1. Where the contract clause of the Federal Constitution is
involved, this Court will determine for itself whether there be a
contract the obligation of which is within the protection of that
clause, and whether that obligation has been impaired, and,
likewise, will determine for itself the meaning and application of
state constitutional or statutory provisions said to create the
contract or by which it is asserted an impairment has been
effected. P.
285 U. S.
441.
2. One section of the California Constitution provided that
directors of corporations should be liable to the creditors for all
moneys embezzled or misappropriated by corporate officers. Another
section reserved power to alter or repeal all existing or future
laws concerning corporations. While creditors who contracted with a
corporation, with these provisions in force, were suing to enforce
their rights against a director for money misappropriated by the
corporation's officers, the section making the director liable was
repealed.
Held:
(1) The right to enforce the liability was part of the
creditors' contracts, perfected and fully vested before the repeal,
and was protected by the contract clause of the Constitution and by
the due process clause of the Fourteenth Amendment. Pp.
285 U. S. 442,
285 U. S.
448.
(2) When the contracts were made, the Supreme Court of
California had not decided that the repeal of a law creating such a
contractual liability extinguishes the cause of action. P.
285 U. S.
445.
(3) The so-called reserved power of a state over corporations
and their shareholders cannot be used to destroy the vested rights
of third persons or to impair the obligations of their contracts.
P.
285 U. S.
441.
213 Cal. 164, 1 P.2d 992, 4 P.2d 157, reversed.
Certiorari 284 U.S. 613, to review a decision dismiss ing an
appeal in a suit to enforce a director's liability to creditors of
a corporation.
Page 285 U. S. 439
MR. JUSTICE SUTHERLAND delivered the opinion of the Court.
This is a suit brought in a California superior court by
petitioner, on behalf of himself and other creditors, to recover
from respondent, a director in Getz Bros. & Company, a
California corporation, the amount of an indebtedness upon an open
account for goods sold to the corporation by petitioner's assignor.
The basis of the liability sought to be enforced is found in the
following provision of § 3, Art. XII, of the California
Constitution of 1879:
"The directors or trustees of corporations and joint-stock
associations shall be jointly and severally liable to
Page 285 U. S. 440
the creditors and stockholders for all moneys embezzled or
misappropriated by the officers of such corporation or joint-stock
association during the term of such director or trustee."
The bill alleges misappropriation and embezzlement of moneys of
the corporation by its officers, with appropriate details to bring
the respondent within the terms of the foregoing provision. The
superior court sustained a demurrer to the complaint, for reasons
not material here, and rendered final judgment accordingly. An
appeal was taken to the state supreme court; and, while that appeal
was pending, the provision of the state constitution above quoted
was repealed. Thereupon, respondent moved to dismiss the appeal on
the ground that the cause of action had abated by reason of the
repeal of the provision of law upon which it was based. The court
sustained the motion and dismissed the appeal,
Coombes v.
Franklin, 1 P.2d 992, and subsequently denied a petition for
rehearing, 4 P.2d 157.
In substance, it was held that the right accorded to corporate
creditors was created by, and dependent alone upon, the
constitutional provision, said to have the force of a statute, and
that, when that was repealed, the right fell with it, being still
inchoate, not reduced to possession nor perfected by final
judgment. It was conceded that the liability created by the
constitution was in its nature contractual and, as a matter of law,
entered into and became a part of every contract between the
corporation and its creditors. But this contractual liability, it
was said, was conditioned by the power reserved over corporate laws
by § 1, Art. XII, of the constitution, as follows:
"All laws now in force in this state concerning corporations,
and all laws that may be hereafter passed pursuant to this section,
may be altered from time to time or repealed. "
Page 285 U. S. 441
In virtue of this reservation of power, the state court held
that the repeal of the liability provision was a known contingency
constituting a part of the contract as much as the provision which
imposed the liability.
