Story Case

James Hill, Joseph Swanson, and George Simpson were working under a partnership contract in the iron brokerage business. They agreed to be partners for two years and to share the profits and losses equally. At the time the partnership was formed, Hill paid in $4,000 as his share of the capital, Swanson assigned to the firm his personal brokerage business which was valued at $4,000, and Simpson put in $1,000 cash and agreed to give his services, skill and reputation in this line of trade. At the end of the two years, the firm had tangible assets worth only $9,000, and owed to creditors $3,000. A dispute arose between the partners as to how these assets should be divided and the matter was taken into Court. How will the Court distribute the assets?

Ruling Court Case. Shea Vs. Donahue, Volume 15 Lea, Tennessee Reports, Page 160; Same Case, Volume 54 American Reports, Page 407

Shea and Donahue became partners in the business of buying and selling hardware. By their agreement, the partnership was to exist for one year from the date of entering into the agreement. Shea agreed to and did pay in $1,000 as the capital of the enterprise, and it was agreed that Donahue, in lieu of capital paid by him in cash, should furnish his skill and services in carrying on the business. It was also agreed that they should bear the expenses and losses equally and share in the profits in the same manner. The business was continued for about three years under the agreement above described. Upon dissolution of the firm, Donahue claimed to be entitled to one-half of the capital which was put in the business by Shea. Shea refused to give him any such share, and this bill, brought for an accounting, had a principal claim for one-half of the capital.

Decision

It was decided that he was not entitled to one-half of the cash capital contributed by Shea. His capital consisted of his skill and services. His skill he retained after the dissolution of the firm, and the other partner is entitled to his cash. Mr. Justice Cooper, in discussing the question, quoted from Lind-ley on Partnership as to how the assets of the firm should be distributed when a partnership is dissolved. They should be distributed in the following order:

"1. In paying the debts and liabilities of the firm to nonpartners.

2. In paying to each partner ratably what is due from the firm to him for advances as distinguished from capital.

3. In paying to each partner ratably what is due from the firm to him in respect of capital.

4. The ultimate residue, if any, will then be divisible as profit between the partners in equal shares, unless the contrary can be shown."

Accordingly, it was held that Shea was entitled to the amount of cash capital which he put into the business, and that Donahue was entitled to no part of it.

Ruling Law. Story Case Answer

Upon the death of a partner all personal property passes to the survivor. All real estate passes as other separate property of the partners, but subject to the right of the survivor to use it in settling up the affairs of the firm. These assets are first used for the purpose of paying all firm debts to persons who are not members of the firm. In the second place, they are used, or the balance thereof, for the purpose of paying debts which are owed to partners, by way of advances or loans to the firm. The balance is used to pay the partners their share of the capital, which they have contributed. If there then be a balance, this is profit, and will be divided among the partners, and those who represent them.

In the Story Case, the creditors will be paid all that is owing to them first, and this will leave a balance of $6,000 to divide among the partners. This can be divided into nine parts; four parts will go to Hill; four parts to Swanson, and one part to Simpson. Of course, Simpson will take away his skill and reputation.