Partnership: Property Rights of a Partner & Obligations of the Partners with Regard to Third Persons (Arts. 1810-)

 CHAPTER 2

Obligations of the Partners

SECTION 2

Property Rights of a Partner

Article 1810. 

The property rights of a partner are:
(1) His rights in specific partnership property;
(2) His interest in the partnership; and
(3) His right to participate in the management.

Extent of property rights of a partner.

1. Principal rights. — The property rights of a partner enumerated under Article 1810 are as follows:
• His rights in specific partnership property (Art.1811.);
• His interest in the partnership (Art. 1812.); and
• His right to participate in the management. (Art.1803.)
2. Related rights. — A partner has other rights which are related to the above, namely:
1. the right to reimbursement for amounts advanced to the partnership and to indemnification for risks in consequence of management (Art. 1796.);
2. the right of access and inspection of partnership books (Art. 1805.);
3. the right to true and full information of all things affecting the partnership (Art. 1806.);
4. the right to a formal account of partnership affairs under certain circumstances (Art. 1809.); and
5. the right to have the partnership dissolved also under certain conditions. (Arts.1830-1831.)

Partnership property and partnership capital distinguished. 

The distinctions are:

1. Changes in value. — 
• Partnership property is variable 
• its value may vary from day to day with changes in the market value of the partnership assets.
• Partnership capital is constant 
• it remains unchanged as the amount fixed by agreement of the partners, and is not affected by fluctuations in the value of partnership property,
• although it may be increased or diminished by unanimous consent of the partners; 
2. Assets included. — 
• Partnership property includes not only the original capital contributions of the partners, but all property subsequently acquired on account of the partnership, or in the partnership name with partnership funds, unless a contrary intention is shown, including partnership name and the goodwill of the partnership.
• Partnership capital represents the aggregate of the individual contributions made by the partners in establishing or continuing the partnership.

Ownership of certain property.

1. Property used by the partnership. 
• General Rule: Such use does not make it partnership property.
• Exception: Where there is express agreement that property used by a partnership constitutes partnership property.
• Whether it is so or not depends on the intention of the parties, which may be shown by proving an express agreement or acts of particular conduct. 
• It is not unusual for an individual partner to allow his property to be used in the partnership business, without intending to transfer ownership of it.
• A partner may contribute to the partnership only the use or enjoyment of property, reserving the ownership thereof (Art. 1830[4].);
• He may allow the partnership to use his separate property without having it become part of partnership property.
• Also, he may hold title to partnership property in his own name without having it belong to him.(see Art. 1819.)
• To solve the confusion that may arise, the intent of the parties — whether the property in question shall belong to the partnership or themselves — is the controlling factor. 
2. Property acquired by a partner with partnership funds. 
• General Rule: Property acquired by a partner in his own name with partnership funds is presumed to be partnership property.
• Exception: Unless a contrary intention appears.
• The presumption created by the use of such funds can be overcome only by a great deal of contrary evidence. 
• But if the property was acquired after dissolution but before the winding up of the partnership affairs, it would be his separate property but he would be liable to account to the partnership for the funds used in its acquisition. 
3. Property carried in partnership books as partnership asset. —
• This fact creates a very strong inference that it is partnership property. 
• The inference is stronger if the records carry as a partnership liability an unpaid balance on the property. 
4. Other factors tending to indicate property ownership.
• The fact that the income generated by the property is received by the partnership or the taxes thereon are paid by the partnership is evidence that the partnership is the owner.
• But the sole fact that partnership funds were later used to repair or maintain property purchased with funds of an individual partner is not sufficient as basis to show that the property now belongs to the partnership.

Article 1811. 

A partner is co-owner with his partners of specific partnership property.
The incidents of this co-ownership are such that:

(1) A partner, 

subject to the provisions of this Title 

and to any agreement between the partners, 

has an equal right with his partners 

to possess specific partnership property

for partnership purposes; 

but he has no right 

to possess such property 

for any other purpose 

without the consent of his partners;

(2) A partner's right in specific partnership property 

is not assignable

except in connection with the assignment of rights 

of all the partners in the same property;

(3) A partner's right in specific partnership property 

is not subject to attachment or execution, 

except on a claim against the partnership. 

