befell the Armenians between 1915 and
1923 is not without controversy. The Court employs the term used as
by the parties, and the Court expresses no opinion on the propriety
of that label.
Back to Reference 2. All docket numbers refer to Civil Action
No. 08-255.
Back to Reference 3. In a Status Report filed on May 5, 2011,
Defendants indicated that all payments had been made under the
installment agreement and that title had been transferred to CFF.
Back to Reference 4. A duplicate copy of this exhibit with some
handwriting on the second page was admitted as PX-112.
Back to Reference 5. As used in this context, "AGM&M" refers to the
museum project, not the corporate entity.
Back to Reference 6. The record at trial indicated that the Assembly,
acting on behalf of AGM&M, refused to cash CFF's check for its annual
payment of $150,000 for the 1340 G Street property in 2007. The
Court found that although the payment was made a few days late, there
was no reason that the Assembly could not have cashed the check and
credited CFF with the payment. Accordingly, the Court finds that CFF
and Cafesjian satisfied their obligation to make the annual payment
in Back to Reference 7. Plaintiffs suggested during the February 24,
2011 Status Hearing that because the Grant Agreement defines the
"Grantor" as Cafesjian and CFF, there must be a private benefit to
Cafesjian. However, Cafesjian has relinquished his right to receive
the property in favor of CFF, and Plaintiffs have not demonstrated
how Cafesjian will benefit from the transfer.
Back to Reference 8. Plaintiffs argue that AGM&M is now a private
foundation and therefore may be subject to this tax if it transfers
the Grant Property to CFF. As explained below, the Court does
not believe that the transfer can be characterized as an act of
self-dealing within the meaning of § 4941. Furthermore, Plaintiffs
assume without discussion that CFF falls within the definition of
"disqualified person" under the statute, but this is not clear.
Back to Reference 9. Plaintiffs erroneously claim that Cafesjian was
entitled to four votes on the AGM&M Board of Trustees by virtue of
his pledge of more than $15 million. See Pls.' Reimbursement Br. at
14. At most, Cafesjian would have been entitled to three votes under
the AGM&M By-Laws. However, because of the 80% vote requirement,
Cafesjian would have had veto power over the Board's decisions
even if he were only recognized as having one vote. In any event,
the Court has already rejected Plaintiffs' argument that Cafesjian
acted in bad faith through his management of AGM&M.
Back to Reference 10. Among the conditions that the AGM&M trustees seek
to impose is an agreement that CFF will forfeit the Grant Property
to the Assembly if a permanent museum and memorial devoted to the
Armenian Genocide is not constructed within five years. See [212]
Pls.' Status Report at 4.
Back to Reference 11. Waters testified at trial that he had not paid
for any legal expenses. See Trial Tr. (11/15 AM) at 36-37.
Back to Reference 12. Plaintiffs did not file a motion for sanctions
under Rule 11, and the Court did not construe Plaintiffs' footnote as
requesting that sanctions be imposed. In any event, it was obvious
to the Court that Defendants' citation of persuasive authority was
not sanctionable conduct.
Back to Reference 13. By contrast, the plaintiffs in Miller v. Up In
Smoke, Inc., 738 F.Supp.2d 878 (N.D. Ind. 2010), upon which Defendants
rely, pled their alternative claim for judicial dissolution in the
complaint. See id.
at 866.
Back to Reference 14. The Court notes that none of the present
trustees of AGM&M were parties to this litigation during the
trial. Hirair Hovnanian was dismissed as a party at the summary
judgment stage. Anoush Mathevosian and Van Krikorian have never been
parties, although Van Krikorian attended the trial as the corporate
representative of the Assembly.
According to Defendants, the CFF-designated trustee of AGM&M is now
John Williams, Defendants' trial counsel. It is unclear whether Mr.
Williams could continue to represent Defendants through any dissolution
proceedings in light of his present status as a trustee.
Back to Reference 15. This Court has never determined that ANI is a
party to this litigation or that AGM&M or the Assembly has control
over ANI. The record at trial indicated only that the AGM&M Board of
Trustees had the right to appoint the Board of Governors of ANI.
Back to Reference
From: A. Papazian
Leagle.com
http://www.leagle.com/xmlResult.aspx?xmldoc=In+FDCO+20110509927.xml&docb ase=CSLWAR3-2007-CURR
May 10 2011
THE ARMENIAN ASSEMBLY OF AMERICA, INC., et al.,
Plaintiffs/Counter-Defendants,v.GERARD L. CAFESJIAN, et al.,
Defendants/Counter-Plaintiffs.
Civil Action No. 07-1259, No. 08-255., 08-1254 (CKK) United States
District Court, District of Columbia.
May 9, 2011.
MEMORANDUM OPINION COLLEEN KOLLAR-KOTELLY, District Judge.
The above-captioned consolidated actions involve a series of claims
and counterclaims relating to the parties' attempts to create a
museum and memorial in Washington, D.C. devoted to the Armenian
Genocide.1 Following a twelve-day bench trial in November 2010,
the Court issued a Memorandum Opinion setting forth its findings
of fact and conclusions of law on January 26, 2011. See [193]2
Mem. Op. (Jan. 26, 2011). The Court found that none of the parties'
substantive claims were meritorious and dismissed all of the claims
save one, holding that Defendants Gerard L. Cafesjian ("Cafesjian")
and John J. Waters ("Waters") were entitled to indemnification from
the Armenian Genocide Museum and Memorial, Inc. ("AGM&M") for legal
expenses incurred in defending claims asserted against them in their
capacities as former officers of AGM&M. The Court also upheld the
validity of a reversion clause in a Grant Agreement executed between
Defendants Cafesjian and the Cafesjian Family Foundation, Inc. ("CFF")
and Plaintiff Armenian Assembly of America, Inc. (the "Assembly"),
ruling that CFF and Cafesjian may exercise their rights under that
clause effective December 31, 2010. The Court asked the parties
to submit additional briefing regarding two issues left unresolved
by the Court's prior Memorandum Opinion: (1) whether CFF should be
required to reimburse AGM&M for part of the value of properties that
shall be transferred to CFF under the terms of the Grant Agreement;
and (2) the amount of legal expenses for which Cafesjian and Waters
are entitled to be indemnified. The parties have now completed the
additional briefing on these issues as ordered by the Court, and these
issues are ripe for the Court's resolution. This Memorandum Opinion
contains the Court's final findings of fact and conclusions of law
with respect to these issues. The parties have also filed a series
of papers with the Court regarding the terms on which the properties
must be transferred to CFF. The Court shall address these filings in
the context of addressing the reimbursement issue.
Pending also before the Court are several additional motions filed
by Defendants Cafesjian, Waters, and CFF (collectively, "Defendants").
First, Defendants have filed a [198] Petition for Involuntary
Dissolution asking the Court to initiate procedures to involuntarily
dissolve AGM&M under D.C. law. Second, Defendants have filed a [221]
Motion Requesting Attorneys' Fees for Vexatious Litigation. Third,
Defendants have filed a [214] Request for Order to Show Cause as to
Why Plaintiffs Should Not Be Held In Contempt for allegedly violating
one of this Court's orders. The Assembly and AGM&M (collectively,
"Plaintiffs") have filed oppositions to each of these motions, and
Defendants have filed replies. In addition, Plaintiffs' former counsel,
K&L Gates LLP, has intervened and filed a brief opposing Defendants'
motion for attorneys' fees for vexatious litigation.
Accordingly, these motions are all ripe for resolution.
For the reasons explained below, the Court finds that the Grant
Agreement does not impose any obligation on CFF to reimburse AGM&M
for the excess value of the properties over the amount of the funds
originally donated. Therefore, the Court shall enter final judgment on
this issue and order AGM&M to transfer the properties to CFF without
further delay. With respect to the amount of legal fees and expenses
subject to the indemnification clause covering Cafesjian and Waters,
the Court shall refer this issue to a magistrate judge for a report
and recommendation. The Court shall deny-in-part Defendants' motion
requesting attorneys' fees for vexatious litigation because Defendants
have mostly failed to demonstrate that Plaintiffs or their counsel
acted recklessly or in bad faith; however, the Court shall hold in
abeyance Defendants' motion with respect to Plaintiffs' untimely
production of documents on the eve of trial. The Court shall decline
to exercise supplemental jurisdiction over Defendants' petition for
involuntary dissolution of AGM&M, as this is a new claim asserted
after trial that is best left to be adjudicated by the Superior Court
of the District of Columbia. Finally, the Court shall deny Defendants'
request for a show cause order because Defendants have not shown that
Plaintiffs violated one of this Court's orders.
I. BACKGROUND The Court set out its factual findings thoroughly in
its Memorandum Opinion issued on January 26, 2011, and the Court
assumes familiarity with that opinion and incorporates it here. See
Armenian Assembly of Am., Inc. v. Cafesjian, ___ F. Supp. 2d ___,
2011 WL 229354 (D.D.C.
Jan. 26, 2011). The Court shall summarize the facts previously found
by the Court to the extent they are relevant to the issues remaining
to be decided.
A. Initial Interest in an Armenian Genocide Museum and the Acquisition
of the National Bank of Washington Building In the late 1990s,
Cafesjian and several individuals involved with the Assembly joined
forces in an effort to create a museum devoted to memorializing
the Armenian Genocide. On or about April 1, 1996, Hirair Hovnanian
("Hovnanian"), one of the Assembly's founders, made a pledge of
about $1.6 million to establish the Armenian National Institute
("ANI") for the study, research, and affirmation of the Armenian
Genocide. Dr. Rouben Adalian ("Adalian"), a historical researcher,
was hired to become the director of ANI. Inspired by Hovnanian's
pledge, Anoush Mathevosian ("Mathevosian") decided in 1996 to pledge $3
million to be used for the purpose of constructing a permanent museum
in Washington, D.C. dedicated to the victims and survivors of the
Armenian Genocide. In 1996, the Assembly began to explore properties in
Washington, D.C. that would be suitable for a museum. Around this same
time, Cafesjian was independently planning to build a memorial to the
Armenian Genocide. Through his trusted associate Waters, Cafesjian
contacted the Assembly and expressed an interest in potentially
associating his planned memorial with the Assembly's museum project.
Because Cafesjian had not been involved in the Assembly, he invited
Hovnanian, Adalian, and Robert Aram Kaloosdian ("Kaloosdian"),
another of the Assembly's founders, to meet with him and discuss
the museum project and the Assembly's advocacy efforts. Cafesjian
officially joined the Assembly as a trustee in August 1998. At that
point in time, Cafesjian and Waters continued to search separately
for a location for a memorial.
In or about late 1999, the Assembly identified the National Bank of
Washington, located at 619 14th Street, NW, Washington, D.C., as a
possible site for the museum. Although it was much larger than the
properties they had been looking at to date, everyone involved in the
search was impressed by the National Bank of Washington building (the
"Bank Building"). The Bank Building has a prime location~Wjust blocks
from the White House~Wand its exterior and part of the interior have
been designated as historic landmarks in the D.C. Inventory of Historic
Sites and the National Register of Historic Places. The property on
which the Bank Building is located also includes a vacant back lot
which would allow for the construction of an annex. Cafesjian was
very interested in the Bank Building, and he dispatched Waters to do
due diligence on the property. Because there was another interested
buyer, Cafesjian directed Waters to work quickly to arrange the
purchase. Cafesjian agreed to donate $3.5 million to the Assembly
to create a consolidated location at which the genocide museum,
the genocide memorial, and offices for ANI could be located. Anoush
Mathevosian agreed to increase her pledge to $3.5 million to acquire
the property.
The Assembly closed on the Bank Building on February 16, 2000,
purchasing the building for $7.25 million. The funds for the purchase
were comprised of a $3.5 million pledge from Mathevosian, a $2.5
million grant from CFF, and a $1 million grant from Cafesjian's
Vanguard Charitable Endowment Program ~W Cafesjian Family Foundation
Charitable Trust. Because Mathevosian could not access funds in
sufficient time to wire them to the Assembly prior to the closing, CFF
provided the Assembly with a $4 million interest-free bridge loan to
cover Mathevosian's pledge and to complete the transaction. On March 8,
2000, after the Assembly had received Mathevosian's pledged donation,
the Assembly repaid CFF $3.5 million by wire transfer. On March 17,
2000, the Assembly executed a promissory note produced by and for
the benefit of CFF for the remaining $500,000.
After the closing, on February 28, 2000, Anoush Mathevosian wrote a
letter to the Assembly restating the purpose of her pledge. The letter
stated that the purpose of her gift was to foster the development of
an Armenian Genocide museum with educational exhibits, and Mathevosian
expressed her desire that the Bank Building be used solely for the
Assembly, ANI, the museum, and the memorial. She wrote: To be certain
that future generations remain true to the intent of our donations,
it should be clear that no changes will be made to the purpose and
usage of the Museum; that no mortgages are taken against the property
and that the Museum's perpetuation is not jeopardized as such or
encumbered in any way; and that there will be no subsequent changes
to the name of the museum.
