Opinion
Nos. 35020, 35021 and 35022
Decided July 3, 1957.
Partnership — Agreement obligating surviving partners to purchase interest of deceased partner — Construction — Percentage each partner entitled or obligated to purchase — Partner's interest bequeathed — Bound by option of purchase at time of death — Legatee's right to proceeds of sale and accrued earnings.
1. Where partners own varying percentages of interest in the partnership, and in their partnership agreement it is provided that in case of the death of one of the partners the remaining partners are obligated to purchase the interest of the deceased partner, and there is no provision as to the percentage of such interest which each partner is obligated to purchase, it is presumed that the right and obligation of each partner as to such purchase is limited to that proportion which corresponds to his percentage of proprietary interest.
2. Where an interest in a business is bequeathed to a legatee, but at the death of the testator that interest is bound by an option of purchase by another, and the testator still owns the interest at the time of his death and has made no provision for the legatee during his (testator's) lifetime which would adeem the legacy, such legacy is not adeemed and the legatee is entitled to the proceeds from the sale of the interest, together with all the earnings that have accrued to it subsequent to testator's death and prior to distribution.
APPEALS from the Court of Appeals for Columbiana County.
Causes Nos. 35020 and 35021 are two actions for declaratory judgment in reference to two agreements of copartnership, and, the questions involved being identical, they are considered together.
Cause No. 35022 is an action for the construction of a will and is so interrelated with the actions for declaratory judgment that it is considered with them.
In 1917, James A. Pidgeon, Sr., now deceased and hereinafter referred to as the father, along with one John Burns and Esther Pidgeon, wife of the father, formed a partnership known as The Church Budget Envelope Company. The father owned 70 per cent of the firm, Burns 25 per cent, and Esther Pidgeon 5 per cent.
About 1930 a business known as The Budget Press was conducted under the original partnership, one John Taylor being employed by the firm.
Esther Pidgeon died in 1928, and her 5 per cent interest in the firm became the property of her children, James A. Pidgeon, Jr., Joseph A. Pidgeon and Lois Pidgeon (now Lois Partridge). James, Jr., and Joseph are hereinafter designated as the sons, and Lois as the daughter.
The proportions in the firm then were the father 70 per cent, John Burns 25 per cent, and the sons and daughter 5 per cent.
On April 16, 1938, The Budget Press became a separate partnership. At the time of its creation, the father had a 35 per cent interest, Burns 30 per cent, Taylor 30 per cent, and the sons and daughter 5 per cent. At this time The Budget Press did not make any money except the salary of John Taylor.
The arrangement with Taylor was not satisfactory, and in the autumn of 1938 the father and Burns took over Taylor's interest for $9,500. Thereupon, the interests in The Budget Press were the father 50 per cent, John Burns 45 per cent, and the sons and daughter 5 per cent.
John Burns died in 1948, and, in the meantime, the sons had taken an active part in both firms, and this activity became their life's work.
At the time of the death of John Burns, the sons purchased his interest in The Church Budget Envelope Company and thereafter became active, managing and working partners, with the substantial interest of 14 per cent each.
As to the partnership of The Budget Press, the sons likewise bought the John Burns interest and became active, managing and working partners, with a 24 per cent interest each.
Both partnerships prospered tremendously.
On December 28, 1951, the father conveyed 35 per cent of his holdings in The Budget Envelope Company to the sons, increasing their interests to 31 1/2 per cent each, which they now hold.
The father died on February 2, 1954, and at the time of his death the proportional interests in the two partnerships were as follows:
In The Budget Press, the father 50 per cent, the sons 24 per cent each, and the daughter 2 per cent; and in The Budget Envelope Company, the father 35 per cent, the sons 31 1/2 per cent each, and the daughter 2 per cent.
Effective December 3, 1948, the father, the two sons, and the daughter entered into two separate partnerships, one called The Church Budget Envelope Company and the other The Budget Press. The partnership agreements, so far as they concern the questions which confront us, are identical, and they and the two partnerships will be referred to in the singular.
