THE FRANK KUMIN CO. INC. vs. M. GRETA MOULTON MAREAN & others.

RUGG, C.J. The plaintiff, in 1929 and 1930, sold merchandise to the Moulton Textile Company, hereafter termed the corporation, which was adjudged a bankrupt on June 22, 1931, before its debt to the plaintiff was paid. The bill alleges that interest is due on the principal debt from October 22, 1930. The inference follows that the debt was due and payable on that date. On October 28, 1931, the plaintiff brought this suit in equity against two directors and officers of the corporation and the wife of a director and officer, although she was not a director or officer, to collect its claim. The directors will be referred to hereafter as the defendants. The bill is framed on G. L. c. 156, § 36, and contains allegations assumed to be adequate to set out a cause of action against the defendants who are officers and directors of the corporation under that section. By its provisions, so far as here pertinent, directors of a corporation were made "liable for all the debts and contracts of the corporation contracted or entered into while they are officers thereof . . . if any statement or report required" by that chapter "is made by them which is false in any material representation and which they know . . . to be false." The defendants demurred to the bill on the ground that the right asserted by the plaintiff was taken away by St. 1931, c. 313, § 1, amending the earlier statute and now embodied in G. L. (Ter. Ed.) c. 156, § 36. That amendment, so far as here pertinent,

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struck out the original section and substituted a new section; but it added, after the words of the earlier section already quoted, these words: "provided, that if a report of condition as a whole states the condition of the corporation with substantial accuracy, in accordance with usual methods of keeping accounts, it shall not be deemed to be false; and provided, also, that the officers or directors signing a false report of condition shall be liable only for debts contracted and contracts entered into before the filing of the next subsequent report of condition, and only to persons who shall have relied upon such false report to their damage." The amending statute was approved and became a law on May 13, 1931, and took effect not earlier than ninety days thereafter. Rosenthal v. Liss, 269 Mass. 373, 376. Art. 48 of the Amendments to the Constitution, "The Referendum," Part I.

The question to be decided is whether said § 36 as it was prior to the amendment gave to the plaintiff as creditor of the corporation a right or remedy against its directors which could not be taken away by subsequent action by the General Court such as here is involved.

The cause of action against directors for the debts of the corporation and the method of its enforcement are wholly the creatures of statute. They are unknown to the common law and do not exist apart from statutes by which they are established. Old Colony Boot & Shoe Co. v. Parker-Sampson-Adams Co. 183 Mass. 557, 559. E. S. Parks Shellac Co. v. Jones, 265 Mass. 108, 113. Union Market National Bank of Watertown v. Gardiner, 276 Mass. 490, 492. It has been held, however, that the liability of directors created by said § 36 before the amendment of 1931 was "compensatory and remedial" and not merely penal. "It is something which the creditor had a right to consider and to rely upon when the debt was created. It constituted an implied term of every contract between the corporation and its creditors." E. S. Parks Shellac Co. v. Harris, 237 Mass. 312, 319. The nature of the liability of directors thus established is contractual. Union Market National Bank of Watertown v. Gardiner, 276 Mass. 490, 494.

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Felker v. Standard Yarn Co. 148 Mass. 226. Nickerson v. Wheeler, 118 Mass. 295, 298-299. While it may have been, and doubtless was, designed to have a deterrent effect upon directors in signing, without careful scrutiny as to their truth, statements and reports required by law, its primary design and dominant result are not punishment of the director but security to the creditor of the corporation. This being the character of the statute and of the liability thereby created, it follows that the force and effect of this contractual obligation as to debts theretofore incurred cannot be impaired by legislative mandate. Statutes to that end are forbidden by the clause in art. 1, § 10, of the Constitution of the United States forbidding the several States to pass any "law impairing the obligation of contracts." This point is completely covered by Coombes v. Getz, 285 U. S. 434, where the question involved was the same as that here presented and was fully discussed. It there was held that a similar liability of directors to creditors, already accrued, for moneys of a corporation embezzled or misappropriated by officers during the terms of directors could not be impaired by action of the State. It there was said at page 442: "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, 156; Pritchard v. Norton, 106 U. S. 124, 132) to enforce his cause of action upon the contract." It would be vain to elaborate the question after this authoritative and controlling pronouncement.

To the same effect in substance is Manchester v. Popkin, 237 Mass. 434. The cases of Wilson v. Head, 184 Mass. 515,

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and Yeomans v. Heath, 185 Mass. 189, are distinguishable because the statute there involved was mainly punitive, intended to suppress a species of gambling, and gave no vested rights. Since the amending statute changed the basis of the liability of directors, it is unnecessary to inquire whether the statute of limitations might have been shortened so as to have effect on the present suit. See Mulvey v. Boston, 197 Mass. 178.

It follows that there was error in sustaining the demurrer. The bill set out a cause of action. The right of the plaintiff against the directors was not affected by the enactment of St. 1931, c. 313, § 1. Manchester v. Popkin, 237 Mass. 434.

Interlocutory and final decrees reversed.