Summary of Putnam v. Shoaf
Citation: 620 S.W.2d 510 (Tenn. App. 1981)
Relevant Facts: For many years, the Charltons (E.C. & Louise) and the Putnams (Lyle & Carolyn) had operated the Frog Jump Gin Company as an equal partnership. They had operated profitably some years, and other years at a loss. In 1974, Mr. Putnam died leaving his share of the partnership to Mrs. Putnam. By 1976, when the Gin Company was operating at a loss, Putnam sought to end her role in the partnership and relieve herself of further liability for substantial partnership debts. John and Maurine Shoaf expressed an interest in Putnam’s half of the partnership, which she eventually contracted to sell to them. After determining that the partnership had a negative value of $90,000, the Shoafs agreed to assume Putnam’s role in the partnership, and further agreed to assume her personal responsibility for partnership debts. As a condition of their assumption of these debts, both Putnam and the Charltons agreed to pay $21,000 each into the partnership account. Putnam and the Charltons paid the monies as required, the Shoafs assumed the debts as required, and Putnam transferred her interest in the partnership by quit claim deed. Thereafter, and with the assistance of a new bookkeeper, the parties learned that the old bookkeeper had been embezzling funds since the time of Mr. Putnam’s death. These discoveries lead to suits against the bookkeeper and banks that had honored his forged checks. As a result of those suits, a fund of $68,000 was created, with half paid to the Charltons and the other half subject to dispute between the Mrs. Putnam and Shoaf. Putnam claimed she did not intend to convey a claim that neither party knew of at the time of sale and sought reformation of the agreement. Putnam died prior to resolution of her suit. The trial judge ruled in favor of the Shoafs, and Putnam’s estate appealed.
Issue: Does a former partner that sells their interest in the partnership retain an interest in an unknown asset belonging to the partnership at the time of sale?
Holding: No, the partnership interest itself includes all assets- whether or not known at the time- of the partnership. In selling an interest in a partnership, the seller necessarily sells all assets whether or not known at the time as that is all that they have available to sell.
Reasoning: Judge Nearn delivered the opinion for a unanimous panel. First, the Court explained the decision of the trial court, pointing out that the Putnam intended to transfer her entire interest in the partnership as evidence by her agreement with the Shoafs and further signed writing with the Charltons. The Court then explained that in order to resolve Putnam’s claim that there was no meeting of the minds regarding what was being sold they had to determine the nature of Putnam’s interest. Partners own an interest in the partnership itself, and assets of the partnership are held by the partnership rather than by individual partners. Similarly, conveyances of property are made in the name of the partnership rather than the partners, such that each partner owns an interest in the profit or loss from assets rather than an individual interest in any particular partnership asset. Accordingly, all Mrs. Putnam owned that she could convey was her interest in the partnership, including all assets of the partnership. As the Court explained, to hold otherwise would have required finding that Mrs. Putnam remained a partner following sale of her interest when it was unquestionably her intention to rid herself of the partnership interest. While neither party knew about the valuable claim the partnership had against the banks, Putnam could not have retained an interest in the claim while ridding her of her partnership interest; accordingly, she could not retain an interest in one partnership asset while selling all others when she did not know of its existence. The Court analogized this case to one in which oil is discovered on partnership land following sale of a partnership interest. In that case, as here, the valuable oil may have altered the decision (or value) in the sale of the partnership interest, but no interest in the undiscovered asset is retained following sale. Finally, the Court explained that this was not a case of mutual mistake but of mutual ignorance. Mrs. Putnam intended to sell her entire interest in the partnership, and necessarily so, as she had nothing else to offer for sale other than her interest in the partnership itself. Accordingly, she sold her interest including the as yet undiscovered partnership claim against the banks.
Conclusion: Partners selling their interest in a partnership do not retain interest in individual assets of the partnership, whether or not the assets or their value is known at the time of sale. All partnership assets are held by the partnership itself rather than individual partners and thus former partners cannot retain an individual interest in a specific asset following sale of their interest.