This section is from the book "Popular Law Library Vol8 Partnership, Private Corporations, Public Corporations", by Albert H. Putney. Also available from Amazon: Popular Law-Dictionary.
The partnership property belongs to the firm, and a partner has an interest in it depending on his share of the capital and his share of the profits, and the value of these shares depends on the relationship between the liabilities and assets of the firm. It is evident that this value is of a varying and uncertain character. Not till an account is taken can it be estimated, and not even then determined for purposes of division except by consent and agreement of all the partners. The property must be sold, debts collected, and creditors paid, and the whole partnership business wound up before a partner's share in the partnership property is legally fixed without his consent. For it is a rule of law that the property cannot be divided in specie unless by unanimous agreement of all the members, with the exception of land remaining after debts and capital have been paid. After all firm liabilities have been met the right of partition inheres in land not bought for speculation. The consequence is that when a partner sells his individual share, or it is sold on execution, the purchaser takes no right to individual property, but only the right to the proceeds that would accrue to the original owner of the share, and must take them as his representative in the same manner after the winding up and settlement of the partnership affairs. Nor does the purchase of the partner's share on voluntary or forced sale constitute the purchaser a partner, but does effect a dissolution of the partnership and entitles the purchaser, on the winding up of the affairs of the firm by the other partners, to an accounting, and this may be compelled by a bill in equity. Real estate bought and sold during the existence of a partnership is not subject to the dower rights of the wives of the partners, but on dissolution of the firm by death, if not otherwise, the real estate not necessarily sold to pay debts of the firm is subject to such rights. Nor could a partner avoid his wife's dower right by putting his individual real estate into the partnership as capital without her joining in the deed of conveyance, and it would seem that he ought not by his individual act, not in furtherance of the purposes of the partnership, dispose of his individual interest in the real estate of the firm, without his wife's joining in the deed to his interest in the land; in other words, a voluntary sale of a partners share in a partnership possessing real estate not purchased for speculative purposes should include a quitclaim deed to the real estate signed by the partner's wife. Whenever the partner has a right of partition, the wife has a right of dower.
7 Bopp vs. Fox, 63 III., 540;
Holmes vs. Stix, 104 Ky., 351; Williams vs. Gillies, 75 N. Y., 197; Kruschke vs. Stefan, 83 Wis., 373.
8 Hammond vs. Hopkins, 143 U.
S., 224. 9 Wiegand vs. Copeland, 14 Fed.
Rep., 118; Riedburg vs. Schmitt, 71 Wis., 644. 10 Robinson Bank vs. Miller, 153 III., 244; 46 Am. St. Rep., 883; Hiscock vs. Phelps, 45 N. Y., 97; Page vs. Thomas, 43 Ohio St., 38; 54 Am. Rep., 788.
A partner cannot mortgage his share either of the real estate or of the personalty of the firm as against creditors of the firm, or, it would be better to say, his interest in the property of the firm, because he has no determinate share till the debts are paid. Nor can any property of the firm be taken on execution on judgment against him individually, because it is the property of the firm and in equity may be the property of a creditor, since the partner's interest in it is merely an equitable right to his share of the capital and profits which is subordinate to the rights of the firm to have firm creditors first paid, his right being in the nature of a contingent debt due him from the firm assets after firm debts are paid, and not of the nature of a tenant in common of specific property.
If a partner assigns his share to another the effect is to dissolve the partnership and the other partners must come to a settlement with the assignee or wind up the partnership affairs. However many of the partners sell their individual interest, the legal title to the firm property remains in the others who have authority to close up its affairs. But suppose all the partners assign, some one or all of the assignees taking possession of the property? Moreover suppose there are judgment creditors. The creditors by bill in chancery may enjoin the sale of the property by the assignees, have a receiver appointed, and a sale and distribution of the proceeds according to law.
That is, where all the partners sell out their interests individually the creditors may follow the firm property wherever it may be found, and till it is in the hands of court by bill brought they may levy on it by execution. And in the hands of a partner the assignees of the interests sold may compel a sale and accounting.