Paragraph 9 of The Budget Press agreement, which is substantially the same as paragraph 10 of The Church Budget Envelope Company agreement, reads as follows:
"That upon the death of any partner his interest may at the option of his executor remain in the partnership for a period not exceeding five years from the date of the death of such deceased partner during which time his estate shall be entitled to receive the same share of the profits as said deceased partner would have received had he been living. Upon the request of such executor or at the end of five years after the death of any partner his interest must be taken over by the surviving partners at book value plus 25 per cent. Said book value to be determined at the time such request is made or at the end of said five-year period and in such manner as is agreed upon by the surviving partners and said executor. In either event the surviving partners shall have a period of three years to pay for such interest. Purchase price to be evidenced by unsecured promissory notes bearing interest at the rate of 4 per cent per annum. During said three-year period the estate of said deceased partner shall not participate in profits nor be liable for any losses. The provisions of this paragraph are intended to be controlling notwithstanding anything to the contrary which may be found in the Ohio statute relative to the settlement of a deceased partner's interest."
On October 22, 1954, the daughter instituted two actions in which she claims that, by the terms of the agreement, upon the death of any partner his interest must be taken over by the surviving partners at book value, plus 25 per cent; that the same shall be done on the request of the executor but not later than 5 years from decedent's death; that the father died February 2, 1954; that the daughter is ready, willing and able to comply with the terms of the agreement and has requested the executors to transfer to her not less than one-third of the interest of the father, but the executors have failed and refuse so to do; and that such refusal is arbitrary and unjustified. She prays that the court construe and declare her rights under the agreement and the duties of the executors.
The various defendants filed answers.
On November 25, 1955, the executors of the father's estate instituted an action in the Probate Court for the construction of the will of the father, particularly with reference to items VI, X and XI. Those items read as follows:
Item VI. "I give, devise and bequeath to my two sons, James A. Pidgeon, Jr., and Joseph A. Pidgeon, all the right, title and interest in the assets, real or personal, in the two partnerships known as The Church Budget Envelope Company and The Budget Press, both of Salem, Ohio, as said interests and assets are shown on the books of account of said partnerships, which I may own or have the right to dispose of at the time of my decease. I further direct that my said right, title and interest in said partnership assets be divided equally between my aforementioned sons, James A. Pidgeon, Jr., and Joseph A. Pidgeon, and I further authorize my executors named herein, to conduct and carry on in the partnership businesses and to do all things necessary or proper in conducting said businesses until such time as my executors shall effect a transfer of my interests to my sons, and I further request that my executors shall make said transfer to my sons, without interruption or stoppage of the business of said partnerships, and that the statutory requirements insofar as bond, inventory and appraisal and accounting by the surviving partners and all other statutory regulations pertaining to the administration of the partnerships interests, be dispensed with insofar as the same may be excused by the Probate Court."
Item X. "All the rest and residue of my estate, whether real, personal or mixed and wheresoever situated, and which I may own or have the right to dispose of at the time of my decease, I give, devise and bequeath to my three children, James A. Pidgeon, Jr., Joseph A. Pidgeon and Lois Pidgeon Davies, to be divided equally among them, share and share alike."
Item XI. "The present partnership agreement now existing between myself and James A. Pidgeon, Jr., Joseph A. Pidgeon and Lois Pidgeon Davies, contains a provision relative to the disposition of a deceased partners interest. I realize that in this will I have given my interests in both partnerships to my two sons. However, in the event that the dispositions made by me in this will of my partnership interests is not respected for any reason whatsoever, and if for any reason the partnership agreement between myself and my sons and my daughter and particularly that section pertaining to the disposition of a deceased partners interest is not followed for any reason whatsoever, I do now in this my last will and testament, give to my sons James A. Pidgeon, Jr., and Joseph A. Pidgeon, the right and option to purchase my remaining interests in said partnerships from the executor or executors of my estate and to do so at the appraised value as set forth in the inventory of my estate, and they shall give notice of the intent to exercise said option within 60 days of the filing of said inventory. This particular provision, however, to be only effective as previously stated, namely, in the event my outright gift to them of my partnerships interests as previously set forth in this my last will and testament, should for any reason not be concluded and if for any reason that section of the partnership agreement pertaining to the disposition of a deceased partners interest is not honored."
