Continental Corp. v. Gowdy
| Decision Date | 31 May 1933 |
| Citation | 283 Mass. 204 |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
| Parties | THE CONTINENTAL CORPORATION v. ROBERT GOWDY & others. |
May 12, 1932.
Present: RUGG, C.
J., WAIT, FIELD & DONAHUE, JJ.
Bond, Of corporation: clause respecting "no recourse" to stockholders, officers or directors. Contract, Construction Validity. Statute, Construction. Corporation, Officers and agents.
Each of a series of bearer bonds issued by a corporation and secured by a mortgage contained a clause providing: "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 . . . mortgage." The corporation subsequently was adjudicated a bankrupt. Thereafter a suit in equity was commenced by one of the bondholders to enforce the personal liability of the directors of the corporation under G.L.c.
156, Section 36, arising from the improper issuance of its stock and falsity in statements or reports required by said chapter, which occurred for the most part after the issuance of the bonds. No other cause of action was alleged and no other relief was sought. Held, that
(1) The clause above quoted, if applicable to the statutory liability sought to be enforced, was available to the directors as a defence to the suit even though the directors were not parties to the contract between the corporation and the plaintiff;
(2) The words "without recourse" in said clause were not used in a technical sense and did not confine the application of the clause to liabilities resulting from transfers of the bonds subsequent to their issuance: the clause was a part of the contract between the corporation and any bearer of the bonds;
(3) Said clause was applicable to the statutory liability sought to be enforced: such statutory liability was a secondary liability for the obligation of the corporation on the bonds and arose "under or by reason of . . . covenants or agreements, express or implied" in the bonds;
(4) Said clause was applicable to such statutory liability of the directors arising from their acts both before and after the issuance of the bonds;
(5) So construed, said clause was not invalid for the reason that it would bar the bondholders from enforcing a liability of the directors which had not yet arisen at the time of the issuance of the bonds;
(6) Such statutory liability being imposed for the benefit of the corporation's creditors and not for the protection of the general public, said clause, so construed as applicable to such liability arising from acts of the directors both before and after the issuance of the bonds, was not invalid in that it was contrary to public policy;
(7) Said clause barred the suit.
BILL IN EQUITY, filed in the Superior Court on November 6, 1931, and afterwards amended, described in the opinion.
Certain defendants demurred. The demurrers were heard by Lummus, J. By his order an interlocutory decree was entered sustaining them. The judge then reported the suit for determination by this court.
D. Burstein, for the plaintiff. A. P. Lowell, for the defendants.
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, Section 38, to establish the indebtedness of The Martin Trailer Co., 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, Section 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 The 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, expressed 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
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, Sections 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, which were false and known to these defendants to be false. See Section 36.
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, Section 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, Section 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, Section 36.) G.L.c. 156, Section 37 (see G. L. [Ter. Ed.] c. 156, Section 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, Section 38 (see also G. L. [Ter. Ed.] c. 156, Section 38), provides in part that ...
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