In re Brown

Stephen H. Brown (Stephen) and his brother, Vernon, started a stockbroker firm in 1895 with another individual named Watson, under the name Watson & Brown. Watson withdrew, and the brothers continued the partnership under the name Vernon C. Brown & Co. (the firm). The firm admitted new members from time to time but kept the same name. The partnership documents did not mention goodwill. Incoming members did not pay anything for goodwill. When one member retired, the firm did not pay him anything for goodwill. The firm operated in an old-fashioned manner without advertising but did well. The firm had four departments: the general commission business, the odd lot business (which earned the most), the two-dollar business, and speculative business transacted for the firm itself. Stephen actively participated in the business like his brother and had a seat on the stock exchange where he represented the firm on the floor. Stephen became sick in 1912. Stephen kept his capital in the firm but sold his seat and stopped working. Stephen earned a 33 percent profit share before he became sick, which the firm gradually reduced until Stephen died in 1917. The surviving partners continued the firm at the same place with the same name but did not pay Stephen’s estate for goodwill. The executors (defendants) of Stephen’s estate did not act against the surviving partners. The estate (plaintiff) sued the executors for their inaction. The lower courts found that the first three departments of the firm had an element of goodwill, valued the goodwill based on the net profits of these departments, and held the executors liable for failing to collect the goodwill value from the surviving partners. The executors appealed.