Where a partnership’s reputation and success was based not just on the partners themselves but on the partnership’s internal team, the partnership could be considered a commercial—rather than merely a professional—partnership. Griffin v. Advisors Financial Center, LLP, 2024 NCBC 26 (J. Bledsoe).  As a result, the partnership’s assets could include goodwill that, upon death of one the partners, was an asset to which the deceased’s estate was entitled to a portion.

Defendant and his deceased brother founded an investment and financial planning business (“Partnership”) which was governed by an agreement (“Agreement”) that provided, in the event one partner died, the surviving brother had the option to either liquidate the Partnership or have the Partnership purchase the decedent’s investment and carry on the business.  If the latter, the business could continue after the transaction without accounting for trade name, goodwill or other intangibles.  (Opinion, ¶6).  Following his brother’s death, Defendant neither liquidated the Partnership nor sought to have the Partnership purchase the decedent’s investment.  Instead, the estate alleged the Defendant merely closed the Partnership’s bank accounts, transferred the funds, continued to operate the business and declined to pay the decedent’s estate any goodwill.  The estate filed suit alleging, inter alia, breach of the Agreement and conversion of the decedent’s goodwill in the Partnership.  Defendant and the Partnership filed a Rule 12(c) motion, seeking a declaration that the Partnership was a professional partnership under North Carolina law and, as such, no goodwill existed at the time of the decedent’s death.

While acknowledging that North Carolina law does not recognize goodwill as an asset that can pass to a deceased partner’s estate in a professional partnership arrangement (because any goodwill is considered to be tied directly to the partners), the Business Court nonetheless denied the motion on the basis that the estate had alleged that the Partnership’s value was based on more than just the brothers’ work and reputation.  Instead, the estate had alleged that it was the internal team within the Partnership that enhanced its reputation and was the cause of its success with clients.  Finding that the Agreement was silent on whether goodwill should be accounted for in valuing the decedent’s interest,  the Business Court reasoned that such allegations concerning the value from the Partnership’s internal team could transform the Partnership into a “commercial” rather than merely a “professional” partnership under North Carolina law.  Relying on a Court of Appeals decision that recognized goodwill to be an asset of the company in a commercial partnership arrangement that was capable of being valued, the Business Court held the nature of the partnership (and thus the availability of goodwill) could not be decided as a matter of law based on the allegations in the complaint.

Based upon this decision, a partnership should examine any governing agreement to ensure that the partnership’s goodwill (or lack thereof) is handled in the way the partners themselves expect.

Additional Legal Points: Because goodwill and contract rights are intangible assets under North Carolina law, there can be claim for conversion. (Opinion, ¶¶27-29).