WHICH DOCTOR?

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AN ENTREPRENEUR

By: Rabbi Max Sutton

Jason created and patented a sophisticated software program and sought a private investor to market his new project. After negotiations, he ultimately signed a multimillion-dollar deal with Eddie and the two entered into partnership in a newly established corporation. The contract signed contained the terms and profit sharing details and also outlined the scheduled financial projections Jason was required to meet in order to secure Eddie’s continuous funding. Another stipulation of the contract restricted Jason from investing company funds in anything other than the development and marketing of the software.

The company got off to a slow start, as Jason was not meeting his anticipated financial projections. With the goal of generating immediate funds to cover the shortfall, Jason used company funds and invested with an outside party, reaping a handsome dividend of nearly $100,000. Jason’s next venture was not successful, as he lost $50,000 while funding a wholesaler filling an order to produce ladies’ flip flops. The designated retailer cancelled the order midway and, due to the specifications of the order cancelled, the funds invested were as good as lost.

During the quarterly review of the company, it was apparent that Jason’s numbers were off, and as a result, Eddie’s staff researched the transactions of the company. They brought to Eddie’s attention Jason’s misappropriation of funds, and Eddie demanded that Jason either borrow and reimburse the $50,000 he lost the company, or sustain a reduction of his equity. Jason found Eddie’s demands preposterous, as he clearly netted between the two unauthorized deals the sum of fifty thousand dollars for the benefit of the company. He was unwilling to reimburse the company for a profitable outcome and challenged Eddie to terminate their relationship because of his breach of contract. Eddie was unwilling to prematurely terminate the deal, though he wanted Jason to pay the $50,000 lost with the wholesaler.

How should the Bet Din rule and why?

TORAH LAW

By rule of the Shulhan Aruch, business partners are required to perform their duties to each other with honesty and integrity. They must conduct their business in accordance with standard market procedures, and not deviate from the norm without conferring with the other first. For example, shipping to a customer whose credit is questionable requires the approval of one’s partner, since doing so poses a financial risk. Under the same logic, operating another business at the same time also requires the prior consent of one’s partner. If a partner violates the above rules, a competent halachic authority must be consulted before determining if financial liability should be imposed.

According to the ruling of the Shulhan Aruch, if one entrusts funds with another party in order to venture as partners in a specific industry, the managing partner is prohibited from using the funds for any other enterprise. This ruling is all the more enforceable when a written contract between the partners exists, stipulating that such activity is restricted. In the event that a managing partner violates this condition and uses company funds for other endeavors, he is solely liable if a loss is sustained. Although he acted on behalf of his partner and intended to profit on behalf of their joint business, since he deviated from the terms of their agreement, he is responsible for compensating the investing partner for the loss incurred. Notwithstanding, if he illegally uses company funds on behalf of their partnership and he reaps a profit, the earnings are to be split by the two partners. Since the managing partner invested on behalf of the partnership and ultimately profited using the funds of the investing partner, the two partners are entitled to their respective shares of the proceeds.

In the event that a managing partner illegally uses funds on behalf of the partnership on multiple occasions, each transaction is to be viewed independently. Hence, in instances in which one of the unauthorized investments profited while the other sustained a loss, the profits are split between the partners, while solely the managing partner pays the loss. Although one of the investments may have reaped a handsome profit, its proceeds are not subject to reduction in the event that a separate illegal venture sustains a loss. Rather, the profitable investment is shared, and the losing investment is to be fully reimbursed by the managing partner. 

When two partners are conducting a successful business, a Bet Din will attempt to restore peace in the event that the two are quarreling. This can be challenging if one partner rightfully no longer trusts the other. In such instances, with the consent of both parties, a Bet Din will reconstruct the partnership using new terms and conditions, thereby allowing them to work together going forward.

Restoring Trust

By law, Jason is responsible for reimbursing Eddie the $50,000 he lost the company. However, since this decision will cause considerable damage to an otherwise successful partnership, our Bet Din reconstructed the operating agreement between the two, with terms and conditions that help Jason to stay disciplined, thereby restoring Eddie’s trust in the partnership.

As mentioned in Torah law, since Jason illegally ventured on behalf of the partnership using Eddie’s money, Eddie is legally entitled to his share of the profits generated from the first investment. As per the losing investment, since it was a separate transaction unaffiliated with the first investment, Jason is required to reimburse the company for the loss. It’s important to note that the two transactions took place over two different fiscal years, a factor which also contributes to Jason’s liability for the loss. Nevertheless, it was apparent that Eddie’s primary motive for demanding payment was to discipline Jason, thereby ensuring that he does not violate the terms of their agreement again. Hence, our Bet Din arranged that Eddie temporarily waive his claim in return for a tightened agreement, which included monthly reports of all the inflows and outflows of the company, and confirmatory emails for all payouts exceeding five thousand dollars. These terms, along with others, helped Eddie and Jason to continue their partnership, and prevented a quarrel as well as a split, which clearly would not have been advantageous to either of them.

Partners for Life?

Sammy and Albert regularly invest in start-up wholesale companies in return for a profit sharing dividend. Prior to their last investment, Joe requested to be included in on the deal; he said he was willing to put up a third of the money as an equal partner. Sammy extended the funds to the wholesale company and by contract the three were listed as equal private investors. Immediately thereafter, Albert reimbursed Sammy for his portion of the investment, yet, Joe delayed transfer of payment to Sammy.  Albert reached out to Joe over the course of the following year, pressing him to provide payment. Joe continuously reassured him that payment was on the way. Unfortunately, a short time later, Joe fell ill, and in a matter of months he passed on.

Not long after his passing, Joe’s two sons reached out to Sammy and Albert seeking to collect on their father’s investment, but Sammy and Albert rejected their claim.  Sammy explained that at the time he did Joe a favor by including him in on the deal. Since Joe failed to make payment upon numerous requests, and did not satisfy his obligation during his final months, he consequently forfeited his share of the partnership. The value of the wholesale company appreciated, and Joe never participated from the onset since he never paid for his share.

Joe’s sons presented to our Bet Din the signed contract by the three partners along with a $250,000 check to cover their father’s third of the initial investment. Sammy asserted that since Joe never paid him upon request, he was entitled to two thirds of the proceeds and his partner Albert was entitled to a third. Albert defended that if Joe was out, he was entitled to a 50% share, since he and Sammy originally agreed, prior to Joe’s involvement, on an equal partnership.

  How Should The Bet Din Rule –
In Favor of Sammy, In Favor Of Albert,
Or In Favor Of Joe’s Sons – And Why?