In the declaratory judgment causes, the Probate Court held that the executors of the father's estate may elect to sell to the surviving partners according to the formula prescribed in the partnership contract, may elect to remain in the business for any period not to exceed five years, during which time they can sell to the surviving partners in accordance with the same formula, or do nothing and after a reasonable length of time the right will exist in any or all of the partners to make a demand for the sale of the deceased partner's interest in accordance with the formula.
The Probate Court held also that each partner has the right to demand that an equal percentage of the business be sold to him, and that, if the executors should elect that the interest of their decedent should remain in the business, they shall have all the voting rights that the decedent had during his lifetime.
With reference to the will construction cause, the Probate Court held that by item VI of the will the father bequeathed to the sons all the right, title and interest in the assets, real and personal, of the partnership as such interest and assets are shown on the books of account of such partnership and which the decedent owned or had the right to dispose of at the time of his death; that such bequest is subject to the rights and duties of the surviving partners under the partnership agreement; that in the event the executors do not elect to have the interest of their decedent continue in the business, as provided by the partnership agreement, the executors, upon demand by the surviving partners, shall sell the interest of the decedent in the assets described in item VI of the will to the sons and daughter in equal parts for the consideration of book value, plus 25 per cent, on the part of the daughter, and at the appraised value, as provided in item XI of the will, on behalf of the sons; that, if the interest of decedent is sold without the executors electing to remain in such partnership, such sale shall revert in its legal effect to the death of decedent, and all moneys earned by such interest in the period from the death shall be divided in accordance with the proportional interest each surviving partner shall purchase; that, if the executors elect to participate in the partnership business and later sell such interest to the surviving partners, all moneys earned by decedent's share by the election to participate shall be for the benefit of decedent's estate generally and be disposed of in accordance with the residuary clause in his will; and that the accrued distributable earnings owing to decedent at his death are a part of the residue of his estate.
The Probate Court held also that any purchase price received by the executors for such decedent's interest, whether paid in cash or by notes, shall be delivered to the sons because of the bequest to the sons in item VI of the will of all the right, title and interest in the assets of the partnership.
The Court of Appeals, considering all three causes as appeals on questions of law, held that the partnership contract can not be altered by any provision of decedent's will; that the purchase price of decedent's interest in the partnership is fixed by the partnership contract and not by the will; that the purchase price as fixed is clearly stated, to wit, the book value, plus 25 per cent, to be determined as agreed upon by the surviving partners and the executors; that, in the absence of anything in the contract to the effect that each partner purchase according to his prorata share, the contract must be held to grant the right and duty of each surviving partner to purchase one-third of the interest of the decedent; and that the Probate Court was in error in determining that the sons are entitled to purchase their share of decedent's interest at the appraised value. With that exception, the judgments of the Probate Court were affirmed.
The causes are before this court upon the allowance of motions to certify the records.
Messrs. Brookes, Lynch McDonald, for appellee Lois Partridge.
Messrs. Fitch Kendall, for appellant.
Mr. J.E. Bauknecht and Mr. F.W. Springer, for appellees and cross-appellants, executors of the estate of James A. Pidgeon, Sr.
In the declaratory judgment causes, appellant Joseph A. Pidgeon assigns as error the affirmance by the Court of Appeals of the trial court's holding that the surviving partners have a right and obligation to purchase shares of the deceased partner's interest in amounts disproportionate to percentages of interests already owned by such surviving partners; and the affirmance by the Court of Appeals of the trial court's holding that, in the event the executors elect that the interest of the deceased partner should remain in the business, such executors shall have all the voting rights that the father had during his lifetime.
The executors, having filed cross-appeals in this court, assign as error the affirmance by the Court of Appeals of the Probate Court's holding that the executors have no option, under the partnership agreement, to refuse to elect to have their decedent's interest in the business remain in the partnership and to transfer it under the decedent's will.