PX-110. At her deposition, Mathevosian explained that she wanted
to ensure that they paid for the property in full so that it would
not be mortgaged or sold in the future. Mathevosian asked that
these understandings be incorporated into the permanent records of
the organization. However, there is no evidence that Mathevosian's
expressed desires were ever formally incorporated by the Assembly
into a binding obligation. Mathevosian testified that Hovnanian
agreed to her conditions, but she did not recall whether he had done
so orally or in writing. John Waters testified that he did not see
Mathevosian's letter until several years later, in late 2003. In
any case, Mathevosian did not ask for a reversionary interest in her
donation, and therefore she does not have one.
The parties agreed that as a condition of Cafesjian's donation of funds
for the purchase of the Bank Building, the Assembly was required to
include a memorial named after Cafesjian as part of the project. On
March 30, 2000, the Assembly sent Cafesjian a letter confirming his
donations and its obligation to build a memorial. The Assembly agreed
to cooperate with the design firm or artist chosen by CFF to complete
the memorial. The anticipated completion date for the project was
March 2002, and CFF agreed to make contributions to the Assembly to
finance the memorial. Because of the size of the Bank Building (34,000
sq. ft) and the property on which it sits, it was contemplated that
the Assembly and ANI would move out of their existing offices when
their lease expired in March 2002 and occupy space on the new site.
Accordingly, it was agreed that the development of suitable office
space on the property would be a priority. Ross Vartian, then-Executive
Director for the Assembly, testified at trial that in retrospect,
they were naïve to think that the museum, the memorial, and offices
for the Assembly and ANI could all be housed within the Bank Building.
B. Acquisition of the Properties Adjacent to the Bank Building Once
the Bank Building was acquired by the Assembly, Cafesjian began
to acquire properties adjacent to the Bank Building. Ultimately,
Cafesjian decided to donate the properties to the Assembly for the
purpose of expanding the footprint of the museum project.
Cafesjian acquired four parcels adjacent to the Bank Building: (1)
1342 G Street, NW; (2) 1340 G Street, NW; (3) 1338 G Street, NW; and
(4) 1334-36 G Street, NW (collectively, the "Adjacent Properties").
Each of the properties was acquired in an arms-length transaction by
one of Cafesjian's entities, TomKat Limited Partnership ("TomKat").
TomKat executed an agreement to purchase 1338 G Street for $1.2 million
on March 10, 2000 and closed on May 15, 2000. TomKat purchased 1342
G Street for $1.2 million on March 16, 2000 and closed on September
30, 2000. On October 24, 2000, TomKat entered into an Installment
Purchase and Sale Agreement to purchase 1340 G Street for a total of
$3 million. Under the installment agreement, payments of $150,000 were
due each year for a period of ten years, with a final balloon payment
of $1.5 million due in March 2011.3 The final adjacent property,
1334-46 G Street, NW, also known as the "Families U.S.A."
building, was acquired later by TomKat, which purchased the building
from a third-party seller for $6.5 million in September 2003.
C. Initial Efforts to Develop the Museum and Memorial A planning
committee was formed to handle the task of developing the Bank Building
into a museum and memorial. The planning committee operated largely
by consensus, and there were about a dozen different individuals
who became involved to varying degrees in the planning for the
project. Although the committee held several meetings in the spring
of 2000 to discuss development plans and fundraising, there was no
dedicated staff to shepherd the project along, and the lack of a
central decision maker slowed the pace of progress considerably. In
2001, Ross Vartian took on the position of planning director for
the project, but the committee was unable to agree on critical
decisions such as how to go about hiring professionals to work on the
building and how to raise funds to cover the costs of construction
and operation. The biggest obstacle was disagreement over the size
and scope of the project, including uncertainty over how Cafesjian's
acquisition of the Adjacent Properties would affect the development
of the museum.
It was around late summer 2001 when Cafesjian agreed to donate the
Adjacent Properties to be used for the genocide museum project. No
official proposal was made to the Assembly until October 15, 2001,
when Cafesjian wrote a letter to Hovnanian outlining the terms of a
proposed grant of the three properties that had been acquired. This
letter was the first in a series of draft grant agreements that would
ultimately be exchanged between Cafesjian and the Assembly. The letter
proposed that Cafesjian and/or CFF donate $5.8 million to the Assembly
to purchase the properties from TomKat. The proposed grant agreement
would require the Assembly to use the properties solely as part of the
genocide museum project, subject to plans approved by the Assembly's
planning committee. The letter also proposed that if the Assembly
failed to develop the property according to those plans, CFF would
be entitled to a return of either the grant funds or the properties.
Cafesjian expressed his frustration with the lack of progress that had
been made, and he explained at trial that he wanted to make certain
that the museum was built during his lifetime.
Cafesjian's proposal was generally well received at the Assembly,
although the Assembly never responded in writing to Cafesjian's
letter. However, there was no meaningful progress throughout the rest
of 2001. In 2002, the parties continued to discuss various development
proposals and there was some progress. In March 2002, the Assembly
determined that an independent entity should be created to develop
and operate the museum project. CFF and the Assembly also agreed to
combine their conditions with prior gifting commitments, which the
newly-formed independent entity would be obliged to honor. CFF and the
Assembly agreed to jointly design and approve the governing documents
for the new entity, which would become known as the Armenian Genocide
Museum & Memorial, Inc. ("AGM&M"). It was agreed that AGM&M would be
incorporated as a 501(c)(3) organization as soon as it was possible to
do so responsibly and sustainably. The parties also decided that the
Assembly offices would not be housed within any portion of the museum
complex, in part to keep the museum independent from any advocacy
organization and in part because it was thought that there would not
be adequate space in the complex for the Assembly. To ensure that the
Assembly would get sufficient credit for launching the museum (and to
combat the perception that the Assembly was abandoning the project),
Cafesjian and Hovnanian agreed to channel their contributions through
the Assembly.
In August 2002, the planning committee met and discussed a revised
draft grant agreement letter from CFF. Like the previous draft grant
agreement sent in October 2001, it contained a reversion clause
stating that if the three adjacent properties were not developed
in accordance with a plan approved by the AGM&M (with the necessary
approval of CFF), CFF would be entitled to a return of either those
adjacent properties or the funds used to purchase them. There was
some discussion at the meeting that such an open-ended reversion
clause would not be appropriate.
The museum project was facing significant cash flow problems over the
course of 2002, and Cafesjian had agreed to advance funds necessary
for work to be completed in that year. In October 2002, the museum
planning committee convened a meeting in New York and engaged in an
extensive discussion about the finances for the project. Hovnanian
expressed his concern that they would be unable to raise enough
money to fund a project with a $100 million budget, and he raised the
possibility of phasing in the project, with later expansion tied to
better economic circumstances. Others also expressed concerns about
the operating deficit. Waters told the committee that Cafesjian was
optimistic that the funds could be raised from the community and
that, if necessary, Cafesjian was prepared to donate $50-75 million
to ensure that the project was completed. According to one draft
summary of the meeting, "[a]ll felt that G. Cafesjian's commitment,
characterized as a `safety net,' alleviated the fiscal concerns."
DX-67 at 2. The planning committee members did reach some agreements
about how best to move forward, but the committee remained focused
on consensus-based decision-making.
On January 22, 2003, CFF sent a revised draft grant letter to the
Assembly for review. As with the previous drafts, the letter contained
a reversion clause, but this time it contained a triggering date:
if the three donated adjacent properties were not developed according
to plans approved by AGM&M by December 31, 2008, then those properties
(or the cash used to acquire them) would revert to CFF. The letter also
provided that a new $500,000 promissory note would be issued to CFF
by the Assembly to replace the previous one, and that the obligation
may be transferred to AGM&M. The letter proposed that decisions of the
AGM&M Board of Trustees be decided by an 80% affirmative vote. This
draft letter was discussed at a meeting in Delray, Florida, where
Hovnanian, Vartian, Kaloosdian, and Adalian were present. The Assembly
Board of Trustees held another annual meeting in Boca Raton on March 1,
2003. By the time of this meeting, everyone agreed that AGM&M should be
launched as an independent entity with a budget of around $100 million
and a new building constructed on the Bank Building and the three
adjacent properties to be donated by Cafesjian. It was also agreed that
ANI would retain its status as an independent 501(c)(3) organization,
but that it would become a subsidiary of the new museum entity.
D. Final Negotiation of the Grant Agreements and the Creation of AGM&M
It took seven months following the March 2003 meeting to finalize the
agreements and governing documents that would create AGM&M. One reason
for the delay was the acquisition of the fourth adjacent property,
the Families U.S.A. building. Through TomKat, Cafesjian entered into
a purchase agreement to buy the property for $6.5 million on September
22, 2003. The closing date was scheduled for October 30, 2003.
The draft grant agreement from Cafesjian continued to be discussed
and negotiated. Because Cafesjian had agreed to channel his donations
to AGM&M through the Assembly, it was decided that Cafesjian would
enter a grant agreement with the Assembly (hereinafter, the "Grant
Agreement"), and the Assembly would transfer all of the museum-related
assets and obligations to AGM&M in a separate agreement, to be known
as the "Transfer Agreement." The law firm of Caplin & Drysdale was
hired to draft the Transfer Agreement as well as the organic documents
for AGM&M, including the Articles of Incorporation, the By-Laws, and
a Unanimous Written Consent agreement signed by all of the initial
trustees of AGM&M.
The record shows that the language in the Grant Agreement was reviewed
by most of the major figures involved in AGM&M during the months
leading up to its execution on November 1, 2003. On October 13, 2003,
Waters emailed an updated draft of the Grant Agreement, which included
the donation of the Families U.S.A. building, for review. The revised
draft also included a new trigger date of December 31, 2010 for the
reversion clause; it was felt that seven years was a reasonable
timeline for the completion of the project. The reversion clause
was also expanded to cover the Bank Building in addition to the four
Adjacent Properties. Because the Families U.S.A. building transaction
was scheduled to close on October 30, Waters urged everyone to act
expeditiously so that title to the building could be transferred
directly to AGM&M, eliminating the need to transfer the property
from TomKat to AGM&M and saving hundreds of thousands of dollars in
transfer and recordation fees. On October 28, 2003, a conference call
was held with, inter alia, Hovnanian, Cafesjian, Kaloosdian, Waters,
and Vartian to discuss the four key documents: the Grant Agreement,
the Articles of Incorporation for AGM&M, the AGM&M By-Laws, and the
Unanimous Written Consent agreement. During this meeting, Kaloosdian
suggested that the language in the reversion clause in the Grant
Agreement be clarified so as to avoid ambiguity about when the right
of reversion might be triggered. The final language of these documents
was approved shortly after this conference call.
The Court noted in its prior Memorandum Opinion that several
individuals involved in these discussions, including Kaloosdian
and Hovnanian, had a convenient lack of memory with respect to what
transpired. Therefore, the Court relied heavily on documents that were
submitted as exhibits to determine the events in question. The Court
also noted that it appeared as if these individuals did not take the
time to fully understand the terms and conditions of the agreements.
Any claim that these individuals had certain intentions with regard
to these documents is disingenuous and belied by the language of the
documents themselves.
The Articles of Incorporation for AGM&M were signed on October
29, 2003, and AGM&M officially became incorporated as a nonprofit
corporation in the District of Columbia. The Articles of Incorporation
and the By-Laws for AGM&M were ratified and adopted, respectively,
pursuant to the Unanimous Written Consent agreement, which was executed
on October 30, 2003. The Grant Agreement and Transfer Agreement were
signed on November 1, 2003 during an Assembly gala in Palm Desert,
California. Because the content of these documents is critically
important to disputed issues in this litigation, the Court shall
review each of these documents in some detail.
1. The Grant Agreement The Grant Agreement was signed by Cafesjian
on behalf of himself and CFF and by Hovnanian and Peter Vosbikian on
behalf of the Assembly.
See DX-2 (hereinafter, "Grant Agreement").4 The eleven-page document
sets forth the terms and conditions of the grants made by Cafesjian
and CFF to the Assembly for the museum project and obligates the
Assembly to comply with those terms and conditions.
Pursuant to the Grant Agreement, Cafesjian and/or CFF (jointly defined
as the "Grantor") agreed to donate $10.3 million for the purchase of
the Adjacent Properties from TomKat and any related transaction costs.
