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Principles Of Business Law - CHAPTER II

1. CHAPTER I

2. CHAPTER II

3. CHAPTER III

4. BOOK I CHAPTER I

5. CHAPTER II

6. CHAPTER III

7. CHAPTER IV

8. CHAPTER V

9. CHAPTER VI

10. CHAPTER VII

11. CHAPTER VIII

12. BOOK II CHAPTER I

13. CHAPTER II

14. CHAPTER III

15. CHAPTER IV

16. BOOK III CHAPTER I

17. CHAPTER II

18. CHAPTER III

19. CHAPTER IV

20. CHAPTER V

21. CHAPTER VI

22. CHAPTER VII

23. CHAPTER VIII

24. CHAPTER IX

25. CHAPTER X

26. BOOK IV CHAPTER I

27. CHAPTER II

28. CHAPTER III

29. CHAPTER IV

30. CHAPTER V

31. CHAPTER VI

32. CHAPTER VII

33. CHAPTER VIII

34. CHAPTER IX

35. CHAPTER X

36. CHAPTER XI

37. CHAPTER XII

38. CHAPTER XIII

39. BOOK V CHAPTER I

40. CHAPTER II

41. CHAPTER III

42. BOOK VI CHAPTER I

43. CHAPTER II

44. CHAPTER III

45. CHAPTER IV

46. CHAPTER V

47. BOOK VII CHAPTER I

48. CHAPTER II

49. CHAPTER III

50. CHAPTER IV

51. BOOK VIII CHAPTER I

52. CHAPTER II

53. CHAPTER III







CHAPTER II
PARTNERSHIP PROPERTY

Sec. 6. What constitutes partnership property. What consti-
tutes partnership property is determined by the agreement be-
tween the partners. In absence of an express agreement, what
constitutes partnership property is ascertained from the conduct of
the parties and from the purpose for and the way in which property
is used in the pursuit of the business. The^mere use of property
by a partnership is not sufficienjb^to_jiistify a conclusion thatjt is

Such~property may be owned by a third



person orb^^ie^partners individually, the partnership possessing
only the right to use the property. The partners may own, as ten-
ants in common, real estate used in the firm business, yet such
property may not be firm assets. 1

The Uniform Partnership Act in general terms states: (1) All
property originally brought into the partnership stock, or sub-
sequently acquired by purchase or otherwise on account of the
partnership, is partnership property. (2) Unless the contrary in-
tention appears, property acquired with partnership funds is part-
nership property.

Sec. 7. Firm name and good will as firm property. In the ab-
sence of statutory requirements a partnership may carry on its
business under any name the partners choose to use. In some
states, by statute, restrictions are placed upon the adoption of a
firm name in that the firm must not, by the use of the words "and
Company/' lead the public to believe that it is a corporation; but
such words may be used if they represent an actual partner or part-
ners. In some states, partners doing business under a fictitious or
an assumed name must file a certificate with the county clerk set-
ting forth the name under which the business is to be conducted
and the true and real names of the parties conducting the business.
Failure to comply with this statute does not make contracts with
third parties void, but a partnership that has not registered its
name cannot sue on such contracts.

A firm is a collection of individuals, and the partnership name is
used primarily in identifying the group. A firm name is an asset
of the firm, and as such will be protected by law. It may also be
sold, assigned, or disposed of in any way that the parties agree
upon.

^aber-Prang Art Co. v. Durant, 1905, 189 Mass. 173, 75 N.E. 221; p. 663.

235



236 BUSINESS ORGANIZATIONS PARTNERSHIPS

Good will is based upon the justifiable expectation of the con-
timied patronage of old customers and the probable patronage of
new customers resulting from good reputation, satisfied customers,
established location, and past advertising. It must be considered
in evaluation of the assets of the business, and is capable of being
sold and transferred. Upon dissolution caused by the death of one
of the partners, it must be accounted for by the surviving partner
to the legal representatives of the deceased partner. 2

The purchaser of the good will of a business, in the absence of an
agreement to the contrary, secures the right to advertise to the pub-
lic generally that he is a successor of the old firm and is carrying on
its business. For example, he may advertise "Brown and Smith,
successors of Smith, Watson and Company/' In some jurisdictions
the purchaser of the good will does not acquire the name of the
business, and the use of the name may be enjoined if injury is
caused thereby.