The decision of the supreme court of a state construing and
applying its own constitution and laws generally is binding upon
this Court; but that is not so where the contract clause of the
Federal Constitution is involved. In that case, this Court will
give careful and respectful consideration and all due weight to the
adjudication of the state court, but will determine independently
thereof whether there be a contract the obligation of which is
within the protection of the contract clause, and whether that
obligation has been impaired, and, likewise, will determine for
itself the meaning and application of state constitutional or
statutory provisions said to create the contract or by which it is
asserted an impairment has been effected.
Scott v. McNeal,
154 U. S. 34,
154 U. S. 45;
Mobile & Ohio R. Co. v. Tennessee, 153 U.
S. 486,
153 U. S. 492;
Stearns v. Minnesota, 179 U. S. 223,
179 U. S.
232-233;
Louisiana Ry. & Nav. Co. v. New
Orleans, 235 U. S. 164,
235 U. S. 170;
Huntington v. Attrill, 146 U. S. 657,
146 U. S. 684;
New Orleans Waterworks v. Louisiana Sugar Co.,
125 U. S. 18,
125 U. S. 38;
Bridge Proprietors v. Hoboken
Co., 1 Wall. 116,
68 U. S. 144;
Jefferson Branch Bank v.
Skelly, 1 Black 436,
66 U. S.
443.
In substance, the contention of respondent here is that the
reserved power provision, read into the contract as one of its
terms, authorizes an extinction by repeal of the creditor's cause
of action, unless previously reduced to final judgment.
The authority of a state under the so-called reserved power is
wide; but is not unlimited. The corporate charter may be repealed
or amended, and, within limits not now necessary to define, the
interrelations of state, corporation, and stockholders may be
changed, but
Page 285 U. S. 442
neither vested property rights nor the obligation of contracts
of third persons may be destroyed or impaired.
Tomlinson
v. Jessup, 15 Wall. 454,
82 U. S. 459;
Lake Shore & M.S. Ry. Co. v. Smith, 173 U.
S. 684,
173 U. S. 690.
Compare Greenwood v. Freight Co., 105 U. S.
13,
105 U. S. 17-19;
Shields v. Ohio, 95 U. S. 319,
95 U. S. 324.
The right of this petitioner to enforce respondent's liability had
become fully perfected and vested prior to the repeal of the
liability provision. His cause of action was not
purely
statutory. It did not arise upon the constitutional rule of law,
but upon the contractual liability created in pursuance of the
rule. Although the latter derived its being from the former, it
immediately acquired an independent existence competent to survive
the destruction of the provision which gave it birth. The repeal
put an end to the rule for the future, but it did not and could not
destroy or impair the previously vested right of the creditor
(which in every sense was a property right,
Ettor v.
Tacoma, 228 U. S. 148,
228 U. S. 156;
Pritchard v. Norton, 106 U. S. 124,
106 U. S. 132)
to enforce his cause of action upon the contract.
Ettor v.
Tacoma, supra; 69 U. S. Calef,
2 Wall. 10,
69 U. S. 22;
Steamship Co. v.
Joliffe, 2 Wall. 450;
Ochiltree
v. Railroad Co., 21 Wall. 249,
88 U. S.
252-253;
Harrison v. Remington Paper Co., 140
F. 385, 390;
Knickerbocker Trust Co. v. Myers, 133 F. 764,
767.
The
Ettor case,
supra, involved a statute of
the State of Washington which required municipalities to compensate
for consequential damages. While that statute was in force, actions
were brought to recover for damages inflicted upon abutting
property in consequence of street grading done by the authority and
direction of the City of Tacoma. While these actions were being
heard, the statute in respect of this liability was repealed, and
the trial court directed a verdict for the city on the theory that
the right of action was statutory, and fell with the
Page 285 U. S. 443
statute, there being no saving clause. Judgment was affirmed by
the state supreme court, and the case came here on writ of of
error. This Court reversed the judgment and, in the course of its
opinion (pp.
