Beit Midrash

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A Disappointing Partnership – part II


Various Rabbis

Tamuz 18 5779
Based on ruling 70052 of the Eretz Hemdah-Gazit Rabbinical Courts

The plaintiff (=pl) was a consultant for the owner (=def3) of a company (=def2). They and two more partners decided to form a new LLC company (=def1), in America, providing the services def2 provides in Israel. The partners divided responsibilities; pl was responsible for financial planning. The principals first all worked from Israel, hiring workers for their Manhattan office. Because business was slower than expected, pl was sent with pay to run the company on site. Sales improved, but def1 remained unprofitable. Disagreements over how to proceed grew, and the other partners agreed to buy out pl’s share in def1 for $68,000. A few months later, they made def1’s operations off limits to pl; now, def1 is being closed. Pl demands to receive the $68,000 plus expenses, arguing that he worked harder than he should have (the others, especially def3, did not do their fair share) and almost succeeded in saving def1. The defendants respond that pl exaggerated his qualifications and was not capable of doing the job properly, did not work with the necessary diligence, and did not meet the earning targets. The internet site was unprofessional; he did not do the proper bookkeeping; he did not report records to the IRS, which caused a $7,000 fine. He also damaged relationships with some clients of def2. The partners excluded pl from def1 when pl threatened to join a competitor of def2. The $68,000 offer was never signed and was contingent on a signed agreement with a non-competition clause, which pl refused to sign. They also learned later about further damages done by pl. The defendants demand the return of $304,140 of salary and expenses.

Ruling: [Last time we saw that there was no binding agreement to buy out pl’s share and that pl cannot be blamed for the company’s overall failure.]

Even if pl is not blamed for losses, does he receive less due to lack of revenues? On the one hand, the Tosefta (Bava Metzia 4:22) says that one cannot extract payment from someone who was supposed to have invested another’s money and did not. On the other hand, the gemara (Bava Metzia 73b) says that one who was supposed to have bought wine for his friend and did not (causing a lost opportunity to earn) must pay. The Chatam Sofer (Choshen Mishpat 178) says it depends how sure the earnings were. In this case, one cannot be at all confident that changing strategies would have had a serious impact. (We note that pl’s replacement claimed he made many improvements, and yet def1’s situation did not change much.)

Regarding the fine for not reporting to the IRS, pl’s claim that reporting is necessary only when there are net profits is unreasonable. However, since such matters were under another partner’s job description, even if he relied on pl to do it, he was required to ensure it occurred.

The defendants’ removing access to pl was an insult, but there were grounds for it, since there was great tension and fear of giving information to competitors. The majority of the partners have a right to do such a thing due to a real need (they would have had to give pl access to certain information because he was a partner).
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