Cont'l Corp. v. Gowdy

• Decision Date: 31 May 1933
• Citation: 186 N.E. 244,283 Mass. 204
• Parties: CONTINENTAL CORPORATION v. GOWDY et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

283 Mass. 204

186 N.E. 244

CONTINENTAL CORPORATION

v.GOWDY et al.

Supreme Judicial Court of Massachusetts, Hampden.

May 31, 1933.

Report from Superior Court, Hampden County; Lummus, Judge.

Action by the Continental Corporation against Robert Gowdy and others. From an interlocutory decree sustaining demurrer, plaintiff appeals, and the trial judge reported to the Supreme Judicial Court the question raised by the appeal.

Affirmed.

D. Burstein, of Boston, for plaintiff.

A. P. Lowell, of Boston, for defendants.

FIELD, Justice.

This case raises a question as to the liability of directors of a Massachusetts corporation for the debts of the corporation. It is a suit in equity brought in the superior court under G. L. (Ter. Ed.) c. 156, § 38, to establish the indebtedness of the Martin Trailer Company, herein referred to as the defendant corporation, upon certain promissory notes or bonds of said corporation, to enforce the personal liability, under G. L. c. 156, § 36, of the individual defendants as directors of said corporation for such corporate indebtedness, and to reach and apply in satisfaction of such personal liabilities of two of the individual defendants shares of stock in the defendant First National Bank of Westfield. The bill was filed November 6, 1931.

The bill alleges that the plaintiff is the bearer of twenty-eight promissory notes made on or about May 1, 1929, of the defendant corporation, a corporation organized under the laws of Massachusetts, payable to bearer and identical (except as to an identifying number), and that the defendant corporation owes the plaintiff the amount of such notes and of the coupons attached thereto. An alleged copy of one of these so-called notes is annexed to the bill. Therein the obligation is described as ‘one of a series of coupon bonds * * * all of which bonds are issued or to be issued under and secured by a mortgage, or deed of trust.’ The note or bond is in the amount of $1,000, dated May 1, 1929, and payable May 1, 1939, with interest at the rate of seven per cent. per annum, payable semiannually, and bears coupons representing such semiannual interest payable upon each November first and May first from November 1, 1930, to May 1, 1939, and contains the following provision: ‘These bonds are issued without recourse against the stockholders, officers, or directors, under or by reason of any covenants or agreements, express or implied, in this bond or in the coupons hereof, or in said trust deed or mortgage.’ This provision is hereinafter referred to as the ‘no recourse clause.’

It is alleged that the individual defendants were directors of the defendant corporation for various periods of time, that the debt of the defendant corporation to the plaintiff was contracted or entered into while the individual defendants were officers thereof, and that on or about September [283 Mass. 207]26, 1930, the defendant corporation was duly adjudged bankrupt.

The facts alleged as the basis of personal liability of the individual defendants need not be recited in detail. In support of such liability on the part of all or some of the individual defendants it is alleged (a) that stock of the defendant corporation was issued in violation of G. L. c. 156, §§ 15 and 16-in one instance by a vote of the stockholders on or about April 9, 1929, and an issue of the shares on or about May 1, 1929, and in other instances by votes of the stockholders and subsequent issues of the shares at later dates in the years 1929 and 1930-and (b) that the individual defendants in the year 1930 made statements or reports required to be filed by G. L. c. 156, § 36, which were false and known to these defendants to be false.

Several of the individual defendants demurred to the bill. In each instance the first ground of demurrer was that it appeared from the copy of the bond annexed to the bill that each of the bonds of which it was a copy was issued ‘without recourse against the stockholders, officers, or directors, under or by reason of any covenants or agreements, express or implied, in this bond or in the coupons hereof, or in said trust deed or mortgage.’ An interlocutory decree was entered that ‘it being agreed by the parties in open court that there is nothing in any trust deed or mortgage accompanying the coupon bonds or notes held by the plaintiff that could be thought to constitute a covenant or agreement, expressed or implied, creating any liability upon any stockholder, officer or director, and it appearing to the court that the first ground of demurrer alleged is well taken, even if no other ground is well taken, it is ordered, adjudged and decreed that said demurrers be and hereby are sustained.’ The plaintiff appealed from this decree and the trial judge reported to this court the question raised by the appeal.