228 U. S.
155-156), said:
"The court below gave a retrospective effect to the amendatory
and repealing act by holding that the effect of the repeal was to
destroy the right to compensation which had accrued while the act
was in force. The obligation of the city was fixed. The plaintiffs
in error had a claim which the city was as much under obligation to
pay as for the labor employed to do the grading. It was a claim
assignable and enforceable by a common law action for a breach of
the statutory obligation."
"The necessary effect of the repealing act, as construed and
applied by the court below, was to deprive the plaintiffs in error
of any remedy to enforce the fixed liability of the city to make
compensation. This was to deprive the plaintiffs in error of a
right which had vested before the repealing act -- a right which
was in every sense a property right. Nothing remained to be done to
complete the plaintiffs' right to compensation except the
ascertainment of the amount of damage to their property. The right
of the plaintiffs in error was fixed by the law in force when their
property was damaged for public purposes, and the right so vested
cannot be defeated by subsequent legislation."
In the
Hawthorne case,
supra, it was held that
a state statute incorporating a railroad company, which provided
that the shares of the stockholders should be liable for the debts
of the corporation, in effect pledges the liability or guarantee of
the stockholders to the extent of their stock to the creditors of
the company.
"They thereby virtually agree to become security to the
creditors for the payment of the debts of the company, which have
been contracted upon the faith of this liability."
Hawthorne
Page 285 U. S. 444
supplied the corporation with materials to build its road, and
obtained judgment against it. Being unable to satisfy the judgment,
he brought suit against Calef, a stockholder. The state supreme
court rendered judgment against Hawthorne on the ground that the
individual liability provision had been repealed by subsequent
legislation, passed two months after the debt was contracted, and
that such repeal had taken away the right to enforce the
stockholders' liability. This Court reversed on the ground that,
when the debt was contracted with the company, the creditor held
the stockholders' liability as security for its payment, and the
repealing act, by abolishing it, impaired the obligation of that
contract.
In the
Joliffe case,
supra, this Court had
before it for determination substantially the same question that is
involved here. There, a California statute had created a Board of
Pilot Commissioners, and authorized the board to license pilots,
prescribe their qualifications, etc. The statute provided, with an
exception, that when a vessel was spoken by a pilot and his service
was declined, he should be entitled to one-half pilotage fees.
Joliffe, a pilot licensed under this statute, spoke a vessel of the
steamship company and offered his service to pilot her out of the
port of San Francisco. This was declined, and the pilot brought
suit to recover for one-half the pilotage. Judgment was rendered
against the company. Pending review in this Court, a new statute
was passed, and the old act, in terms, repealed. The point was made
that, the claim to half pilotage fees having been given by statute,
the right to recover fell with its repeal, and accordingly that the
writ of error should be dismissed. This Court held the point not
well taken, and declined to dismiss the writ. The transaction
between the pilot and the ship, it was held (pp.
69 U. S.
457-458), gave rise to a
quasi-contract.
"The claim of the plaintiff below for half-pilotage fees,
resting upon a transaction regarded by the law as a
quasi-contract, there is no just ground for the position
that it fell with the repeal of the statute under which the
transaction
Page 285 U. S. 445
was had. When a right has arisen upon a contract, or a
transaction in the nature of a contract authorized by statute, and
has been so far perfected that nothing remains to be done by the
party asserting it, the repeal of the statute does not affect it,
or an action for its enforcement. It has become a vested right
which stands independent of the statute. And such is the position
of the claim of the plaintiff below in the present action: the
pilotage services had been tendered by him; his claim to the
compensation prescribed by the statute was then perfect, and the
liability of the master or owner of the vessel had become
fixed."
Respondent, however, insists that, long prior to the extension
of credit to the corporation by petitioner's assignor, the
decisions of the Supreme Court of California had established that
the repeal of a law creating such a liability as that here involved
extinguishes the cause of action, and that this amounted to a
construction of the constitutional provision which entered into the
contract, and will be followed and applied by this Court.
