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A Disappointing Partnership – part III


Various Rabbis

Tamuz 26 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 an 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: [We have seen that there was no binding agreement to buy out pl’s share and that pl cannot be blamed for the overall failure of the company. We finish off with another couple points.]

It is not clear if the company is fully closed. In any case, at this point, def1’s debts definitely far exceed its value, and therefore pl’s demand to be paid for his shares is rejected. On the other hand, if def1 remains solvent and someday it is worth money, pl will maintain his rights.

The defendants want to prevent pl from competing with them, especially against def2 in Israel. This can be justified in two ways. The partnership agreement precludes competition, but this is only written in regard to def1, not def2. There is some logic to preventing competition against def2 because pl worked there. The Chatam Sofer (II, 9) says that if a shochet trained a student and made it conditional on his not competing, it is binding, because the condition was, in essence, part of his salary. However, here def2 did not make an explicit condition. The Shevet Halevi said that even without a condition, a worker cannot take secret information that can only be received at this place of work to help competition, but skills that are available in the field in general can be used elsewhere. In our case, there are no indications that pl has secret information, especially since several years have passed since he worked for def2. Therefore, his future employment is not restricted.
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