The U.S. businesses consist of sole proprietorships or various forms of partnerships and corporations. It’s not unheard of that solo businesses enter business ventures with other businesses. Due to the tough economy, more and more business partners join business partnerships with each other than before to survive. A business partnership union can be compared to a marriage. Like in a marriage, a business partnership has a honeymoon period filled with well-meant, and perhaps, not-so-well-meant promises. Then, there is a drudgery of ins and outs of a daily and weekly workload and activity with potential lack of communication may lead to contempt and breach of respect and/or trust. Does it sound too familiar? Yes. That’s because it happens all the time. Luckily, there are ways to prevent a fall out, and in case if it’s too late, peacefully depart. Similarly to a good marriage, a personal responsibility and entering the business partnership with the idea that nothing in this world is permanent is the key to success.
There are many issues that can arise among partners and wreck a business partnership. For example, a closed company shareholder dispute over under performance, a lack of sufficient capital and an increase in business expenses, a breach of fiduciary duty, among other things such as including but not limited to business debt collection and/or personal disputes.
A scenario where business partners are partnering with each other instead of hiring happens all the time. Sharing household tasks is not an unfamiliar approach. In short, two or more partners with different set of skills agree to make an input and be responsible for separate aspect(s) of the business. Sometimes one partner’s particular or unique skill or service in the beginning is what brings the company to its success. Later, someone could be hired instead of him. At one point, one of the partners may think that hiring someone else with the same set of skills would be a cheaper alternative than to retain the original business partner leading to a rift in the relationship affecting the daily business flow. Perhaps, communicating would have helped.
There are many issues that can arise among partners and financial outcome be at stake. For example, a conflict may arise in a closed company shareholder dispute may arise over an under performance, a lack of sufficient capital and an increase in expenses. That can lead to a breach of fiduciary duty, and unfulfilled promises and wreck a business flow. In addition, a simple business debt collection suit by a creditor or personal disputes can lead to a prolonged grudge. This is exactly what happened in one of the cases in Massachusetts. See, Weiler v. PortfolioScope, Inc., 83 Mass. App. Ct. 216 (2013).
In Weiler, the business structure involved a complex array of partnerships among companies and individuals making separate contractual agreements and obligations. The outcome resulted in securities regulations preempting over contractual agreements between the parties because there was a properly secured and timely perfected creditor.
Milton Weiler (Weiler), the plaintiff in this case, was a President and CEO of the PorfolioScope, the defendant. Weiler developed a certain portfolio that became a part of PortfolioScope, Inc. (PortfolioScope). PortfolioScope is an entity formed when formerly named Spencer Trask acquired Computer Aided Decisions (CAD) and CAD Research along with Plaintiff’s, among with Weiler’s, software. In 2008, PortfolioScope sued iFlex Solutions, Ltd for the theft of trade PortfoliosScope’s secrets software. The case with iFlex Solutions Ltd. settled and PortfolioScope was to receive a lump-sum payment in the amount of $10 million. However, in 2002, Weiler resigned leading to replacing of the CEO within the company. Through a stock option purchase and the sale agreement with PortfolioScope, Weiler, in exchange for the sale of his portion of ProtfolioScope, retained the right to five percent (5%) of its net proceeds received in connection with the iFlex Solutions, Ltd.
Plaintiff argued that PortfolioScope breached the agreement with the plaintiff to pay (5%) of the proceeds from a settlement related to a pending lawsuit between PortfolioScope and iFlex Solutions. See, Weiler, at 218.
The main issue was whether an agreement between the plaintiff and the defendant stating that the plaintiff was entitled to 5% of defendant’s net proceeds in connection with the third party litigation gave the plaintiff a priority over a secured creditor who had a preferred his claim. The Trial court held that the agreement gave Weiler the priority of payment and said that the defendant “was required to pay because the agreement did not mention any creditor, secured or unsecured.” See Weiler 218-223.
The Appeals Court of Massachusetts, however, disagreed with the trial court and interpreted the effect of the contract between the parties differently. The Court said that the payment was simply one of several parts of the consideration for the sale of his stock options back to the company… The court held that “PortfolioScope lacked authority to encumber collateral preciously securitized in favor of the creditor…” “The resolution of priority conflicts is governed by the general rule “first in time, first in right” See Weiler 225-226. Because the creditor did not subordinate his interest to Weiler, “Weiler was an unsecured creditor, whatever the nature of his interest in the settlement proceeds, was not superior to other creditor who had their interest secured.
Communication is crucial. Comparisons with marriage aside, writing is a great communication tool. While its not always perfect it can show the meaning among the parties. A well drafted agreement between partners could divert a disaster by laying out possible creditors. It can also minimize the possibility of misinterpretation and help to avoid losses and costly litigation.
Written by Margarita Smirnova, Esq.
If you have a specific question relating to your business, please contact Margarita