|
|
 |
|
| Best Practices: Family Business |
Mortal Combat
Kris Frieswick
01/01/2006
|
After working together for 25 years, brothers Frank and David had risen to
the top of their profession, equal partners in a New Jersey firm that developed
and managed real estate and owned a number of fast food franchises. David, who
asked that Worth not use their real names, says that by 1994 the company had
gross revenues of $20 million.
Then the older of the two, Frank,
learned he had a terminal illness.
Anticipating the worst, the brothers
decided to liquidate Frank’s equity and pay it out to his family over time, so
the company would not be forced to disgorge a crippling amount of capital all at
one time. The result, after some arbitration over asset values, was a promissory
note that delivered 50 percent of the net asset value of the company, a little
more than $7 million, to Frank’s family over 10 years. The two men further
agreed that all legal fees and settlement costs for a pending court case with a
lender would be paid equally from each of their shares when it was finally
resolved. Frank retired from the company and passed away in 1996.
TOP VIEW
When a business partner dies, the surviving partners may find themselves in a
legal struggle with the family of the deceased over the disposition of the late
partner’s equity. To avoid this all-too-common (and expensive) dilemma, partners
should work with their attorneys to craft airtight agreements that address
dissolution scenarios in ways that are acceptable to everyone—including heirs. |
As
wrenching as it had been to watch his brother’s slow decline, for David things
deteriorated further after Frank died. He says that lawyers converged on Frank’s
widow and convinced her to negotiate an out-of-court settlement with the lender
for less than the 50 percent her husband had agreed to pay. The lender then came
after David for the remaining amount, which was much more than he had agreed to
pay. David paid it, but withheld money from the promissory note payment to
compensate for the difference. “They drew the first sword by trying to make an
end-run settlement,” David says. “Why would you circumvent an agreement that
everyone agreed to?”
The resulting court case landed David and his brother’s
widow in court for six years and consumed tens of thousands of dollars in legal
bills. David eventually won the case, but the fight ruined the relationship he
had with his brother’s wife. The combination of the legal fees incurred and the
regular payments due under the promissory note “sent me back to square one in
this business,” he says. “It was an incredibly stressful time.” David, however,
does not blame his sister-in-law. “She was unequivocally manipulated by her
attorneys,” he says. “They were taking advantage of her. She had no way to
understand the depth of the business issues involved.”
Kurt Olender, the
Union, N.J., attorney who represented David in the suit, explains that the
brothers made one very common mistake that allowed the case to drag on for so
long: The promissory note agreement and the lender payout agreement between the
brothers were not integrated with one another. This left all parties feeling
wronged. “What [David] did worked legally for a variety of reasons,” Olender
says, “but from the spouse’s perspective, she had a promissory note; it said she
was supposed to be paid X per month, and she wasn’t getting it.”
Competing Interests
This case, while painful, illustrates just how quickly
and profoundly problems can spiral out of control when one member of a
partnership dies. Despite careful planning, many partners are not aware that
even the smallest omission in the agreements that they create can drive a wedge
between surviving partners and the family of the deceased, each of whom has a
different interest. The family wants what is owed as quickly as possible. The
surviving partners want to keep the business solvent. The two interests often
clash.
Through careful legal planning, however, most partnership succession
problems can be avoided. Partnerships, perhaps the least restrictive business
entities, are governed by state statutes, but those statutes assume that the
parties will draw up agreements to fill in the details where the laws are vague.
In most states, for example, a partnership dissolves if one of the members dies
or leaves, unless a binding agreement is drawn up indicating otherwise. Yet many
partnerships are formed without benefit of any documentation whatsoever. “It
happens over and over,” says Joe Lunin, a partner in the law firm of Pitney
Hardin in Florham Park, N.J. “Some people are fearful that if they get lawyers
involved in drawing up agreements, they’ll foster mistrust.”
|
|
|
|
|
|
|