In addition, Cafesjian and/or CFF agreed to make the annual $150,000
payments under the installment agreement for 1340 G Street and the
final balloon payment of $1.5 million due in March 2011. See Grant
Agreement §§ 2(D)-(E). The amounts paid under the Grant Agreement
were calculated based on the purchase price paid by TomKat for the
Adjacent Properties, plus the holding costs paid by TomKat pending
transfer minus any rents earned during this period, plus the legal
costs associated with the transfer.
For purposes of this litigation, the most critical feature of the Grant
Agreement is the reversion clause. Under § 3.1 of the Grant Agreement,
the "Grant Property"~Wdefined as the Bank Building and the Adjacent
Properties~W"may only be used as part of the AGM&M,5 subject to
plans for the AGM&M approved by the Board of Trustees of the American
Genocide Museum & Memorial, Inc. (the `Plans'). . . ." Grant Agreement
§ 3.1(A). The next section reads as follows: If the Grant Property is
not developed prior to December 31, 2010 in accordance with the Plans,
or if the Grant Property is not developed in substantial compliance
with the Plans including with respect to the deadlines for completion
of the construction, renovation, installation and other phases detailed
in the Plans, then: (i) in the event any portion of the Grants has not
been funded, this Agreement terminates; (ii) to the degree any portion
of the Grants has been funded, at the Grantor's sole discretion, the
Assembly shall return to the Grantor the Grant funds or transfer to
the Grantor the Grant Property.
Id. § 3.1(B). The phrase "Grant funds" as referenced in the reversion
clause includes both the initial grant of $4 million that was used
to acquire the Bank Building as well as the $12.85 million pledged to
acquire the Adjacent Properties. Cafesjian testified that the purpose
of the reversion clause was to provide an incentive to complete the
museum expeditiously, so that it might be built before Cafesjian died.
Waters testified that the reversion clause was most likely his idea;
he explained that CFF often inserted reversion clauses into its grant
agreements. Section 3.3 of the Grant Agreement requires the Assembly to
use the "Grant funds only for purposes described in Section 501(c)(3)
of the Internal Revenue Code of 1986, as amended." Id. § 3.3.
The Grant Agreement provides that the Assembly shall make available
a space for a memorial to be named the "Gerard L. Cafesjian Memorial"
or another name approved by CFF, which shall be operated and maintained
in perpetuity by the Assembly at its own cost. Grant Agreement § 3.2.
The Grant Agreement also provides that neither CFF nor Cafesjian have
any obligation to provide additional funding to the Assembly or to
AGM&M. Id. § 3.8. The Grant Agreement also contains a breach clause:
(A) If the Assembly fails to use the Grants solely for the purposes
set out in this Agreement or if the Assembly fails to satisfy any
of the conditions of this Agreement, Grantor is released from any
remaining obligation under this Agreement to provide funds or property
to the Assembly.
(B) If the Assembly uses any portion of the Grants either for a purpose
other than those set out in this Agreement or for a purpose other
than those described in Section 501(c)(3) of the [Internal Revenue]
Code, as amended, the Assembly shall repay the portion of the Grants
so spent to Grantor, plus interest.
(C) The remedies set out in this Section 3.9 are in addition to any
other remedies that may be available to the Grantor at law or equity.
Grant Agreement § 3.9.
The Grant Agreement also required the Assembly to enter into a Transfer
Agreement with AGM&M to transfer all of its interest in all cash,
pledges, property, and other assets being held by the Assembly for the
museum project. Id. § 5.3(A). The Transfer Agreement would obligate
AGM&M to honor all existing donor requirements at the time of transfer
and to assume all obligations in the Grant Agreement relating to the
Memorial. Id. § 5.3(B)-(C). The Grant Agreement also provided that
the Assembly would assign its right to appoint the Trustees of the
Armenian National Institute to AGM&M. Id. § 5.5.
2. The Transfer Agreement The Transfer Agreement was executed
on November 1, 2003 by the Assembly and the newly-incorporated
AGM&M. See PX-114 (hereinafter, the "Transfer Agreement"). The
Transfer Agreement requires the Assembly to contribute to AGM&M "all
of its rights, title and interest in and to all cash, pledges, real
property, tangible property, intangible property, and other assets
contributed to the [Assembly] and/or held by the [Assembly] for the
development, renovation, and construction of the AGM&M." Id. § 1.1. The
approximate aggregate value of the grant was listed as $27.8 million,
including $7.25 million in property, over $19 million in pledges,
and approximately $670,000 in cash and other assets. Id. § 1.1(C).
Pursuant to § 1.2 of the Transfer Agreement, "AGM&M, Inc. must
honor all of the [Assembly]'s donor requirements existing at time of
transfer, or in the alternative, obtain donor consent to the transfer
and any modification of donor terms." Transfer Agreement § 1.2(A). The
agreement also explicitly requires AGM&M to comply with the obligation
to construct a memorial as set out in the Grant Agreement. Id. §
1.2(B). The Transfer Agreement also requires AGM&M to use the funds
and property transferred "solely to develop, construct and operate"
the Armenian Genocide Museum & Memorial. Id. § 1.3. The agreement also
contains an arbitration clause. See Transfer Agreement § 5.3. However,
as the Court noted in its prior Memorandum Opinion, none of the
parties is presently seeking to enforce that arbitration clause.
3. The AGM&M Articles of Incorporation The Articles of Incorporation
for AGM&M were executed on October 29, 2003. See PX-121. The
Articles provide that AGM&M is a nonprofit corporation organized for
charitable purposes within the meaning of § 501(c)(3) of the Internal
Revenue Code. Id., Art. IV(A). The purpose of the corporation is
defined as, inter alia, "to own, operate, and maintain a permanent
museum and memorial to the victims and survivors of the Armenian
Genocide." Id. The Articles provide that AGM&M has no members and that
the board of directors for the corporation shall be referred to as
the Board of Trustees. See id., Arts. V-VI. The manner of election
or appointment to the Board of Trustees is to be set forth in the
By-Laws of the corporation. Id., Art. VI. The Board of Trustees must
have at least three trustees at all times, and the initial trustees
are defined to be Gerard L. Cafesjian, Hirair Hovnanian, Anoush
Mathevosian, and Robert Kaloosdian. Id., Art. IX. The Articles also
provide that "[n]o part of the net earnings of the Corporation shall
inure to the benefit of or be distributed to any trustee, employee
or other individual, partnership, estate, trust or corporation having
a personal or private interest in the Corporation."
Id., Art. IV(C).
4. The AGM&M By-Laws The By-Laws of AGM&M set out rules that govern
the operation of the Board of Trustees. See PX-122 (hereinafter,
"By-Laws"). The By-Laws provide that the term of office of each
of the initial trustees (i.e., Cafesjian, Mathevosian, Hovnanian,
and Kaloosdian) "shall be perpetual." By-Laws § 2.4. Each donor
that elected an initial trustee (CFF, Mathevosian, Hovnanian,
and the Assembly) is entitled to appoint a successor trustee
in the event that the initial trustee is unable to serve for any
reason. Id. Additional trustees may be elected to the Board of Trustees
by making a contribution of $5 million to AGM&M, provided that the
Board of Trustees has accepted the contribution by an 80% affirmative
vote and the donor has appointed a successor. Id. § 2.5. Each donor
(including initial donors) is entitled to one vote on the Board of
Trustees for each $5 million contributed. Id. §§ 2.4-2.5.
The By-Laws prohibit AGM&M from engaging in any activities or conduct
that would not be permitted to a corporation exempt from federal
income tax under Section 501(c)(3) of the Internal Revenue Code. See
By-Laws § 3.3. Similarly, the By-Laws provide that "[n]o part of
the net earnings shall inure to the benefit of, or be distributable
to, the Trustees, officers or others except that the Trustees shall
be authorized and empowered, if they so elect, to pay to Trustees,
officers or others reasonable compensation for service rendered and
to make payments and distribution in furtherance of the purposes set
forth in these By-Laws." Id.
Pursuant to § 4.1 of the By-Laws, Unless otherwise prohibited by
law or sections 4.3 and 4.4 of these By-Laws, the Corporation shall
indemnify any Trustee or officer of the Corporation, any former
Trustee or officer of the Corporation, or any person who may have
served at its request as a trustee, director or officer of another
corporation or entity, whether for profit or not for profit, and may,
by resolution of the Board of Trustees, indemnify any employee or
agent of the Corporation against any and all expenses and liabilities
actually and necessarily incurred by him or her or imposed on him
or her in connection with any claim, action, suit or proceeding
(whether actual or threatened, civil, criminal, administrative or
investigative, including appeals) in which he or she is or may be
made a party by reason of having been such Trustee, officer, person,
employee or agent, subject to the limitation, however, that there
shall be no indemnification in relation to matters as to which he
or she shall be adjudged in such claim, action, suit or proceeding
to be guilty of a criminal offense or liable to the Corporation for
damages arising out of his or her own negligence or misconduct in
the performance of a duty to the Corporation.
The By-Laws provide that indemnification shall include, but not be
limited to, counsel fees and other costs. Section 4.3 of the By-Laws
provides that if AGM&M is ever deemed a private foundation within the
meaning of Section 509 of the Internal Revenue Code, no indemnification
shall be paid if such payment would constitute an act of self-dealing
or a taxable expenditure as defined in Sections 4941(d) or 4945(d)
of the Internal Revenue Code, respectively. Id. § 4.3.
5. The Unanimous Written Consent Agreement On October 30, 2003, each of
the four initial trustees of AGM&M signed a document titled Unanimous
Written Consent in Lieu of the Organization Meeting of the Board of
Trustees of AGM&M. See DX-1 (hereinafter, "UWC"). By unanimous written
consent, the Board of Trustees adopted a series of resolutions. First,
the actions of the incorporators were ratified and the By-Laws were
approved. Second, the initial donors (and their appointed trustees)
were recognized to be CFF (Cafesjian), Hirair Hovnanian (himself),
Anoush Mathevosian (herself), and the Assembly (Kaloosdian). Cafesjian
was appointed Chairman and President, Hovnanian was appointed Vice
Chairman, and John Waters was appointed Secretary and Treasurer.
Through the Unanimous Written Consent agreement, the AGM&M Board of
Trustees authorized the officers to pay all of the organizational
expenses of the corporation. The actions of the Chairman (Cafesjian)
and the Secretary/Treasurer (Waters) in negotiating the purchase
of the Adjacent Properties were ratified and approved, and the
Secretary/Treasurer was authorized "to enter into and execute any
and all documents necessary to effect the purchase" of the Adjacent
Properties and "to take such other action as deemed necessary or
desired to effect such transactions." UWC at 3. The AGM&M Board
also approved and ratified the negotiation of grant agreements with
donors and the Assembly, and the Secretary/Treasurer was authorized
to negotiate further grant agreements with donors. The Board also
accepted from the Assembly its power to appoint trustees for the
Armenian National Institute.
E. Efforts to Develop An Armenian Genocide Museum Through AGM&M The
facts surrounding what happened after AGM&M was formally created
were thoroughly discussed in the Court's prior Memorandum Opinion
and need not be repeated herein. The AGM&M Board of Trustees was
unable to reach consensus on the proper size and scope of the project,
and tensions between Cafesjian and Hovnanian increased over a series
of disagreements about the museum project and other policies of the
Assembly. By 2006, relations between the parties had completely broken
down, prompting Cafesjian to propose that AGM&M be dissolved.
Cafesjian ultimately resigned from the AGM&M Board of Trustees,
designating Waters as his successor. After Cafesjian sued the Assembly
for payment on the promissory note, the other AGM&M Trustees voted
to exclude Waters from participation on all matters relating to the
museum project. This resulted in a series of lawsuits filed by the
parties fighting for control of AGM&M and alleging mismanagement of
the corporation. The three other AGM&M trustees attempted to move
forward with the project without Waters's involvement, but they were
unable to raise the funds necessary to implement a development plan.
Accordingly, the museum was not developed by December 31, 2010,
thus triggering the reversion clause in the Grant Agreement.
II. DISCUSSION A. Findings of Fact and Conclusions of Law Regarding
CFF's Obligation to Reimburse AGM&M for the Value of Properties
that Revert Under the Grant Agreement The Court ruled in its prior
Memorandum Opinion that the reversion clause in the Grant Agreement
was valid and enforceable and that CFF and Cafesjian may exercise
their rights under that clause effective December 31, 2010. Cafesjian
informed the Court that only CFF will exercise its rights under
the reversion clause and that CFF will elect to have the properties
transferred in lieu of the grant funds. The Court indicated, however,
that Plaintiffs had raised questions about whether returning the
properties to CFF violates the rule~Wstated in the AGM&M By-Laws and
Articles of Incorporation~Wthat no part of AGM&M's net earnings shall
inure to the benefit of any trustee. The Court asked the parties to
address in further briefing whether it would be inequitable to enforce
the reversion clause without requiring CFF to reimburse AGM&M for any
potential increased value over the amount of funds originally donated
by CFF or Cafesjian, and to address whether it was the original intent
of the contracting parties that the reversion would be a nonprofit
transaction. Through supplemental briefing, the parties have clarified
their positions on these issues.
