Helen Juanita MAHAN, individually and as Executrixof the Estate of Terrell B. Mahan, Deceased, Appellant, v. T.

Gordon MAHAN and Doris I. Mahan, husband and wife, Appellees.

489 P.2d 1197 ; 29 Oct 1971 ; J. Cameron
Facts: The partners here are Terrell Mahan (deceased) and Gordon Mahan. After Terrell Mahan died, his widow, Helen
Mahan, INDIVIDUALLY and as EXECUTRIX of his ESTATE, filed an ACTION FOR ACCOUNTING AND DIVISION OF
PARTNERSHIP PROPERTIES against the surviving partner.
The partnership was formed by the brothers Mahan. Originally, there were three of them: Terrell, Gordon, and Merwin.
Their profits were divided equally among them. Later, when brother Merwin withdrew from the partnership, profits were
divided equally, on a 50-50 basis, between Terrell and Gordon.
1964: During the subsistence of the partnership, and with the consent of brother Gordon, Terrell REDUCED HIS CAPITAL
CONTRIBUTION by $23,000 in exchange for a house, wherein Terrell+Wife later on resided.
Subsequently, the partnership became inactive and remained inactive until Terrell's death in 1966. Note, however, that the
partnerships assets consisted mostly in investments and REAL ESTATE, i.e. the Red Lake Ranch. Hence, despite the
partnerships inactive status, its assets continued to grow over time.
1969: Widow-executrix of Terrell's ESTATE, Helen Mahan, filed the aforesaid suit for accounting and division against the
surviving brother-partner, Gordon Mahan.
The lower court ruled in favor of widow- Helen Mahan, but the computation for partnership profits distribution was based
on the CAPITAL CONTRIBUTIONS of the brothers Mahan. Deducting the earlier aforementioned $23,000 from Terrell's
contribution, the lower court ruled that Terrell, in effect, reduced his CAPITAL CONTRIBUTION to 1/8 of the partnership
property. Computing, hence: TOTAL PARTNERSHIP ASSETS @ $33,274.61 x 1/8 = $4,005.45 for Terrell; and $27,302.61
for Gordon.
Of course, the widow Helen was very unhappy with this result, so she filed this appeal.
Arguments:
Gordon (surviving partner): when a partnership continues despite the death of a partner, the division of profits should be
based on their capital contributions.
Helen (Executrix): division of profits should be based on 29-218 A.R.S. (Arizona Revised Statute), which provides as
follows: Each partner shall be repaid his contributions, whether by way of capital or advances to the partnership property
and share equally in the profits and surplus remaining after all liabilities, including those to partners, are satisfied
Issue: What is the proper computation for the division of partnership profits?
Held: Equally, on 50-50 basis AFTER PAYMENT of partnership liabilities
Ratio: The defendant in this case has placed reliance on 29-242 A.R.S., relating to continuation of the business when a
partner dies. In the instant case, the business was not continued by the surviving partner. Quite the contrary. The
partnership remained dormant and nothing was done until suit was brought by the plaintiff to compel an accounting.
Where the efforts of one partner in the production of profits in an active partnership cease, it is apparent that he no longer
bears full entitlement to his respective share of the profits. In this case, however, where the partnership has been and
continues to be inactive, any appreciation of worth is due to the nature of the partnership property rather than the effort of
the surviving partner. Thus, we hold that any profit or surplus resulting shall be shared equally.
How then do we treat the capital contributions of the partners? They are debts owing to the partners. Upon liquidation, the
rules of payment are governed by 29-240 A.R.S., which decrees that the liabilities of the partnership shall rank in the
following order of payment:
(a) Those owing to creditors other than partners
(b) Those owing to partners other than for capital and profits
(c) Those owing to partners in respect of capital
(d) Those owing to partners in respect of profits."
(see this provision's counterpart at CC 1839(2))
May the partners reduce their capital contributions to the partnership?
The capital of the partnership is the amount specified in the agreement of the partners, which is to be contributed by the
partners for the purpose of initiating and operating the partnership business." Thus, ordinarily we would look to the initial

contributions for a determination of the amounts "owing to partners in respect of capital." While the general rule is that the
amount of capital may not be changed absent consent of all the partners, the partners in this case have apparently
conceded to adjustments in their capital accounts. Thus, we accept, for purposes of this case, adjustments in plaintiff's
and defendant's capital accounts to $4,005.45 and $27,302.61 respectively.
This conclusion is buttressed by the situation confronting plaintiff and her husband Terrell when they gave up $23,000 of
their capital account for a $23,000 home. They knew that the partnership had few or no debts and owned a piece of
property that had sold for $284,200 a few years previous. If the value of the land had stayed reasonably constant in the
interim, the partnership would have been worth over $300,000. It is highly unlikely that the plaintiff and her husband
intended, when they gave up $23,000 of their capital account for a $23,000 house, that they were actually giving up not
$23,000 but well over $100,000.
Fallo: We hold that the partnership assets must be liquidated, and that the general creditors be paid first. If the assets are
insufficient for this purpose, the estate and Gordon should be charged equally for the losses. If the assets are more than
sufficient then the surviving partner (GORDON) should be paid first up to the amount of $23,297.16 to set off the
withdrawal from the capital account by Terrell. Any amount left over should be equally divided between Terrell's estate and
the surviving partner, Gordon Mahan.