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.
13 Strong vs. Lord, 107 III., 25; Gal-braith vs. Tracy, 153 III., 54; Shearer vs. Sheaver, 98 Mass., 107.
14 Sune vs. Tyler, 49 Me., 252;
Goodwin vs. Richardson, 11
Mass., 469. 15 63 III., 541.
The rule, therefore, as to division in specie of the firm property on dissolution is exactly the reverse in case of personal property and real estate. A partner's interest, accordingly in firm property, entitles him, on dissolution, after debts are paid, to a share in the proceeds of the sale of the personalty, and, after debts are paid, to a partition, depending on the extent of his interest, in the remaining real estate. And one who puts in personal services or the bare use of property is entitled to nothing on division of the original capital invested, but, after debts are paid and capital repaid, the surplus in profits is equally divisible; all of which is subject to contract between the members of the firm except such matters as dower and general liability to third parties.
It is an elementary principle of law that the gift, or sale for a fraudulent and inadequate consideration, of property by an insolvent debtor is a fraud on the creditors, and the property so disposed of is equitable assets to be reached by creditors' bill brought by judgment creditors. A commentary on this principle as applied to a partnership is to be found in Wilson vs. Robertson,17 wherein the court says: "The firm is not liable for the private debts of one of its members, nor is there any liability resting upon other members in respect to those debts. An appropriation of the firm property to pay the individual debt of one of the partners is, in effect, a gift from the firm to the partner - a reservation for the benefit of such partner, or his creditors, to the direct injury of the firm creditors." This was a case in which an insolvent firm assigned its effects for the payment of the private debts of a member and the assignment was set aside as a fraud upon the joint creditors of the assignors.
16 Buchan vs. Sumner, 2 Barb. Ch., 165; Dyer vs. Clark, 5 Metc, 562; Howard vs. Priest, 5
Metc, 582; Bopp vs. Fox, 63 III., 541. 17 21 N. Y., 587.
But one partner may sell his entire interest in the firm to his co-partner so as to give him a good title to the firm property, and the co-partner may, in his turn, appropriate the property so purchased to the payment of his individual debts. Nor will it invalidate the transaction that the purchase was made with this intention. When such a sale is made the firm is dissolved and the purchaser becomes the individual owner of the prior firm property, and may do with it as he pleases. In this case, here referred to, Hapgood vs. Cornwell,18 it was also held that one partner buying out his co-partners and promising to pay the firm debts only creates a personal obligation and not a lien on the effects so purchased and his creditors, not knowing of the obligation, take a good title to the goods received in payment of their debt.
But these cases in which one partner buys out the others so that there is no necessity for partnership accounting - no question between partners - and those other cases where a partner sells his interest to a third party, in which case there is a necessity for accounting in the final disposition of the property, must be carefully distinguished. It is evident in this latter case if the property gets into the hands of a third party by the purchase of the partnership shares, he has not made a purchase of property, but of a chose in action, a contingent interest, which is only a right to the surplus after the debts are paid, and a judgment creditor of the firm may levy on the property. The distinction may be illustrated in this way: A, B and C, partners, may sell the firm property; for they own it, and creditors have no lien upon it as creditors; but if A, B and C successively sell their firm shares or contemporaneously and separately, not as a firm, sell their respective shares to one or more parties, the title to the property does not pass, but the legal title remains in the old firm, the members of which have parted with their equitable interests, and judgment creditors of the firm may reach the property. The dissolution of a firm does not conduce to the destruction of the firm title to the firm property, but the title adheres to the old membership, except in the case of death when it inheres in the survivors. And the members retain some of the attributes of partners for the purpose of disposing of the property and winding up its affairs, but not for the purpose of making new contracts or binding the old firm by new obligations not necessary to wind up its affairs. The powers and interests of partners give rise to the conception of a partnership as an entity acting through an agency whose scope is restricted by dissolution and thereupon ended by final disposition of the property. This conception is fortified by what has been said of the nature of a partner's interest as being a right merely to the repayment of capital and to a receipt of profits after firm debts are paid, or, where there is a surplus over debts, yet a deficit as to original capital, the partner's interest is a right to share according to his advancement toward the original capital in whatever surplus there may be.
