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The Problem With Oral Contracts Between Family Members

The Problem With Oral Contracts Between Family Members

When it comes to family, you may think written contracts are unnecessary. But any time you are dealing with a corporate or business transaction, you should not treat a parent or sibling differently than any other partner. A written agreement is essential to ensure both parties acknowledge their rights and responsibilities to one another.

Brother's Lawsuit Against Sister Over Mother's Business Allowed to Proceed

Here is a recent example from New York City of what can go wrong when family tries to do business without a written agreement. The plaintiff and the defendant in this case are brother and sister, respectively. The siblings' mother owned a pizzeria in Manhattan. The mother originally had a will providing both children would inherit the business equally. But after the brother filed for divorce from his wife, the mother decided to change her will to leave 100% of the business to the sister. The mother passed away about a year later.

According to the brother, there was an oral agreement between the siblings whereby the brother would pay the mother's estate taxes, and in exchange the sister would give him 50% ownership of the business once his divorce was final, as well as 50% of the business income generated prior to the divorce. As a form of collateral, the sister also agreed to acquire a life insurance policy, at the brother's expense, naming the brother as sole beneficiary.

The brother claimed he lived up to his end of the deal—he paid the mother's estate taxes—but the sister did not. She never transferred 50% ownership of the business, and she only made “sporadic deposits” of business income into a joint account which did not amount to the agreed upon 50%. The sister did, however, purchase the life insurance policy.

The brother subsequently sued the sister for breach of contract and other claims. A Manhattan Supreme Court judge dismissed the lawsuit, but on appeal, the Appellate Division, First Department reinstated some of the brother's claims and returned the case for trial.

The First Department agreed with the Supreme Court that the brother could not sustain a breach of contract claim. Under New York's statute of frauds, certain contracts must be in writing to be enforceable in court. This includes any agreement involving a “promise” to “name a beneficiary” of a life insurance policy, as was the case here. The brother argued the insurance provision could be severed from the rest of the oral agreement with his sister, but the courts disagreed. The First Department noted the brother's concession the insurance policy was “collateral” to guarantee performance of the contract, and therefore it was “intertwined with and dependent on the provision involving transfer of the assets.”

That said, the First Department said the brother could pursue separate claims against his sister for promissory estoppel and unjust enrichment. Promissory estoppel refers to cases where a person relies on another person's promises and suffers damages as a result. Here, the brother claims he paid his mother's estate taxes in reliance on his sister's promises to transfer half the business to him. Similarly, there may be unjust enrichment in that the sister received a significant benefit—payment of the mother's estate taxes where she was the “sole beneficiary of the will”—at the brother's expense.

Need Help From a Long Island Civil Litigation Attorney

Nobody wants to go to court against a brother or sister. Yet as this case illustrates, when two parties in a business relationship try to operate without a written contract, family or not there will be extended civil litigation. This is why before agreeing to any disposition of property or assets you should speak with an experienced New York business attorney. Contact the offices of Nisar & Mason, P.C. today if you have any questions or concerns.
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