Meinhard v. Salmon, 164 N.E. 545

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Meinhard v. Salmon, 164 N.E. 545 by Mind Map: Meinhard v. Salmon, 164 N.E. 545

1. Impact

1.1. Pegram et al. v. Herdrich

1.1.1. Background Cynthia Herdrich sought treatment from Dr. Lori Pegram, a provider for Carle HMO, which is covered by Herdrich's health insurance through her husband's employee policy with State Farm Insurance Company. The physician did not provide timely services to treat the patient's condition and the patient subsequently developed peritonitis. The patient, Herdrich, sued the physician, Pegram, for malpractice and the breach of their fiduciary duty to Herdrich.

1.1.2. How the law applied Meinhard v Salmon was not the central decider in this case. However, the court did reaffirm the findings from Meinhard v Salmon that a trustee has a duty to act in the best interests of the trust they are responsible for. However, the rulings from Meinhard v. Salmon can only be applied if the relationship between these parties met the definition of one requiring fiduciary duty as defined by the ERISA.

1.1.3. Result Ultimately the court found that the relationship between Dr. Lori Pegram and Cynthia Herdrich did not qualify as fiduciary in nature. This decision was based on the fact that the behaviors listed in the claim involved eligibility and treatment decisions. These types of decisions are not classified as fiduciary by the Employee Retirement Income Security Act (ERISA), and thus there was not a fiduciary relationship between the two parties.

1.2. Page v. Clark

1.2.1. Background Morton and Alice Clark owned two parcels of land. Mr. Clark worked for Mr. Page and Mr. Page utilized Mr. Clark's east parcel for his aircraft salvage business. Over time the Clarks sold their parcels of land to Mr. Page for a negotiated consideration. There were oral agreements made concerning the use and tenancy of the properties. Their personal relationship soured. When Mr. Page filed to have the Clarks removed from his land, they claimed the acquisition of the land was fraudulent.

1.2.2. How the law applied If a partnership or joint venture existed, then there would be a fiduciary duty between Page and the Clarks. If a fiduciary duty existed, when Page purchased the property from the Clarks for $5,000 less consideration than it was worth, there would have been a breach in the partnership or joint venture.

1.2.3. Result The findings of the lower courts were that the sales of the land were transactional in nature and the relationship between the two parties did not constitute a partnership. Through the appeals process additional facts concerning the case came to light. The Supreme Court of Colorado reversed the lower appeals court's decision and sent the case back to the trial courts for retrial with all available information.

2. Influence

2.1. The most significant business practice influenced by this case is that of renouncing the thought of self, however hard the abnegation.

2.1.1. In other words, the practice of acting in the best interests of the partnership at the expense of personal gain if that personal gain would come at the expense of the partnership.

2.1.2. A distinction drawn is that if there is no harm to the partnership, it may be fine to pursue profitable opportunities. If two surgeons (A & B) in a small physician practice do surgeries at a local hospital (more expensive) and physician A buys a nearby surgery center and start taking all of the cases due to an inherently lower price, and physician A have not communicated this opportunity to the partners, there may have been a breach of fiduciary duty. However, if physician A, instead, decides to buy a donut shop in the next state over and it is profitable and physician B does not have any knowledge of it, this will likely be within the boundaries of the law.

2.2. While this case was a joint venture (JV), the same duty applies to partnerships.

2.2.1. In both types of ventures, the coadventurers/partners are held to the highest standard of loyalty, fiduciary duty. At the time, coadventurers merely had to refrain from actively subverting the rights of their coadventurers. This distinction is important still today.

3. Importance

3.1. The importance of this landmark case in a business environment is twofold; there are huge implications on either side of this case.

3.1.1. What we can learn from the defendant's side is that when in a JV or partnership, there is a fiduciary duty and business opportunities pertaining to the JV/partnership's subject matter cannot be pursued by one partner without being communicated to the other partner(s). This is a breach of fiduciary duty by the partner pursuing a venture without freely and openly communicating with the other partner(s) without deception. A partner could also not, for example, buy good at an inflated price (which hurts the partnership) and get kickbacks (to enrich themselves) because this breaches their fiduciary duty. This would be cause for legal action.

3.1.2. From the plaintiff's perspective another important concept should be noted. If a partner breaches their fiduciary duty, there is legal ground to take action and seek damages. There are obviously also significant implications in industries such as investment management. If a partner and I invest together in a partnership and they find an attractive investment and do not communicate it to me for example, this is likely a breach of fiduciary duty.

4. Facts

4.1. Parties

4.1.1. Plaintiff Morton H. Meinhard

4.1.2. Defendant Walter J. Salmon

4.2. What happened

4.2.1. 1. Salmon and Meinhard entered into a joint venture that consisted of renovating and managing the property known as the "Hotel Bristol".

4.2.2. 2. The parties had a written formal agreement detailing the terms of the joint venture. The lease on this property ran from May 1, 1902 to April 30, 1922.

4.2.3. 3. When the lease was near its end (less than 4 months left) the owner of the property, Elbridge T Gerry, approached Salmon to enter into a project concerning the same property.

4.2.4. 4. Salmon did not discuss the terms of the new agreement with Meinhard and made no offer to involve him in the new venture.

4.2.5. 5. Salmon signed a new lease with the property owner on January 25, 1922.

4.2.6. 6. Meinhard discovered the existence of the new agreement in February 1922, after the lease had expired on his and Salmon's venture.

