Meinhard v. Salmon
Encyclopedia
Meinhard v. Salmon, 164 N.E. 545
(N.Y. 1928), is a widely cited case in which the New York Court of Appeals
held that partners
in a business owe fiduciary duties to one another where a business opportunities arises during the course of the partnership. 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. Furthermore, the duty of loyalty was breached where the partner appropriated to himself a benefit arising from his status as a partner without allowing his co-partner an opportunity to compete. This holding relates to the doctrine of corporate opportunity
.
on a hotel owned by a third-party in 1902. He wished to convert it to shops and offices. He did so in a joint venture
with Meinhard and they put the terms of their relationship in writing. Meinhard provided the investment capital while Salmon managed the business. Both partners were to share equally in the profits and losses of the venture. Meinhard was given the sole power to assign the lease during the term of the venture. The venture was created to terminate at the end of the lease.
After 20 years, as the lease was expiring and the joint venture coming to an end, the owner of the reversion
of the lease, Gerry, approached Salmon to negotiate a substantial redevelopment of the property
. Gerry was ignorant of the partnership. The terms of the new lease contemplated destruction of the then-existing buildings after a period of seven years followed by reconstruction. Salmon resigned the lease in his individual capacity without telling Meinhard. When Meinhard found out, he sued. Meinhard argued the new opportunity belonged to the joint venture and sued to have the lease transferred to a constructive trust
. Salmon argued any interest in the new lease could not belong to the joint venture since both parties expected the venture to terminate when the first lease expired.
A referee agreed the opportunity belonged to the joint venture, and awarded Meinhard a 25% interest (based on Meinhard's half interest in half the property). The Appellate Division ratcheted it up to 50%. Salmon appealed from that decision.
The court further held that Salmon was an agent for the joint venture. The court determined the new business opportunity — which was made available to Salmon because during the course of his agency, or management of the venture — Salmon was obligated to act as a fiduciary of the venture in the transaction. Specifically, the court held that he was obligated by the fiduciary duty of communication to notify the venture of profits obtained during the course of his agency. The court held that he was obligated by the duty of loyalty
to share the profits with the venture. Alternatively, the court holds that he was required to inform Meinhard of the opportunity and allow him an opportunity to compete for the lease.
This decision extended the duties of partnership far beyond duties under a contract. Contractual duties among merchants do not typically extend beyond the duty of good-faith
. However, the court held that a joint venture created a fiduciary relationship in which each member is bound to a higher standard. It determined that in such a relationship, loyalty must be undivided and unselfish, and that a breach of fiduciary duty can occur by something less than fraud or intentional bad-faith. The court that Salmon did not maliciously appropriate to himself the benefits of the partnership. The court observed that, by contract, Salmon was simply exercising his sole ability to execute a lease and may have assumed that he owed no further duty. Nonetheless, the court ruled in favor of Meinhard.
on the subject.
Case citation
Case citation is the system used in many countries to identify the decisions in past court cases, either in special series of books called reporters or law reports, or in a 'neutral' form which will identify a decision wherever it was reported...
(N.Y. 1928), is a widely cited case in which the New York Court of Appeals
New York Court of Appeals
The New York Court of Appeals is the highest court in the U.S. state of New York. The Court of Appeals consists of seven judges: the Chief Judge and six associate judges who are appointed by the Governor to 14-year terms...
held that partners
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
in a business owe fiduciary duties to one another where a business opportunities arises during the course of the partnership. The court holds that the fiduciary duty of communication was breached where a partner in a joint venture
Joint venture
A joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets...
failed to inform his co-partner of a profitable opportunity that was offered by a third-party who was ignorant of the partnership. Furthermore, the duty of loyalty was breached where the partner appropriated to himself a benefit arising from his status as a partner without allowing his co-partner an opportunity to compete. This holding relates to the doctrine of corporate opportunity
Corporate opportunity
The corporate opportunity doctrine is the legal principle providing that directors, officers, and controlling shareholders of a corporation must not take for themselves any business opportunity that could benefit the corporation...
.
Facts
Salmon bought a 20 year leaseLease
A lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. A rental agreement is a lease in which the asset is tangible property...
on a hotel owned by a third-party in 1902. He wished to convert it to shops and offices. He did so in a joint venture
Joint venture
A joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets...
with Meinhard and they put the terms of their relationship in writing. Meinhard provided the investment capital while Salmon managed the business. Both partners were to share equally in the profits and losses of the venture. Meinhard was given the sole power to assign the lease during the term of the venture. The venture was created to terminate at the end of the lease.
