Story Case

John Anderson and Walter Wilson were partners in the express business. The firm property was worth $10,000; each had a one-half interest. Wilson sold his interest in the firm for $2,000 to Elmer Bailey. Bailey demanded that the property be sold, and that he be given one-half of the proceeds. At a forced sale, only $6,000 was realized. The firm owed to creditors the sum of $4,000. These creditors maintained that all of their obligations should be paid before Bailey should receive anything. Bailey contended that he bought the property outright and, therefore, should have his share first, or at least stand on equal basis with the other creditors. How should the money be divided?

Ruling Court Case. Staats Vs. Bristow, Volume 73 New York Reports, Page 264

Staats had recovered judgment on a personal account against one Stockbridge, who was a member of the partnership of Stockbridge & Martin. Staats procured the issuance of execution against the partnership to recover, if possible, the judgment which he had against Stockbridge. The sheriff sold the interest of Stockbridge in the partnership, and Staats became purchaser thereof. Subsequently, the partnership made an assignment to Bristow for the benefit of creditors. Staats, in order to establish his title to a part of the property and recover the same, thereupon, brought this action against Bristow, who held possession of the property of the partnership under the assignment.

Now the partnership was in an insolvent condition and there would be nothing left after all the partners' debts were paid.

Decision

By the purchase at the sheriff's sale, the plaintiff received only the interest which Stockbridge had in the property. Now his only interest was to share in the surplus after all the partnership obligations were met. Therefore, the plaintiff receives nothing because it was evident, in this case, that there would be no surplus.

Mr. Justice Folger said in part: "So it is apparent that the plaintiff did not buy the property itself, specifically; but only the interest, right and title which Stockbridge had in it. Now the interest which he had in it was that of one or two partners, as the property was part of the assets of a copartnership firm of which he was a member. The interest of a member of such a firm in the assets of it is the share to which he is entitled by the terms of the copartnership in the surplus of those assets remaining after all partnership debts are fully paid. It appears in this case that the firm was insolvent; that its debts much exceeded its assets; that there never could arise a surplus. So the interest of Stockbridge, as an individual in this property was nothing and so the plaintiff got nothing by his purchase." Accordingly, it was held that judgment should be given for the defendant.

Ruling Law. Story Case Answer

Each and every partner has an interest in the property owned by the partnership. They are not necessarily joint owners, however. The interest of a partner in a partnership property is the right to share in the surplus after all the obligations and debts of the firm have been met. It is not a right to any particular property, nor is it a right to have the property divided. It is only a right to have the property sold, and after payment of firm debts, to share in the remaining money.

A partner's interest will depend for its amount upon the arrangement which has been made as to the distribution of the partnership assets. In the absence of any such arrangement, partners will share equally, both as to the distribution of the capital of the firm and as to the profits which have been made. It follows from this that, when a partner assigns or sells his interest, he does not sell or assign title to any particular property. He assigns or sells only his right to share in the remaining part of the partnership assets after all debts are paid.

Consequently when a partner's interest is seized and sold on execution, the attaching creditor gets no right to any particular property; he gets only the right to share in the assets in the same manner and to the same extent that the partner himself would have shared. Accordingly, in the Story Case, Bailey does not receive any more than Wilson was entitled to, that is, a half share in the proceeds after the creditors were satisfied. Since the creditors of the firm should receive $4,000, Bailey should receive merely $1,000, which is one-half of the balance from $6,000.