18 48 III., 64.
This conception is rather strengthened than weakened by the American doctrine that as to land on dissolution the agency only extends to the disposal of what is necessary to wind up the affairs of the firm according to its necessities and equities and that the legal title is held by the partners as tenants in common or as tenants in common with the heirs of a deceased partner, and that the right of partition and dower exists in surplus land.
The distinction between partners dealing with third parties and partners dealing with partners might not be important if partners bought and sold shares of each other instead of property. For technical reasons and for substantial reasons too, a partner cannot sue his firm at law, or another partner, on account of dealings with the partnership. But this does not prevent A, B and C, partners, from selling property to C, although C buys in a sense from himself. So A and B can buy all the property, including the good will, of the firm of A, B and C, that is, they can buy out C; for all have agreed to the disposition of the property. But if D is a third party he may buy any one or two shares of one or two members but the property only of A, B and C, unless one of these members sells as the agent of the firm. If D is taken in as a new member by the agreement of all, constituting a new firm of A, B, C and D, there is what amounts to a sale of all the property to the new firm. The result is that A, B and C are liable on the old firm debts, D is not. The shares of A, B and C may be sold on execution on judgment against the old firm, but the property itself cannot be levied upon. The essential point is that the property passes when the firm agrees that it shall pass, and that the sale of a partner's interest passes no title to property.
"It has repeatedly been determined, both in the British and American courts, that the property or effects of a partnership belong to the firm and not to the partners, each of whom is entitled only to a share of what may remain after payment of the partnership debts, and after a settlement of the accounts between the partners; consequently, that no greater interest can be derived from a voluntary sale of his interest by one partner, or by sale of it under execution." Bank vs. Corrollton R. R., 11 Wallace, 624. Quoting from the same case: "When, therefore, the bank obtained from Graham the assignment, which is the foundation of its claim in this suit, it obtained thereby no ownership of the lease made by the railroad company to Beauregard, and which he agreed to hold for the benefit of the firm. The utmost extent of its acquisition was an interest in the surplus, if any, which might remain after all debts of the firm should be paid, and after the liabilities of Graham to his copartners, as such, should be discharged. It was not in the power of Graham, by retiring from the firm in violation of the articles of co-partnership, either to introduce another partner or to deprive the partners who remained of their right to have all the partnership property held for partnership purposes. Incident to the right of the bank to share in the surplus was a right to enforce settlement of the partnership accounts, in order to ascertain whether there was any surplus. It is true the words of the assignment were very broad. It purported to transfer all the right, title and interest in the lease made by the New Orleans and Corrollton Railroad Company to Beauregard, to which the assignor might be entitled by virtue of the articles of copartnership, and also all his right and interest in any property and effects of the partnership, and all debts due him from the partnership or any member thereof. But no matter what its language, it is clear no more could pass under it than the right of the assignor; and if, as we have said, there was not a right to the specific articles of property belonging to the firm, the bank obtained no such right. We are not now speaking of the fact that, under his contract with the railroad company, Beauregard had no right to transfer the lease either to the partnership or its members. The case does not require us to consider that inability. It is sufficient that the complainant's right was only an equity to share in the surplus, if any, of the firm property after settlement of the partnership accounts, and that this is a bill for such settlement. Manifestly, then, it is incurably defective, because neither Graham nor May are made parties defendant. It is too plain for discussion that to such a bill all the members of the firm are indispensable parties, for they are all directly affected by any decree that can be made."
It is from considerations like these that the general rule obtains that one partner cannot sue another at law for a transaction forming a part of running partnership accounts without an accounting and an express promise thereon, it being deemed that courts of equity have a peculiar facility for the adjustment of complex accounts, where the parties themselves cannot agree on the balance due.
The rights of partners in disposing, in interest of the firm, of property on dissolution will be considered further in another chapter.