Court Ruling Highlights “The Perils Of Going Into Business With Family Members”
An Indiana Court of Appeals recently ruled upon a dispute between a mother and her daughter and son-in-law(and their business) concerning the lease of commercial property and the repayment of loans the mother made on the business’ behalf. The Court began its decision in Wayt v. Maschino (December 29, 2017), by noting: “This case can be added to an unfortunately long list of cautionary tales concerning the perils of going into business with family members.”
Phyllis Maschino owned commercial property, which she leased to one of her sons for his use in connection with a metal fabrication shop. In the late 1990s, Ed Wayt, one of Maschino’s sons-in-law, was looking to move his sandblasting business to a facility more suited to the business’ needs. Ed and his wife, Tex, who was Maschino’s daughter, reached an agreement with Maschino to operate a blasting facility at Maschino’s property, next to the existing fabrication shop. In addition to providing Ed with “superior facilities,” the parties believed the addition of an on-site blasting business would create more opportunities for the fabrication shop.
Maschino arranged for the permitting for the new facility, made a $27,000 down payment for the purchase of blasting equipment, took out loans in the amount of $200,000 to finance the construction and guaranteed another $50,000 loan to cover operating expenses. The Wayts began operating the blasting business at the property under the name “The Blast Shop.” The Wayts did not pay rent to Maschino nor did they agree to pay her any portion of The Blast Shop’s profits. Instead, the parties orally agreed that the Wayts would make the payments on the outstanding loans. The parties did not seek the advice of counsel or put their agreement in writing “because the parties were family and trusted each other.”
Maschino thereafter made numerous payments on the loans when the Wayts were unable to do so and also made a number of cash loans to the Wayts to cover The Blast Shop’s operating expenses. By 2012, the balance on Maschino’s various loans, after prior payments, remained at $133,000. At that time, the Wayts entered into an agreement to sell The Blast Shop and its equipment for $70,000. The Wayts did not provide notice to Maschino concerning the proposed sale or seek her consent. The sale agreement also did not provide for the repayment of Maschino’s outstanding loan balance. When Maschino learned of the sale efforts, she locked the Wayts and the purchaser out of the facility and claimed ownership of the business and equipment.
The family members then filed claims against each other, with Maschino claiming trespass, fraud, breach of contract and other claims. The Wayts counterclaimed for conversion of the equipment, unlawful eviction and other claims. The purchaser also sued Maschino and the Wayts for conversion of the equipment and for breach of the purchase agreement. The purchaser’s suit was later dismissed after he acknowledged that he had “walked away” from the purchase before filing suit.
Maschino and the Wayts proceeded to trial on their claims. The trial court found that Maschino had loaned the Wayts a total of $354,000 and that they had repaid a total of $201,000, leaving an unpaid balance of $153,000. The court also found that the Wayts were the owners of the blasting equipment and that Maschino owed them an offset of $70,000 for the value of the equipment. The court entered a net judgment of $83,000 in Maschino’s favor and also ordered her to return certain personal property belonging to Ed.
On appeal, the Wayts argued that the trial court’s findings and rulings were erroneous as to the specific amounts of the loans Maschino made to the Wayts and as to the amounts they had repaid. The Court of Appeals rejected this argument, concluding that the trial court’s findings were supported by the evidence presented at trial. The Wayts also argued that Maschino’s claims for repayment of the loans were barred by the statute of frauds because there was no writing evidencing the Wayts’ agreement to pay the loans. The Court of Appeals noted that, pursuant to the Indiana statute of frauds, any agreement that is not to be performed within one year must be in writing in order to be enforceable. In this case, however, the Court of Appeals determined that it was possible for the Wayts to have repaid the loans within one year, even though Maschino did not expect them to do so. Thus, the statute of frauds did not bar Maschino’s claim to repayment. The Appeals Court then affirmed the monetary judgment in Maschino’s favor but remanded the matter to the trial court for further clarification regarding the personal property Maschino was required to return to the Wayts.
The Wayt decision serves as a reminder of some of the “perils” that can arise when family members do not document their agreements properly (or at all).
Even though the parties may “trust each other” as family members when first arranging their business dealings, such trust unfortunately can deteriorate over time as family relationships and business conditions change. Even where family members get along and trust each other to honor their commitments, it is far better practice to document all commercial relationships, including, as in the Wayt case, loan agreements, commercial leases and property ownership agreements. Through such documents, the parties should be able to clarify their rights and obligations and may be able to avoid lengthy and costly litigation if their familial or commercial relationships break down.