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The Armenian Assembly of America, Inc., et al v. Gerard L. Cafesjian

February 20, 2013

THE ARMENIAN ASSEMBLY OF AMERICA, INC., ET AL., PLAINTIFFS/COUNTER-DEFENDANTS,
v.
GERARD L. CAFESJIAN, ET AL., DEFENDANTS/COUNTER-PLAINTIFFS.



The opinion of the court was delivered by: Colleen Kollar-kotelly United States District Judge

MEMORANDUM OPINION

Following a twelve-day bench trial in November 2010, the Court held that Defendants/Counter-Plaintiffs John J. Waters and Gerard L. Cafesjian were entitled to indemnification from Plaintiff/Counter-Defendant Armenian Genocide Museum & Memorial, Inc. ("AGM&M") for legal expenses incurred in defending claims asserted against Waters and Cafesjian in their capacities as former officers of AGM&M. Armenian Assembly of Am., Inc. v. Cafesjian, 772 F. Supp. 2d 20, 126-27 (D.D.C. 2011) ("Armenian Assembly I"). The Defendants subsequently filed a motion seeking $2,875,058.23 in fees and expenses from AGM&M, which the Court referred to Magistrate Judge Alan Kay for resolution. Defs.' Suppl. Mot. for Attorney's Fees, ECF No. [220]; 5/9/2011 Order, ECF No. [309].*fn1 Magistrate Judge Kay issued a Report and Recommendation on April 24, 2012, recommending that the Court award the Defendants indemnification in the amount of $1,461,658.54. Report & Recomm. ("R&R"), ECF No. [352]. Presently before the Court are AGM&M's objections to Magistrate Judge Kay's R&R.*fn2 Upon consideration of the pleadings,*fn3 the relevant legal authorities, and the record as a whole, the Court finds none of AGM&M's objections have merit. The Court shall deduct $13,684.38 from the final award as agreed to by the parties, but the AGM&M's objections are OVERRULED. Magistrate Judge Kay's Report and Recommendation is ADOPTED as modified below, for substantially the same reasons as articulated by Magistrate Judge Kay.

I. LEGAL STANDARD

Under Local Civil Rule 72.2(b), "[a]ny party may file written objections to a magistrate judge's ruling under [Local Civil Rule 72.2(a) ] within 14 days[.]" Local Civ. R. 72.2(b). Local Civil Rule 72.2(b) further provides that "[t]he objections shall specifically designate the order or part thereof to which objection is made, and the basis for the objection." Id. Pursuant to Local Civil Rule 72.2(c), "a district judge may modify or set aside any portion of a magistrate judge's order under this Rule found to be clearly erroneous or contrary to law." See also Fed. R. Civ. P. 72(a) ("The district judge in the case must consider timely objections and modify or set aside any portion of the [magistrate judge's] order that is clearly erroneous or is contrary to law.") (emphasis added). A court should make such a finding when the court "'is left with the definite and firm conviction that a mistake has been committed.'" Am. Soc'y for Prevention of Cruelty to Animals v. Feld Entm't, 659 F.3d 13, 21 (D.C. Cir. 2011) (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573 (1985)).

II. DISCUSSION

A. AGM&M's Status as a Private Foundation Does Not Preclude Indemnification Initially, AGM&M objects to Magistrate Judge Kay's refusal to revisit the Court's earlier decision that AGM&M's status as a private foundation does not preclude AGM&M from indemnifying the Defendants. Pl.'s Objs. at 14. The indemnification provision of AGM&M's By-laws indicates that the corporation will indemnify any former trustee or officer "against any and all expenses and liabilities actually and necessarily incurred by him . . . in connection with any claim, action, suit or proceeding . . . in which he or she is or may be made a party by reason of having been [a] Trustee[]" or officer. Pls.' Tr. Ex. 122 (PX-122), § 4.1. The availability of indemnification is limited by Section 4.3 of the By-laws, which provides that [I]f at any time the Corporation is deemed to be a private foundation within the meaning of Section 509 of the Code then, during such time, no payment shall be made under this Article if such payment would constitute an act of self-dealing or a taxable expenditure, as defined in Section 4941(d) or Section 4945(d), respectively, of the [Internal Revenue] Code.

Armenian Assembly of Am., Inc. v. Cafesjian, 772 F. Supp. 2d 129, 151 (D.D.C. 2011) ("Armenian Assembly II"). AGM&M asserts (and the Defendants do not dispute) that AGM&M is currently considered a private foundation by the IRS. Pl.'s Objs. at 14 & Ex. B (IRS Exempt Org. Select Check for AGM&M). Pursuant to section 4941(d)(1), "self-dealing" includes payment of compensation or transfer of income/assets of the foundation to a "disqualified person." 26 U.S.C. § 4941(d)(1)(D), (E). Per section 4946, officers like Defendants Waters and Cafesjian are "disqualified persons." 26 U.S.C. § 4946(a)(1)(B), (b)(1).

As previously noted by the Court, under certain circumstances, Treasury regulations provide that indemnification of former officers does not constitute self-dealing for purposes of section 4941(d). Armenian Assembly II, 772 F. Supp. 2d at 151. 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.

The Court thus held that "the By--Laws provision precluding payment of indemnification where it constitutes self-dealing does not preclude the Court from ordering AGM&M to pay Cafesjian and Waters for the reasonable expenses they incurred in defending their claims." Armenian Assembly II, 772 F. Supp. 2d at 152. Magistrate Judge Kay declined AGM&M's invitation to revisit this ruling. AGM&M now argues that indemnifying Waters and Cafesjian would amount to self-dealing under the relevant Treasury regulation because (1) Waters and Cafesjian breached their fiduciary duties to AGM&M, and thus acted "willfully and without reasonable cause"; and (2) the expenses incurred were not reasonable. Neither argument has merit.

AGM&M argues that Waters' and Cafesjian's acted willfully and without reasonable cause by: (1) "failing to take a more aggressive approach in soliciting contributions" for the museum project; (2) "initiating lawsuits against AGM&M (and refusing to arbitrate these matters)"; and (3) "generating adverse press . . . against AGM&M and its trustees." Pl.'s Objs. at 16. The Court previously determined as a matter of law that none of these actions constituted breaches of Waters' or Cafesjian's fiduciary duties AGM&M. Armenian Assembly I, 772 F. Supp. 2d at 107-116. The Court specifically found, among other things, that "the Board's inability to reach agreement over an architect prevented the implementation of any fundraising initiatives," id. at 108, Cafesjian's lawsuit seeking rescission of the Grant agreement was not filed in bad faith, and "Cafesjian filed the lawsuit to protect his contractual rights, which he was entitled to do," id. at 114. With respect to the allegedly "adverse press," the Court found that "there is no evidence in the record that any of the published statements were inaccurate or defamatory," and thus the articles were not published in bad faith to harm AGM&M. Id. at 115. Cafesjian and Waters did not act "willfully or without reasonable cause" as alleged by AGM&M.

With respect to AGM&M's second argument, as set forth infra, Magistrate Judge Kay's proposed methodology sufficiently accounts for any potentially excessive billing entries, ensuring the overall award is reasonable. The Defendants satisfy the requirements of the relevant Treasury regulation, 26 C.F.R. ยง 53.4941(d)--2(f)(3), therefore indemnification of the Defendants as ...


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