Putnam v. Shoaf
620 S.W.2d 510, 1981 Tenn. App. LEXIS 608 (1981)
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Rule of Law:
The conveyance of a partner's entire 'interest in the partnership' transfers all assets attributable to that interest, including claims or assets unknown to either party at the time of the sale, because a partner's interest is a share in the partnership's profits and surplus, not an ownership right in specific partnership assets.
Facts:
- Carolyn Putnam held a one-half partnership interest in the Frog Jump Gin Company, which was heavily indebted.
- Seeking to be relieved of the partnership's liabilities, Putnam agreed to sell her interest to John A. and Maurine H. Shoaf.
- The financial records examined by the Shoafs indicated the partnership had a negative net worth.
- As part of the transaction, Putnam and the other partners (the Charltons) each paid $21,000 into the partnership.
- The Shoafs agreed to assume personal liability for all of the partnership's debts, including those incurred prior to their entry.
- Putnam executed a quitclaim deed conveying her entire one-half interest in the partnership's real and personal property, including accounts receivable, inventory, and 'all other assets of Frog Jump Gin Company.'
- Over a year after the sale, it was discovered that a former bookkeeper had embezzled a significant amount of money from the partnership.
- The partnership recovered over $68,000 from banks that had honored forged checks, creating a new, previously unknown asset.
Procedural Posture:
- The Frog Jump Gin Company filed suits against its former bookkeeper and the banks that honored forged checks.
- Carolyn Putnam intervened in the litigation, claiming an interest in any funds recovered from the banks.
- The banks paid a judgment of over $68,000 into the court's registry.
- The dispute between the Shoafs and Putnam over the funds was heard by the trial court (the Chancellor).
- During the litigation, Mrs. Putnam died, and her estate was substituted as the claimant.
- The Trial Judge dismissed the Putnam estate's claim, ruling that it had no interest in the fund.
- The Putnam estate, as appellant, appealed the trial court's judgment to the intermediate court of appeals.
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Issue:
Does a partner who conveys her entire interest in a partnership retain a claim to a partnership asset that was unknown to both the buyer and the seller at the time of the conveyance?
Opinions:
Majority - Nearn, J.
No. A partner who conveys her entire interest in a partnership does not retain a claim to a partnership asset that was unknown at the time of conveyance. Under the Uniform Partnership Act, a partner's interest is their share of the profits and surplus, which is considered personal property; it is not a direct ownership interest in any specific partnership asset. Therefore, Putnam conveyed her entire 'interest in the partnership' and not a collection of specific, itemized assets. She had no specific interest in the unknown claim against the banks to separately convey or retain. The court found Putnam's clear intent was to sever all ties with the partnership and escape its liabilities. This situation constitutes 'mutual ignorance' of an asset's existence or value, not a 'mutual mistake' that would warrant reformation of the contract. Just as a seller would not be entitled to the value of oil discovered on partnership land after the sale, Putnam is not entitled to a share of the subsequently recovered funds because the right to those funds belonged to the partnership itself and was transferred along with her entire interest to the Shoafs.
Analysis:
This case clarifies the distinction between a partner's 'interest in the partnership' and the partnership's specific assets under the Uniform Partnership Act. It establishes the precedent that a general conveyance of a partnership interest is a complete divestiture, transferring rights to all assets, including choses in action, even if they are unknown at the time of the sale. The court's distinction between 'mutual mistake' and 'mutual ignorance' is significant, narrowing the grounds for contract reformation where parties are unaware of an asset's true value or existence. This decision provides transactional certainty for purchasers of partnership interests, assuring them that they acquire all associated assets, discovered or not, and prevents sellers from later claiming windfalls.
