New Orleans Opera v. So. Reg. Opera Endow.

Decision Date27 August 2008
Docket NumberNo. 2007-CA-1373.,2007-CA-1373.
Citation993 So.2d 791
PartiesNEW ORLEANS OPERA ASSOCIATION, INC. v. SOUTHERN REGIONAL OPERA ENDOWMENT FUND, et al.
CourtCourt of Appeal of Louisiana — District of US

Daniel Lund William M. Davis Montgomery Barnett Brown Read Hammond & Mintz, L.L.P., New Orleans, LA, for Plaintiff/Appellee.

George Denegre, Jr., Shannon S. Holtzman, Jason R. Johanson, Liskow & Lewis, APLC, New Orleans, LA, for Defendant/Appellant, New Orleans Opera Endowment Fund.

(Court composed of Judge JAMES F. McKAY, III, Judge MICHAEL E. KIRBY, Judge Pro Tempore MOON LANDRIEU).

MICHAEL E. KIRBY, Judge.

The Southern Regional Opera Endowment Fund f/k/a New Orleans Opera Association Endowment Fund (hereinafter "Fund") appeals the granting of Summary Judgment in favor of the New Orleans Opera Association (hereinafter "Opera Association"). This matter dictates that we analyze the cause, as defined by La. Civil Code art. 1967, of the Articles of Incorporation of the Fund.

HISTORY

New Orleans has the longest history of grand opera performance of any city in the United States. The American premiers of some of the greatest French and Italian operas occurred in New Orleans in the 19th Century. In the 1840's, New Orleans supported three resident opera companies. Between 1860 and 1919, the regular performance of grand opera at the Old French Opera House in the Vieux Carré was a staple of the musical life of the city.

For the past 63 years, Grand Opera has been presented in New Orleans under the aegis of the Opera Association, a non-profit corporation formed in February, 1943. Every year the Opera Association has presented public performances of major grand operas featuring nationally and internationally known opera stars, professional sets and costumes, and a full orchestra and chorus. During this period, no other New Orleans based organization undertook this endeavor. The Opera Association also has developed and implemented community and educational outreach activities and has enriched young audiences by inviting student groups, free of charge, to the final dress rehearsals of each opera.

Although Hurricane Katrina forced the cancellation of a portion of the 2005-2006 season, the Opera Association quickly returned with an opera gala at the New Orleans Arena on March 5, 2006 featuring world-renowned tenor Placido Domingo. This gala was attended by nearly 7,000 people, the largest single attendance at an opera performance in New Orleans in the history of the city. Shortly thereafter, the Opera Association resumed regular opera programs and continues to this day.

On September 17, 1990, supporters of the Opera Association incorporated the Fund, a Louisiana non-profit corporation. The Fund's purpose was to provide a perpetual source of financing for the Opera Association whose full name was incorporated in the name of the Fund. Article 2 of the Fund's 1990 original articles of incorporation, states:

The purpose of this corporation shall be to support grand opera in New Orleans. In furtherance thereof, this corporation shall provide support exclusively for tax-exempt charitable purposes to the New Orleans Opera Association so long as the New Orleans Opera Association is an organization described in Section 501(c)(3) of the federal Internal Revenue Code of 1986, as amended, and in connection therewith, shall consider requests for financial assistance by the executive committee of the New Orleans Opera Association. [Italics added.]

Further confirming the exclusive purpose of the Fund, Article 11 states:

In the event of the dissolution or termination of the corporation, the Liquidator shall, after paying or making provision for the payment of all of the liabilities of the corporation, dispose of all of the assets of the corporation to the New Orleans Opera Association exclusively ... [Italics added.]

The intent of the of the original articles was re-affirmed in the deposition of Mrs. Lois Hawkins, a former president of the Opera Association, whose husband, Lloyd Hawkins, was a founder of the Fund. Mrs. Hawkins has donated generously to the Fund and sits on its Board. Her testimony was the following:

Q. Did you and Lloyd Hawkins ever entertain the idea of supporting opera in any other community than New Orleans through the New Orleans Opera Association?

R. No. * * * *

Q. Was it your intent, to the best of your knowledge your husband's intent, that the earnings from that corpus or from the principal in that Fund would benefit the New Orleans Opera Association?

R. Oh, very definitely. It would go only to the Association.

Q. * * * * I quote [from an exhibit]: "... The Fund creates a perpetual source of money assuring the growth and healthy development of the New Orleans Opera Association now and into the future." Period. End quote. And do you agree with that statement by Mr. Niehaus?