In the absence of an agreement, the vendor of the good will may
establish a new business of like character in the same locality, but
he cannot advertise that he is carrying on the old business. In
many jurisdictions he is under a duty to refrain from active solici-
tation of business from old customers. This is particularly true
where the dissolution sale is a voluntary one. Such business of the
old firm as comes to him from general advertisements or ordinary
business activity, he is free to accept. The vendor may not use his
own name in the establishment of a new business, if, by doing so,
the public is led to believe that he is continuing the old business.

Sec. 8. Partnership capital. In the eyes of the law, partner-
ship capital consists of jthe^totaljcredits to thej?apital accounts^af
the various partners^ provided the credits are for permanent invest-
ments maHe in the Business. Such capital represents that amount
which the partnership is obligated to return only at the time of dis-
solution, and it can be varied only with the consent of all the part-
ners. JUndj^djJ^^ arejpermitted by somejo^^
ners to accumulate in th^business^db not become^TFofthe capital.
They, like~lempdro^ are subject To
withdrawal at any time.

The amount which each partner is to contribute to the firm, as
well as the credit he is to receive for assets contributed, is entirely
dependent upon the partnership agreement. Even though a per-
son makes no capital investment, it is still possible for him to be a
partner. His services or standing in the community may, for in-
come purposes, balance the capital investment of others. Such a
partner, however, has no capital to be returned at the time of liqui-

a Slater et al. v. Slater et al., 1903, 175 N.Y. 173, 67 N.E. 224; p. 664.



PARTNERSHIP PROPERTY 237

dation. Only those who receive credit for capital investments
which may include good will, patent rights, and so forth, if agreed
upon are entitled to the return of capital when dissolution occurs.
As suggested, investments may be made in forms other than
money. In cases of this kind, as soon as the particular asset is con-
tributed, it no longer belongs to the contributing partner. He has
vested the firm with title and he has no greater equity in the prop-
erty than any other party. At dissolution he recovers only the
amount allowed to him for the property invested.

Title to Partnership Property

Sec. 9. Personal property. For the purpose of conducting
business the title to personal property may be contracted for, ac-
quired, held, and transferred in the firm name. This is true even
though the firm name is other than the names of the individuals
within the firm. Such an artificial name is merely representative
of the individuals making up the partnership entity. Bills of sale,
chattel mortgages, 3 warehouse receipts, bills of lading, and other
legal documents used in business involving personal property,
whether tangible or intangible, are effectively executed under the
firm name.

Sec. 10. Real property. A partnership, for many purposes
heretofore discussed, is a distinct entity, separate from its members.
This is particularly true with reference to the title to personal prop-
erty, to taxing statutes, and to some extent to bankruptcy law.

The Uniform Partnership Act recognizes such entity for the pur-
pose of taking, holding, and conveying title to real property in the
partnership name. Title so acquired can be conveyed in the .part-
nership name; and a conveyance to a partnership in the partner-
ship name, though without words of inheritance, passes the entire
estate of the grantor, unless a contrary intent appears. Where
title to real property is in the partnership name, any partner may
convey title to such property by a conveyance executed in the part-
nership name. Such a conveyance must be with the consent of all
the members of the firm, or within the pursuit of the partnership
business.

In those jurisdictions still controlled by the common law and
which have not adopted the Uniform Partnership Act or do not rec-
ognize the entity idea, the method of taking title to real property
rests upon a different footing. The common law requires that the
title to real property rest in a person, either natural or artificial.
A partnership as such, therefore, at common law, cannot hold title
to real estate in its own name. In these states, a deed containing

3 Hendren et al. v. Wing et al., 1895, 60 Ark. 561, 31 S.W. 149; p. 665.



238 BUSINESS ORGANIZATIONS PARTNERSHIPS

the name of a partnership as a grantee is a nullity for want of a
person to receive legal title. If the grantee in the deed includes
the names of all the partners in the firm, the legal title rests in the
individual partners as tenants in common. If the firm name used
as grantee includes the name of one of the partners, the whole legal
title vests in him, as trustee, for the benefit of the firm. The same
is true where title is expressly taken in the name of one of the part-
ners for the benefit of the partnership.