Plaintiffs argue that the reversion clause in the Grant Agreement,
when read in context with the other provisions of the Grant Agreement
and the terms of the AGM&M By-Laws and Articles of Incorporation,
should be construed as requiring that CFF not realize a profit from the
reversion. Plaintiffs contend that CFF will profit from the reversion
because the value of the properties being transferred exceeds the
value of the donation that CFF and Cafesjian made as part of the Grant
Agreement. Furthermore, Plaintiffs argue that a reversion without
some form of reimbursement would violate federal tax laws applicable
to nonprofit organizations under § 501(c)(3) of the Internal Revenue
Code. Defendants, by contrast, claim that the language in the Grant
Agreement is unambiguous and places no restrictions on the right
of CFF to elect a reversion of the properties rather than the grant
funds. They also dispute Plaintiffs' claim that the reversion runs
afoul of the tax laws. The Court shall address these arguments below.
1. The Grant Agreement Ultimately, the issue before the Court is a
straightforward question of contract interpretation: does the Grant
Agreement require CFF to reimburse AGM&M for the extent to which the
value of the properties to be transferred exceeds the value of the
grant funds donated to acquire them?
The District of Columbia adheres to an "objective" law of contracts,
meaning that "the written language embodying the terms of an agreement
will govern the rights and liabilities of the parties [regardless] of
the intent of the parties at the time they entered into the contract,
unless the written language is not susceptible of a clear and definite
undertaking, or unless there is fraud, duress, or mutual mistake."
Dyer v. Bilaal, 983 A.2d 349, 354-55 (D.C. 2009) (citation omitted;
brackets in original). "If the court finds that the contract has more
than one reasonable interpretation and therefore is ambiguous, then the
court-after admitting probative extrinsic evidence-must determine what
a reasonable person in the position of the parties would have thought
the disputed language meant." Tillery v. D.C. Contract Appeals Bd.,
912 A.2d 1169, 1176 (D.C. 2006) (quoting In re Bailey, 883 A.2d 106,
118 (D.C. 2005)). "Ambiguity exists only if the court determines
that the proper interpretation of the contract cannot be derived from
the contractual language exclusively, and requires consideration of
evidence outside the contract itself." Steele Foundations, Inc. v.
Clark Constr. Grp., Inc., 937 A.2d 148, 153 (D.C. 2007). "[C]ontracts
are not rendered ambiguous by the mere fact that the parties do not
agree upon their proper construction." Id. In determining whether a
contract is ambiguous, courts examine the document on its face and
give the language its plain meaning. Tillery, 912 A.2d at 1176.
The first step in interpreting a contract is to determine "what a
reasonable person in the position of the parties would have thought the
disputed language meant." Steele Foundations, 937 A.2d at 154 (quoting
Dodek v. CF 16 Corp., 537 A.2d 1086, 1092 (D.C. 1988)). "The meaning
must be ascertained in light of all the circumstances surrounding the
parties at the time the contract was made," and "[t]he writing must
be interpreted as a whole, giving a reasonable, lawful, and effective
meaning to all its terms." 1010 Potomac Assocs. v.
Grocery Mfrs. of Am., Inc., 485 A.2d 199, 205 (D.C. 1984) (internal
citations omitted).
The language in the Grant Agreement is unambiguous: if the conditions
triggering the reversion are met, "at the Grantor's sole discretion,
the Assembly shall return to the Grantor the Grant funds or transfer to
the Grantor the Grant Property." It is clear from this language that
the Grantor (CFF and Cafesjian) may choose between a return of the
funds donated and a transfer of the properties. There is no language
in the reversion clause or anywhere else in the Grant Agreement that
restricts the Grantor's right to receive the Grant Property. The Court
presumes that if the parties had intended to place any restrictions of
the Grantor's right to elect a transfer of the Grant Property, they
would have memorialized that intent in the Grant Agreement itself,
particularly in light of the fact that the Grant Agreement contains
an integration clause. See Luther Williams, Jr., Inc. v. Johnson,
229 A.2d 163, 165 (D.C. 1967) ("[I]t has always been presumed that
a written contract is the final repository of the agreement of
the parties. . . . [A]n integration clause merely strengthens this
presumption.") (internal citation omitted).
Plaintiffs argue that the two options in the reversion clause, "when
read together and with the balance of the Grant Agreement, signify
that the exercise of the reversion would be a nonprofit transaction."
See Pls.' Br. Regarding Reimbursement at 3. However, that is not a
natural construction of the plain language of the Grant Agreement. All
parties knew at the time they entered into the agreement that the
value of the Grant Property, which included the Bank Building and
the Adjacent Properties, would be potentially much greater than the
value of the Grant funds, which covered the purchase of the Adjacent
Properties and only about half the cost of the Bank Building (the
other half being covered by Anoush Mathevosian). Therefore, even at
the outset, the Grantor's choice was not between two options that
were equal in value. It is implausible that the parties would have
intended the options to be equal seven years later on the reversion
date of December 31, 2010, for this would effectively eliminate the
Grantor's right to elect the most valuable remedy.
It is even more inconceivable that the parties would have intended
for the transfer of the Grant Property to be a nonprofit transaction
without specifying any provisions for determining the value of
the Grant Property at the time of transfer. Valuing property in the
absence of an arms-length market transaction is inherently uncertain,
and the record at trial indicated that there were widely varying
appraisals of the properties depending on whether they would be used
to build a museum or sold to a commercial developer, with no definite
valuation. See Trial Tr. (11/16 PM) at 85-87; DX-513N. Any valuation
offered by the parties at this time would be speculative. Since the
Court has determined that there are no "strings" attached to CFF's
use of the properties once transferred, how would the Court decide
what method of valuation was appropriate to ensure that CFF did not
realize a profit? Such uncertainty over how to implement a "nonprofit"
transfer is a significant reason to assume that this was not what
the parties intended.
Plaintiffs argue that their interpretation of the options as equal
in value is supported by the limiting phrase in the reversion clause:
"to the degree any portion of the Grants has been funded. . . ." They
argue that this phrase must be read as limiting the Grantor's right of
reversion to the extent that the Grants have actually been funded, and
they argue that Defendants' construction "would allow the grantors to
take back the entire grant properties even if they had not fulfilled
their payment obligations under the pledge." Pl.'s Br. Regarding
Reimbursement at 7. But Plaintiffs overlook the fact that under the
Grant Agreement, the Grant funds had to be used to purchase the Grant
Property, meaning that if Cafesjian and CFF had not fulfilled their
pledges, AGM&M would never have acquired all of the properties that
now must be transferred. Therefore, there was never any risk that
Cafesjian and CFF would receive a windfall, for example, by paying
for the acquisition of only one of the Adjacent Properties and then
receiving all four of them under the reversion clause. Ultimately,
the Court is not persuaded that the phrase "to the degree any portion
of the Grants has been funded" places any restriction on the Grantor's
right to elect a transfer of the Grant Property, particularly where
the record demonstrates that Cafesjian and CFF have fulfilled their
obligations under the Grant Agreement.6 Plaintiffs also argue that
the requirement in § 3.3 of the Grant Agreement that the Grant
funds be used "only for purposes described in Section 501(c)(3) of
the Internal Revenue Code" supports their position. By its own terms,
this provision acts as a limitation only on the use of the Grant funds;
it says nothing about transferring the Grant Property. Even assuming
that § 3.3 applied to the transfer of the Grant Property, the general
language in § 3.3 cannot be fairly read to implicitly restrict the more
specific language contained in the reversion clause. Therefore, the
Court finds that § 3.3 does not impose any reimbursement requirement
on the transfer of the Grant Property.
Plaintiffs complain that without a reimbursement requirement, CFF
will be allowed to retain the benefit of the appreciated value of the
properties, Anoush Mathevosian's $3.5 million donation, and more than
seven years of carrying costs, taxes, and insurance that were paid
for the properties, with the result being that AGM&M is stripped of
nearly all its assets. Plaintiffs argue that the parties could not
have intended such an inequitable result. But this was a foreseeable
consequence at the time the parties entered into the agreement. The
reversion clause in the Grant Agreement was intended to create a
meaningful incentive for the parties to substantially complete the
museum project by December 31, 2010. Since the parties failed to
reach that milestone, Plaintiffs must live with the consequences of
their bargained-for agreement. The Court cannot reform the plain terms
of the Grant Agreement simply because Plaintiffs belatedly realized
how dire those consequences would be. 2007, and there was no other
evidence at trial suggesting that CFF and Cafesjian did not perform
their funding obligations under the Grant Agreement.
2. The AGM&M By-Laws and Articles of Incorporation Plaintiffs argue
that the Court should look beyond the four corners of the Grant
Agreement to the AGM&M By-Laws and Articles of Incorporation in
determining the meaning of the reversion clause. However, the Court
has no occasion to search beyond the text of the Grant Agreement
because the terms of the reversion clause are clear and unambiguous.
See 1010 Potomac Assocs., 485 A.2d at 205 ("Extrinsic evidence of the
parties' subjective intent may be resorted to only if the document is
ambiguous."). Although the Court may consider these documents as part
of the circumstances surrounding the formation of the Grant Agreement,
see id., the execution of these documents does not alter the Court's
interpretation of the Grant Agreement. Plaintiffs contend that the
adoption of the AGM&M Articles of Incorporation and By-Laws around the
same time as the Grant Agreement and Transfer Agreement demonstrates
that the parties intended for the private inurement restrictions
contained in the By-Laws and the Articles to apply to the Grant
Agreement. Again, however, the specific and direct language in the
reversion clause is the best evidence of the parties' intent. The
Court is not persuaded that the parties would have intended to
restrict the Grantor's reversion rights through more general language
contained in entirely separate documents. See Washington Automotive
Co. v. 1828 L Street Assocs., 906 A.2d 869, 880 (D.C. 2006) ("[It is]
a familiar principle of contract interpretation[] that `specific terms
and exact terms are given greater weight than general language.'")
(quoting Restatement (Second) of Contracts § 203(c) (1981)). The lack
of any explicit restriction on the transfer in the Grant Agreement
strongly suggests that the parties did not intend to subject the
transfer to any private inurement regulations.
Plaintiffs argue that the Court should not construe the reversion
clause in a manner that could result in adverse tax consequences
for AGM&M, suggesting that the parties would not have intended such
a result. However, there is no reason to assume that the parties
expected AGM&M to survive if the reversion clause was exercised; to
the contrary, it is reasonable to assume that the parties expected
the reversion of either the Grant funds or the Grant Property to be
the death knell for the organization. The parties in this litigation
created AGM&M for the express purpose of creating a museum and memorial
devoted to the Armenian Genocide on the site of the Bank Building
and the Adjacent Properties. Without those properties, it is unclear
how AGM&M could be expected to fulfill its mission and survive as an
organization. Therefore, the Court is not persuaded that the parties
intended to spare AGM&M from any adverse tax consequences that might
result from the transfer of the Grant Property.
Plaintiffs claim that construing the reversion clause as requiring
no reimbursement for appreciated value would create "a vehicle for
tax fraud" because it would allow wealthy donors to put cash into
a charity for the acquisition of real estate, wait for the value of
that real estate to increase over time, and then seek the return of
the appreciated real estate pursuant to some unmet condition, thereby
gaining the appreciated property without any consequence. See Pls.'
Br. Regarding Reimbursement at 7. It is unclear why Plaintiffs believe
there would be no tax consequences to the donor in this hypothetical,
and Plaintiffs cite no authority to explain their theory of this
"vehicle for tax fraud." In any event, the collection and recovery
of federal taxes is the sole responsibility of the United States
government; Plaintiffs cannot compel Defendants to comply with the tax
code through this litigation. See 26 U.S.C. § 7401 ("No civil action
for the collection or recovery of taxes, or of any fine, penalty, or
forfeiture, shall be commenced unless the Secretary [of the Treasury]
authorizes or sanctions the proceedings and the Attorney General or
his delegate directs that the action be commenced."). Furthermore,
the Court has no power to change the terms of the Grant Agreement
merely because enforcing the reversion clause can be expected to have
adverse tax consequences for the parties.
