Meinhard v. Salmon and the Opportunity a Partner Cannot Keep

A partner who learns of a business opportunity because of the partnership has to tell the other partners before taking it, and that rule traces to one New York case. In Meinhard v. Salmon, decided on December 31, 1928, the Court of Appeals held that a managing partner who quietly took a new 80-year lease for himself had taken something that belonged half to his partner, though the court assumed he acted in good faith and his partner had put in only money. The vote was 4 to 3, and the dissent is worth reading too.

What follows is the case from the opinion, what it requires of partners now, and how an agreement can turn it into a procedure. The wider set of duties is in Fiduciary Duties Business Partners Owe Each Other. This is general information; a lawyer in the partners' state should read their agreement.

In April 1902 Louisa Gerry leased the Hotel Bristol, at the northwest corner of Fifth Avenue and 42nd Street, to Walter Salmon for 20 years, ending April 30, 1922; Salmon was to convert it to shops and offices at a cost of $200,000. To raise the money he formed a joint venture with Morton Meinhard, a wool merchant. Meinhard paid half of what it took to rebuild, manage and operate the building; Salmon paid him 40% of the net profits for five years and 50% after, losses were shared equally, and Salmon alone had the power to 'manage, lease, under-let and operate' it. The building lost money at first, then earned well for both.

By 1921 the reversion had passed to Elbridge Gerry, who owned the adjoining lots too and wanted one tenant to tear everything down and build a single large building. Other developers turned him down. In January 1922, with less than four months left on the Bristol lease, he approached Salmon. The result was a lease of the whole tract to Midpoint Realty, a company Salmon owned and controlled: 20 years, renewable to as many as 80, a new $3 million building after seven years, and rent of $350,000 to $475,000 a year against $55,000 under the old lease. It was signed on January 25, 1922. Meinhard learned of it in February, after the fact, demanded that it be held for the venture, and sued when Salmon refused.

The court did not find fraud. It said Salmon very likely assumed in good faith that, with the venture about to end, he could take the extension for himself, and it acknowledged that he had given the business his time and labor while Meinhard gave only money. None of that mattered. The new lease came to Salmon because he held the old one as manager of the venture, and it was 'an extension and enlargement' of the same property. What he owed Meinhard was a chance: he 'excluded his coadventurer from any chance to compete', and 'the price of its denial is an extension of the trust.'

Two points in the reasoning do most of the work today. First, the duty was heavier on Salmon because he was the managing partner, the only one in a position to hear of the offer. Second, the court refused to ask whether Meinhard would have won the lease if told; such 'a calculus of probabilities is beyond the science of the chancery.' A partner who conceals an opportunity cannot defend himself by arguing it would not have gone to the other partner anyway.

The remedy was practical. Meinhard got an interest measured by half of the entire new lease, not just the Bristol part, because the single building covered the whole site and could not be divided. But giving him exactly half the shares of Salmon's company might have taken away the control Salmon was always meant to have, so the court let Salmon choose to hold the trust in shares, with half of them plus one more allotted to him.

Judge Andrews, joined by two others, made the strongest argument the other way. This was a joint venture for a limited object that would end on a fixed date, not a general partnership. The new lease, covering more land, on new terms, for up to 80 years, with the old buildings to be torn down, was 'something distinct and different', closer to buying the reversion than to renewing the old lease. Meinhard had no expectation of renewal under the venture, and 'no fraud, no deceit, no calculated secrecy' was found. 'I think this not enough,' he wrote.

The objection has force. It is fair to ask whether a venture that would have expired in April 1922 should claim a lease running toward 2002. The majority's answer was not that the venture owned the new lease outright, but that a manager who learned of it through the venture could not decide alone that it was not the venture's business. Disclosure would have cost Salmon nothing but the chance of a rival bid. That is still the rule's whole demand.

The Uniform Partnership Act, which most states have adopted in some form, writes Meinhard into the statute. Section 404(b)(1) of the 1997 act requires a partner to hold as trustee for the partnership any benefit derived from the partnership business, 'including the appropriation of a partnership opportunity'; the 2013 harmonized text moves the duties to section 409. Section 103(b)(3) says the partnership agreement may not eliminate the duty of loyalty, but it may identify specific types or categories of activities that do not violate it, if not manifestly unreasonable, and all the partners (or the number the agreement specifies) may authorize or ratify a specific transaction after full disclosure of the material facts. Delaware goes further for LLCs: 6 Del. C. § 18-1101(c) lets the LLC agreement restrict or eliminate fiduciary duties, though not the implied covenant of good faith and fair dealing.

In practice, the disputes that follow Meinhard are a partner who buys the building the business rents, takes a customer to a side company, or starts a competing venture with a supplier met through the firm. What to Do When a Business Partner Is Stealing From the Business covers the remedies once it has happened. The same duty applies in a joint venture between companies, which is where Meinhard began, and What a Joint Venture Agreement Needs to Cover deals with scope and exclusivity there.

Meinhard is one of 20 decisions summarized, with the clause each one needed, in Business Partnership Dispute Cases. The rule it set is easy to follow and expensive to break: tell the partner first, in writing, and let them say no.