G. L. c. 156, § 36, before its amendment by St. 1931, c. 313, was as follows: ‘The president, treasurer and directors of every corporation shall be jointly and severally liable for all the debts and contracts of the corporation contracted or entered into while they are officers thereof if any stock is issued in violation of section fifteen or sixteen, or if any statement or report required by this chapter is made by them which is false in any material representation and which they know, or on reasonable examination could have known, to be false; but directors who vote against such issue, and are recorded as so voting, shall not be so liable, and only the officers signing such statement or report shall be so liable.’ By the amendment the words ‘or on reasonable examination could have known,’ were struck out and a provision in regard to reports of condition added. See G. L. (Ter. Ed.) c. 156, § 36. Since on the allegations of the bill the false statements or reports were known to the individual defendants to be false and since they were not contained in reports of condition, it is unnecessary in passing on the first ground of demurrer to decide whether the statute as it stood before or as it stands after the amendment controls. (No such decision is to be inferred from later references in this opinion to G. L. [Ter. Ed.] c. 156, § 36.) G. L. c. 156, § 37 (see G. L. [Ter. Ed.] c. 156, § 37), provides that directors shall be liable ‘for the debts and contracts of the corporation’ in certain circumstances not shown by this bill. G. L. c. 156, § 38 (see, also, G. L. [Ter. Ed.] c. 156, § 38), provides in part that ‘A stockholder of a corporation shall be held liable for its debts and contracts under section thirty-five, and the president or treasurer, or a director of any such corporation, shall be held so liable under section thirty-six or thirty-seven, if the corporation has been duly adjudicated bankrupt. The president or treasurer, or a director, shall also be held so liable under section thirty-six or thirty-seven, if before a suit to enforce such liability is brought by a creditor of said corporation, a written demand by or on behalf of the creditor upon such corporation for the payment of his claim has been made, and said corporation has for ten days thereafter neglected to pay it. Except as above provided, no suit shall be maintained against a stockholder or officer for the debts or contracts of the corporation.’

The demurrers were sustained rightly.

First. The no recourse clause is a part of the contract between the plaintiff and the defendant corporation, but, nevertheless, is available to the individual defendants as a defense to the bill if it is construed as applicable, on the facts alleged in the bill, to the statutory liability of the individual defendants as directors for the contractual obligation of the defendant corporation under the bond, and if so construed it is valid. It was said by Holmes, J., speaking for the court in Brown v. Eastern Slate Co., 134 Mass. 590, 592, of a statutory liability of stockholders for the debts and contracts of a corporation asserted in somewhat similar circumstances, that ‘the plaintiff could not strike at the members of that corporation in a court of equity through and by means of a transaction which bound him not to do so.’ And the principle is equally applicable to a suit in equity against directors.

Second. The no recourse clause of the bond is to be construed as applicable, on the facts alleged in the bill, to the statutory liability of the individual defendants as directors for the contractual obligation of the defendant corporation under the bond.

Clearly the words ‘without recourse’ are not used in the technical sense in which they are used in a qualified indorsement of a negotiable instrument. When so used they are a part of the contract of the indorser and affect only the liability which, if these or similar words had not been used, would have been imposed on him as a result of his transfer of the instrument by indorsement. G. L. (Ter. Ed.) c. 107, § 61. Aronson v. Nurenberg, 218 Mass. 376, 105 N. E. 1056. Here the words are a part of the contract of the obligor of the bond and there is an express agreement that the bonds are ‘issued’ without recourse against ‘the stockholders, officers or directors.’ The clause, therefore, cannot be construed as applicable merely to liabilities resulting from transfers after the bond had been issued, but its natural meaning is that a bearer of the bond by accepting it agrees that he will not enforce against stockholders, officers, or directors the obligations referred to in the clause.

The plaintiff contends, however, that the statutory liabilities of the directors did not arise ‘under or by reason of any covenants or agreements, expressed or implied’ in the bond, coupons, trust deed, or mortgage and, consequently, are not within the terms of the no recourse clause. This contention is unsound. There is, of course, no express covenant or agreement on the part of the directors to be liable on the bond or its coupons. Whether such an agreement on their part is implied need not be...