Jeff Neuburger

Business relationship with family member? – Get it in writing!

Mixing business with family relationships makes great television drama, as fans of shows from Dallas to The Sopranos can attest, but it often results in real-life disagreements that flare up during Thanksgiving dinners and end up in court. This is especially so if the family members are unable or unwilling to formalize their business arrangement in written agreements.

In McKee v. McKee, decided last month, the Chancery Court of Delaware (a lower Delaware state court that hears matters and causes in equity, mainly corporate, commercial and contractual matters) considered a husband's claim that his wife promised to give him half of her business – but unfortunately for the husband and his heirs, that promise was never reduced to a written agreement.

"I want an equal share"

Here’s the story.  JoAnn owned a successful marina business, George was her employee and manager of the marina. When JoAnn divorced her first husband, she married George, who expressed the desire to own half of the business. JoAnn had her attorney draw up various agreements to formalize their business relationship, including one that would have given George a partial interest in the marina. But George never signed any of the agreements, apparently because none of them gave George the "equal share" that he wanted.

Despite the lack of an agreement to give George half the business, or even a formal employment contract, the marriage continued, as did George's work as an employee of the marina. He received a salary and bonuses in return for his work. There was no question that George's work was important to JoAnn: she took out "key man" insurance on George and made him an officer of the business, and he even co-signed business loans.

Promises, promises

Eventually the marriage deteriorated along with the business relationship. JoAnn fired George, then divorced him. He sued. Even though he hadn't signed any written agreements, he claimed that he was entitled to an interest in the marina business under the theory of "promissory estoppel."

“Promissory estoppel”? It’s a fancy legal term which means that a person who has induced another person to rely upon an unwritten promise is not allowed to argue that the promise is not enforceable because it is not in writing.

George argued that the basic elements for recovering under that legal theory were present: JoAnn had promised to give him half the marina business; she expected that he would rely on that promise; he had in fact continued to work in the business in reliance on her promise; and fairness dictated that he receive the half share.

By the time the case went to trial, George was dead and the litigation was being carried on by his estate. The court ruled that there was no evidence that JoAnn had made a specific promise to George to give him half the business, or that such a specific promise was coupled with reliance by George's that was to his detriment. Regarding George's continued work at the marina, the court found that George was fairly paid for his work as an employee therefore the continued work was not a “detriment” that would support a promissory estoppel claim.

In assessing the facts, the court commented that the business and marital relationships of George and JoAnn were so intertwined, and played out over such a long time, that George's estate couldn't show that there was a single, clear promise from JoAnn to George that was connected to specific conduct on George's part that could be considered detrimental reliance.

Regarding fairness, the court said: "One can argue that, as an ethical matter, such commitments ought to be honored; a promise, however, to make a gift such as this is not enforceable, without more."

Lessons learned

When dealing with family, it can be difficult to quantify love and even more so to define business relationships.  Yet, it is essential to do so, in writing, to avoid the kind of time-consuming and expensive litigation that can result from unfulfilled promises and unspoken agreements.

A lawyer's guess

One final point: JoAnn was willing to give George an interest in the business, but only something less than an equal share. Although the opinion doesn't speculate on this point, it may be that JoAnn, who was represented by an attorney, was concerned that by giving George an equal share in the business, she was giving up sole control. Giving George less than an equal share might have been her way of keep control firmly in her hands. But that's just a lawyer's guess.

The posts on this blog reflect the personal views of Jeffrey D. Neuburger, in his individual capacity, and do not necessarily represent the views of his law firm or his clients, and are not sponsored or endorsed by them. The information contained in this blog is provided only as general information for educational purposes, and no warranty or representation is made about the accuracy of the information provided. Blog topics may or may not be updated subsequent to their initial posting. This information is not provided in the course of an attorney-client relationship and is not intended to constitute legal advice. This blog should not be used as a substitute for competent legal advice from a licensed attorney in your state.

Posted by Jeff Neuburger on June 8, 2007 | Comments (1)