§ 156. Sale of Assets The surviving partner sells the assets at his discretion. He may sell them out in the usual course of business, or he may sell them in lots to other dealers, or he may sell them at public auction. He is himself a party in interest and so is likely to adopt such plan as is most profitable to himself and the owners of the estate. If he can sell the business as a going concern for an adequate price, that may be best, and he cannot be called to account unless bad faith is shown. If he does not wish to continue the business himself, it would seem that a sale of the business as a whole would be simplest and should produce the largest result. § 157. Disposition of Good-Will In all cases the good-will has an actual value, and it is to the interest of surviving partners and beneficiaries that it should not be dissipated. In modern times, by means of extensive advertising, the good-will of some establishments is worth as much or more than the tangible assets. (See discussion of this in connection with the transfer tax, § 293.) Good-will is legally defined as "every possible advantage acquired by a firm in carrying on its business, whether connected with premises or name or other matter." 1 The surviving partner's own interest should lead him to dispose of the good-will to the best possible advantage. Difficulty in some cases arises where the surviving partner tries to settle up the business so that only the bare value of the assets is accounted for, while he arranges to continue the business so as to secure the benefit of the good-will for himself. If anything like this is attempted, it is the duty of the personal representative to look into it, and if there is adequate evidence the court will require the surviving partner to account for the value of the good-will to the estate. 117 Am. & Eng. Encyc., p. 1184. § 158. Paying Debts In settling the affairs of the estate, the personal representative must satisfy all claims against the estate before he pays over and delivers legacies or distributes the surplus to those whom the law designates as entitled to receive it. In like manner a surviving partner must pay all debts outstanding against the business before he has any surplus to divide between himself and the executor or administrator. If the business was not solvent, there would be an excess of firm debts, in which case the private property of both the decedent and the surviving partner would be answerable for the deficiency. Any private creditors would be paid from the assets of the estate, and the partnership creditors from the partnership assets; then, if the creditors of either class were not fully paid, they would have the right to be paid from any surplus in the other class of assets. § 159. Dividing Surplus After the assets have been sold and all of the firm's obligations have been paid, the surviving partner should prepare a plain accounting statement of what he has done, and submit it to the personal representative and pay him the amount due the estate of the deceased partner as shown by said statement. In ascertaining the surplus, it is necessary first that any advances above the stipulated investment of capital by the partners be returned to them or credited to them. Then the capital investment of each partner is returned to him or credited to him. And last, any surplus remaining would represent profits, and it would be apportioned among the partners in such way as the partnership agreement prescribed, or if nothing had been specified, it would be divided equally. The receipt of the executor or the administrator is all the evidence of settlement that a surviving partner gets. The executor may properly ask that the settlement of the winding up be verified by a competent accountant at the expense of the estate. § 160. Provisions for Death in Articles Men have made partnership agreements in which they have mutually agreed that in case of death the survivor should own the whole business, and the estate of the deceased partner should have some stated or ascertainable amount. Such an arrangement has been held by some courts to be a legacy and not enforcible unless the contract was drawn up as a will. This does not seem reasonable and has not been the rule in other courts. A fair arrangement for the surviving partner to buy out the interest of the deceased partner at a suitable price has been upheld by the courts of New York and Massachusetts, and by the federal courts. In McKinnon v. McKinnon, 56 Fed. 409, the partnership agreement provided that the junior partner was to have the partnership business and property if the senior partner died without immediate family. This was sustained by the United States Circuit Court. The court said: The consideration which supports the partnership agreement is the mutual promises of the partners to become partners, and to conduct the partnership business on the terms mentioned in the partnership agreement. A Massachusetts court sustained a partnership agreement to this effect: "The surviving member of said partnership upon payment to the widow or personal representative of the deceased partner of the sum of $3,000 shall own said business, stock and good will." The court said: There are sound reasons why a fair agreement entered into by partners, as to the disposal of partnership property in the event of the death of one or more of the partners should be sustained. The terms of such an agreement made by those most familiar with the real character of the prop- A New York court sustained a provision to this effect: "The surviving partner is to purchase the share of the deceased partner at the net value of his share as shown by the last annual balance sheet, with interest at 4% from the date of the balance sheet." 3 Such a plan should include some method of determining the value of the tangible assets from the books or from the last inventory, and the good-will from the average profits for a period three or five years previous. Then provision should be made for payment in cash or notes, in such shape that it may be practicable for the surviving partner to manage the payments without inconvenience. Another plan that has merits is for the firm to insure the lives of its members for such an amount as will pay out the interest of each. Then, at death, the policy provides at once the cash to pay for the deceased partner's share, and the business is neither interrupted nor embarrassed. REVIEW QUESTIONS 1. What advantage has the corporate form of organization in case of death? What makes a partnership interest difficult to turn into cash? 2. What is the evidence of a partner's interest in the business? What is the relation of mutual agency in partnership? What is the effect of death on a partnership? Whose duty is it to close up a partnership? What is the executor's duty? 3. If the decedent had a sole business, what would be the representative's duty? If it is best to continue a sole business, how 2 Murphy v. Murphy, 217 Mass. 233. Matter of Columbia Trust Co., 169 App. Div. (N. Y.) 822. may the representative protect himself? If a representative starts or continues a business on his own initiative with assets of the estate, what is his liability? 4. What details of a partnership interest should be given in the inventory? How are the data of a partnership interest to be obtained for the inventory? 5. May the personal representative sell a partnership interest as a whole? Would he require an order of court or the consent of the beneficiaries to do this? Why would he ask such an order or consent? 6. What effect on a partnership has the death of a partner? What is the duty of the surviving partner? What right has the surviving partner? 7. What is the rule as to new contracts? 8. How should the surviving partner sell the assets? 9. What is good-will? What is the duty of the surviving partner in regard to the good-will? When will the court act? 10. Who pays the partnership debts? If the business were insolvent, how would the estate be affected? 11. After the business has been closed, what should the surviving partner do? How is a partnership surplus ascertained? What evidence of settlement does a surviving partner receive? 12. May partners contract in the articles for a settlement in case of the death of a partner? What are the advantages of such an arrangement? What should such arrangement provide for? How may the death of a partner be provided against by insurance? |