When partnership property is attached for a partnership debt,

the partners, or any of them, or the representatives of a deceased partner, 

cannot claim any right under the homestead or exemption laws;

(4) A partner's right in specific partnership property 

is not subject to legal support under article 291.

Nature of a partner’s right in specific partnership property. 

• A partner, as such, does not actually own any part of partnership property or property owned by the partnership as a separate business entity, although he does have rights in specific partnership assets. 
• Article 1811 contemplates tangible property, such as a car, truck, or a piece of land, but not intangible thing such as the beneficial right to a land of the public domain like a fishpond.
• A fishpond of the public domain can never be considered a specific partnership property because only its use and enjoyment, never its title or ownership, is granted to specific private persons. 
• A partner is a co-owner with his partners of specific partnership property, but the rules on co-ownership do not necessarily apply. 
• This statement in Article 1811 is not accurate because specific partnership property is owned not by the partners in common but by the partnership as a juridical person. 
• In contemplation of law, a partnership is a distinct and separate entity from the partners who compose it (see Art. 1768.)
• The Uniform Partnership Act regards a partnership as an “association” (see Art. 1767.) and not as a legal entity; hence, it cannot hold title to partnership property in its name. 
• However, the incidents of the co-ownership enumerated are consistent with the legal entity theory of a partnership. 

The legal incidents of this tenancy in partnership are distinctively characteristic of the partnership relation. They are as follows:

1.  Equal right of possession for partnership purposes.
• Ordinarily, a partner has an equal right to possess specific partnership property for partnership purposes.
• None of the partners can possess and use the specific partnership property other than for “partnership purposes” (e.g., for his own individual purpose) without the consent of the other partners.
• Should any of them use the property for his own profit or benefit to the exclusion of his partner or partners, he must account, like any stranger, to the others for the profits derived therefrom (see Arts.1807, 1788, par.2.) or the value of his wrongful possession or occupation. 
• A partner who is wrongfully excluded from the possession of partnership property by his co-partner has a right to formal account from the latter (Art. 1809[1].), and even apply to a judicial decree of dissolution. (see Art. 1831[3, 4, 6].)
• On the death of a partner, his right in specific partnership property vests in the surviving partners, not in the legal representative of the deceased partner (except when he was the last surviving partner). 
• That is to say, the surviving partners have the right to wind up the business, and the executor of a deceased partner cannot insist on participating in the winding up process. 
• By agreement, the right to possess specific partnership property may be surrendered, and this is especially true of a partnership with large membership, where the management and possession are concentrated in the managing partners. 
• It is not beyond the scope of partnership articles to provide for the vesting of exclusive control in one partner. 
• In the absence of special agreement, however, neither partner separately owns, or has the exclusive right of possession of, any particular partnership property; nor does he own any proportional part of any particular partnership property, but each has dominion over such property and over the entire partnership property.
• The possession of partnership property by one partner is the possession of all partners until his possession becomes adverse. 
• A partner cannot initiate title to property by adverse possession as against his co-partner, until and unless he makes an adverse claim of title under such circumstances as will charge his co-partner with notice of the adverse claim.
2. Right not assignable.
• A partner cannot separately assign his right to specific partnership property but all of them can assign their rights in the same property.
• A partner’s right in specific partnership property is not assignable because it is impossible to determine the extent of his beneficial interest in the property until after the liquidation of partnership affairs. 
• As property of the partnership, the same could not be disposed of or mortgaged even by the partner who contributed the same without the consent or approval of the partnership or of the other partners.
• The consent of all the partners, either express or implied, is the source and limit of a partner’s right to deal with partnership property for any but a partnership purpose.
• The primary reasons for the non-assignability of a partner’s right in specific partnership property are that:
1. It prevents interference by outsiders in partnership affairs;
2. It protects the right of other partners and partnership creditors to have partnership assets applied to firm debts; and 
3. It is often impossible to measure or value a partner’s beneficial interest in a particular partnership asset.
• Why it is often impossible to determine a partner’s beneficial interest in a specific partnership property has been explained as follows:
• In a sense, each partner, having thus a beneficial interest in the partnership property considered as a whole, has a beneficial interest in each part, and such beneficial interest might be regarded as assignable if it were not impossible, except by purely arbitrary and artificial rules, to measure partner’s beneficial interest in a specific chattel belonging to the partnership, or any other specific portion of partnership property.
• Where, however, none of the above reasons apply, an authorized assignment by a partner of his right in specific partnership property is void, but it may be regarded as a valid assignment of the partner’s interest in the partnership. The rationale of this rule is stated thus: 
• “Where an assignment is not clearly intended to convey a partner’s interest in specific partnership property, that is, his right to use partnership property for partnership purposes, but is intended to convey some interest in partnership property, the fact that the parties did not couch their assignment in proper terms does not justify a court holding their transaction void when there exists evidence establishing a basis upon which the transaction can be consistent and valid.’’
• The law allows a retiring partner to assign his rights in partnership property to the partner or partners continuing the business.
3. Right limited to share of what remains after partnership debts have been paid. 
• Strictly speaking, no particular partnership property or any specific or an aliquot part thereof can be considered the separate or individual property of any partner. 
• The whole of partnership property belongs to the partnership considered as a juridical person (Art. 1768.), and a partner has no interest in it but his share of what remains after all partnership debts are paid. (Art. 1812.)
• Consequently, specific partnership property is not subject to attachment, execution, garnishment, or injunction, without the consent of all partners except on a claim against the partnership. 
• “If a partner’s right in specific partnership property is not assignable by voluntary assignment for a separate purpose of the assigning partner, his separate creditors should not be able to force an involuntary assignment. The beneficial rights of the separate creditors of a partner in partnership property should be no greater than the beneficial right of their debtor.”
• For the same reason that the property belongs to the partnership, the partners cannot claim any right under partnership debts. 
• A contrary rule would, in effect, allow the use of partnership property for other than partnership purposes and result in the diminution, as far as partnership creditors are concerned, of partnership property to the extent of the exemption granted. 
• But a partner’s interest in the partnership itself may be levied upon by a judgment creditor because it is actually his property, by means of a “charging order.”
4. The right of the partners to specific partnership property is not subject to legal support under Article 195
• The right of the partners to specific partnership property is not subject to legal support under Article 195 of the Family Code.
• Art. 195. Subject to the provisions of the succeeding articles, the following are obliged to support each other to the whole extent set forth in the preceding article:
• The spouses;
• Legitimate ascendants and descendants
• Parents and their legitimate children and the legitimate and illegitimate children of the latter;
• Parents and their illegitimate children and the legitimate and illegitimate children of the latter; and
• Legitimate brothers and sisters, whether of full or half-blood. 
• The reason is also because the property belongs to the partnership and not to the partners. 
• But their interest in the partnership (Art.1812.) is, of course, subject to legal support. (Art.1814.)