After 20 years, as the lease was expiring and the joint venture coming to an end, the owner of the reversion
Reversion (law)
A reversion is a type of "remainder" interest created when incomplete ownership in property is alienated subject to a condition subsequent. Upon the fulfillment of the condition subsequent, the incomplete possessory rights cease to exist and exclusive ownership returns to the holder of the...
of the lease, Gerry, approached Salmon to negotiate a substantial redevelopment of the property
500 Fifth Avenue
500 Fifth Avenue is a 60-floor , 697-foot art deco office tower in Manhattan, New York City, standing at West 42nd Street. It is adjacent to Bryant Park....
. Gerry was ignorant of the partnership. The terms of the new lease contemplated destruction of the then-existing buildings after a period of seven years followed by reconstruction. Salmon resigned the lease in his individual capacity without telling Meinhard. When Meinhard found out, he sued. Meinhard argued the new opportunity belonged to the joint venture and sued to have the lease transferred to a constructive trust
Constructive trust
A constructive trust is an equitable remedy resembling a trust imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding legal right to property which they should not possess due to unjust enrichment or interference...
. Salmon argued any interest in the new lease could not belong to the joint venture since both parties expected the venture to terminate when the first lease expired.
A referee agreed the opportunity belonged to the joint venture, and awarded Meinhard a 25% interest (based on Meinhard's half interest in half the property). The Appellate Division ratcheted it up to 50%. Salmon appealed from that decision.
Judgment
While it lowered the plaintiff's award to 49%, the court affirmed the decision. It held that Salmon, as the managing partner, owed Meinhard, as the investing partner, a fiduciary duty, and that this included a duty to inform Meinhard of the new leasing opportunity. Joint venturers owe each other the highest duty of loyalty and Salmon, as managing partner has assumed a responsibility by which Meinhard must rely on him to manage the partnership. As Cardozo J said,The court further held that Salmon was an agent for the joint venture. The court determined the new business opportunity — which was made available to Salmon because during the course of his agency, or management of the venture — Salmon was obligated to act as a fiduciary of the venture in the transaction. Specifically, the court held that he was obligated by the fiduciary duty of communication to notify the venture of profits obtained during the course of his agency. The court held that he was obligated by the duty of loyalty
Duty of Loyalty
Duty of Loyalty is a term used in corporation law to describe a fiduciaries' "conflicts of interest and requires fiduciaries to put the corporation's interests ahead of their own." "Corporate fiduciaries breach their duty of loyalty when they divert corporate assets, opportunities, or information...
to share the profits with the venture. Alternatively, the court holds that he was required to inform Meinhard of the opportunity and allow him an opportunity to compete for the lease.
This decision extended the duties of partnership far beyond duties under a contract. Contractual duties among merchants do not typically extend beyond the duty of good-faith
Implied covenant of good faith and fair dealing
In contract law, the implied covenant of good faith and fair dealing is a general presumption that the parties to a contract will deal with each other honestly, fairly, and in good faith, so as to not destroy the right of the other party or parties to receive the benefits of the contract...
. However, the court held that a joint venture created a fiduciary relationship in which each member is bound to a higher standard. It determined that in such a relationship, loyalty must be undivided and unselfish, and that a breach of fiduciary duty can occur by something less than fraud or intentional bad-faith. The court that Salmon did not maliciously appropriate to himself the benefits of the partnership. The court observed that, by contract, Salmon was simply exercising his sole ability to execute a lease and may have assumed that he owed no further duty. Nonetheless, the court ruled in favor of Meinhard.
Andrews' dissent
A three-judge dissent, written by Judge Andrews, contended that any duty following from the partnership ended at the end of the twenty year period; because the partnership was created to manage the building for the twenty year term, the dissent felt that deals involving events to occur after the expiration of that term were of no matter to the partnership.Significance
The case is considered a landmark case of partnership law, and has since come to be reproduced or at least discussed in virtually every American casebookCasebook
A casebook is a type of textbook used primarily by students in law schools. Rather than simply laying out the legal doctrine in a particular area of study, a casebook contains excerpts from legal cases in which the law of that area was applied. It is then up to the student to analyze the language...
on the subject.
External links
- The complete text of the majority opinion and the dissent are available at Wikisource; see links to the right.