THE COMPLETED EXPANSION OF Ohel Yaacob Congregation, LAWRENCE AVENUE SYNAGOGUE

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PARTNERS FOR LIFE?

By: Rabbi Max Sutton

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?

TORAH LAW

According to the ruling of the Shulhan Aruch, a partnership formed by contractual agreement is legally binding and entitles a partner (or his designated heirs) the right to collect on the proceeds of the investment. This ruling is applicable even in the event that the deceased partner did not participate financially as stipulated by contract, but rather instructed another partner to extend the funds on his behalf. By law, the lending partner maintains the legal right to collect the money he extended in case the investment should sustain a loss. Likewise, he is obligated to share the proceeds upon payment of the loan by the heirs.

The above ruling is applicable providing the deceased partner expressed the intention to pay out his obligation throughout his lifetime. Although ultimately his death prevented him from paying, his intention is still realized when the debt is collected posthumously from his estate. In the aftermath, his heirs rightfully inherit the proceeds of the investment.

If, however, the deceased verbally refused to pay his share during his lifetime, or if his partner resorted to pressing charges in an attempt to collect the funds, his heirs are not entitled to the proceeds. The rationale for this limitation is as follows: In retrospect, it is beyond the shadow of a doubt that in such extenuating circumstances the lending partner never intended to include the deceased on the deal. Hence, the contractual agreement originally signed is rendered null and void.

In instances in which one of the partners extended funds on behalf of a group, only to later discover that another partner must forfeit their shares, the newly found shares are distributed evenly between the remaining partners. Since the loan extended to the group has become the responsibility of the remaining partners, they are each entitled to an equal distribution of the proceeds.

The aforementioned laws are relevant with regard to proceeds of an investment that came to fruition after the passing of a partner. However, in instances in which a partner passes on, his heirs are not necessarily entitled to assume the operating position of the deceased. Subject to their original agreement, it is the legal right of a partner to refuse to operate his business with the heirs of his deceased partner. A new arrangement is required, which is likely to include a buy-out of shares.

Due to the complexity of the above rulings, particularly regarding the nullifying of contracts and the terminating of a partnership upon the passing of a partner, a competent halachic authority is to be consulted. Various rulings which are not within the scope of this article do apply.

VERDICT

Distribution of Proceeds

Our Bet Din awarded Joe’s sons the proceeds of their father’s investment. Since Sammy, Albert, and Joe were by contract equal shareholders in the investment, Sammy maintained the legal right to collect the money owed to him by Joe. Even if the investment sustained a loss, Sammy nevertheless could have legally collected the funds from Joe’s estate. Hence, Sammy is likewise required to share
the proceeds of the investment with Joe’s sons. We therefore instructed that after the $250,000 check representing Joe’s obligation to
the partnership cleared in the bank, Sammy and Albert forward a third of the proceeds to the estate of their late partner Joe.