Waters v. Armenian Genocide Museum & Memorial, Inc.

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
THE ARMENIAN ASSEMBLY OF
AMERICA, INC., et al.,
Plaintiffs/Counter-Defendants,
Civil Action Nos. 07-1259, 08-255,
v. 08-1254 (CKK)
GERARD L. CAFESJIAN, et al.,
Defendants/Counter-Plaintiffs.
MEMORANDUM OPINION
(May 9, 2011)
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
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.
2
All docket numbers refer to Civil Action No. 08-255.
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
2
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.
3
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
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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—just blocks from the White House—and 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 - 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.
5
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
6
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
7
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
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.
8
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
9
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.
10
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.
11
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
12
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
13
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”—defined as the
Bank Building and the Adjacent Properties—“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,
4
A duplicate copy of this exhibit with some handwriting on the second page was
admitted as PX-112.
5
As used in this context, “AGM&M” refers to the museum project, not the corporate
entity.
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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
15
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
16
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).
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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
18
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
19
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
20
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—stated in the
AGM&M By-Laws and Articles of Incorporation—that 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
21
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
22
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
23
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
24
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
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
25
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.
26
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
27
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
28
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.”).
29
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
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.
30
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
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.
31
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
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.
32
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
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.
33
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
34
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—
(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
35
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-
36
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
11
Waters testified at trial that he had not paid for any legal expenses. See Trial Tr. (11/15
AM) at 36-37.
37
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
38
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
39
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
40
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
41
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
42
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
43
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
44
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.
45
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
46
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
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.
47
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—some 12,000 pages of emails—less than two weeks before the start
of the trial. Plaintiffs’ late production is troubling because these emails—many of which were
ultimately used by Defendants as important exhibits at trial—should 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
48
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
49
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.
50
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
51
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
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.
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
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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
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.
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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—unless
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
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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—you’ve been on pause while we’ve been waiting for this for at least—at 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—stipulate that nobody—either 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
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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
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.
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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.
Date: May 9, 2011 /s/
COLLEEN KOLLAR-KOTELLY
United States District Judge
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