Warburton v. White, 176 U. S. 484,
176 U. S. 495;
Ennis Water Works v. Ennis, 233 U.
S. 652,
233 U. S. 657.
But, upon a careful consideration of the California cases referred
to, we are of opinion that they fail to establish the premises upon
which the conclusion is based.
The decisions chiefly relied upon are
Moss v. Smith,
171 Cal. 777, 155 P. 90, and
Willcox v. Edwards, 162 Cal.
455, 123 P. 276;
Moss v. Smith involved § 309 of the Civil
Code of California, which created a liability against directors who
had participated in the creation of debts in excess of the
subscribed capital stock. Suit was brought to enforce this
liability against directors of a public utility company, but, it
appearing that, during the pendency of the suit, § 309 had been
repealed as to public utility companies without a saving clause,
the court held that all pending causes of action were thereby
extinguished. The basis of the decision was that the statute was of
a penal character; the court, however, saying that
Page 285 U. S. 446
it was not of vital consequence whether it be viewed as penal or
remedial. In any event, the liability was not held to be
contractual. On the contrary, the court said (p. 787),
"The right of action against these directors conferred by § 309
was a statutory right pure and simple, having no foundation in
contract, nor any existence at common law."
And it is significant that the court perceived a determinative
distinction between § 309 of the Civil Code and the provision of
the Constitution here under consideration. "Nothing in
Winchester v. Howard, 136 Cal. 441, 64 P. 692, 69 P. 77,"
the court said (p. 785),
"is in conflict with this; in the first place, because the
directors, under § 3, Art. XII, of the Constitution, which section
was the foundation of the action, are liable solely for loss
sustained by embezzlement and misappropriation -- a liability
involving loss, and thus entirely different in character from that
which appellants contend is imposed by § 309."
"And that this statute,' the court already had said (p. 783),
'becomes highly penal in character the moment there is eliminated
from it the consideration of compensation for loss is at once
apparent."
As already suggested,
Winchester v. Howard, 136 Cal.
432, 64 P. 692, 69 P. 77, arose under § 3, Art. XII, of the state
constitution, and the court there, in pointing out the purpose and
effect of that provision, said (p. 444):
"The constitution merely makes the directors sureties for their
fellow directors and for the officers of the corporation for moneys
when so misappropriated as to make the officer misappropriating
liable, and authorizing the creditors and stockholders to sue. . .
. It is not penal in the technical sense, as it allows no recovery
as a punishment, but only to compensate for a loss."
And again at p. 448:
"There is no difference between this case and the ordinary
contract of a surety, unless it can be said that this liability is
placed upon the director against his will.
Page 285 U. S. 447
Argument is hardly required to show that such is not the case.
The state could refuse to grant corporate franchises altogether, or
may grant on such terms as it pleases. The right to do business as
a corporation, or to be a director, if I may speak of it as a
right, is not a natural right. These directors took office knowing
the responsibilities they assumed in so doing, and, in the eye of
the law, did so as freely and voluntarily as they would have done
had they signed a bond agreeing to be responsible for the corporate
officers."
The distinction between the section of the Code and the
constitutional provision therefore is clear. In the former, the
liability is wholly statutory; in the latter, it is
contractual.
In
Willcox v. Edwards, supra, the court had under
consideration a constitutional provision repealing a former
provision of the constitution making valid certain contracts for
the sale of stocks on margin. The right to sue for the recovery of
money paid under such a contract, the court held, was not a vested
right depending upon a
quasi-contract arising by operation
of law from the terms of the original constitutional provision, but
a right dependent upon that provision standing alone, and that,
upon its repeal, without a saving clause, pending litigation fell
for want of authority to maintain it. But it plainly appears that
the decision would have been otherwise if the court had deemed the
right to be contractual.
Another case relied upon is
Napa state Hospital v.