Property Rights of a Partner

Sec. 11. Partner's rights in specific partnership property. A
partner is a co-owner with his partners of specific partnership prop-
erty, and, subject to any agreement between the partners, a partner
has an equal right among his partners to possess partnership prop-
erty for partnership purposes. He has no right to possess specific
partnership property for other purposes without the consent of the
other partners. A partner has a right that the property shall be
used in the pursuit of the partnership business and to pay firm
creditors. A partner does not own any particular part of the part-
nership property. He, therefore, has no right in specific partner-
ship property that is assignable, and any sale by him, as an indi-
vidual, of a particular part of the partnership property does not
pass title to the specific property. 4 He has no right to use firm
property in satisfaction of his personal debts and he has no interest
in specific partnership property that can be levied upon by his per-
sonal creditors. 5 For example, A, B, and C are partners and the
firm owns three trucks of about equal value. A does not own one
of the three, nor does he own a one-third undivided interest in the
three trucks. He has no power to sell any of the trucks except in
the pursuit of the partnership business, and a personal creditor of
A could not, after obtaining a judgment against him, levy upon and
sell any of the trucks. The trucks are owned by the firm and are
to be used in its business or in the satisfaction of firm obligations.

Sec. 12. Partner's interest in the partnership. A partner's in-
terest in the firm consists of his rights to share in the management
of the business, to share in the profits which are earned, and, after
dissolution and liquidation, to the return of his capital and such
profits as have not been distributed previously. This assumes, of
course, that his capital has not been absorbed or impaired by losses.
A partner may pledge his interest in the firm as security for a per-

4 McNair v. Wilcox, 1888, 121 Pa. St. 437, 15 Atl. 575; p. 666.
5 R. A. Mylcs and Co. v. A. D. Davis Packing Co, 1919, 17 Ala. App. 85, 81 So. 863;
p. 666.



PARTNERSHIP PROPERTY 239

sonal obligation, or a personal creditor may levy upon it and have
it sold at public auction. Under the Uniform Partnership Act, the
firm is not dissolved by the pledging or forced sale of the interest.
The purchaser at the sale obtains only the right to the profits and
to the return of capital at dissolution. If the partner, after his in-
terest is sold, withdraws from the firm, the partnership is dissolved.
The purchaser of the partner's interest may become a partner, with
the assent of the remaining partners, and thus participate in the
management.

Sec. 13. Partnership insurance. A partner has an insurable
interest in partnership property and may legally carry insurance
upon it to secure him personally against loss arising through its
destruction. Similarly, the firm may carry insurance against vari-
ous hazards, and in the latter case the proceeds are payable to the
firm in case of loss. Very little controversy arises over indemnity
insurance, but, where life insurance is carried on a member of the
firm, numerous problems develop.

If the surviving partner is the beneficiary, does he keep the pro-
ceeds or hold them in trust for the firm ; if payable to the firm, must
they be used to purchase the interest of the deceased partner; and,
if so, must the estate accept the proceeds of the insurance in full
payment of the deceased partner's interest? Since the answers to
these questions are not clear, the partnership agreement should
cover all questionable matters relating to partnership life insurance.
If insurance is carried upon the life of a partner and the premium
is paid by the firm, it would seem that the proceeds should belong
to the business, even though the named beneficiary is the surviving
partner, 6 although there are cases to the contrary. 7 If the partner-
ship is the beneficiary, the surviving partner is not obligated to use
the insurance for acquiring the interest of the deceased partner.
Provision for such procedure should be made in the partnership
contract or in the policy of insurance, preferably in the former. If
the survivor is to use the funds to purchase the interest of the de-
ceased partner, he must pay the full value of the interest, unless
some contract establishes the amount which will be paid to the es-
tate of the deceased.

Powers with Respect to Property

Sec. 14. Power to sell personal property. Each partner has
implied authority to sell to good-faith purchasers personal prop-
erty which is held for the purpose of resale, and to execute such doc-

Quinn v. Leidinger, 1930, 107 N.J. Eq. 188, 152 All. 249; p. 667.
7 Rush v. Howkins, 1910, 135 Ga. 128, 68 S.E. 1035; p. 668.



