Cengage Advantage Books: Fundamentals of Business Law Today 10th Edition by Roger LeRoy Miller

Exercise 14

FACTS Walter Salmon negotiated a twenty-year lease for the Hotel Bristol in New York City. To pay for the conversion of the building into shops and offices, Salmon entered into an agreement with Morton Meinhard to assume half of the cost. They agreed to share the profits and losses from the joint venture (a joint venture is similar to a partnership but typically is created for a single project, whereas a partnership usually involves an ongoing business), but Salmon was to have the sole power to manage the building.
Less than four months before the end of the lease term, the building's owner approached Salmon about a project to raze the converted structure and construct a new building. Salmon agreed and signed a new lease in the name of his own business, Midpoint Realty Company, without telling Meinhard. When Meinhard learned of the deal, he filed a suit against Salmon. From a judgment in Meinhard's favor, Salmon appealed.
ISSUE Did Salmon breach his fiduciary duty of loyalty to Meinhard?
DECISION Yes. The Court of Appeals of New York held that Salmon had breached his fiduciary duty by failing to inform Meinhard of the business opportunity and secretly taking advantage of it for himself. The court therefore granted Meinhard an interest "measured by the value of half of the entire lease."
REASON The court stated, "Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty." Salmon's conduct excluded Meinhard from any chance to compete and from any chance to enjoy the opportunity for benefit. As a partner, Salmon was bound by his "obligation to his copartners in such dealings not to separate his interest from theirs, but, if he acquires any benefit, to communiand thus the court found that "for him and for those like him the rule of undivided loyalty is relentless and supreme."
WHAT IF THE FACTS WERE DIFFERENT? Suppose that Salmon had disclosed the proposed deal to Meinhard, who had said that he was not interested. Would the result in this case have been different ? Explain.
IMPACT OF THIS CASE ON TODAY 'S LAW This landmark case involved a joint venture, not a partnership. At the time, a member of a joint venture had only the duty to refrain from actively subverting the rights of the other members. The decision in this case imposed the highest standard of loyalty on joint-venture members. The duty is now the same in both joint ventures and partnerships. The eloquent language in this case that describes the standard of loyalty is frequently quoted approvingly by courts in cases involving partnerships.