We are of the opinion that the assignments of error of appellant Joseph A. Pidgeon are well taken.
From the time they came into the business, the sons gave all their time and attention to it. They received no salaries but were only rewarded by the distributive share of the profits. It is true that their share of the profits was out of proportion to their share of the ownership of the business, but that was the reward for their continuous efforts. On the other hand, the daughter had only a two per cent interest. Her share of the profits was limited to the two per cent, and, as between the partners, she was liable for only two per cent of the losses. She had little to do with the business, except for a few months as an employee on a salary.
Although no mention is made in the partnership agreement as to the proportionate amounts of a decedent's interest the surviving partners may purchase, it seems inconceivable that it could have been the intention in the agreement to give the daughter a right to purchase an equal amount with the sons, in the light of the fact that her interest came to her by inheritance from her mother, with a trifle added to make it an even two per cent, whereas the sons acquired most of their interests by purchase and by their lifetime efforts contributed so greatly to making the business a success.
It is true that under the partnership agreement the daughter had an equal vote with each of the other partners in the important affairs of the company, but it seems to us that such fact would not outweigh the greatly superior equities in the sons to have the privilege of keeping all the remaining interests in the partnership in the same proportion as they had been prior to the father's death.
With reference to the voting rights of the executors, there is nothing in the partnership agreement concerning them, and, in our opinion, without express authority the executors do not have such rights.
The agreement provides that upon the death of a partner his interest may, at the option of his executor, remain in the partnership for a period not exceeding five years from the date of the death of the deceased partner, during which time his estate shall be entitled to receive the same share of the profits as the deceased would have received had he been living. If the executor chooses, or at the end of five years after the death, the interest of the deceased partner must be taken over by the surviving partners at book value, plus 25 per cent. There is nothing in the agreement which even hints at the executors being allowed to manage, control, or have a voice in the business of the partnership.
As to the assignment of error of the executors in their cross-appeals, it is their claim that under the partnership agreement they have an option to remain in the partnership or not to remain, and that they have a right to exercise the option not to remain, in which event the surviving partners have no right to purchase the decedent's interest, and such interest passes under the will of the father.
We do not so interpret the partnership agreement.
Where it says that the decedent's interest may, at the option of his executors, remain in the partnership for the five-year period, but upon the request of the executors, or at the end of five years, the interest must be taken over by the surviving partners, it conveys the meaning that the interest is in the partnership at the decedent's death, that it stays there for five years unless the executors exercise their option to require the surviving partners to purchase the interest under the terms of the contract, which must be purchased, in any event, after the expiration of the five years if the executors have not exercised the option to require the purchase prior to that time. The interest is already in the business. It remains there for five years if nothing is done, and the option refers to the right of the executors to require a purchase of the interest prior to the end of the five-year period.
In the will construction cause, the appellant Joseph A. Pidgeon claims that the Court of Appeals erred in affirming the trial court's holding that the accrued distributive earnings from the interest owned by the father from July 1, 1953, to his death on February 2, 1954, less his withdrawals, are a part of the residue of the father's estate; that such court erred in affirming the trial court's holding that, in the event the executors participate in the partnership business for a period of time and then later elect to sell the father's interest to the surviving partners, all moneys earned by the father's share from such participation shall be disposed of in accordance with the residuary clause of the father's will; that the Court of Appeals erred in affirming the trial court's holding that, if the father's interest in the partnership is sold, without the executors electing to remain in such partnership, such share shall revert in its legal effect to the date of the death of the father, and all moneys earned by the interest, from the date of his death, shall be as if such interest had come into the possession of the buyer on February 2, 1954, the date of the death; that the Court of Appeals erred in affirming the trial court's holding that the earnings, after the purchase of the father's interest by surviving partners, shall be divided in accordance with the proportional interest each surviving partner shall purchase; and that the Court of Appeals erred in affirming the trial court's holding that a transfer of the father's interest in the partnership to the beneficiaries, under item VI of the father's will, would be subject to the right of the daughter to purchase not less than one-third of such interest at book value, plus 25 per cent.
