This post is not legal advice.
Earlier, I posted on family limited partnerships, I’m continuing the theme today with what happens when a general partner passes away. For example, father and son start a general partnership to run the farm. This partnership will continue till the partners agree to dissolve the partnership or the death of a partner. Similar to a sole proprietorship ending at the death of the owner, a partnership ends at the death of a partner. But a partnership does not terminate until the partnership’s business affairs are wound up (§ 9a-802). Looking back at my example, if father passes away then the partnership dissolves, but the partnership does not end until the affairs are wound up. A recent decision by the Court of Special Appeals of Maryland highlights the importance of winding up partnership affairs can be.
Background
Layfield v. Insley involves a father and son farm partnership that began operation in 1979. Morris (the father) passed away in 1993 and Reggie (the son) passed away in 2013. Between 1993 and 2013, Reggie operated the farm (under the same name of Layfield Farms) as a sole proprietorship (paying taxes, signing contracts, and loan agreements as a sole proprietorship). At the time of Reggie’s death, Reggie’s widow, Mary Ann, and his mother (Morris’s wife), Helen, were both still alive.
Mary Ann instituted a suit to determine ownership interest in Layfield Farms’ property. The Somerset County court determined that:
· Morris was a partner until his death;
· Reggie continued to operate the partnership without liquidating Helen’s share;
· Morris and Reggie’s shares should be calculated equally at the time of Reggie’s death.
Mary Ann believed that the partnership should be valued at Morris’s death and not Reggie’s death and appealed.
When Should The Division Be Timed?
On appeal, Mary Ann argued that the partnership should have to be valued at Morris’s death (not Reggie’s death). Valuing at Morris’s death would allow any appreciation in value in the farm between Morris’s death and Reggie’s death to go to Mary Ann. The court of special appeals did not agree with Mary Ann’s argument.
A partnership, unless there is a partnership agreement to the contrary, dissolves at the death of one partner (regardless of number of partners). The partnership does not terminate until all its affairs are wound down. So according to the court, Reggie had two options: liquidate the assets and wind down the affairs of the farm, or continue to operate the farm as a sole proprietorship with the consent of the deceased partner’s executor. The estate of the deceased partner can request to be bought out at a fair share of the partnership’s value at death plus interest or attributable profits.
In this case at Reggie’s death, the sole proprietorship terminated and it was appropriate to value the partnership. At that point, Helen would have had the option of the partnership’s value plus interest or attributable profits. In this case, the circuit court picked attributable profits. Because there was no evidence of the value of the partnership at the time of Morris’s death and impossible to calculate the value at his death, the court agreed it was fair to calculate at the time of Reggie’s death.
Why Care?
Why should you care about this decision? Many families may currently operate farming operations as partnerships, much like the Layfields did. This case highlights the importance of developing succession plans for the death of one partner. Developing this plan might have benefited Mary Ann and Helen.
For example, Morris and Reggie could have agreed early on what would have happened at one of their deaths. Both could have agreed the surviving partner would buy out the deceased partner’s share of the partnership. The agreement would have taken away the ability of the surviving partner to continue the partnership.
Buying out the deceased partner’s share may not be an option in agriculture. The agreement to buy out the deceased partner’s share might allow the surviving partner to do it over a period plus a fixed interest rate.
As you can see, there are many ways to agree early on how to wind down a partnership upon the death of one of the partners. Setting how to wind down the partnership early on will ensure that each partner gets his/her fair share of the partnership. Consider working with a professional to determine the appropriate methods to put in place. In the end, even the simplest methods will be better than no methods to winding down the partnership.
Reference
Layfield v. Insley, No. 0177, 2016 WL 4379230 (Md. Ct. Spec. App. Aug. 17, 2016).
Md. Code Ann., Corps. & Ass’ns § 9a-802 (West 2016).