• The method of reaching a judgment debtor’s interest in partnership property is specifically set forth in Article 1814. 
• It is clear from the above that although separate creditors of an individual partner may reach the interest of a partner in the partnership, they cannot go after any specific partner property.

Article 1812. 

A partner's interest in the partnership 

is his share of the profits and surplus. 

Nature of partner’s interest in the partnership. 

• A partner’s right in specific partnership property belonging to the firm to be used for business purposes is to be distinguished from a partner’s right to share in the firm’s earned profits.

1. Share of the profits and surplus.
• The partner’s interest in the partnership consists of his proportionate share in the undistributed profits during the life of the partnership as a going concern and his share in the undistributed surplus after its dissolution.
• Profit
• means the excess of returns over expenditure in a transaction or series of transactions; 
• or the net income of the partnership for a given period of time.
• Surplus 
• refers to the assets of the partnership after partnership debts and liabilities are paid and settled and the rights of the partners among themselves are adjusted. (see Art. 1839.)
• the excess of assets over liabilities. 
• if the liabilities are more than the assets, the difference represents the extent of the loss.
2. Extent of the partner’s interest.
• Nothing is to be considered as the share of a partner but his proportion of the residue or balance after an account has been taken of the debts and credits, including the amount paid by the several partners in liquidating firm debts or in making advances to the partnership, and until that occurs, it is impossible to determine the extent of his interest. 
• This interest in the surplus alone which remains after the firm’s debts have been paid and the equities between the partner and his copartners have been adjusted and the partner’s share has been ascertained and set apart, is available for the satisfaction of the separate debts of the partners.
3. Partner’s interest not a debt due from partnership. 
• A partner is not a creditor of the partnership for the amount of his share. 
• The interest of a partner in a going partnership business where there has been no settlement of his account is not a debt due to the partner by partnership and, therefore, is not subject to attachment or execution on a judgment recovered against the individual partner.

