Question

Case 5: Case Problem 9, p. 1046 (Mallor 16^th Ed. Chap 39): Creel v. Lilly, 729 A.2d 385 (Md. Ct. App. 1999)

Please read case and answer questions below true or false with an explanation.

Joe Creel owned a NASCAR collectibles business named Joe's Racing Collectibles. In 1994, Creel brought Arnold Lilly and Roy Altizer into the business, which they reformed as a partnership named Joe's Racing. Creel contributed as capital to the partnership inventory and supplies of the old business, valued at $15,000. Lilly and Altizer each contributed $6,666 in cash to the partnership, and each paid $3,333 to Creel for his rights in the existing business. The partners agreed to share profits and losses with 52 percent going to Creel and 24 percent each to Lilly and Altizer. Less than a year later, Creel died and his wife sought to receive the value of his interest in the partnership. An accountant valued the partnership at $44,589.44. The partnership's creditors were the accountant for $875, Mrs. Creel $495, Lilly $2,187, and Altizer $900.

1. Creel’s death triggers a nonwrongful dissociation of Joe’s Racing partnership, after which Lilly, Altizer, and Mrs. Creel can decide whether or not to dissolve the partnership.
2. Unless their agreement provides otherwise, Creel’s estate is entitled to that amount of money which would otherwise have resulted from winding up and termination of the partnership, the assets being valued at the greater of their liquidation value or the value if the entire business was sold as a going concern.
3. When Lilly and Altizer became partners in the business, Lilly, Altizer and Joe Creel assumed unlimited personal liability for debts and obligations of the firm both existing and future.
4. Joe Creel’s estate is entitled to 52% of the market value of the partnership, which is the greater of the liquidation value or value if sold as a going concern.
5. If Lilly and Altizer decide to dissolve and liquidate the partnership, the amount owning to the accountant and Mrs. Creel have no priority over the debts owed to Lilly and Altizer.

Answer 1

What was the value of the Creel's partnership interest:

$21,136.22.  The court used a book value, not a market value, approach to value the partnership interest on the grounds that the new partnership had no goodwill that would result in it having a market value exceeding book value.  Hmm!  The court started with the partnership assets of $44, 589.44 and subtracted the debts owed to the three partners, which must be paid first.  That left $40,132.44.  From this the court deducted the three partners’ capital contributions:  $6,666 each for Lilly and Altizer and $15,000 for Creel.  (Note that the court did not treat the $3,333 payments by Lilly and Altizer to Creel as being additional capital contributions for Lilly and Altizer or as a return of capital to Creel.)  After those deductions, the remaining value of the partnership was $11,800.44.  Mrs. Creel received 52% of this remaining value, that is, $6,136.22.  Adding this allocation to the capital contribution returned to her, the total value of Creel’s partnership interest is $21,136.22.  Creel v. Lilly, 729 A.2d 385 (Md. Ct. App. 1999).