Expert: Timmy Chou - 8/7/2010

Question
I started a website with a "partner" I didn't check out very carefully. My fault. Lesson learned. Turns out he is essentially broke but didn't tell me that when we started this thing. He's also got the IRS on his tail now for back taxes apparently so won't be GETTING any money any time soon.

I would like to determine first whether I even HAVE a partnership here, or if I could simply pay him back what he's put in to it and be done with him (preferred.)

Facts: I thought of, purchased, and solely own the domain name for the website. The company who hosts and created the web site has ME (and only me) as the "official" owner (i.e. I get the bills.) I had been dealing with this "partner" of mine on some other business, but don't really know him well. We did however talk about and decide to start a web site, which I had actually already been considering. I agreed to be a 50/50 partner with him. Big mistake I now realize, especially without anything in writing.

Our oral agreement was to split the profits from the website 50/50 (another bad choice I know now) and also to share the COSTS of maintaining and creating the website 50/50.

He has only paid 15% of the costs associated with putting up and maintaining the website in the past year, though the bills had been due and owing for months. I have been forced to pay the balance myself in order to keep the site up. He now owes me several thousand dollars, but is still claiming he owns 50% of the web site, and should therefore receive 50% of any profits the site makes.

The site has made NO profits yet, though I anticipate it will once I can advertise it. My "partner" however has no money to spend on advertising, and actually still owes me several thousand dollars for his half of the costs incurred so far.

I just want him out. I don't want to wait for him to pay me, I don't want to share any of the profits with him when they come (since he has put very little into the site thus far.

His bright idea is to just pay me what he owes me once the site makes a profit. Until then, he expects me to just "carry" him as I have been for months. I don't want him as a partner and don't need him as a partner.

Question: Can he claim a legitimate 50% ownership in this website? If he can claim even 15%, I still want him out. I would prefer to just give him the $1000 he paid back and be done with him. Can I do this without him coming back on me later and saying I kicked him out or something?

My opinion is that if it can be determined that we DON'T actually have a partnership, then all I need to do is give him his money back and be done with him.

If however, he CAN claim that a partnership was created, then I may have a problem with him later.

What do you think I should do? Can I get rid of him by just paying him back what he's put in to this? He will NOT willingly sign anything I suspect, and will probably not even accept any money I try to send back to him. He WANTS his 50%, and will probably fight to keep it (if he even has it.) I don't think he can make any claim here. Do you?

Thanks!

Answer
Thank you for your question!

If you have looked at some of my previous answers you may know that I always advise questioners that mediators act as neutral third parties to disputes and never "get involved" in judging the merits of conflict, but merely use special techniques to help the parties decide how to negotiate their own settlement.   

I am not an attorney and cannot give you legal advice but can respond from my mediation, management and consulting experience. Note that this issue may certainly have legal ramifications and you may wish to consult an attorney.

Well let first observe that the entire partnership, capital structure space can be very murky and ill-defined space PRACTICALLY speaking.  The reason I say this is because there are no business structure "police".  It is always up to individuals to enforce business agreements, and this takes money -- LOTS.  Often the cost of enforcement is higher than the claimed amount, and in these cases people are foolish to try to pursue claims.  In other cases, such as a dispute over ownership percentage in a start-up business, if you win it is not clear what exactly you will get nor is it clear that the business will even succeed.  Therefore, committing huge money to a lawsuit is very risky and most people don't do it.  

So in the end there is a calculation that must be made concerning the value and resources available, the quality of the agreements, the performances of the parties, and the cost of enforcement.  

Here is how I think you should proceed.  Note that risk exists to take this course of action (or any course of action).  One can file a lawsuit for pretty much any reason (even for false reasons) and as long as you are willing to pay lawyers, they are willing to file lawsuits.  

1.  Be sure you are documenting a chronological timeline noting the events, issues and conduct of the business, the general agreements you have and the manner of dealing with them.  

2.  Review any existing documents, even if scanty.  In most states, where there is no written agreements in the corporation or partnership, the rules default to the statutory state established rules in the Commercial Code.  Try and get a copy of these rules and again reference and rely on them as best you can as you move ahead.    

3.  Go see a lawyer.  The local Bar Association usually has a referral service that will give you access to an attorney for free.  You should understand the legal landscape.  

4.  I think you should send a certified letter to the partner and announce that you are dissolving the Partnership due to non-performance.   You should state that your agreement depended on good faith provision of resources to the development of the business and the partner did not disclose that he did not have adequate resources and has not kept his end of the bargain.  You should thank him for his energy and enthusiasm but you cannot continue a partnership where these conditions are the case.  You should announce that you are forgiving the balance of the debt due you and this constitutes full and complete payback of any initial paid-in-capital, liquidated damages and payment to him for any inconvenience.  You may wish to choose an arbitrary number that includes another check you enclose to him -- if he cashes it is another evidence that he accepts the deal.

Remember that the system favors those that have money and act. Next you should immediately create another business entity, assign the website to the new entity, move money, accounts or other assets into the new entity and roll.  If he objects, merely restate your position and decline to argue.  You are drawing a picture that begins to stake out a legal "position" you would take in an actual lawsuit and he would have to think hard about whether he could win given his conduct. Just turn the page and he will soon discover that it will cost at least $5k to hire a lawyer to sue you.  Besides, once a new business is created, he must not only sue you, but then try to sue the new business, which is not you.  

Of course some idiots will do this anyway so you should assess the risks here.

4.  Time is not in your interests.  You must act before too much time passes or before the business gains in value so you cannot be cast as a corporate raider -- taking something from him for nothing.  It is very hard to make this case now.

5.  As you say, he CAN claim that a partnership was created and if you become a gazillionaire you may hear from him again, but he would have to try to mount a lawsuit against a gazillionaire.  

You can see how this works:  it is better to have control of the money and assets and then make a strong offensive move that builds obstacles and risks into any challenge.  

These are some ideas.  Feel free to follow up with additional questions.

For your general information, the pros and cons of the types of dispute resolution methods follows.

GOOD LUCK!


Arbitration, Mediation, and Litigation

Arbitration: the referral of a dispute to one or more impartial persons for final and binding determination outside of the judicial system

Benefits of Arbitration:

 Confidential, no public record
 Limited exchange of documentation, information
 Quick, don't have to wait for a court date
 Arbitrators have expertise in the subject matter and are trained in conflict resolution
 Cheaper than litigation
 Preserves business relationships

Negatives of Arbitration

 It's often a compromise, no 100% winner
 Complex arbitration can be costly
 If not satisfied, may litigate the arbitration procedure
 Poor results with an unskilled arbitrator
 Both parties must agree to cooperate in the process

Mediation: the process by which parties submit their dispute to a neutral third party (the mediator) who works with the parties to reach a settlement of their dispute.

Benefits of Mediation:

 Neutral mediator can objectively suggest alternatives not considered before
 Parties are directly engaged in negotiating the settlement
 Can be quicker than litigation
 Less costly than litigation
 Preserves business relationships
 85% of American Arbitration Association cases mediated find successful solutions

Negatives of Mediation

 may not reach a binding decision
 unskilled mediator

Litigation: using the judicial system to resolve disputes

Benefits of litigation:

 a clear winner and loser
 uses a prescribed set of procedures
 more predictable outcomes
 is final

Negatives of Litigation:

 waiting for court dates can do more harm
 usually more expensive than mediation and arbitration
 part of the public record