Article 1813. 
A conveyance by a partner 

of his whole interest in the partnership 

does not of itself dissolve the partnership, or, 

as against the other partners 

in the absence of agreement, 

entitle the assignee, 

during the continuance of the partnership, 

to interfere in the management or administration 

of the partnership business or affairs, 

or to require any information or account 

of partnership transactions, 

or to inspect the partnership books; 

but it merely entitles the assignee 

to receive in accordance with his contract 

the profits to which the assigning partner would otherwise be entitled. 

However, in case of fraud in the management of the partnership, 

the assignee may avail himself of the usual remedies.

In case of a dissolution of the partnership, 

the assignee is entitled to receive his assignor's interest 

and may require an account 

from the date only of the last account agreed to by all the partners.

Effect of assignment of partner’s whole interest in partnership.

General Rule: A partner’s right in specific partnership property is not assignable (Art.1811[2].)
Exception: But he may assign his interest in the partnership (Art. 1812.) to any of his co-partners or to a third person without the consent of the other partners, in the absence of agreement to the contrary.

1. Rights withheld from assignee. 
• This article permits the conveyance by a partner of his whole interest in the partnership (e.g., sale, donation, as collateral security for a loan) without causing dissolution. 
• However, such assignment does not grant the assignee the right: 
1. To interfere in the management; 
2. To require any information or account; or 
3. To inspect any of the partnership books.
2. Status and rights of assignor as partner unaffected. 
• The legal effect of such a conveyance is the same as that of a partner associating another in his share or interest.(Art.1804.)
• Subpartnership. In effect, a subpartnership is a partnership within a partnership and is distinct and separate from the main or principal partnership.
• Not being a member of the partnership, he does not acquire the rights of a partner nor is he liable for its debts.
• Partnership s a relation in which delectus personae is an important element. 
• No one may be introduced into the firm as a partner without the unanimous consent of the other partners.
• The assignment does not divest the assignor of his status and rights as a partner nor operate as a dissolution of the partnership. 
• The law, however, provides the non-assigning partners with a ground for dissolving the partnership if they so desire. (Art. 1830[1, c].)

Remedy of other partners. 

At common law, the mere assignment of a partner’s interest dissolved the partnership because it was conceived to give rise to a situation incompatible with the prosecution of a partnership. The law has been changed under the Uniform Partnership Act from which Article 1813 was taken. 

1. Dissolution of partnership not intended.
• The new rule is preferable for many partnership assignments are made merely as security for loans, the assigning partner never intending to destroy the partnership relation. 
• Moreover, if the assigning partner neglects his partnership duties after assignment, the other partners may dissolve the partnership under Article 1830(1, c) which provides that:
• “Dissolution is caused . . . by the express will of all the partners who have not assigned their interests, or suffered them to be charged for their separate debts, either before or after the termination of any specified term or particular undertaking.”
2. Dissolution of partnership intended. 
• A partner’s conveyance of his interest in the partnership operates as a dissolution of the partnership only when it is clear that the parties contemplated and intended the entire withdrawal from the partnership of such partner and the termination of the partnership as between the partners. 

Rights of assignee of partner’s interest.

The only rights of the transferee or assignee are as follows: 

1. To receive in accordance with his contract the profits accruing to the assigning partner;
2. To avail himself of the usual remedies provided by law in the event of fraud in the management; 
3. To receive the assignor’s interest in case of dissolution; and
4. To require an account of partnership affairs, but only in case the partnership is dissolved, and such account shall cover the period from the date only of the last account agreed to by all the partners. 

• The mere act of assignment with nothing more, does not bring about the dissolution of the partnership. 
• The purchaser of a partner’s interest under Articles 1813 or 1814 may, however, apply to the court for the dissolution of the partnership, after the termination of the specified term or undertaking or at any time if the partnership is one at will. (Art. 1831, par. 2.)