4.2.7. 7. Meinhard demanded he be given the opportunity to participate in the new venture. When this was denied, he decided to file a suit against Salmon.

4.3. Procedural History

4.3.1. Morton H Meinhard sued Walter J Salmon in the New York court system to force the new real estate project to be held in trust by the partnership.

4.3.2. A referee awarded Meinhard 25% share in the total project (or 50% of the half held by his former partner, Salmon).

4.3.3. This finding was appealed.

4.3.4. The appellate court awarded Meinhard 50% interest in the new project, or 100% of Salmon's share. The breach of Salmon's fiduciary duties led to this award.

4.3.5. Salmon appealed this decision.

4.3.6. The New York Court of Appeals confirmed the findings of the lower court, but altered Meinhard's share of the total project to 49%.

5. Issue

5.1. What was the issue or legal question?

5.1.1. Does a business partner in a joint venture have the fiduciary duty to announce an opportunity that arose from the activities of the venture to their partner?

6. Rule of Law

6.1. Legal Principle involved in Partnership are coadventurers

6.1.1. Duty of loyalty [UPA 404(a)] Partners in a partnership owe moral duty of loyalty to each other. Partners should refrain from directly competing with the partnership [UPA 404(b)]

6.1.2. Duty of communication Partners have a duty to freely and openly communicate without deception

6.1.3. Fiduciary Duty UPA 404(a)] Fiduciary duty in a partnership is the highest duty of care under English Common law of Equity Partners act as agents of the business or joint venture and they have fiduciary duty to the business Punctilio of Honor A level of care and honor which should be exhibited by a fiduciary

6.1.4. Corporate Opportunity Corporate opportunity is a doctrine which dictates that an agent or partner should not avail him/herself to business opportunity that could be beneficial to business or partnership

6.1.5. Accountability Partners are accountable to each other

6.1.6. Duty of Care [UPA 404(c)] Requires that partners refrain from grossly negligent or unlawful activities

6.2. Legal Precedent

6.2.1. Mitchell v. Reed, 61 N.Y. 123 "one member of a partnership could not, during its existence, without the knowledge of his copartners, take a renewal of a lease for his own benefit of premises leased by the firm, upon which it had made valuable improvements and enhanced their rental value, although the term of the renewed lease did not begin until the termination of the partnership."

6.2.2. Anderson v. . Lemon, 8 N.Y. 236 (NY 1853) "Here the defendant counseled with, and by his conduct and declarations intentionally induced the plaintiff to believe, that he was acting for the benefit of the firm, when his object was to secure the purchase for himself"

6.2.3. Cassels v. Stewart, 6 App. Cas. 64, 73 A case from Scotland in which one partner colluded with the other one to acquire his share without the knowledge of third partner. Court decided that partners owe duty of communication to each other. The Law Times Reports of Cases Decided in the House of Lords, the ..., Volume 95

7. Analysis and Application

7.1. Duty of Loyalty

7.1.1. There was breach of duty of loyalty since Salmon put his own interests above those of the partnership In signing new lease directly, Salmon directly competed with the established partnership

7.2. Duty of Care

7.2.1. Salmon's conduct is not grossly negligent or purposeful

7.2.2. Salmon genuinely believed that since the lease agreement was ending, their partnership would effectively end

7.3. Fiduciary Duty

7.3.1. Since Salmon failed to act as an agent of the partnership (and thus in the best interests of the partnership), he did not uphold highest fiduciary duty Partners are expected to uphold good faith and fair dealing [UPA 103(b), 404(d)]. Of course, Salmon can pursue his own interest. However, Salmon had the duty to communicate his interests to Meinhard. Based on the suit filed, it is clear that Meinhard felt that Salmon undermined the partnership by making a secret deal on his own.

7.3.2. Punctilio of Honor Salmon's action appear to not hold Punctilio of Honor. He owed it to his partner to alert him of new business opportunity and allow him to compete

7.4. Duty of Communication

7.4.1. Salmon failed to communicate the new business opportunity with his partner.

7.5. Need for Unanimous Agreement

7.5.1. Under UPA, when the nature of a business changes, all partners need to agree. In this case Salmon acted unilaterally

7.6. Authority

7.6.1. Clearly Salmon had the authority to act on behalf of his partner. However, Albridge Gerry was not aware that Salmon had a partner

8. Conclusion

8.1. Court of Appeals of New York decision

8.1.1. Court agreed with lower court and decided in favor of Meinhard but lowered the stake to 49%. Plaintiff was given 49% shares of joint venture.

8.2. Implication for Partnerships

8.2.1. Partners in a joint venture are bound to each other via fiduciary duty. This duty entails the duty to present new business opportunities or profit opportunties to their partners.

8.2.2. Partners are held to a higher standard of conduct under fiduciary duties. The expectation is more than general honesty or loyalty. It requires highest degree of loyalty, honesty and communication relevant to partnership.

9. Sources and References

9.1. Accessed April 25, 2017.

9.2. Accessed April 25, 2017

9.3. Accessed April 25, 2017

9.4. Accessed April 25, 2017.

9.5. Accessed April 25, 2017.

9.6. [Cross, Frank B.; Miller, Roger LeRoy. The Legal Environment of Business: Text and Cases (Page 401). South-Western College Pub. Kindle Edition.

9.7. Pegram et al. v. Hendrich, 530 U.S. 211 (2000).

9.8. Page v. Clark, 592 P.2d 792 (1979).