CHAPTER XLV

PARTNERSHIP PROPERTY

§ 294. Nature of Partnership Property

The partnership investment is the money or property, tangible or intangible, contributed by the partners for the purposes of the business. The original property of a partnership is derived from the contributions of the partners. When profits are made, they may be drawn out, or they may be allowed to accumulate and meanwhile may be used in the prosecution of the firm's business. If retained in the business. they are practically merged in the original capital, the two together constituting the partnership property.

Any property purchased with partnership funds becomes prima facie partnership property. If such property is taken in the name of a single partner, he holds as trustee for the firm. The firm name, the good-will of the business, and any trademarks used in the business are the property of the partnership, in which each partner has his interest.

When the business is sold, the firm name passes with it. If the business is sold as a whole, the good-will passes with the firm name and the tangible assets.

A firm as such cannot hold real estate. Hence, land must be deeded to the members of a firm to hold as tenants in common, or to some individual, who is usually a member of the firm, to hold as trustee for its benefit. A conveyance of real estate to a firm by name, in cases where the firm name contains the name or names of existing members, passes a legal title to the members named, who will hold in trust for

the whole firm. If no member is named in the firm title, no title passes to anyone, but the seller can later be compelled to deed to the individual members of the firm.

Real estate held for the benefit of the firm is, for all partnership purposes, treated as personal property. The money or property invested in a partnership and any property acquired by the firm is partnership property. Each partner may deal with it in the firm business as an agent of the firm, but he has no personal right to any of it.

A partner has no claim to interest on his investment, nor even to interest on money put in, over and above his agreed investment, unless it has been expressly so agreed. It is always possible for a partner to advance money or to let the firm have the use of property of which he retains the right to possession, and such money or property remains his individual property. Money or property, however, put into a partnership as an investment becomes the actual property of the partnership.

Power Over Personal Property of Firm. Each partner's power over the property of the firm is the same. Each is agent for all the others in everything that pertains to the care, sale, and management of the partnership property.

A partner has full power to buy and sell personal property within the scope of the partnership business, and the firm is bound by his transactions. This power does not extend to the sale of property used by the firm for carrying on the firm business, as such a sale would tend to destroy the partnership business. Where a sale is to be made of the stock in trade, or of the entire assets, or of fixtures or furniture, all of the firm should join in the assignment.

Power as to Real Estate. One partner cannot make a valid deed to real estate held by the firm, but he can, when such contract is within the scope of the partnership business, make a contract to convey, which the courts will compel the firm to

perform. Likewise, in a similar case, a partner can make a valid contract for the purchase of land by the firm.

A partnership may be formed by either written or verbal contract for the express purpose of buying and selling real estate. In such cases the realty is treated for all partnership purposes as if it were personalty.

For a legitimate purpose a partner has also the right to pledge or mortgage the real property of the firm. He has, however, no power to sell property of the firm or to borrow money upon it for his own purposes or to pay his own debts, and anyone lending him money, or buying property from him under such circumstances, with knowledge, takes no title to the property in question.

The wife of a partner has no right to dower in real estate held for the purposes of the firm until all the claims of creditors and of all the other partners have been satisfied. In a solvent firm, however, the wives of the partners would be entitled to dower, and when such property is sold the wives should release their dower rights.

Notes:

I. A partner has a right to make use of firm property for the purposes of the business in common with all the other partners.

2.

He has no right to firm property personally until the firm has been wound up and the assets divided, unless he has loaned property with the express provision that it is to remain his individually.

§ 295. Liability of Partnership Property for Debts

A partner's interest can be reached by attachment or by execution. This interest, however, is merely a right to a certain proportion of the surplus after debts are paid and the affairs of the partnership are adjusted, and this is all that can

be reached by legal process. The effect of the sale of a partner's interest under execution would be to give the purchaser the right to merely the same interest in value that the debtor partner had. Such a sale would make necessary the dissolution of the partnership, and the immediate settlement of its affairs, for all partnership debts must be settled before anything is set aside for a purchaser under execution.

Execution following judgment on a claim against the firm runs in the names of the individual partners, and can be levied on the partnership property, or on the individual property of any of the partners. If it is levied on individual property, the partner to whom such property belongs has recourse against the other partners for their proportions of the debt.

In event of insolvency the partnership assets should be applied to the payment of the partnership debts, and the separate assets to the payment of the individual debts, and any surplus from either class should be carried over to the payment of the other class. This process is called "marshaling the assets."

On execution against the partnership there can be no claim for homestead or exemption out of the joint assets. This is the general law, but it does not apply to New York and a few other states, in which the provisions of the exemption law extend to property owned by a partnership of which the debtor was a member. (See § 300.)

Assignment for Benefit of Creditors. An assignment for the benefit of creditors can be made only by all the partners acting together. If, however, one partner makes such an assignment, the others may, if they choose, ratify his action, thus making the unauthorized assignment valid. In case a partner has absconded, or cannot be reached, the remaining members of the firm, acting together, may make a valid assignment.

It has, however, been held in New York that one partner

may transfer the partnership effects directly to a creditor of the firm, without the knowledge or consent of his associates, and that the courts will sustain his action.

Under the National Bankruptcy Law, however, in any case where an assignment is made when the firm is insolvent, any aggrieved creditor may proceed under the Bankruptcy Act. For the liability of individual partners to third persons, see §§ 287, 300.

Note:

I.

If an assignment of partnership property has been made, any creditor can institute bankruptcy proceedings.

$296. Profits

The sharing of profits is an essential feature and the usual object of a partnership. Ordinarily these profits are ascertained by deducting the current expenses from the current receipts, or gross profits, or, on dissolution or any general accounting, by deducting the firm indebtedness and the original partnership investment from the total partnership assets. As there is often room for differences of opinion as to what constitutes profits, it is well to define in the articles of association how they are to be determined.

In the absence of a special agreement otherwise, the common law rule governs the division of both profits and losses. Under this the partners must share equally, without any variation, or any allowance for the greater value of services rendered, the greater amount of time devoted, or the greater investment made by one or the other of the partners. This is usually arranged by agreement, however, so that partners who devote more time or money to the business, receive a more nearly commensurate return. Salaries for services and interest on investments are sometimes provided for in the partnership agreement.