Article 1814. 
Without prejudice to the preferred rights 

of partnership creditors under article 1827, 

on due application to a competent court 

by any judgment creditor of a partner, 

the court which entered the judgment, 

or any other court, 

may charge the interest of the debtor partner

with payment of the unsatisfied amount 

of such judgment debt 

with interest thereon; 

and may then or later appoint a receiver 

of his share of the profits, 

and of any other money due or 

to fall due to him in respect of the partnership, 

and make all other orders, directions, accounts and inquiries 

which the debtor partner might have made, or 

which the circumstances of the case may require.

The interest charged may be redeemed 

at any time before foreclosure, or 

in case of a sale being directed by the court, 

may be purchased without thereby causing a dissolution:

(1) With separate property, by any one or more of the partners; or
(2) With partnership property, by any one or more of the partners with the consent of all the partners whose interests are not so charged or sold.

Nothing in this Title shall be held 

to deprive a partner of his right, if any, 

under the exemption laws, 

as regards his interest in the partnership.

Remedies of separate judgment creditor of a partner.

1. Application for a “charging order” after securing judgment on his credit.
1. While a separate creditor of a partner cannot attach or levy upon specific partnership property for the satisfaction of his credit (Art. 1811[3].) because partnership assets are reserved for partnership creditors (Art. 1827.), he can secure a judgment on his credit and then apply to the proper court for a “charging order,” subjecting the interest of the debtor partner in the partnership (Art. 1812.) with the payment of the unsatisfied amount of such judgment with interest thereon with the least interference with the partnership business and the rights of the other partners. 
2. By virtue of the charging order, any amount or portion thereof which the partnership would otherwise pay to the debtor-partner should instead be given to the judgment creditor. 
3. This remedy is, however, without prejudice to the preferred rights of partnership creditors under Article 1827. It means that the claims of partnership creditors must be satisfied first before the separate creditors of the partners can be paid out of the interest charged. (See Art. 1839[8].)
2. Availability of other remedies. 
• In providing for the charging order above described, Article 1814 seems to have made this an exclusive remedy so that a writ of execution will not be proper.
• The court may resort to other courses of action provided in Article 1814 (i.e., appointment of receiver, sale of the interest, etc.) if the judgment debt remains unsatisfied, notwithstanding the issuance of the charging order. 
• A similar procedure is established by Article 1862 as to private creditors of a limited partner.

Redemption or purchase of interest charged.

1. Redemptioner. 
1. The interest of the debtor-partner so charged may be redeemed or purchased with the separate property of any one or more of the partners, or with partnership property but with the consent of all the partners whose interests are not so charged or sold. 
2. Redemption price.
• In an ordinary sale, the price of the thing sold theoretically represents its market or actual value. 
• This is not true in a foreclosure sale where mere inadequacy of the price obtained (normally the amount of the creditor’s claim) at the sheriff’s sale is not material because the mortgagor is given the right to redeem.
• By the same token, the value of the partner’s interest in the partnership has no bearing on the redemption price which is likely to be lower since it will be dependent on the amount of the unsatisfied judgment debt. 
3. Right of redeeming non-debtor partner. 
• For this reason, the redeeming non-debtor partner, it is believed, does not acquire absolute ownership over the debtor-partner’s interest but holds it in trust for him consistent with principles of fiduciary relationship.

Right of partner under exemption laws. 

• Under Article 1811, a partner cannot claim any right under the homestead laws or exemption laws when specific partnership property is attached for partnership debt. 
• With respect, however, to the partner’s interest in the partnership as distinguished from his interest in specific partnership property, the partner may avail himself of the exemption laws after partnership debts have been paid. 
• A partner’s interest or share in the partnership is really his property. (Art. 1812.)

Q:  Does the redeeming or purchasing partner acquire the interest of the debtor-partner? 

• In case of redemption, the price ordinarily would be the amount of the creditor’s claim against the debtor-partner, and the payment would be in the nature of advance to the latter. 
• In case of purchase, the price would have to be based on the value of the interest purchased. 

It would seem that the non-debtor partner will acquire the interest of the debtor-partner in the second situation but not in thefirst.