Meinhard v. Salmon

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Meinhard v. Salmon by Mind Map: Meinhard v. Salmon

1. Rule of Law

1.1. Legal Principles

1.1.1. Duty of Loyalty

1.1.1.1. Corporate fiduciaries breach their duty of loyalty when they divert corporate assets, opportunities, or information for personal gain.

1.1.2. Fiduciary Duties

1.1.2.1. New York Court of Appeals held that partners in a business owe fiduciary duties to one another where a business opportunity arises during the course of the partnership.

1.1.2.1.1. The court holds that the fiduciary duty of communication was breached where a partner in a joint venture failed to inform his co-partner of a profitable opportunity that was offered by a third-party who was ignorant of the partnership.

1.1.3. Profit Sharing

1.1.3.1. A conveyance by a partner of his interest in the partnership does not of itself dissolve the partnership, nor, as against the other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership or business affairs

1.1.4. Rule Timing

1.1.4.1. One partner may not appropriate to his own use a renewal of a lease, though its term is to begin at the expiration of the partnership

1.1.5. Duty of Communication

1.1.5.1. Partners have a duty to openly and freely communicate without deception

1.1.6. Corporate Opportunity

1.1.6.1. Doctrine that states a partner should not avail him/herself to business opportunity that could be beneficial to the business or the partnership

1.1.7. Duty of Care

1.1.7.1. Under the duty of care, partners are expected to act in a reasonably prudent manner in managing and directing the partnership.

1.2. Legal Precedence

1.2.1. Mitchell v. Reed, 61 N.Y. 123

1.2.1.1. The functions, rights and duties of partners in a great measure comprehend those both of trustees and agents, and the general rules of law applicable to such characters are applicable to them. Neither partner can, in the business and affairs of the firm, clandestinely stipulate for a private advantage to himself; he can neither sell to nor buy from the firm at a concealed profit to himself. Every advantage which he can obtain in the business of the firm must enure to the benefit of the firm. Mitchell v. . Reed, 61 N.Y. 123 – CourtListener.com

1.2.2. Anderson v. . Lemon, 8 N.Y. 236 (NY 1853)

1.2.2.1. 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. Anderson v. . Lemon, 8 N.Y. 236 – CourtListener.com

2. Facts

2.1. Parties

2.1.1. Monton Meinhard (Plaintiff) Walter J. Salmon (Defendant)

2.2. What happened

2.2.1. On April 10th, 1902 Loisa M. Gerry leased Hotel Bristol, located in New York, to J.Salmon

2.2.1.1. The lease was for 20 years at the cost of $200,000

2.2.1.1.1. Salmon intended to convert the hotel into shops and offices. Alterations and improvements had to me made

2.2.2. Cuncurrently with the lease, a written partnership agreement between M. Meinhard and J. Salmon was formed with the following terms:

2.2.2.1. 1) Meinhard had to pay Salmon half the amount required for reconstruction, management and operations on the property 2) Salmon had to pay Meinhard 40% of the net profits of the first five years of the lease and 50% for the years thereafter 3)Both parties agree to bear losses equally 4)Salmon had the exclusive authority to manage, lease and operate the building

2.2.2.1.1. The first years the partners suffered losses but the following years the profits increased

2.2.3. In 1921, Elbridge T. Gerry had inherited the property of Bristol Hotel along with many nearby properties

2.2.3.1. E. Gerry was looking to find someone to lease and demolish the existing buildings and construct new ones

2.2.3.1.1. In January, 1922 (4 months before the termination of the old lease) Gerry and Salmon's Midpoint Realty Company agreed upon a new lease with the following terms:

2.3. Procedural History

2.3.1. Meinhard demanded the new lease to be held in trust as an asset of the joint agreement. Salmon refused.

2.3.1.1. Meinhard filed a suit

2.3.1.1.1. A referee awarded Meinhard 25% interest of the Midpoint Lease but after appeal increased to 50%

3. Issue

3.1. Does a business partner in a joint enterprise violate his fiduciary duty if he fails to inform his partner of a business opportunity that arises as result of the partnership?

4. Analysis/Application

4.1. Meinhard and Salmon were co-adventurers and therefore have fiduciary duties of loyalty, honesty and morality to the partnership and to each other-"King v. Barnes"

4.1.1. The duty of loyalty requires a partner to account to the partnership for " any property, profit or benefit" derived by the partner in the conduct of the partnership's business or from the use of its property.