3. Tax Regulations Prohibiting Private Benefit Plaintiffs have
presented the Court with a rather complicated set of arguments as
to why they believe that allowing CFF to profit from the transfer
of the Grant Property will violate federal tax laws pertaining to
tax-exempt organizations. As the Court has explained, these arguments
are essentially irrelevant because the Grant Agreement clearly and
unambiguously requires AGM&M to transfer the properties without regard
to the tax consequences of the transfer. In any event, the Court is
not persuaded that the transfer of the properties to CFF violates
the tax laws as Plaintiffs claim.
Plaintiffs' central argument is that by transferring the
Grant Property to CFF, AGM&M will be violating regulations that
require § 501(c)(3) organizations to be operated exclusively for
tax-exempt purposes. Pursuant to 26 C.F.R. § 1.501(c)(3)-1(c)(2),
"[a]n organization is not operated exclusively for one or more
exempt purposes if its net earnings inure in whole or in part
to the benefit of private shareholders or individuals." A private
shareholder or individual is defined as a person having a personal and
private interest in the activities of the organization. 26 C.F.R. §
1.501(a)-1(c). The purpose of the inurement provision is "to prevent
the siphoning of charitable receipts to insiders of the charity."
United Cancer Council, Inc. v. Comm'r, 165 F.3d 1173, 1176 (7th Cir.
1999); see also I.R.S. Priv. Ltr. Rul. 201047033 (Nov. 3, 2010)
("Inurement is any transfer of charitable assets to the organization's
insiders for which the organization does not receive adequate
consideration. Inurement can take many forms.").
Defendants argue that there can be no violation of the inurement
provision because the property is being transferred to CFF, another
501(c)(3) organization which is neither a shareholder of AGM&M nor a
private individual. Because CFF itself must operate exclusively for
tax-exempt purposes, Defendants argue that there will be no "private"
benefit from the transfer of property that would frustrate the purposes
of § 501(c)(3). Plaintiffs do not directly respond to this argument in
their briefing, and they have cited no cases in which it was determined
that a 501(c)(3) organization was a private shareholder or individual
for purposes of the inurement provision. In fact, Plaintiffs' counsel
essentially conceded the point during a Status Hearing on February 24,
2011, noting that "by designating the actual acquiring entity as CFF,
that . . . avoids some of the limitations in the private inurement
law." 2/24/11 Hr'g Tr. at 16. Accordingly, the Court is not persuaded
that the transfer of the properties to CFF will violate the prohibition
on private inurement as stated in the federal tax laws and incorporated
into the By-Laws and Articles of Incorporation of AGM&M.7 Moreover,
based on a review of the substance of the transaction as a whole,
the Court is not persuaded that the transfer of the property under the
Grant Agreement qualifies as private inurement. Contrary to Plaintiffs'
characterization, this is not a case where a wealthy donor gave money
to an organization to buy property and then the corporation gave the
property back to the donor after it had substantially appreciated. This
is a case where a donor made a conditional gift of funds to be used
for a specific purpose, and after AGM&M was unable to fulfill the
required conditions, it was compelled to allow the donor to recover
the properties acquired with the gifted funds. Defendants rely heavily
on Underwood v. United States, 461 F.Supp. 1382 (N.D.
Tex. 1978), which also involved the return of a conditional gift. In
Underwood, the plaintiff had agreed to donate $1 million to the
Southern Methodist University School of Law through a charitable
foundation with the understanding that all of his donations would be
deductible for federal income tax purposes. See id. at 1384. After
the IRS disallowed some of Underwood's deductions to the charitable
foundation, Underwood reached an agreement with the foundation to
return his donations so that he could give the money directly to the
law school. Id. at 1385. The IRS determined that the return of funds
from the foundation amounted to self-dealing in violation of 26 U.S.C.
§ 4941, which imposes a tax on any act of self-dealing between a
private foundation and any "disqualified person" such as a substantial
contributor to the foundation. See 26 U.S.C. §§ 4941, 4946(a)(1).8
However, the Underwood court held that the return of funds by the
foundation was not an act of self-dealing because it was simply the
return of a conditional gift. 461 F. Supp. at 1389.
Underwood is distinguishable from this case, primarily because the
donor in that case received an exact refund of the amount he had
donated. By contrast, CFF is going to receive properties that were
purchased for $3.5 million more than CFF and Cafesjian donated to
acquire them (the amount of Mathevosian's contribution) and that may
or may not have appreciated in value since then. Therefore, it could
be argued that CFF will "profit" from the transfer of the properties.
However, pecuniary gain does not automatically equate to inurement;
the question is whether the profit is reasonable in light of the
benefits to AGM&M. Cf. Church By Mail, Inc. v. Comm'r, 765 F.2d 1387,
1392-93 (9th Cir. 1985) (noting that payment of excessive salaries
to employees may constitute inurement to the benefit of a private
person). The circumstances surrounding the Grant Agreement and the
formation of AGM&M demonstrate that the reversion clause was an
essential part of the bargain that enabled AGM&M to obtain the funds
necessary to acquire the properties. Cafesjian and CFF were unwilling
to donate additional millions of dollars to the genocide museum and
memorial project unless they could be reasonably assured that the
project would be substantially completed in a timely manner.
Therefore, they demanded a reversion clause that would enable them to
get control of the properties in case AGM&M was unsuccessful. This was
not a sham transaction for AGM&M to shelter assets for Cafesjian and
CFF; it was an agreement that gave AGM&M a financial incentive to be
successful with the money donated by Cafesjian and CFF. The Court has
already found that Cafesjian and the CFF-designated trustees of AGM&M
acted in good faith to try to develop the genocide museum and memorial
before the reversion date of December 31, 2010. In that regard, it
is unfair and without support to characterize the Grant Agreement as
an act of self-dealing or to state that AGM&M was operating for the
private benefit of Cafesjian or CFF.9 4. Implementing the Transfer
For all of the aforementioned reasons, the Court finds that the Grant
Agreement clearly and unambiguously requires AGM&M to transfer the
Grant Property to CFF without regard to any tax consequences that
flow therefrom. To date, AGM&M has failed to transfer the Grant
Property, citing concerns about the tax consequences of the transfer
and demanding that several restrictions be placed on the transfer.10
Now that the Court has addressed Plaintiffs' arguments relating to
the tax consequences of the transfer, there should be no reason for
further delaying the transfer of the properties. Defendants have asked
the Court to order the trustees of AGM&M to sign certain documents
prepared by Defendants to complete the transfer. The Court declines
at this time to order the trustees to sign the specific documents
drafted by Defendants' counsel. Instead, the Court shall order the
AGM&M trustees to transfer the property to CFF in accordance with
D.C. law by no later than May 23, 2011.
B. Findings of Fact and Conclusions of Law Regarding AGM&M's
Indemnification of Cafesjian and Waters The Court ruled in its prior
Memorandum Opinion that Defendants Cafesjian and Waters were entitled
to indemnification under § 4.1 of the AGM&M By-Laws for expenses
actually and necessarily incurred by them in defense of claims brought
against them by Plaintiffs. The indemnification requirement extends
only to claims that arose out of Cafesjian's or Waters's duties as
officers or directors of AGM&M, which are asserted in Count One of
the Consolidated Complaint.
Expenses relating to the Assembly's claims against Cafesjian and
Waters for breach of fiduciary duty or misappropriation of trade
secrets are not covered by the indemnification clause in the AGM&M
By-Laws. The Court previously indicated that it would determine the
amount of indemnification in post-trial proceedings. Cafesjian and
Waters have submitted a brief with supporting documentation that
sets forth the amount of their expenses. Plaintiffs have filed an
opposition contesting the reasonableness and validity of those
expenses, and Defendants have filed a reply. Plaintiffs raise a
series of objections to Defendants' request for indemnification,
and the Court shall address each below.
"[O]nce a contractual entitlement to attorney's fees has been
ascertained, the determination of a reasonable fee award is for the
trial court in light of the relevant circumstances." Ideal Electronic
Sec. Co. v. Int'l Fid. Ins. Co., 129 F.3d 143, 150 (D.C. Cir. 1997).
"[T]he reasonableness of an attorney's fees award is within the
sound discretion of the trial court and is reviewed only for abuse of
discretion." Id. The Court has discretion to determine the nature and
amount of proof necessary to determine reasonableness and may fix the
amount of the fee without hearing any evidence at all. FDIC v. Bender,
127 F.3d 58, 64 (D.C. Cir. 1997).
1. Self-Dealing Although they did not raise this argument before the
Court issued its Memorandum Opinion, Plaintiffs now contend that
indemnification is not required under the By-Laws because AGM&M
has been deemed a private foundation within the meaning of § 509
of the Internal Revenue Code and the payment of legal expenses to
Cafesjian and Waters would amount to an act of self-dealing under
§ 4941(d) of the Internal Revenue Code. See By-Laws § 4.3 ("[I]f
at any time the Corporation is deemed to be a private foundation
within the meaning of Section 509 of the Code then, during such
time, no payment shall be made under this Article if such payment
would constitute an act of self-dealing or a taxable expenditure,
as defined in Section 4941(d) or Section 4945(d), respectively, of
the Code."). Defendants dispute whether AGM&M has been "deemed to be
a private foundation," since there is no evidence that the IRS has
yet made such a determination. Plaintiffs have submitted financial
documents to the Court under seal purportedly showing that AGM&M
lost its status as a public charity in fiscal year 2010, when its
public support fraction dropped below the level required to maintain
public charity status. See [217] Pls.' Status Report to the Court at
3-5. However, there is no evidence before the Court indicating that
the IRS has made any determination that AGM&M qualifies as a private
foundation. Section 4.3 provides that indemnification shall not be
paid "during such time" that "the Corporation is deemed to be private
foundation," suggesting that until a determination is made by the IRS,
indemnification must be paid.
Even assuming that AGM&M is deemed a private foundation, however,
Treasury regulations provide that indemnification of former officers
does not amount to an act of self-dealing for purposes of § 4941(d).
Pursuant to 26 C.F.R. § 53.4941(d)-2(f)(3), section 4941(d)(1)
shall not apply to the indemnification by a private foundation of
a foundation manager, with respect to the manager's defense in any
civil judicial or civil administrative proceeding arising out of the
manager's performance of services (or failure to perform services)
on behalf of the foundation, against all expenses (other than taxes,
including taxes imposed by chapter 42, penalties, or expenses of
correction) including attorneys' fees, judgments and settlement
expenditures if~W (A) Such expenses are reasonably incurred by the
manager in connection with such proceeding; and (B) The manager has
not acted willfully and without reasonable cause with respect to the
act or failure to act which led to such proceeding or to liability
for tax under chapter 42.
Therefore, the By-Laws provision precluding payment of indemnification
where it constitutes self-dealing does not preclude the Court from
ordering AGM&M to pay Cafesjian and Waters for the reasonable expenses
they incurred in defending their claims.
2. Arbitration Plaintiffs next argue that the Court should reject
Defendants' request for indemnification because the legal expenses
associated with this litigation could have been avoided had Cafesjian
and Waters agreed to arbitrate this dispute. Plaintiffs had filed a
demand for arbitration with the American Arbitration Association on
September 13, 2007 relating to the first lawsuit filed by Cafesjian
and CFF against the Assembly in Minnesota. On October 10, 2007,
Cafesjian and Waters, inter alia, filed a lawsuit in Minnesota to
enjoin the arbitration.
The parties ultimately stipulated to the dismissal of that lawsuit in
September 2007. Therefore, Plaintiffs have long since abandoned any
attempt to compel arbitration of the issues contested in these actions,
and there is nothing in the arbitration provisions of the AGM&M By-Laws
that requires Cafesjian and Waters to agree to arbitration. Most
significantly, the indemnification provision in the AGM&M By-Laws does
not require Cafesjian or Waters to submit to arbitration. Accordingly,
there is no basis for concluding that Cafesjian's and Waters's legal
expenses are unreasonable or unnecessary based on their decision
to litigate in federal court. The Court also notes that Plaintiffs
did not include this argument in their proposed conclusions of law
or otherwise present this argument to the Court during the trial;
this is an independent reason for rejecting Plaintiffs' argument.
3. Expenses Incurred by CFF Plaintiffs next claim that CFF has
paid the legal expenses for this litigation on behalf of Cafesjian
and Waters, and since CFF is not subject to indemnification under
the AGM&M By-Laws, they claim that no indemnification is owed. In
response to Plaintiffs' claim, Defendants state that they have removed
any expenses paid by CFF from their request for indemnification,
leaving only expenses paid by Cafesjian.11 Defendants have produced a
declaration with supporting documentation demonstrating that Cafesjian
personally paid for the legal expenses that were not covered by
CFF. See Defs.' Reply in Support of Br. Quantifying Attorneys'
Fees for Indemnification, Ex. E (Suppl. Decl. of William G. Laxton,
Jr.). Accordingly, the Court shall consider only these expenses that
were incurred by Cafesjian in determining the amount of indemnification
required under the AGM&M By-Laws.