Flaherty, 134 Cal. 315, 66 P. 322, 323. There, a state statute
made certain kindred of indigent insane persons liable for their
board at the insane asylum to which such insane persons were
committed. The right to maintain an action for nonpayment was
conferred upon the board of trustees or directors. Such an action
was brought, but the court held that the remedy had been repealed
and the cause of action fell with it, putting its decision upon
Page 285 U. S. 448
the ground that
"where a right is created solely by a statute, and is dependent
upon the statute alone, and such right is still inchoate, and not
reduced to possession, or perfected by final judgment, the repeal
of the statute destroys the remedy, unless the repealing statute
contains a saving clause."
The case here is entirely different. There, the obligation which
was imposed upon the relatives was purely statutory. No act was
contemplated on their part by way of assumption of an obligation in
order to fix the liability. No element of a contract was present.
Here, both parties acted. The creditor extended credit to the
corporation, and his action in so doing, under the state
constitutional provisions, brought into force for his benefit the
constitutional obligation of the director, which, by becoming a
director, the latter had voluntarily assumed and, thereby, in the
eye of the law, created against himself a contractual liability in
the nature of a suretyship.
Harrison v. Remington Paper Co.,
supra, p. 388. Doubts which otherwise might have existed in
respect of the character and effect of the transaction are no
longer open. It is settled by decisions of this and other federal
courts (
Ettor v. Tacoma, and cases cited in connection
therewith,
supra) that, upon the facts here disclosed, a
contractual obligation arose, and the right to enforce it, having
become vested, comes within the protection of both the contract
impairment clause in Art. I, § 10, and the due process of law
clause in the Fourteenth Amendment, of the federal
Constitution.
Decree reversed.
MR. JUSTICE CARDOZO.
I am unable to concur in the reversal of this judgment.
"The directors or trustees of corporations and joint stock
associations shall be jointly and severally liable to the creditors
and stockholders for all moneys embezzled
Page 285 U. S. 449
or misappropriated by the officers of such corporation or joint
stock association during the term of office of such director or
trustee."
Constitution of California, Art. XII, section 3, repealed
November 4, 1930.
The Supreme Court of California has said that the liability thus
created is contractual (
Dean v. Shingle, 198 Cal. 652, 246
P. 1049), but only in a qualified sense, as the expression of a
legal fiction, is the statement true, nor did the court that made
it intend otherwise. The liability would not be destroyed though
the directors when assuming office and repeatedly thereafter were
to repudiate the obligation utterly. They would be held for all
their protestations upon a liability imposed by law. Indeed, they
would have to answer to the creditors though they had ceased to be
directors before the debts were in existence. If we put aside
deceptive labels, borrowed from the law of
quasi-contracts, the tangle is unraveled. The petitioner
had a contract with the corporation, and not with anyone else
(
Crane v. Hahlo, 258 U. S. 142,
258 U. S.
146), but annexed by law to the obligation of that
contract was a liability purely statutory imposed on the directors.
Compare Christopher v. Norvell, 201 U.
S. 216,
201 U. S. 225;
Bernheimer v. Converse, 206 U. S. 516,
206 U. S. 529.
The decisions in California, when analyzed, will be found to hold
nothing to the contrary. They amount merely to this -- that the
liability created by the statute, which is enforceable also by the
shareholders, is not penal, but remedial, and is limited to the
damage resulting to the corporation from the loss of the embezzled
moneys as if the director were a surety to the corporation for the
acts of its defaulting officer.
Dean v. Shingle, supra; compare
Winchester v. Howard, 136 Cal. 432, 64 P. 692, 69 P. 77. In
any event, this Court is not controlled by the label which the
state court may affix to a liability growing out of a given state
of facts. It determines for itself whether, within the meaning of
the Constitution, the product is a contract to be protected
Page 285 U. S. 450
by the power of the nation.
Appleby v. New York,
271 U. S. 364,
271 U. S. 380;
Coolidge v. Long, 282 U. S. 582,
282 U. S. 597.
As to this, its judgment is guided by realities and not by words.
