Harris v. Klure
205 Cal. App. 574, 23 Cal. Rptr. 313, 205 Cal.App.2d 574 (1962)
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Rule of Law:
Where a partnership agreement provides a comprehensive buy-out mechanism that includes a specific interest rate to be paid on the value of a deceased partner's share from the date of death, this constitutes an 'agreement otherwise' under the Uniform Partnership Act, supplanting the estate's statutory option to elect a share of the profits in lieu of interest.
Facts:
- Edward Harris and Harry P. Klure were partners in a business under a written agreement dated June 22, 1949.
- The agreement contained a clause allowing a surviving partner to purchase the deceased partner's interest.
- The purchase price was defined as the 'appraised value,' to be determined by the State Inheritance Tax Appraiser, unless either party found it unacceptable, in which case the value would be determined by arbitration.
- The agreement further stipulated that the purchase price would be paid with interest at 5% per annum from the date of the partner's death.
- Harry P. Klure died.
- Edward Harris, the surviving partner, continued to operate the business and expressed his intent to purchase Klure's interest per the agreement.
Procedural Posture:
- A dispute arose between Edward Harris and the administrator of Harry P. Klure's estate over the purchase price of Klure's interest.
- Harris filed an action for declaratory relief and specific performance in the trial court.
- The State Inheritance Tax Appraiser filed an appraisement valuing the decedent's interest at $62,136.
- Harris notified the estate of his intent to purchase at that price.
- The administrator of Klure's estate rejected the appraisement and requested arbitration as provided in the agreement.
- The trial court found that the administrator had accepted the appraisement prior to its filing and was therefore bound by it.
- The trial court also ruled that Harris owed 5% interest in lieu of profits, but that no interest was due for the period of the litigation.
- The administrator of Klure's estate, as the defendant, appealed the trial court's judgment to the court of appeal.
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Issue:
Does a partnership agreement provision requiring a surviving partner to pay a set interest rate on the purchase price of a deceased partner's share from the date of death constitute an agreement to opt out of the default statutory rule that otherwise allows the deceased partner's estate to choose between interest and a share of the business's profits?
Opinions:
Majority - Coughlin, J.
Yes, the partnership agreement's provision for a set interest rate from the date of death overrides the default statutory rule. The statutory rule (Corporations Code § 15042) grants a deceased partner's representative the option to receive either interest on the value of the decedent's share or the profits attributable to its use, but this rule only applies 'unless otherwise agreed.' The court found that the partners did 'otherwise agree' by including a specific provision for 5% interest from the date of death in their buy-out agreement. To interpret the agreement as requiring the surviving partner to pay both the contractually specified interest and a share of profits would be 'oppressive and inequitable.' Therefore, the agreement's specific terms for interest create an election that supersedes the statutory option. The court also held it was unreasonable for the trial court to find the estate had accepted the appraisal before it was officially filed, and that interest must be paid for the full period, including during litigation.
Analysis:
This decision clarifies the 'unless otherwise agreed' exception within partnership law concerning the dissolution of a partnership upon a partner's death. It solidifies the principle that partners can, through a carefully drafted agreement, create a complete and binding buy-out mechanism that displaces default statutory remedies. The ruling provides certainty for surviving partners by allowing them to rely on the contractual terms for compensation to the deceased's estate, rather than facing an unpredictable liability for profits earned post-dissolution. This emphasizes the critical importance of foresight and specificity in drafting partnership agreements to control the outcome of future events like a partner's death.