4. Identification of Expenses Subject to Indemnification Because the
scope of indemnification under the AGM&M By-Laws is limited to the
expenses incurred by Cafesjian and Waters in defending the claims
asserted against them as former officers and trustees of AGM&M,
Defendants must identify which expenses are related to these claims
and separate any expenses that they incurred asserting counterclaims
against Plaintiffs or defending against separate claims asserted by the
Assembly. In order to accomplish this task, Defendants have identified
three categories of expenses: (1) those that are clearly related to
the defense of claims asserted against Waters and Cafesjian in their
capacities as fiduciaries of AGM&M; (2) those that are clearly related
to other claims asserted in the litigation; and (3) those expenses
that cannot easily be separated between these two categories of claims
("blended expenses"). Defendants seek indemnity for the amount of
expenses in the first category and 67% of the blended expenses, based
on Defendants' estimate of the proportion of those expenses that
can be fairly attributed to the defense of claims that are subject
to indemnification. Plaintiffs do not take issue with Defendants'
decisions about which expenses belong in each category.
However, Plaintiffs argue that none of the blended expenses should
be awarded because they cannot clearly be linked to the claims that
must be indemnified. Alternatively, Plaintiffs argue that Defendants'
proposed percentage is too high and should be greatly reduced to 19%.
The parties have cited only a few cases to support their arguments
regarding the proper allocation of attorneys' fees, all of which
involve application of a fee-shifting statute rather than a contractual
indemnification clause. In Hensley v. Eckerhart, 461 U.S.
424 (1983), the Supreme Court addressed how fees should be awarded
to a prevailing party where the party prevailed on only some of the
claims asserted in the litigation. The Court noted that in such cases,
"[m]uch of counsel's time will be devoted generally to the litigation
as a whole, making it difficult to divide the hours expended on a
claim-by-claim basis," and therefore courts "should focus on the
significance of the overall relief obtained by the plaintiff in
relation to the hours reasonably expended on the litigation." 461 U.S.
at 435; accord Thomas v. Nat'l Football League Players Ass'n, 273
F.3d 1124, 1128-29 (D.C. Cir. 2001). The most analogous case cited
by the parties is Alpo Petfoods, Inc. v. Ralson Purina Co., No. Civ. A.
86-2728, 1991 WL 1292963 (D.D.C. Dec. 4, 1991), in which the court
awarded attorneys' fees that were limited to the costs of prosecuting
successful aspects of the prevailing party's case-in-chief. See
id. at *12-13. In that case, the party seeking an award undertook
a three-step methodology to calculate the time attributable to its
successful counterclaim: first, it excluded time clearly unrelated to
the successful claim; then, it segregated the remaining legal fees
into various subject matter categories based on the nature of the
relationship to the successful claim; and finally it estimated the
percentage of time in each category that could fairly be attributed to
a successful result. Id. at *12. The court accepted this methodology
as a valid means of proving the amount of fees that should be awarded.
Id.
These cases are somewhat in tension with the D.C. Court of Appeals's
decision in Safeway Stores, Inc. v. Chamberlain Protective Services,
Inc., 451 A.2d 66 (D.C. 1982). In that case, the court affirmed the
denial of attorneys' fees and expenses to a party where the court
determined that it was impossible to allocate the fees and expenses
among three claims, only one of which was subject to indemnity. Id. at
72-73. However, in that case, the party's right to indemnification
was based on the limited exception to the American Rule that allows a
party wrongfully involved in litigation with a third party to recover
the expenses of such litigation from the wrongdoer. See id. at 68-69.
It is therefore unclear whether Safeway Stores controls beyond its core
holding that "an indemnitee may be denied recovery of attorney's fees
from his codefendant indemnitor where the fees incurred in establishing
his right to indemnity are considered inseparable from those incurred
in defending the alleged negligence." Id. at 73.
The Court finds that it is unnecessary to resolve this issue at
this time because Defendants may be able to break down many of their
"blended" expenses in a manner that more clearly identifies whether
the costs incurred or the work performed were actually related to
the claims subject to indemnification. Moreover, beyond criticizing
Defendants' approach to calculating a percentage for the blended
expenses, Plaintiffs also contend that many of the expenses claimed
by Defendants are unreasonable. Plaintiffs complain that Defendants'
legal bills are bloated by excessive time devoted to ordinary tasks,
appearances by multiple attorneys where only one was necessary, and
other unnecessary expenses. In order to expedite resolution of these
disputes over the necessity of particular expenses, the Court shall
refer this issue to a magistrate judge for a report and recommendation
pursuant to Federal Rule of Civil Procedure 72(b) and Local Civil Rule
72.3(a). The magistrate judge may review Defendants' categorization of
"blended" expenses and determine whether there is a more appropriate
methodology for separating which expenses should be indemnified and
which should not. The magistrate judge may also review Plaintiffs'
objections to particular expenses and make decisions about which
expenses were "actually and necessarily incurred" within the meaning
of the indemnification provision of the AGM&M By-Laws. Upon review
of the magistrate judge's report and recommendation, the Court shall
determine, if necessary, whether Defendants' proposed blended expenses
approach is appropriate and what percentage should be applied to
those expenses.
C. Defendants' Motion for Attorneys' Fees for Vexatious Litigation
Apart from their claim for indemnification, Defendants have filed a
[221] Motion Requesting Attorneys' Fees for Vexatious Litigation.
Defendants argue that the Court should award attorneys' fees under
its inherent authority to sanction parties for vexatious conduct or,
alternatively, under 28 U.S.C. § 1927, which provides that "[a]ny
attorney or other person . . . who so multiplies the proceedings
in any case unreasonably and vexatiously may be required to satisfy
personally the excess costs, expenses, and attorneys' fees reasonably
incurred because of such conduct." Defendants contend that they should
be awarded attorneys' fees based on: (1) Plaintiffs' pursuit of a
claim for equitable disgorgement of Cafesjian's investments in Armenia
that was ultimately withdrawn before trial; (2) Plaintiffs' refusal
to disclose its theories of damages during discovery; (3) Plaintiffs'
use of allegedly obstructive tactics during discovery; (4) Plaintiffs'
filing unnecessary motions in the course of the litigation; and (5)
Plaintiffs' failure to produce a substantial number of documents until
the eve of trial. Plaintiffs have filed an opposition to Defendants'
motion, and Plaintiffs' trial counsel, K&L Gates LLP, have intervened
for the purpose of filing an opposition to Defendants' motion.
Defendants have responded to both of these oppositions, and the motion
is now ripe for adjudication.
Although the American Rule generally provides that each party must
bears its own legal costs, the federal courts have inherent power
to assess attorneys' fees when a party has "acted in bad faith,
vexatiously, wantonly, or for oppressive reasons." Chambers v. NASCO,
Inc., 501 U.S. 32, 45-46 (1991) (quoting Alyeska Pipeline Serv. Co. v.
Wilderness Soc'y, 421 U.S. 240, 258-59 (1975)). "As old as the
judiciary itself, the inherent power enables courts to protect their
institutional integrity and to guard against abuses of the judicial
process with contempt citations, fines, awards of attorneys' fees, and
such other orders and sanctions as they find necessary." Shepherd v.
Am. Broad. Cos., 62 F.3d 1469, 1472 (D.C. Cir. 1995). To support
a sanction under this inherent authority, "the court must make a
finding by clear and convincing evidence that [the [sanctioned party]
committed sanctionable misconduct that is tantamount to bad faith."
Ali v. Tolbert, ___ F.3d ____, 2011 WL 691364, at *5 (D.C. Cir. Mar.
1, 2011).
The Court may also award attorneys' fees based on vexatious conduct
pursuant to 28 U.S.C. § 1927. The purpose of § 1927 is to allow the
Court "to assess attorney's fees against an attorney who frustrates
the progress of judicial proceedings." United States v. Wallace,
964 F.2d 1214, 1218 (D.C. Cir. 1992). Before imposing sanctions on an
attorney, the Court must evaluate whether the attorney's conduct was
"at least reckless[.]" Id. at 1217. Recklessness is a "high threshold
. . . and in general requires deliberate action in the face of a
known risk, the likelihood or impact of which the actor inexcusably
ignores." Id. at 1219-20. "The power to assess costs on the attorney
involved is a power which the courts should exercise only in instances
of serious and studied disregard for the orderly process of justice."
Id. at 1220 (quotation marks and citations omitted). "[U]nintended,
inadvertent, and negligent acts will not support an imposition of
sanctions under section 1927." Id. at 1219 (quoting Cruz v. Savage,
896 F.2d 626, 631 (1st Cir. 1990)).
The Court notes at the outset that the majority of Defendants'
requests for fees relate to disputes that arose in the course
of discovery over what evidence should be produced in relation to
particular claims asserted by Plaintiffs. The Federal Rules of Civil
Procedure provide a mechanism for awarding expenses to parties who
incur expenses as a result of unnecessary discovery, and that is the
preferred approach for awarding expenses as a result of misconduct
during discovery. See Fed. R. Civ. P. 26(c)(3) & 37(a)(5). Defendants
did not seek expenses during the course of discovery, and Defendants
do not rely on the Federal Rules in asking the Court to award fees
for vexatious litigation.
1. Plaintiffs' Pursuit of a Claim for Disgorgement of Cafesjian's
Investments Defendants argue that they should be awarded the fees
they incurred in defending a claim asserted by the Assembly for
disgorgement of Cafesjian's business interests based on his failure
to disclose those interests to the Assembly under its conflicts
of interest policy. The Assembly did not explicitly assert such a
claim in its original complaint in Civil Action No. 08-255. However,
the Assembly did pursue discovery based on a disgorgement theory of
damages in connection with its claims for breach of fiduciary duty
and violation of the conflicts of interest policy. Defendants refused
to respond to the Assembly's requests for discovery on relevancy
grounds, and the Court denied the Assembly's motion to compel this
discovery. The Assembly ultimately dropped this claim prior to
trial. Defendants complain that they were forced to investigate the
Assembly's disgorgement theory and devote resources to defeating it
during the course of the litigation.
Defendants essentially argue that the disgorgement claim was frivolous
and that Plaintiffs were asserting it for the improper purpose of
harassing Cafesjian with improper discovery requests.
Although the legal basis for the Assembly's disgorgement claim has
never been clear to the Court and the claim was ultimately dropped as
lacking merit, the Court is not persuaded that Plaintiffs' pursuit
of that theory demonstrates recklessness or bad faith. It is often
the case that the contours of a party's claims evolve throughout the
discovery process, particularly with respect to damages and remedies.
The fact that Plaintiffs propounded overbroad discovery requests
related to this claim does not warrant imposition of sanctions
for vexatious litigation, even though it may have been sufficient
to justify an award of expenses under Rule 26(c) if Defendants
had moved for a protective order. See Fed. R. Civ. P. 26(c)(3) &
37(a)(5) (providing that expenses may be awarded if a motion for
protective order is granted). The fact that Defendants did not move
for discovery sanctions suggests that Plaintiffs' efforts to pursue
their disgorgement claim were not more vexatious than their pursuit
of other claims that were ultimately found to be meritless. In fact,
the record shows that Plaintiffs' attempts to litigate a disgorgement
claim were limited to identifying disgorgement as a potential remedy
in their answers to interrogatories, requesting discovery relating
to Cafesjian's business interests (which the Court denied), and
asserting this argument during the deposition of Edele Hovnanian. While
Defendants complain that they were forced to conduct legal research
to determine the viability of Plaintiffs' theory, that is part of the
ordinary costs of civil litigation. Accordingly, the Court declines
to exercise its discretion to award legal expenses to Defendants
based on Plaintiffs' attempts to pursue a disgorgement claim.
2. Plaintiffs' Failure to Disclose Theories of Damages During
Discovery Defendants contend that they should be awarded expenses
as a result of Plaintiffs' failure to disclose various theories of
damages during discovery. The Court previously granted Defendants'
motion to strike any theories of damages that were not sufficiently
disclosed during discovery. See Pretrial Conference Mem. Op. &
Order (Oct. 22, 2010) at 13-27. However, Defendants ask for the
additional sanction of attorneys' fees, arguing that Plaintiffs
vexatiously avoided their obligations to disclose their theories
of damages. Defendants rely on the fact that Plaintiffs failed to
provide a computation of their damages at the outset of discovery as
required by Rule 26(a)(1)(A)(iii), instructed Dr. Rouben Adalian not
to answer questions relating to damages during his deposition, and
provided incomplete or vague responses to Defendants' interrogatories
about damages. Defendants also rely on the fact that Plaintiffs'
Rule 30(b)(6) witness, Van Krikorian, was unable to answer questions
relating to the calculation of damages during his deposition.