240 BUSINESS ORGANIZATIONS PARTNERSHIPS

uments as are necessary to effect a transfer of title thereof. Of
course, if his authority in this connection has been limited and such
fact is known to the purchaser, the transfer of title will be ineffec-
tive or voidable. A partner has power to sell the fixtures and
equipment used in the business only when he has been duly au-
thorized. Such acts are not a regular feature of the business and a
prospective purchaser of such property should make certain that
the particular partner has been given authority to sell. The power
to sell, where it is present, gives also the power to make such war-
ranties as normally accompany similar sales.

Sec. 15. Power to sell realty Wrongful conveyance. As
said in a previous section, the right to sell firm real property is to
be inferred only if the firm is engaged in the real estate business. 8
In other cases, the right to sell and convey realty exists only where
the sale has been approved by a majority of the partners. Since
the execution of deeds in most cases must be under seal, authority
to execute a deed must normally be created under seal.

Under the Uniform Partnership Act title may be taken in the
firm name and any member of the firm has power to execute a deed
thereto by signing the firm name. In such a case, what is the ef-
fect of a wrongful transfer of real estate that has been acquired for
use in the business and not for resale? The conveyance may be set
aside by the other partners since the purchaser should have known
that one partner has no power to sell without the approval of the
others. However, if the first purchaser has resold and conveyed
the property to an innocent third party, the latter takes good title.

If the title to firm property is not held in the firm name, but is
held in the names of one or more of the partners, a conveyance by
those in whose names the title is held passes good title unless the
purchaser knows or should know that title was held for the firm.
There is nothing in the record title in such a situation to call the
buyer's attention to the fact that the firm has an interest in the
property.

Sec. 16. Power to pledge -or mortgage firm property. The
power to mortgage or pledge firm property is primarily dependent
upon the power, later discussed, to borrow money and bind the firm.
A partner with authority to borrow may, as an incident to that
power, give the security normally demanded for similar loans.
Since no one partner, without the consent of the others, has the
power to commit an act which will destroy or terminate the busi-
ness, the power to give a mortgage on the entire stock of merchan-
dise and fixtures of a business is usually denied. Such a mortgage
would make it possible, upon default, to liquidate the firm's assets,

8 Robinson et al. v. Daughtry, 1916, 171 N.C. 200, 88 S.E. 252; p. 669.



PARTNERSHIP PROPERTY 241

and thus destroy its business. Subject to this limitation, the power
to borrow carries the power to pledge or mortgage. 9

Review Questions and Problems

1. A owned a flour mill. Later, he and B formed a partnership for the
manufacture of flour, and the mill was used in the business. No rent
was paid to A for the use of the mill, but all repairs were paid for by the
firm. In a dispute between firm and individual creditors the question
arises as to whether the property is firm or individual property. What
is your opinion?

2. A and B formed a partnership and A contributed an unpatented in-
vention. He later took out the patent in his own name. To whom does
the patent belong upon dissolution?

3. A invests $10,000 and B $5,000 in a certain business for profit.
With the investment they purchase fifteen pianos. What is the interest
of each one in the pianos?

4. A and B were equal partners in the transfer and drayage business.
"They owned six trucks with which they conducted their business. C,

a creditor of A, levied on three of the trucks and had them sold to H.
Did H obtain good title to the trucks?

5. A and B are partners. A dies and B continues the business in his
own name. In accounting for the firm assets, he refuses to make any
allowance for good will. May the executrix of A recover an additional
sum for the good will of the business? Give a definition of good will.

6. How is title to partnership personal property held? Is the same
true of real estate? Has the Uniform Partnership Act changed the law
in this respect?

7. A, B, and C formed a partnership to purchase and develop a sub-
division of suburban real estate. Title to some of the property was taken
in the name of College Crest Realty Company, other portions of the
realty were taken in the name of -A, J5, and C jointly, and some in C's
name. In each of the above situations what will be necessary to convey
proper legal title to a purchaser?




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