The section of the Constitution whereby contracts are secured
against impairment is aimed at true agreements, and not at
quasi-contracts, as distinguished from agreements implied
in fact.
Crane v. Hahlo, 258 U. S. 142,
258 U. S. 146;
Louisiana v. New Orleans, 109 U.
S. 285,
109 U. S. 288.
Here, whatever duty was assumed by a director through the
acceptance of his office was one that he owed in the first instance
to the corporation itself, though the creditors and shareholders
were privileged to enforce it.
Dean v. Shingle, supra.
Payment to the corporation before action brought would establish a
defense, and even after action brought, any surplus remaining would
go into the treasury. A distinction may exist between a liability
cast upon directors and one cast upon the shareholders, who are
quasi-partners in the venture.
Corning v.
McCullough, 1 N.Y. 47. To develop the implications of the
distinction is unnecessary now.
I start then with the assumption that the petitioner had a
contract with a corporation secured in certain contingencies by a
statutory liability. I add the assumption that the State of
California was not at liberty, after the contract had been made and
a cause of action had accrued thereunder, to make the security
defeasible if it was indefeasible in its origin. Either the article
of the Constitution prohibiting the impairment of contracts (U.S.
Constitution, Art. I, § 10) or the Fourteenth Amendment (which,
however, is not invoked) might then stand in the way.
Hawthorne v.
Calef, 2 Wall. 10;
Steamship
Co. v. Joliffe, 2 Wall. 450;
Ettor v.
Tacoma, 228 U. S. 148;
Forbes Pioneer Boat Line v. Board of Commissioners,
258 U. S. 338. The
difficulty with the petitioner's case is this -- that his security
in its origin was not vested, but contingent. The meaning of the
California Constitution
Page 285 U. S. 451
is whatever the courts of California declare it to be. The
obligation of the petitioner's contract is whatever the law of
California attached to the contract at the hour of its making. Long
before that time, the supreme court of that state had held that,
under the law of California, a statutory cause of action, whether
penal or remedial, may be cancelled or modified by repeal or
amendment until it has ripened into a judgment.
Moss v.
Smith, 171 Cal. 777, 788, 155 P. 90;
Napa state Hospital
v. Flaherty, 134 Cal. 315, 66 P. 322;
Willcox v.
Edwards, 162 Cal. 455, 466, 123 P. 276.
Compare Combes v.
Franklin, 1 P.2d 992, 4 P.2d 157, the decision under review.
Consistent with these decisions is a provision of the Political
Code:
"Any statute may be repealed at any time, except when it is
otherwise provided therein. Persons acting under any statute are
deemed to have acted in contemplation of this power of repeal."
California Political Code, § 327, quoted in
Moss v. Smith,
supra, p. 787. I assume for present purposes that the rule
thus announced would be held of no effect if the statute and
decisions declaring it had been made after Coombes became a
creditor. Made as they were before that time, they were
reservations or conditions limiting the statutory liability, and to
be read into the statute, and hence into any contract to which the
statute was an incident, as if written there in words.
Citizens' Savings Bank v. Owensboro, 173 U.
S. 636,
173 U. S. 644;
Farmers' Bank v. Federal Reserve Bank, 262 U.
S. 649,
262 U. S. 660.
"The claim of an irrepealable contract cannot be predicated upon a
contract which is repealable."
Hammond Packing Co. v.
Arkansas, 212 U. S. 322,
212 U. S. 346.
Either the petitioner took his cause of action subject to such
infirmities or contingencies as were attached to it by the law of
the state of its creation, or he did not take anything.
This view of the case puts aside as irrelevant the provision of
the California Constitution permitting the
Page 285 U. S. 452
amendment of corporate charters, and sustains the repeal upon
the ground that the liability by the law of its creation was
defeasible in its origin.
MR. JUSTICE BRANDEIS and MR. JUSTICE STONE join in this
dissent.