Krikorian testified during that deposition that Plaintiffs would
produce an expert witness to address the subject of damages, but
Plaintiffs never designated any expert witnesses.
It is clear from the record that Plaintiffs were less than forthcoming
about their theories of damages during discovery, and that is the
basis upon which the Court granted Defendants' motion to strike
those claims. However, the Court is not persuaded that Plaintiffs'
conduct amounts to recklessness or bad faith sufficient to justify a
sanction under § 1927 or the Court's inherent authority. The record
indicates that Plaintiffs did supplement their disclosures with
estimates of their damages, and it appears that they may have had a
good faith basis for asserting those claims at the time. Ultimately,
Plaintiffs were unable to come up with evidence in support of those
claims, and therefore they were unable to give satisfactory responses
to Defendants' discovery demands. The Court is not convinced that
Plaintiffs were acting vexatiously by asserting their damages claims
during discovery and then being caught without evidence to support
them. Therefore, the Court finds that its pretrial sanction precluding
Plaintiffs from proceeding based on undisclosed damages was sufficient,
and it declines to award attorneys' fees based on this conduct.
3. Plaintiffs' Alleged Gamesmanship During Discovery Defendants next
argue that they should be awarded fees as a result of what they call
"unnecessary discovery and obstructive tactics" by Plaintiffs relating
to two depositions taken during discovery. First, Defendants complain
about the fact that Plaintiffs' counsel instructed Adalian not to
answer questions about damages during his deposition, since this was
not a proper instruction. See Fed. R. Civ. P. 30(c)(2) ("A person may
instruct a deponent not to answer only when necessary to preserve
a privilege, to enforce a limitation ordered by the court, or to
present a motion under Rule 30(d)(3).") Second, Defendants complain
about the fact that two days prior to Anoush Mathevosian's scheduled
deposition, Plaintiffs filed an emergency motion for a protective
order to proceed with the deposition by written questions in lieu of
an oral examination pursuant to Rule 31. Although Plaintiffs based
their motion on Mathevosian's poor health, Defendants argue that
it was made for purely strategic reasons because Plaintiffs needed
additional time to prepare Mathevosian to testify regarding the May 7,
2007 meeting of the AGM&M Board of Trustees.
With respect to deposition of Adalian, the Court granted Defendants'
motion to compel his testimony on the subject of damages. See [59]
Order (May 7, 2009). Plaintiffs' counsel had instructed Adalian not
to answer questions about damages because a Rule 30(b)(6) witness
was being designated for that purpose. During a telephone conference
on the record with the Court, Plaintiffs' counsel agreed that this
was an inappropriate basis upon which to instruct Adalian not to
answer questions. Accordingly, the Court ordered that Dr. Adalian's
deposition be continued so that Defendants could ask him questions
relating to damages. Defendants did not request any sanctions at the
time, and the Court did not award any sanctions.
With respect to the deposition of Mathevosian, the Court denied
Plaintiffs' emergency motion to proceed upon written questions rather
than by oral examination. See [64] Order (June 23, 2009). The Court
held that Defendants had established that it was important to depose
her and that Plaintiffs had not substantiated their claims that she
was too ill to be deposed. Defendants ultimately deposed Mathevosian
at her home, and the videotape of that deposition was presented to
the Court as part of the record at trial. It is apparent from that
video that she was in poor health, and given the limited scope of the
questioning from Defendants during that deposition, it was reasonable
for Plaintiffs to ask the Court to limit the method of questioning.
Defendants have seized upon these two incidents during discovery
as evidence of Plaintiffs' vexatiousness. However, the Court is not
persuaded that Plaintiffs' counsel acted recklessly or in bad faith
in taking these actions. Accordingly, the Court declines to award a
sanction of attorneys' fees based on this conduct.
4. Unnecessary Motions Practice Defendants next argue that they should
be awarded expenses because Plaintiffs filed several unnecessary
"motions" during the course of the litigation. First, Defendants
complain about a request for entry of default that was filed 35
days after Defendants failed to file an answer to Plaintiffs' Second
Amended Complaint in Civil Action No.
07-1259. The Court denied Plaintiffs' request for entry of default,
agreeing with Defendants that default was inappropriate in light of
their participation in the lawsuit and the related actions pending
before the Court. Defendants argue that Plaintiffs filed their request
only for the purpose of delay and harassment, but they concede that
Plaintiffs' action was allowed by Rule 55. The Court declines to
sanction Plaintiffs for taking an action that is explicitly authorized
by the Federal Rules of Civil Procedure.
Defendants next complain about Plaintiffs' reference to Rule 11 in
a footnote of their reply brief in support of summary judgment. See
[79] Pls.' Reply Mem. at 5 n.5. In that footnote, Plaintiffs suggested
that Defendants had improperly cited Delaware case law and secondary
sources in support of their breach of fiduciary duty claims. With leave
of the Court, Defendants filed a surreply to respond to Plaintiffs'
suggestion. See [82] Defs.' Surreply. The Court agrees with Defendants
that the reference to Rule 11 was unnecessary, but Defendants also
did not need to file a surreply to respond to Plaintiffs' footnote.12
The Court shall not sanction Plaintiffs for asserting a legal argument
that Defendants' cited sources are not controlling authority.
Finally, Defendants complain about a motion filed by Plaintiffs
on the eve of trial asking Defendants to certify that they had
complied with certain discovery obligations. See [152] Pls.' Mot. for
Order Requiring Defs.' Confirmation of Compliance with Discovery
Obligations. Plaintiffs were seeking confirmation that Defendants
had searched all of Cafesjian's email addresses for discoverable
information in light of new evidence of additional email accounts
that surfaced before trial. Defendants argue that Plaintiffs' motion
was unnecessary and vexatious because the parties were engaged in
discussion about producing any outstanding materials before trial. The
Court ultimately denied the motion without prejudice after the parties
appeared to have resolved the dispute through negotiation. While
Plaintiffs should have been able to resolve their disagreement with
Defendants before filing a motion with the Court, the Court does
not find that Plaintiffs' motion was vexatious. The parties had
legitimate disputes about last-minute discovery obligations, and
Plaintiffs' decision to file a motion with the Court was not clearly
inappropriate. Therefore, the Court shall not sanction Plaintiffs
based on this conduct.
5. Production of Documents on the Eve of Trial Defendants' final
request for attorneys' fees is based on the fact that Plaintiffs
produced a large number of documents~Wsome 12,000 pages of emails~Wless
than two weeks before the start of the trial.
Plaintiffs' late production is troubling because these emails~Wmany
of which were ultimately used by Defendants as important exhibits
at trial~Wshould have been produced prior to the close of discovery
pursuant to the Court's scheduling order and prior rulings relating
to the consolidated discovery in these actions. By producing these
documents on the eve of trial, Plaintiffs forced Defendants to spend
a significant amount of time and resources reviewing these materials
instead of preparing their witnesses, rehearsing their arguments,
and otherwise preparing for a lengthy bench trial. Ultimately, it is
unclear what impact Plaintiffs' late production had on Defendants'
ability to prepare for trial. Defendants did not ask for a continuance
based on Plaintiffs' late production, but it was not in Defendants'
interest to delay the trial, so the Court cannot assume that Defendants
were not prejudiced by the untimely disclosures.
Based on the damning contents of many of the documents, Defendants
speculate that Plaintiffs acted in bad faith and abused the discovery
process by waiting until before trial to produce them. Plaintiffs
indicated to the Court that a computer problem had inadvertently
caused these documents to be omitted from its prior production of
documents during discovery. See [170] Pls.' Resp. to Defs.' Mot. to
Amend the Joint Pretrial Stmt. at 2. Plaintiffs' former counsel has
presented the Court with a declaration indicating that he was unaware
until October 2010 that additional emails existed that had not been
produced. See Decl. of Arnold E. Rosenfeld ¶ 11. While the Court
is willing to accept the declaration of Plaintiffs' former counsel
as an officer of the Court that documents were not deliberately
withheld until the eve of trial by legal counsel, it is unclear
whether Plaintiffs acted recklessly or otherwise breached their
obligation to timely supplement their discovery responses. Therefore,
the Court shall require Plaintiffs to provide the Court with a more
specific explanation as to why they did not produce these documents
during discovery. The Court may order payment of reasonable expenses
caused by Plaintiffs' untimely production pursuant to Rule 26(c)(1)
if the Court is not satisfied with Plaintiffs' response. The Court
shall hold in abeyance Defendants' motion for attorneys' fees with
respect to the untimely production of these documents.
D. Defendants' Petition for Involuntarily Dissolution On February 16,
2011, Defendants filed a [198] Petition for Involuntary Dissolution
asking this Court to begin the involuntarily dissolution of AGM&M
pursuant to the procedures in the District of Columbia Nonprofit
Corporation Act, D.C. Code §§ 29-301.01 to 301.114.
Pursuant to D.C. Code § 29-301.55, the Act provides in pertinent part:
The court shall have full power to liquidate the assets and affairs
of a corporation: (1) In any action by a member or director when it is
made to appear: (A) That the directors are deadlocked in the management
of the corporate affairs and that irreparable injury to the corporation
is being suffered or is threatened by reason thereof, and either that
the members are unable to break the deadlock or there are no members
having voting rights; (B) That the acts of the directors or those in
control of the corporation are illegal, oppressive, or fraudulent;
(C) That the corporate assets are being misapplied or wasted; or (D)
That the corporation is unable to carry out its purposes[.] D.C. Code
§ 29-301.55(a). The Nonprofit Corporation Act sets out specific
procedures for liquidation proceedings. See id. §§ 29-301.55 to 301.60.
As the Court explained in a Memorandum Opinion and Order issued on
February 17, 2011, following passage of the District of Columbia Court
Reform and Criminal Procedure Act, Pub. L. No. 91-358, 84 Stat. 473
(1970), all powers over nonprofit corporation liquidation are vested
in the Superior Court of the District of Columbia. See [202] Mem. Op.
& Order at 5-6. The Court suggested, however, that it might be
appropriate to exercise supplemental jurisdiction over Defendants'
petition for involuntary dissolution, and the Court asked the parties
to submit briefing on this issue. Defendants filed a response to the
Court's order addressing the issue of jurisdiction, and Plaintiffs
have filed an opposition to Defendants' petition, to which Defendants
filed a reply. Therefore, the issue is ripe for the Court's resolution.
The supplemental jurisdiction statute, 28 U.S.C. § 1367, provides
that "the district courts shall have supplemental jurisdiction over
all other claims that are so related to claims in the action within
[the courts'] original jurisdiction that they form part of the
same case or controversy under Article III of the United States
Constitution." 28 U.S.C. § 1367(a). However, the statute provides
that a court may decline to exercise supplemental jurisdiction where
(1) the claim raises a novel or complex issue of state law; (2)
the claim substantially predominates over the claim or claims over
which the district court has original jurisdiction; (3) the court has
dismissed all claims over which it has original jurisdiction; or (4)
in exceptional circumstances, there are other compelling reasons for
declining jurisdiction. Id. § 1367(c).
Many federal courts have recognized that claims for corporate
dissolution involve special state interests that may be disrupted or
frustrated by the exercise of federal jurisdiction, and the existence
of state procedures for dissolution may require federal courts to
abstain from exercising jurisdiction. See, e.g., Pennsylvania v.
Williams, 294 U.S. 176, 185 (1935) ("It has long been accepted practice
for the federal courts to relinquish their jurisdiction in favor of
the state courts, where its exercise would involve control of or
interference with the internal affairs of a domestic corporation
of the state."); Caudill v. Eubanks Farms, Inc., 301 F.3d 658,
661-65 (6th Cir. 2002) (affirming district court's abstention from
jurisdiction over corporate dissolution claim under Burford v. Sun Oil
Co., 319 U.S. 315 (1943)); Friedman v. Revenue Mgmt. of N.Y., Inc.,
38 F.3d 668, 671 (2d Cir. 1994) (recognizing that the comprehensive
regulation of corporate governance and existence by the state may
warrant abstention under Burford); In re English Seafood (USA) Inc.,
743 F.Supp. 281, 288-89 (D. Del. 1990) ("We find that abstention is
required in this case. The state of Delaware has a strong interest
in the formation and termination of corporations under its laws and
in the uniform development and application of the statutory scheme
that the state legislature and courts have created to regulate those
corporations."); see also Kermanshah v. Kermanshah, 580 F.Supp.2d 247,
271 (S.D.N.Y. 2008) (citing cases). Although there is some question
whether similar principles should apply to the District of Columbia,
see Silverman v. Barry, 727 F.2d 1121, 1123 n.4 (D.C. Cir. 1984),
there is some basis for considering the Superior Court's expertise in
resolving these local issues, see Handy v. Shaw, Bransford, Veilleux &
Roth, 325 F.3d 346, 351-52 (D.C. Cir. 2003). Accordingly, the Court is
reluctant to assert jurisdiction over a matter that is nearly always
handled exclusively by the local courts of the District of Columbia.