The executors, in their cross-appeals, claim that the Court of Appeals erred in affirming the holding of the Probate Court that the bequest of the father's interest in the partnership is subject to the rights and duties in the father's surviving partners, as evidenced by the partnership agreement, as such rights and duties were determined in the declaratory judgment causes.
The daughter filed assignments of error to the effect that the court erred in holding that the sons have the right to receive and retain the purchase price or consideration to be given for the father's partnership interest.
Motions were filed to strike such assignments of error, for the reason that the daughter had not filed a notice of appeal.
In view of the conclusion at which we have arrived, it is not necessary to discuss those motions, and, therefore, for the purposes herein, the motions are overruled.
With reference to the assignments of error of appellant Joseph A. Pidgeon, we are of the opinion that they are well taken. As we hereinafter discuss, the interest of the father was not adeemed, and, although it can not specifically pass under his will to the sons because of the restrictions of the partnership contract, in the absence of ademption the proceeds from the sale of it do pass under the will. If the specific interest had passed under the will, any earnings which had accrued to it would pass with the specific legacy, and it follows that such earnings must likewise pass with the purchase price. Therefore, such earnings do not go into the residuary estate of the father but pass, as a bequest, to his sons. Under the equitable maxim, that that which should have been done is considered as done, we hold that both the earnings which had accrued upon his interest at the time of the father's death, as well as those which accrued thereafter, passed to the estate of the father at the time of the accrual.
We have already discussed the assignment of errors relied upon by the executors and have found it to be not well taken.
With reference to the assignment of error of the daughter, namely, that the court below erred in holding that the sons have the right to receive and retain the purchase price or consideration to be given for the father's interest, the daughter's claim is that under item VI of the will the sons are bequeathed a specific thing, that is, all the right, title and interest in the assets of the partnership, that is to say, the father's percentage ownership thereof, and that this bequest could not be transferred to the sons because it was controlled by the partnership contract.
With this proposition we are in accord.
The daughter then contends that, since the bequest can not pass to the sons under the will and since the bequest is a specific thing, when the specific thing is sold under the terms of the contract, the proceeds can not go to the sons for the reason that they are not the property bequeathed. As a matter of fact, the daughter really claims that the bequest to the sons has been adeemed.
We are of the opinion that the courts below were correct in holding that there was no such ademption. An ademption takes place where a thing bequeathed is not in existence at the time of the decease of the testator, or where a testator in his lifetime has made a gift or provision for the legatee as a substitute for the bequest and evidencing an intention to revoke or cancel it. This condition is not present in the instant situation. Here the testator's ownership interest in the partnership was in existence at his decease and he had made no substitute provision to take its place.
It follows that the lower courts were correct in following the rule that where property which is the subject of a specific bequest is in existence at testator's death, but subject to an agreement to purchase, which option is exercised, no ademption results, and the legatee is entitled to receive the proceeds of the sale of the property in lieu of the specific property.
Accordingly, we affirm the judgments of the Court of Appeals so far as they hold that the will of the father is subject to the partnership agreement, and that the proceeds of any sale of the father's interest to the surviving partners pass to the sons under the father's will.
However, we reverse the judgments of the court so far as they hold that the sons and daughter each has a right under the partnership agreement to purchase equal shares of the father's partnership interest, but hold that their purchases must be in proportion to their present interests in the partnership.
We further reverse the judgments of the court below so far as they hold that the executors must make a specific election to remain in the partnership, that they have the right to vote as long as they do remain therein, or that the earnings of the partnership interest of the deceased father pass under the residual clause of the father's will.
Further, the causes are remanded to the Probate Court for further proceedings in accordance with this opinion.
Judgments accordingly.
WEYGANDT, C.J., ZIMMERMAN, TAFT, MATTHIAS and HERBERT, JJ., concur.
My inability to agree with the majority herein results from a difference of opinion in the interpretation of the rights of the executors under the partnership agreements.
In my opinion, the executors do have an option to elect not to remain in the partnerships after the death of the father. And if such option is exercised (within a reasonable time after they have an opportunity to do so) the interest of the father should pass under the provisions of his will.