A sale of the property as property by the partnership itself or by a liquidating partner is another matter. Creditors have no lien on partnership property and a firm, or liquidating partner, may dispose of any or all of its property under the same conditions and rights as to passing title as an individual owner, and in case of real estate sold to pay partnership debts or to secure funds to carry on the business the sale will be unhampered by dower rights.
The right of a single partner in a going concern to sell in the name and in the behalf of the partnership may be restricted by lack of authority, and this may be a matter of which a third party should take notice. For instance, a partner could not be presumed to have general authority to sell the whole stock of goods in a retail store or the equipment and furnishings necessary to conduct the business. Nor has one partner without the consent of the other partners, a right to sell the partnership real estate, the partnership not being engaged in the buying and selling of lands.
The fact that a partnership is insolvent does not prevent a sale of partnership property, even the whole of it, for a reasonable consideration. The giving away or sale of partnership property for an inadequate consideration would be a fraud upon creditors, but a firm has the same right to prefer one creditor to another that an individual has, the right to pay A his whole debt when nothing is left to pay B. Also a right to sell to a partner for an adequate consideration all the firm property though he may be largely in debt; but to sell on credit under such circumstances might be a fraud on creditors.
Till courts of equity or bankruptcy obtain jurisdiction over the firm property, an insolvent firm may dispose of its property and divide the proceeds equitably and fairly among themselves without first paying the debts of the firm.
As the individual property of the members of the firm as well as that of the firm is capable of being reached by judgment creditors of the firm, it would seem that there could be no inequity in this procedure. And a judgment may be obtained on a firm debt in a suit against the members as well after as before the dissolution of the firm.
But courts of equity have jurisdiction over matters of fraud and trust, equitable assets disposed of in fraud of creditors, the settlement of partnership accounts, and the appointment of receivers. Consequently the property of a partnership is frequently in the hands of a court of equity at the suit of judgment creditors or a complainant partner, or the purchaser of his interest. When in such cases partnership property is thus in the hands of a court of equity or a court of bankruptcy, the court applies, according to the equities, the assets to pay the firm creditors, whether their claims are reduced to judgment or not, giving due regard to prior liens, if any, and if there is a surplus, it is divided among the partners or those who are subrogated to their rights.
It is generally in the case of the insolvency of firms or of individual partners, or both, and in matters of probate and receivership, that the probate and other courts - courts of chancery or bankruptcy-have, when property is brought under their jurisdiction for distribution, established the rule of marshaling assets of firm and partner by which the firm assets are first to be applied to the payment of firm creditors, the balance, if any, to be divided among the individual partners, their assignees or representatives; and the assets of each individual partner, when these are in the hands of the court, are to go to pay his individual creditors first, the balance, if any, to be paid to the assignee or receiver of the partnership to be applied on firm debts.
Judgments outstanding on firm debts often force an otherwise solvent partner into bankruptcy. On the other hand partners may be individually bankrupt while the firm has surplus assets, and the bankruptcy of the member dissolves the partnership and entitles his assignee to an accounting; and often without insolvency, on charges of fraud or waste, partnership affairs are in the hands of a receiver. So the matter of a surplus is not always visionary.
In these cases all creditors, whether judgment creditors or not, file their claims, and, if there is a deficit, share pro rata, unless some creditor has a lien obtained according to law. But as said before, speaking of property in the hands of the firm, a mere creditor's claim, not reduced to judgment, is no lien on firm property, and when so reduced becomes a lien in the same manner and form as in the case of private property. Therefore there is nothing to prevent, except through insolvent or bankrupt statutory laws, insolvent partners before chancery or bankrupt proceedings are begun, from settling affairs among themselves, and any disposition of the property that does not amount to a gift, or sale for an inadequate consideration, is valid. Usually an injunction is asked at the beginning of chancery proceedings to restrain any disposition of the property until hearing on the bill is had.
The result is that the firm has a right to dispose of partnership property in its own hands as it pleases, subject to the same restrictions as are imposed upon individuals in regard to mortgages and other liens and disposition in fraud of creditors.
Again we see that a partner's interest in the partnership property must be distinguished from the partnership title to the property. A partner often disposes of the partnership property, even the whole of it, as agent of the firm; but his personal interest is a chose in action, a contingent interest, and his claim may be barred by the statute of limitations.