1. As part of the deal between Salmon and Meinhard, Meinhard paid 50% of the costs needed for renovations and operations of the property and Salmon paid 40% of the net profits for the first five years, then 50% of net profits for the following years. In the event of losses, the cost would be split.
2. Facts
2.1. Stakeholders
2.1.1. Walter J. Salmon
2.1.1.1. Walter Salmon is the defendant in the case and the coadventurer of Morton Meinhard
2.1.2. Morton H. Meinhard
2.1.2.1. Morton Reinhard is the plaintiff in the case and coadventurer of Walter Salmon
2.1.3. Louisa M. Gerry
2.1.3.1. Louisa Gerry is the original owner of Hotel Bristol and the lessor of the property
2.1.4. Elbridge T. Gerry
2.1.4.1. Elbridge Gerry is the subsequent owner of the Hotel Bristol property as well adjoining property
2.1.5. Midpoint Realty Company
2.1.5.1. Midpoint Realty is the realty company owned by Walter Salmon and through which the second lease in the case was issued
2.2. Louisa Gerry leased the Hotel Bristol to Walter Salmon in 1902 for 20 years and Salmon intended to renovate the building for $200,00
2.3. To afford the renovations, Salmon also struck a deal with Morton Meinhard and the two became "coadventurers"
2.3.1. The partnership included that Salmon would keep the sole power to "manage, lease, underlet, and operate" the property.
2.3.2. After several years of financial loss, huge profits were made for both parties.
2.4. In 1922, the last year of the lease between Louisa Gerry and Walter Salmon, the new owner of the property, Elbridge Gerry, leased the same property as well as five other lots to Midpoint Realty Company
2.4.1. Elbridge Gerry had shopped around for a potential lessee for his string of lots to no avail when he approached Salmon
2.4.2. Midpoint Realty Company is owned by Walter Salmon
2.4.3. The lease between Gerry and Midpoint was for 20 years with the potential for renewal for up to 80 years
2.4.4. Under this lease, the standing buildings would remain in tact for seven years then would be demolished and a new one built in its place
2.4.4.1. The new building would cost $3,000,000 with rent increasing from $55,000 under the old lease to between $350,000 and $475,000 under the new lease
2.5. Salmon did not include his long time coadventurer, Meinhard, in the negotiations or agreements of the new lease with Elbridge Gerry
2.6. In response, Meinhard requested that Salmon include him in the new venture. When Salmon refused, Meinhard sued
2.7. The court ruled in favor of Meinhardt but originally only to the extent of 25% of profits, then back to 50% in appellate court.
2.8. Salmon appealed
3. Issue Before The Court
3.1. Whether or not Mr. Salmon was obligated to include Mr. Meinhard in his endeavors concerning the second lease with Elbridge Gerry
3.1.1. The primary issue for this case revolves around informing, inclusion and communication.
3.1.2. When a partner within a business relationship fails to inform / disclose information to his or her co partners, does this in fact constitute a breach of loyalty / duty?
3.1.3. Do the business opportunities that arise due to a partnership then belong to that partnership even if they are offered only to an individual?
3.2. Whether or not there was a duty of good faith and communication on the part of Salmon to Meinhard
4. Rule of Law
4.1. Partnership law
4.1.1. The ruling in this case dealt with partnership law and the fiduciary responsibilities between partners. The court saw the onus on Salmon to make Meinhard aware of the new lease
4.1.2. Opportunities that arise to one partner in a partnership are considered to be belonging to the partnership itself
4.1.2.1. One partner taking advantage of such opportunity would be considered a breach of the partnership
4.2. Duty of good faith
4.2.1. As the case state: "He [Salmon] was bound to use good faith. He could not willfully destroy the lease, the object of the adventure, to the detriment of Mr. Meinhard."
4.2.1.1. There was no written statement that tied Meinhard to Salmon after the original lease, but the court agreed that Salmon had the responsibility of acting in good faith to extend the offer to Meinhard
4.2.2. Under this premise, Mr. Salmon had the obligation to include Mr. Meinhard in the new lease, at a minimum to allow him the opportunity to compete for the lease
5. Application
5.1. Redefining Partnership Law
5.1.1. Fiduciary Duty
5.1.1.1. It is indisputable that Meinhard and Salmon entered a written partnership with respect to the Hotel Bristol property. Salmon’s reason for seeking a partner: he lacked the funds to begin the improvements of the initial property (Hotel Bristol)
5.1.1.1.1. Because of the original agreement to partner, Salmon had a fiduciary duty to inform Meinhard of the new business venture.
