Philip L. Chapman, Esq.
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Representing the Family Business: an Interdisciplinary ApproachInstitute for Continuing Legal EducationJune 11, 2002Session 1-Managing the Family Business
The Mel-Len Corporation, Philip L. Chapman, Esq. Lum, Drasco & Positan, LLC. I. The SettingMel (age 63) and Len (age 60) are brothers and equal owners of Mel-Len Corporation, a subchapter S corporation (the "Company"). The Company, twenty years old, manufactures and sells various products, some of them proprietary and some only on special order. They both are very active in the business, Mel being "Mr. Inside" (operations, finance, purchasing and customer relations) and Len being "Mr. Outside" (marketing and sales). Mel has one child, a daughter, Marlene. Marlene is not active in the business, but her husband, Barry, has been working for the Company, for seven years. Barry has no employment agreement; and his marriage to Marlene is not in good shape. Len has three children ranging from age 27 to 21. His two older children are married, have families and live in other parts of the country. His youngest child, a son, is studying architecture in college. Mel and Len pull down identical and substantial salaries and perks, worth in the aggregate about $300,000 per year. Both families spend most of the monies they get out of the business on enjoying the "good life"; and they have no other sources of income. Neither Marlene, Mel’s wife, nor Lenore, Len’s wife, has ever been involved in the business. Moreover, while Mel and Len have always gotten along well, each wife believes that her husband is the person mostly responsible for the Company’s growth and success and has hostile feelings about his brother, principally because she believes he is considerably overpaid. Lastly, the relationship between the wives leaves a lot to be desired. Mel and Len have personally guaranteed the Company’s $750,000 term loan for equipment and its $1,000,000 revolving line of credit. Mel and Len have a partnership which owns the real estate from which the Company operates. The inter-entity lease was executed fifteen years ago when the partnership took out a twenty year non-recourse mortgage loan. The lease provides for a twenty year term and does not provide for any right of renewal. Despite the prodding of the Company’s accountant, its lawyer and an occasional insurance salesperson, the Company does not carry key-man insurance, has no "credit life" insurance to provide for payment of the bank in case either dies; and there is no "buy-sell" agreement. Neither brother carries any income disability insurance and the amount of life insurance they carry is only about $250,000 per man. Mel’s will is 7 years old, and Len does not have a will. When last urged to have a "buy-sell" agreement dealing with the possibility of either of them becoming disabled or dying, Mel and Len got so stuck on the issue of the value of the Company that they dropped the entire subject. Also, the issue of a mandatory buy-sell in case of death or disability were been discussed with Len, he has stated that he would not want this, just in case his youngest son should decide to abandon architecture and come into the business. II. On Mel or Len’s Disability or Death---What is going to happen?Assume that either Len or Mel becomes severely disabled or dies----what events are likely to unfold for the affected brother, his family, the other brother and the Company? And, if Len is one who is incapacitated or dies, how precarious is the position of his-son-in law, Barry? |
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