Legal Definitions - jingle rule

The jingle rule is a traditional legal principle, once widely applied in common law, that determined how creditors were paid when both a business partnership and its individual partners owed money and were unable to satisfy all their debts. It established a specific order of priority for who had the primary claim to which assets.

Under the jingle rule:

• Creditors who lent money to the partnership itself had the first and primary claim to the partnership's assets.
• Creditors who lent money to an individual partner for personal reasons had the first and primary claim to that individual partner's personal assets.

This meant that if partnership assets were insufficient to pay partnership creditors, those creditors could only pursue an individual partner's personal assets *after* the individual partner's personal creditors had been fully satisfied. Conversely, if an individual partner's personal assets were insufficient to pay their personal creditors, those creditors could only pursue partnership assets *after* the partnership's creditors had been fully satisfied. The jingle rule aimed to keep the assets of the partnership and the assets of the individual partners distinct for the purpose of debt collection, establishing a "dual priority" system. This approach has since been modified by modern partnership laws, such as the Revised Uniform Partnership Act (RUPA).

Examples of the Jingle Rule in Action:

• Scenario 1: Partnership Debt Exceeds Partnership Assets

  Imagine "BuildRight Construction," a partnership, owes $150,000 to a lumber supplier. The partnership only has $80,000 in equipment and cash. One of the partners, Mark, personally owes $40,000 to his bank for a home equity loan. Mark has $60,000 in personal savings and investments.

  Under the jingle rule:

  • The lumber supplier (a partnership creditor) would first claim the $80,000 from BuildRight Construction's partnership assets. This leaves $70,000 of the supplier's debt unpaid.
  • Mark's bank (a personal creditor) would have first priority on Mark's $60,000 personal savings. After the bank is paid its $40,000, Mark has $20,000 remaining in personal assets.
  • Only *then* could the lumber supplier potentially claim the remaining $20,000 from Mark's personal assets (and similarly from other partners' remaining personal assets) to help satisfy the outstanding $70,000 partnership debt. The rule ensures Mark's personal creditors are paid from his personal assets before partnership creditors can access them.

• Scenario 2: Individual Partner Debt Exceeds Personal Assets

  Consider "Creative Minds," a marketing partnership. One partner, Sarah, personally owes $75,000 to a credit card company. Sarah only has $25,000 in personal assets. Creative Minds, as a partnership, owes $20,000 to its web hosting provider and has $100,000 in partnership assets.

  Under the jingle rule:

  • The credit card company (Sarah's personal creditor) would claim Sarah's $25,000 personal assets. This leaves $50,000 of Sarah's personal debt unpaid.
  • The web hosting provider (a partnership creditor) would have first priority on Creative Minds' $100,000 partnership assets. After the provider is paid its $20,000, the partnership still has $80,000 in assets.
  • The credit card company, despite Sarah's remaining personal debt, could *not* immediately claim the partnership's assets. It could only pursue the partnership's assets *after* all partnership creditors (like the web hosting provider) had been fully satisfied. This illustrates how the jingle rule protected partnership assets for partnership creditors first.