Stan, the owner of a childrenswear company, needed funds to further develop his business. Additionally, he was searching for a popular brand name to help market his product. He approached Jack and offered to sell him 50 percent of the shares of his business in return for a cash investment, and the exclusive rights to use Jack’s privately owned brand name for his childrenswear products. Stan and Jack agreed, and the venture was underway. However, some three years later, Stan was unable to turn his company around, and although there were no substantial losses, no profitable income was generated. Stan then opened, with Jack’s consent, a sock division in Jack’s accessory company, selling socks with the same name brand. The division was a huge success, and after only its first season it was evident that the company was on course to net substantially. Stan requested Jack advance him payment against his share of the profits as an equal partner. Jack refused, claiming that Stan was not a partner in the sock division. Jack explained that as opposed to the childrenswear company, which was owned and operated by Stan, the sock division was not. The finances, overseas contacts, design team, and warehousing were all his sole responsibility. According to Jack, Stan was acting merely as a commission salesman with a base salary. Stan counter-claimed, that before he founded and launched the sock division, he verbally confirmed with Jack his role as a 50 percent partner. Jack responded that he does not recall any such conversation. Stan insisted that he invested time and energy like an owner, and he is unwilling to accept terms that do not compensate him accordingly.
Is Stan a partner in the sock division or a commission salesman? How should the Bet Din rule and why?
Torah Law
According to the ruling of the Shulhan Aruch, a defendant who denies a monetary claim is required to take an oath before he is acquitted. Since the plaintiff has no evidence or valid testimony to support his claim, a defendant is exempt from payment once he swears before a Bet Din that the claim against him is false. In instances in which a defendant contests the claim in its entirety, the oath he is required to take is of rabbinic origin.
The above ruling is applicable to all sorts of financial claims, including claims of litigants disputing a partnership.
Notwithstanding, a Bet Din will consider other variables before imposing an oath on a defendant. If the claim of the plaintiff is farfetched or unreasonable, a Bet Din will dismiss a case without further ado. Generally, it is considered unreasonable to award a party with a fifty percent share of a company, without liability for loss, or without an arrangement to pay back-office fees for overhead expenses. Unless an individual possesses a proven talent or expertise that justifies such favorable terms, an owner is not subject to take an oath for such a claim.
In our case at hand, a standard salesman who previously operated a failing business, cannot impose an oath on an owner based on such a remote claim.
By rule of the Shulhan Aruch, in instances in which a dispute exists between an employer and employee regarding the amount agreed upon as compensation for his services, a Bet Din will impose on the employer to pay the customary amount in the industry.
The obvious reasoning for this ruling is that an employer is required to compensate his employee for the benefit he received from his labor. Thus, the accepted market price is what is fair and serves as adequate compensation.
At times, a Bet Din will refer litigants to an experienced third party to finalize the details of an agreement. A Bet Din will first meet with the third party and explain to them the details of the verdict and request a business model that meets the terms and reasoning of the verdict.
Once a detailed operating agreement is formulated by the third party, the Bet Din will review and approve if appropriate.
Constructing a Deal
Our Bet Din ruled in favor of Jack, denying Stan a blanket 50 percent of the shares in the sock company. Although Stan is claiming that Jack verbally agreed to such terms, without signed documentation, Jack is not required to transfer shares that are presently in his legal possession. Furthermore, Jack is not required by law to take an oath that Stan’s claim is false, since it is difficult to impose an oath due to the remote nature of Stan’s claims. Nevertheless, by law, Stan is entitled to compensation exceeding the amount Jerry is offering to pay. As head of a division, and facilitator of nearly all daily operations, Stan is entitled to be compensated for his services. In order to structure an appropriate operating agreement between Stan and Jack, our Bet Din referred them to an experienced third party who regularly formulates such agreements for divisions of his own company. After providing clear instructions to the third party as per this verdict, our Bet Din reviewed and ultimately approved the suggested agreement. The basic outline of the deal requires the sock division to pay a notable percentage of its gross sales to Jack’s accessory company, before Stan can share in the profits. This formula was applied retroactively and will hopefully enable Jack and Stan to maintain their successful partnership in the future.
In Loving Memory of Vera Bat Carol, A”H
YOU BE THE JUDGE
A Handshake
Henry and Gladys, an elderly couple, finally consented to selling their home to their next-door neighbor, Bobby. For years, Bobby persistently knocked on the old couple’s door attempting to persuade them to sell him their home. On that day, Bobby shook hands with Henry and Gladys and finalized a verbal commitment to purchase their home for 2.2 million dollars. Henry called his lawyer to draw up a contract, and thereafter he notified his only son of the news. Henry’s son told his father that since Bobby’s last offer over 18 months ago the value of the property had appreciated substantially. Henry’s son was appalled with Bobby’s conduct, complaining that Bobby had no right to take advantage of his parents’ age and innocence. When Bobby heard of the son’s involvement, he explained to Henry that they shook on the deal and that it is immoral for him to renege on his word. The parties approached are Bet Din seeking a ruling whether Henry is ethically required to sell his home for the price they agreed upon or not.
How should the Bet Din rule and why?