Serendipity is distracting and infectious. I felt its early
symptoms when, as a plodding mediocrity, I sat in the law library stacks with
open books strewn about me while reading up on some arcane point of torts, or
contracts, or whatever. While thusly occupied I occasionally stumbled upon a
case that grabbed my attention. The case that follows was discovered in just
this way. It comes from the law of trusts – to me one of the dryer
jurisprudential topics, but one with an occasional juicy moment.
Justice Holmes once wrote, “great cases, like hard cases, make
bad law.” But sometimes they make great law – especially if they’re decided by
great judges, as we shall see.
The Bristol Affair
At the turn of the 2oth century, Elbridge T. Gerry,
wealthy member of the famous family whose name gave us the politically loaded term gerrymandering, owned the Hotel
Bristol on Fifth Avenue at 42nd Street in Manhattan. He leased it in 1902 to
real estate operator Walter J. Salmon for a term of 20 years. Salmon converted
the building into shops and offices at the cost of $200,000, half of which was
contributed by Morton H. Meinhard (a “woolen merchant,” according to court
records). According to their agreement, Salmon ran the property but split the rental
profits equally with his silent partner.
By the time 1922 rolled around, Gerry had acquired more property in the area and wanted to clear the land and erect a superb new
building. After other potential investors turned Gerry down, Salmon agreed to be the developer. Unfortunately, he kept the plan to himself and didn't tell Meinhard
about it.
The deal was inked in January 1922, and a month later Meinhard
caught wind of it. Smelling something fishy, he demanded his fair share. He even offered to split the expenses and possible losses. Salmon
refused, and Meinhard filed suit in New York’s equity courts.
The Equity Courts
Equity courts (“courts of chancery”) developed centuries ago
in England when the regular courts were hopelessly mired in rules and codes
that often thwarted rather than enabled just results. (Fans of Dickens’ Bleak
House know whereof I write.) Thus Chancery courts focused mainly on matters
of conscience and fairness, and they could order people to do (or not do)
things in a way that law courts could not. They achieved justice without regard
to burdensome legal procedures.
Although "law" and "equity" are merged today, New York still had chancery courts in 1922, and Meinhard filed
suit there because he felt he had been denied basic fairness. He had been a loyal partner for
twenty years; he had put up half the money for the Bristol adventure; and he
had carried half the risk of failure. He hadn’t done much besides cash his
dividend checks, but he was literally and emotionally invested in the business.
To his way of thinking, Salmon would not have received Gerry’s offer if he,
Meinhard, had not helped the Hotel Bristol deal get off the ground in 1902.
The trial judge and first level appellate court agreed with
Meinhard and awarded him 50 percent of the new business. Salmon, of course, was
not thrilled with this decision, so he hauled himself up to Albany and went
before the highest court in the Empire State. There he encountered Chief
Justice Benjamin Cardozo.
A Fine Point of Honor
Benjamin Nathan Cardozo – one of the greatest jurists and
legal stylists of the Twentieth Century – was the original “hermit philosopher,”
so called due to his lofty principles and permanent bachelorhood. He served on both
New York’s highest tribunal and the US Supreme Court, and his opinions in both
venues are often “works of judicial art,” according to judge Richard A. Posner,
himself a writer extraordinaire. Cardozo’s decision in Meinhard v. Salmon
is a case in point.
After reviewing the evidence and the briefs in the case,
Cardozo was appalled at Salmon’s indifference to his partner’s situation. It is
true, as Salmon argued, that the new lease was not an extension of the Bristol
deal. It was a totally different business proposition. But to Cardozo, Mr.
Salmon was not only a co-investor in the Bristol project, he was a fiduciary
and had a special responsibility to protect his partner’s interests. Thus Cardozo,
acting in effect as New York’s “Lord High Chancellor,” aimed to achieve
fairness. He wrote:
Joint adventurers, like
copartners, owe to one another … the duty of the finest loyalty. Many forms of
conduct permissible in a workaday world for those acting at arm’s length, are
forbidden to those bound by fiduciary ties. A trustee is held to something
stricter than the morals of the market place. Not honesty alone, but the
punctilio of an honor the most sensitive, is then the standard of behavior.
As to this there has developed a tradition that is unbending and inveterate.
Uncompromising rigidity has been the attitude of courts of equity when petitioned
to undermine the rule of undivided loyalty …. Only thus has the level of
conduct for fiduciaries been kept at a level higher than that trodden by the
crowd. It will not consciously be lowered by any judgment of this court.
[Emphasis added.]
Wow! Not only was Mr. Salmon being unfair, in Cardozo’s view he
had violated a code of honor. Duels have been fought over lesser slights. In
the 1700s Meinhard might have slapped Salmon with his glove to demand “satisfaction.”
The End Result
Lawyers, law students and MBA candidates have debated Meinhard
v. Salmon for more than nine decades, and many are surprised by the outcome.
They find it odd to think that a new business deal made by one supposed “partner”
at the end of a profitable 20-year business venture could be challenged this
way. The original Bristol lease did not require Salmon to tell Meinhard
anything about Gerry’s new plans, and apparently Salmon didn’t actively cover
up his negotiations with Gerry. It might not have occurred to him that Meinhard
should be consulted.
Salmon was a real estate developer. Meinhard was merely his
financial backer in a previous venture. And the land the Bristol sat on was only
a small portion of the tract that Gerry wanted to clear and rebuild on. He
could have let the hotel property sit idle for a while after the previous lease
expired and then approached Salmon with the new proposition.
Regardless of its merits, Cardozo’s decision gave Meinhard the
50 percent share he sought, and from it he and his family profited handsomely
over the years from the property Salmon and Gerry built. The Hotel Bristol was
torn down and in its place, across the street from Bryant Park and the New York
Public Library, rose the 59-storey “500 Fifth Avenue Building.” It stands today
on what its website calls “the Smartest Corner in Midtown.”
And Cardozo’s opinion stands smartly on the legal landscape
having, if nothing else, taught generations of law students the meaning of punctilio.
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