South Shore Realty was started 20 years ago when T. S. Tyler, R. C. Strong, and A. J. Hibbert established a partnership to sell real estate near Galveston, Texas. The Partnership has been extremely successful.

In 2014, Tyler, the senior partner, who in recent years had not been very active in the partnership, died. Unfortunately, the partnership agreement is vague about how the partnership interest of a partner who dies should be valued. It simply states that the estate of a deceased partner shall receive compensation for his or her interest in the partnership in a reasonable time after death.

The attorney for Tylers family believes that the estate should receive one-third of the assets of the partnership based on the fair market value of the net assets (total assets less total liabilities). The total assets of the partnership are $10 million in the accounting records, but the assets are worth at least $20 million. Because the firms total liabilities are $4 million, the attorney is asking for $5.3 million (one-third of $16 million).

Strong and Hibbert do not agree, but all parties want to avoid a protracted, expensive lawsuit. They have decided to put the question to an arbitrator, who will make a determination of the settlement.

Here are some other facts that may or may not be relevant. The current balances in the partners Capital accounts are $1.5 million for Tyler, $2.5 million for Strong, and $2.0 million for Hibbert. Net income in 2014 is to be distributed to the Capital accounts in the ratio of 1:4:3. Before Tylers semiretirement, the distribution ratio was 3:3:2.

Assume that you are the arbitrator, and develop what you would consider a fair distribution of assets to Tylers estate. Defend your solution