''Meinhard v. Salmon'', 164
N.E. 545 (N.Y. 1928), is a widely cited case in which the
New York Court of Appeals
The New York Court of Appeals is the highest court in the Unified Court System of the 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 and confirmed by t ...
held that
partners
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* ''Partner'' (m ...
in a business owe
fiduciary duties
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exa ...
to one another where a business opportunity 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
A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures for one of four reasons: to acce ...
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 The duty of loyalty is often called the cardinal principal of fiduciary relationships, but is particularly strict in the law of trusts. In that context, the term refers to a trustee's duty to administer the trust solely in the interest of the ...
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.
Facts
Meinhard claimed that his former business partner, Salmon, had violated a
fiduciary duty
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exampl ...
by taking an opportunity to renew a lease in his own name without sharing the benefits. In 1902,
Salmon
Salmon () is the common name
In biology, a common name of a taxon or organism (also known as a vernacular name, English name, colloquial name, country name, popular name, or farmer's name) is a name that is based on the normal language of ...
bought a 20-year
lease
A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industr ...
for the Hotel Bristol, owned by
Elbridge Thomas Gerry, at
5th Avenue and
42nd Street in
New York
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* New York (state), a state in the northeastern United States
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. Salmon wished to convert the hotel into shops and offices. To raise money, he entered a
joint venture
A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures for one of four reasons: to acce ...
with Meinhard. They put the terms of their relationship in writing. Meinhard provided the investment capital while Salmon managed the business. The first five years, Meinhard would receive 40% of the profits and 50% every year after until the twentieth year. 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
A constructive trust is an equitable remedy imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding a legal property right which they should not possess due to unjust enr ...
. 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 Chief Judge
Benjamin Cardozo 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
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exa ...
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 The duty of loyalty is often called the cardinal principal of fiduciary relationships, but is particularly strict in the law of trusts. In that context, the term refers to a trustee's duty to administer the trust solely in the interest of the ...
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
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exa ...
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 noted 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
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, 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
Landmark court decisions, in present-day common law legal systems, establish precedents that determine a significant new legal principle or concept, or otherwise substantially affect the interpretation of existing law. "Leading case" is commonly ...
of partnership law, and has since come to be reproduced or at least discussed in virtually every American
casebook
A casebook is a type of textbook used primarily by students in law schools.Wayne L. Anderson and Marilyn J. Headrick, The Legal Profession: Is it for you?' (Cincinnati: Thomson Executive Press, 1996), 83. Rather than simply laying out the legal do ...
on the subject.
Aftermath
Initially, Salmon was unhappy about the decision. But when the Great Depression began shortly after the decision, Salmon came to view his loss as a surprise victory. Since Meinhard was now a half owner in the joint enterprise, he was not only entitled to half of the profits but also required to pay half of the losses. During much of the Great Depression, this property lost money. Salmon's finances were thus assisted by Meinhard's financial contributions.
See also
*
US trusts law
*
United States corporate law
United States corporate law regulates the governance, finance and power of corporations in US law. Every state and territory has its own basic corporate code, while federal law creates minimum standards for trade in company shares and governa ...
*''
Beatty v Guggenheim Exploration Co
''Beatty v. Guggenheim Exploration Co.'' (1919) 225 NY 380 is a Law of New York (state), New York state law case, concerning the test for the imposition of a constructive trust. It is best known for a quote from the leading opinion by Justice Card ...
'' (1919) 225 NY 380
*
English trusts law
English trust law concerns the protection of assets, usually when they are held by one party for another's benefit. Trusts were a creation of the English law of property and obligations, and share a subsequent history with countries across ...
Notes
External links
*
* {{caselaw source
, case = ''Meinhard v. Salmon'', 249 N.Y. 458, 164 N.E. 545 (N.Y. 1928)
, courtlistener =https://www.courtlistener.com/opinion/3629080/meinhard-v-salmon/
, other_source1 = New York Courts
, other_url1 =https://www.nycourts.gov/reporter/archives/meinhard_salmon.htm
1928 in United States case law
New York (state) state case law
United States corporate case law
1928 in New York (state)
United States trusts case law
Fifth Avenue