R. Yes, very definitely.

Prior to 2006, the Charter of the Fund was amended only once, on February 14, 2000. That amendment dealt with provisions for life membership in the Fund, the timing of directors' meetings, the location and addresses of the registered office and registered agent. Otherwise, the original articles of incorporation remained unchanged prior to 2006.

With its initial contribution supplemented by donations from hundreds of donors to the Fund since 1990, the Fund grew to $3,776,983 as of July 31, 2007. The donations, which both established the Fund and contributed to its growth, were solicited and accepted as the product of joint solicitation efforts and cooperative agreements between the Opera Association and the Fund.

Article 4(1) of the Fund's articles of incorporation requires the Fund to distribute its income on investments for each taxable year and authorizes distributions of additional amounts. In addition, the Fund is required to distribute any amount required to be distributed under Section 4942 of the Internal Revenue Code. Through calendar year 2005, all distributions were made each year exclusively to the Opera Association as exclusive beneficiary of the Fund. The amount of the annual distributions during the years 1998 through 2005 ranged between $75,000 and $275,000.

John C. Lovell, Jr., a director on the Fund's Board, stated in an affidavit that the Fund originally filed for tax-exempt status as a public charity. For public charities, the Internal Revenue Code does not impose a maximum or minimum amount that must be distributed each year. Over time, the Fund was unable to maintain its status as a public charity due to a lack of donations from the general public. In Mr. Lovell's opinion the Fund was required to adopt another tax-exempt classification in order to continue its tax-exempt status. In June 2005, the Fund's Board of Directors concluded that it could best meet its founders' objectives by becoming a private foundation.

Section 4942 of the Internal Revenue Code requires five per cent (5%) of the average value of a private foundation's investment assets for the previous year, less administrative costs, to be distributed yearly. The Lovell Affidavit further stated that the Fund's Board was concerned that these required minimum distributions would force it to significantly invade principal and erode the Fund's corpus over time. Mr. Lovell stated that preservation of the Fund's corpus is of paramount concern to the Opera Fund Board.

On February 1, 2006, acting "pursuant to a resolution of all the Members and Directors" of the Fund, the Fund amended and restated its Articles of Incorporation to change, inter alia, the Fund's name, its purpose, voting rights of members, control of its management and affairs and to remove the Opera Association's right to receive one hundred percent (100%) of the net assets of the Fund upon its dissolution.

On or about June 29, 2006, the Fund created a "donor designated" fund at the Greater New Orleans Foundation, ("GNOF") with an establishing gift of $145,000. The fund avers it did this to preserve the corpus of its funds and still comply with the public charity rules of the Internal Revenue Code. The GNOF was created as a Section 501(c)(3) public charity. See 26 U.S.C.A. § 501(c).

The Opera Association argues that under the 26 U.S.C.A. § 4942 rule, as well as Article 4(1) of the Fund's articles of incorporation, the Fund's Board was obligated to distribute to it about $220,000 by June 30, 2006. Instead, it argues, the Fund's Board chose to distribute a meager $75,000 to the Opera Association and diverted the remaining $145,000 to GNOF. The Fund responds to this contention by asserting that the decisions of the Fund's Board to alter the tax classification and adopt the February and November 2006 amendments all fall within the ambit of the business judgment rule. Salley v. Salley, 95-0387 (La.10/16/95), 661 So.2d 437, 441.

Through cooperative agreements, the Opera Association and the Fund have jointly solicited donations to the Fund. Examples of such agreements are evidenced in newsletters and program books produced by the Opera Association.

In the 1997-98 program, the Fund's Secretary, Owen Q. Niehaus, stated:

One may ask why such a substantial funding target is needed. Perhaps it is timely to review the purpose of the Endowment Fund. The Fund creates a perpetual source of money assuring the growth and healthy development of the New Orleans Opera Association now and into the future. [Italics supplied.]

In the 2002-03 program, Niehaus stated:

Remember: our purpose is to provide financial back-up to the New Orleans Opera Association if and when critical financial needs arise. We need your support and look specifically to being included in your income and estate planning to accomplish this objective.

And, in the 2000-01 and 2001-02 programs, Secretary Niehaus stated:

The objective of the New Orleans Opera Association Endowment Fund is to provide additional income to the Opera Association when needed. To achieve this objective, the Fund monitors closely the needs of...

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