Defendants argue that the Court should exercise supplemental
jurisdiction over the petition because the Court has already invested
a substantial amount of time in this litigation and is familiar with
the problems facing AGM&M. However, while the Court may be familiar
with some of the facts that are relevant to Defendants' petition,
Defendants did not assert this claim for relief in their Streamlined
Counterclaims or any of their pretrial briefs, and this claim was not
litigated by the parties at trial.13 Resolution of Defendants' petition
would require additional findings of fact by the Court following "a
hearing had upon such notice as the court may direct to be given to
all parties to the proceedings and to any other parties in interest
designated by the court."14 D.C. Code § 29-301.56(b). Such proceedings
would likely occur after the Court has finally disposed of the parties'
original claims, which is an additional reason to decline the exercise
of supplemental jurisdiction. See 28 U.S.C. § 1367(c)(3).
It is one thing to have the Court exercise supplemental jurisdiction
over a claim in the interest of judicial economy; it is another
thing entirely to seek to extend the Court's jurisdiction by adding
a completely new claim after the trial has been held.
For the foregoing reasons, the Court declines to exercise supplemental
jurisdiction over Defendants' [198] Petition for Involuntary
Dissolution. Defendants should seek appropriate relief from the
Superior Court for the District of Columbia.
E. Defendants' Motion for Order to Show Cause as to Why Plaintiffs
Should Not Be Held in Comtempt On March 21, 2011, Defendants filed a
[214] Request for Order to Show Cause as to Why Plaintiffs Should Not
Be Held in Contempt. Defendants contend that Plaintiffs have violated
one of this Court's orders by relocating certain materials maintained
by the Armenian National Institute ("ANI") off the premises of the
Families U.S.A. building.
Plaintiffs do not dispute that ANI has moved its materials out of the
Families U.S.A. building, but they contend that they should not be
held in contempt because ANI is a separate legal entity that is not a
party to this litigation and the Court did not expressly order it to
keep its belongings in the Families U.S.A. building. The Court agrees
with Plaintiffs that there is no basis for finding them in contempt.
Following the completion of closing arguments at trial, the Court asked
the parties if they would agree not to take any actions with respect
to the properties pending the Court's ruling. Because the reversion
date of December 31, 2010 was approaching soon after trial, the Court
wanted assurances that the parties would not attempt to enforce the
Grant Agreement or change the status quo while the Court was in the
process of deciding the case. Plaintiffs agreed that they would wait
until the Court's ruling before taking action. Defendants also agreed
that they would not take any actions with respect to the buildings,
but they raised a concern about "the ANI situation," referring to
the materials being stored in the Families U.S.A.
building and the staff working there. See Trial Tr. (11/29) at 168. In
response, the Court stated: I would hope that while we await my
decisions that nothing happens to them or they get moved or anything
else. I'd prefer not to enter an order because I'm sure~Wunless you
can reach an agreement about what both sides need to do. If you can
reach some stipulation or some sort of consent order, I'd be happy
to sign something until I make a decision.
Id. at 168-69. Defendants complained about the lack of an enforcement
mechanism and asked for a right of inspection. See id. at 170-71. The
Court then inquired as to whether there was inventory of the materials
kept by ANI, and Plaintiffs' counsel informed the Court (after
conferring with Dr. Rouben Adalian, who was present in the courtroom),
that there was not a precise inventory. Id. at 171. Plaintiffs'
counsel told the Court that nothing had happened to the materials for
a long time since the litigation began, and Plaintiffs agreed that
nothing should happen to them pending the Court's decision. The Court
then told the parties several times that they should try to reach an
agreement about this issue before asking the Court to enter an order:
Let me make the suggestion, in order to enter some sort of order you
either have to agree to it or you need to file something in terms of
what my authority would be. ANI, technically, is not a party, although
they are under you, it's under the umbrella of [AGM&M], I'd have to
take a look at that more carefully. So, I'm just saying that this is
not something I would do off the top of my head. If you can reach
some agreement that just simply says nothing gets moved by anybody
that relates to this until I make this decision, that would be helpful.
Once I make a decision, I will bring you back to have some discussion
further.
. . .
[I]f you can agree to something, that would be most helpful. Just
leave everybody with nobody moving or doing anything, that would be
helpful. If you can't do that and you still feel strongly, then file
something and then I'll take a look at it. I prefer not to put my
resources into that. But why don't you have a discussion about it.
. . .
As I said, I would prefer that you have discussion about it, see if
you can resolve something. If you want me to sign something, fine.
Reach a stipulation, however you want to do it. If you can't, then
you need to file something. I'm not going to do it today without your
filing something in writing.
. . .
[W]hat I'm asking is nobody move anything. I mean, in other words,
we've been~Wyou've been on pause while we've been waiting for this
for at least~Wat least for a couple of years at the end [of the]
year. So, don't change anything. I mean, you can accept new donations,
but don't move the property or make changes to the thing. To the extent
that you want to put something~Wstipulate that nobody~Weither side is
going to do anything, then that would be helpful. But I'll do this
as fast as I can. But if you're not satisfied, then file something
in writing and I'll litigate it. But I would suggest that you talk
and see whether you can do it on a more amicable basis.
Id. at 171-75. The parties did not present any stipulation or agreement
to the Court for ratification, nor did the parties file any motions
asking the Court to enter an Order.
Defendants argue that the removal of the ANI materials from the
Families U.S.A. building, which apparently occurred after the Court
issued its Memorandum Opinion on January 26, 2011, violated the Court's
oral admonition that "nobody move anything." However, as should have
been clear from the context, the Court's statement was not intended to
constitute a binding order on ANI.15 Even if the Court had intended to
impose a binding obligation, ANI's actions would not justify a finding
of contempt. The record presented by Plaintiffs demonstrates that ANI
waited until after the Court issued its January 26, 2011 Memorandum
Opinion before moving its materials to an offsite storage facility,
where they remain under the supervision of Dr.
Adalian. See Decl. of Dr. Rouben Adalian ¶¶ 3-6, 11, 14. Therefore,
there is no basis to conclude that ANI's assets have been wasted.
For these reasons, the Court finds that there is no basis for holding
Plaintiffs in contempt, and the Court shall deny Defendants' request
for a show cause order.
III. CONCLUSION For the foregoing reasons, the Court finds that the
Grant Agreement clearly and unambiguously requires AGM&M to transfer
the Bank Building and the Adjacent Properties to CFF without any
reimbursement requirement and without regard to any tax consequences
that might result from the transfer. Therefore, the Court shall order
AGM&M to effect the transfer of the properties without further delay
in compliance with D.C. law. The Court reaffirms its ruling that
Cafesjian and Waters are entitled to indemnification from AGM&M for
their attorneys' fees in defending the claims asserted against them
for breaching their fiduciary duty to AGM&M, but the Court shall refer
this issue to a magistrate judge for a report and recommendation. The
magistrate judge shall review the expenses submitted by Defendants
and make recommendations as to which of the claimed expenses should
be subject to indemnification; the Court shall review the magistrate
judge's report and recommendation and make a final ruling as to the
amount of the indemnification. The Court shall also deny-in-part
Defendants' [221] Motion Requesting Attorneys' Fees for Vexatious
Litigation because Defendants have mostly failed to demonstrate that
Plaintiffs or their counsel acted recklessly or in bad faith. However,
the Court shall hold in abeyance Defendants' motion with respect to
Plaintiffs' untimely production of documents on the eve of trial and
require Plaintiffs to more clearly explain why they did not produce
these documents during discovery.
The Court shall decline to exercise supplemental jurisdiction over
Defendants' [198] Petition for Involuntary Dissolution of AGM&M,
as this is a new claim asserted after trial that is best left to be
adjudicated by the Superior Court of the District of Columbia.
Finally, the Court shall deny Defendants' [214] Request for Order
to Show Cause as to Why Plaintiffs Should Not Be Held In Contempt
because Defendants have not shown that Plaintiffs violated one of
this Court's orders.
Because the Court has now finally disposed of all the parties'
claims except for determining the amount of indemnification, the
Court shall direct entry of final judgment pursuant to Rule 54(b)
as to all claims except for Defendants' claim for legal fees and
expenses under the indemnification provision of the AGM&M By-Laws
(Count VII of their Streamlined Counterclaims). An appropriate Order
accompanies this Memorandum Opinion.
--------------------------------------------------------------------------------
Footnotes
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1. As the Court has previously noted, the use of the term "genocide"
to describe the atrocities that befell the Armenians between 1915 and
1923 is not without controversy. The Court employs the term used as
by the parties, and the Court expresses no opinion on the propriety
of that label.
Back to Reference 2. All docket numbers refer to Civil Action
No. 08-255.
Back to Reference 3. In a Status Report filed on May 5, 2011,
Defendants indicated that all payments had been made under the
installment agreement and that title had been transferred to CFF.
Back to Reference 4. A duplicate copy of this exhibit with some
handwriting on the second page was admitted as PX-112.
Back to Reference 5. As used in this context, "AGM&M" refers to the
museum project, not the corporate entity.
Back to Reference 6. The record at trial indicated that the Assembly,
acting on behalf of AGM&M, refused to cash CFF's check for its annual
payment of $150,000 for the 1340 G Street property in 2007. The
Court found that although the payment was made a few days late, there
was no reason that the Assembly could not have cashed the check and
credited CFF with the payment. Accordingly, the Court finds that CFF
and Cafesjian satisfied their obligation to make the annual payment
in Back to Reference 7. Plaintiffs suggested during the February 24,
2011 Status Hearing that because the Grant Agreement defines the
"Grantor" as Cafesjian and CFF, there must be a private benefit to
Cafesjian. However, Cafesjian has relinquished his right to receive
the property in favor of CFF, and Plaintiffs have not demonstrated
how Cafesjian will benefit from the transfer.
Back to Reference 8. Plaintiffs argue that AGM&M is now a private
foundation and therefore may be subject to this tax if it transfers
the Grant Property to CFF. As explained below, the Court does
not believe that the transfer can be characterized as an act of
self-dealing within the meaning of § 4941. Furthermore, Plaintiffs
assume without discussion that CFF falls within the definition of
"disqualified person" under the statute, but this is not clear.
Back to Reference 9. Plaintiffs erroneously claim that Cafesjian was
entitled to four votes on the AGM&M Board of Trustees by virtue of
his pledge of more than $15 million. See Pls.' Reimbursement Br. at
14. At most, Cafesjian would have been entitled to three votes under
the AGM&M By-Laws. However, because of the 80% vote requirement,
Cafesjian would have had veto power over the Board's decisions
even if he were only recognized as having one vote. In any event,
the Court has already rejected Plaintiffs' argument that Cafesjian
acted in bad faith through his management of AGM&M.
Back to Reference 10. Among the conditions that the AGM&M trustees seek
to impose is an agreement that CFF will forfeit the Grant Property
to the Assembly if a permanent museum and memorial devoted to the
Armenian Genocide is not constructed within five years. See [212]
Pls.' Status Report at 4.
Back to Reference 11. Waters testified at trial that he had not paid
for any legal expenses. See Trial Tr. (11/15 AM) at 36-37.
Back to Reference 12. Plaintiffs did not file a motion for sanctions
under Rule 11, and the Court did not construe Plaintiffs' footnote as
requesting that sanctions be imposed. In any event, it was obvious
to the Court that Defendants' citation of persuasive authority was
not sanctionable conduct.
Back to Reference 13. By contrast, the plaintiffs in Miller v. Up In
Smoke, Inc., 738 F.Supp.2d 878 (N.D. Ind. 2010), upon which Defendants
rely, pled their alternative claim for judicial dissolution in the
complaint. See id.
at 866.
Back to Reference 14. The Court notes that none of the present
trustees of AGM&M were parties to this litigation during the
trial. Hirair Hovnanian was dismissed as a party at the summary
judgment stage. Anoush Mathevosian and Van Krikorian have never been
parties, although Van Krikorian attended the trial as the corporate
representative of the Assembly.
According to Defendants, the CFF-designated trustee of AGM&M is now
John Williams, Defendants' trial counsel. It is unclear whether Mr.
Williams could continue to represent Defendants through any dissolution
proceedings in light of his present status as a trustee.
Back to Reference 15. This Court has never determined that ANI is a
party to this litigation or that AGM&M or the Assembly has control
over ANI. The record at trial indicated only that the AGM&M Board of
Trustees had the right to appoint the Board of Governors of ANI.
Back to Reference
From: A. Papazian