5.1.2. Punctilio
5.1.2.1. Judge Cordova held Salmon to the highest standard of punctilio, or etiquette/attention to details.
5.1.2.1.1. Cordova mentioned a failure of Salmon to hold himself to these standards by acting in secrecy
5.1.3. Duty of Good Faith
5.1.3.1. In a partnership, the general partners owe each other a duty of honesty, good faith, fairness and loyalty.
5.1.3.1.1. Cordova states that the duty of partnerships goes beyond a simple duty of good faith that is applicable on most contracts.
5.1.4. Duty of Information/Communication
5.1.4.1. Salmon did not even communicate the idea of this new venture to Meinhard. He kept his partner in the dark about any venture.
5.1.4.1.1. It begs the question, would the ruling have changed at all if Salmon performed the most basic duty of communication/information.
6. Conclusion
6.1. Meinhard was originally awarded 25%
6.2. The Apellate Court raised Meinhard's award to 50%
6.3. The Supreme Court affirmed the lower court's decision but lowered the award to 49%
6.3.1. Although Chief Judge Cordoza eloquently argued in favor of Meinhard (and he was joined by 3 other judges, tipping the scales in favor of Meinhard), there was a three judge dissent lead by Judge Andrews
6.3.1.1. In other words, according to Judge Cordoza, the duties of loyalty, money, and communication in a partnership extends far beyond the normal contractual relationships aka duty of good faith.
6.3.1.2. Per the dissenting Judge Andrews, the partnership ended at the end of 20 year contract period, since the partnership was formed to manage the building for twenty years.
6.3.2. According the Supreme Court lead by notable Judge Cordoza, Salmon (the managing partner) owed Meinhard a fiduciary duty and highest loyalty to inform Meinhard of the new venture ( a leasing opportunity).
6.3.2.1. It was only because of this original partnership and opportunity between Meinhard (the managing partner) and Salmon, that Salmon was able to obtain the new leasing opportunity. So, it was 'unfair' of Salmon to leverage the opportunity that arose from their partnership and benefit solely from it without sharing both the initial information and the monetary benefit of Meinhard.
6.3.2.1.1. This conclusion begs the question - would Meinhard have won if Salmon had performed the initial duty of communication, but withheld the monetary benefits?
7. Business and Ethical Impact of nearly a Century
7.1. This is a landmark case of corporate law and partnership law, with an impact that reverberates nearly a century later. According to WestLaw, the Meinhard v Salmon case had been cited 1,021 times, including 296 New York Cases, 120 cases in the Second Circuit, 591 decisions from other federal and state courts, and 14 international cases. Source: New York University and Economic Papers by Geoffrey Miller.
7.1.1. However, it is to be noted that the high standards of partnership duty is not reflected in the current Uniform Partnership Act.
7.1.1.1. In the Uniform Partnership Act, a partner's co-adventures are limited in modest terms.
7.2. This case has significant impact on almost every business after 1928 which defined itself by a partnership. This case re-defined and clarified the very nature of a business partnership, as one that goes beyond normal 'good faith duty' into one of highest fiduciary duty and highest duty of communication
7.3. This is also a case and impact of business ethics. Is it morally justifiable to keep information such as a leveraging opportunity or a co-adventure from your business partner?
7.4. Referenced Cases
7.4.1. Anderson v Lemon
7.4.1.1. Established what is considered to be fraudulent intent within a copartnership
7.4.1.2. Defendant advised his partner of interest in pursuing property as a joint purchase
7.4.1.3. Defendant ends up covertly bidding alone without terminating copartnership
7.4.2. Beatty v Guggenheim
7.4.2.1. "Constructive trust"
7.4.2.1.1. "The constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee. " - Justice Cardozo
7.4.2.2. Ruling: employee has fiduciary obligation to employer
7.4.3. Selwyn & Co. v Waller
7.4.4. Munson v Syracuse
7.4.4.1. This case rules to uphold the duty of loyalty and the assumption of "undivided loyalty" in partnership.
7.4.5. Latta v Kilbourn
7.4.5.1. Each [business] partner has fiduciary duty to other partners.
7.4.5.2. Ruling: a partner cannot use partnership assets for individual benefit.
7.4.6. Durkee v Gunn
7.4.6.1. Question of "intent" in partnership