4.1.1.1. The fiduciary duty was breached since Salmon:

4.1.1.1.1. Excluded Meinhard from the opportunity, the warning and the benefit to compete and profit

4.1.1.1.2. Put his own interest before partnership's interest

4.1.1.1.3. Acted in secrecy and silence and made secret profits

4.1.1.2. Was the fiduciary duty breached since Salmon offered to the enterprise not only money but labor and time in comparison to Meinhard who offered only money

4.1.1.2.1. salmon was a partner but a managing co-adventurer/partner

4.2. Salmon, under the partnership, had the power to control and manage

4.2.1. The Court will reduce Meinhard's shares by one to avoid hardships resulting from equal shares

4.3. The new lease covers a wide area, including Bristol Hotel and other undivided parts. This makes a division of interests more complicated

4.3.1. If confusion has resulted from the union of adjoining parcels the trustee who consented to the union must bear the inconvenience- "Hart v. Ten Eyck"

4.4. The partnership between Salmon and Meinhard was heavily based on intention

4.4.1. The proof of the importance of that intention was the fact that in 1917 Meinhard reassigned all his rights, title and interest to his wife. Salmon did not object and made all payments directly to plaintiff's wife

4.4.1.1. Even though Meinhard's wife involvement was done exclusively for Meinhard's tax reduction it is still strong evidence that the enterprise, for the most part, was one of mutual rights and duties and in compliance with the Partnership Law

4.5. Andrews. J dissenting opinion

4.5.1. Salmon properly paid Meinhard for the duration of the lease. The new lease took place near the ending of the previous lease.

4.6. First Right of Refusal

4.6.1. As Salmon's partner, Meinhard reserved the right of First Right of Refusal (FROR)

4.6.1.1. An RFR can also be set up among ownership principals that allows those who wish to continue to own a jointly held property the right to make a first offer or match an offer to a partner who wants to exit the partnership or to that partner’s estate.

5. Conclusion

5.1. The Court affirmed lower court's decision that plaintiff's equitable interest is to be measured by the value of half of the entire lease and not by half of some undivided part

5.1.1. The Court affirmed the lower court's decision but reduced the plaintiff's award to 49% of the shares

5.1.1.1. A reduction in Salmon's shares would make future business decisions and majority ownership disputes less complicated

6. Impact

6.1. Lawrence v. Cohn Decided: March 28, 2003 Link: FindLaw's United States Second Circuit case and opinions.

6.1.1. Alice Lawrence v. Seymour Cohn: United States District Court, S.D. New York. April 29, 2002. Lawrence filed a securities fraud action suit in which the “fiduciary duty with respect to a business opportunity” concept as mentioned in Meinhard v. Salmon was quoted by the Plaintiff.

6.1.1.1. The Defendant (Cohn’s) motion was granted in a conclusion that referred to the case of Meinhard v. Salmon which would prove the Defendant’s (Cohn’s) individual partnership position and status as a partner would be fundamental in an impartial division.

6.2. Page v Clark

6.2.1. Morton and Alice Clark owned two parcels of land. Mr. Page, Morton Clark's employer, used one of the land parcels for his aircraft salvage business.

6.2.1.1. Page and Clark became friends and negotiated an oral agreement for the use and tenancy of the property. Eventually, the relationship deteriorated and Mr. Page wanted Clark (the original land-owner), removed from the property.

6.2.1.1.1. The lower courts found that the sale of land was transactional in nature and that it should not be considered a partnership

7. Importance

7.1. The court holds “a partnership” to a high standard of fiduciary duty

7.1.1. It is of paramount importance to differentiate between what is perceived a partnership versus an individual business transaction for a business professional, as transparency is the key ingredient to prove “good faith” in business dealings

7.1.1.1. Any individual business interests perceived or created during a “partnership” maybe seen as a way of fraudulent or gainful abuse of the partnership and create unnecessary friction and legal and monetary issues amongst partners

7.1.2. Legal action can be taken if a partner breaches their fiduciary duty

8. Influence

8.1. This case presents the notion of fiduciary responsibility as a separate entity in a partnership. It is defined as a legal obligation to act in the best interest of the other party in a partnership as well as oneself.

8.1.1. This applies to partnerships and joint ventures (JV) alike