Frank Kumin Co. v. Marean

• Decision Date: 28 June 1933
• Citation: 186 N.E. 780,283 Mass. 332
• Parties: FRANK KUMIN CO. v. MAREAN et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

283 Mass. 332

186 N.E. 780

FRANK KUMIN CO.

v.MAREAN et al.

Supreme Judicial Court of Massachusetts, Worcester.

June 28, 1933.

Appeal from Superior Court, Worcester County; Lummus, Judge.

Suit by the Frank Kumin Company against M. Greta Moulton Marean and others. From adverse interlocutory and final decrees, plaintiff appeals.

Reversed.

S. A. Seder, of Worcester, for appellant.

L. M. Erskine and G. S. Taft, both of Worcester, for appellees.

RUGG, Chief Justice.

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, 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 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, 169 N. E. 142; Article 48 of Amendments to the Constitution, ‘The Referendum,’ Part 1.

The question to be decided is whether section 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, 67 N. E. 870;E. S. Parks Shellac Co. v. Jones, 265 Mass. 108, 113, 163 N. E. 883;Union Market National Bank v. Gardiner, 276 Mass. 490, 492, 177 N. E. 682, 79 A. L. R. 1512. It has been held, however, that the liability of directors created by section 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, 129 N. E. 617, 620;Union Market National Bank v. Gardiner, 276 Mass. 490, 494, 177 N. E. 682, 79 A. L. R. 1512;Felker v. Standard Yarn Co., 148 Mass. 226, 19 N. E. 220;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...