E.S. Parks Shellac Co. v. Harris

• Decision Date: 15 January 1921
• Citation: 237 Mass. 312,129 N.E. 617
• Parties: E. S. PARKS SHELLAC CO. v. HARRIS et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

237 Mass. 312

129 N.E. 617

E. S. PARKS SHELLAC CO.

v.HARRIS et al.

Supreme Judicial Court of Massachusetts, Bristol.

Jan. 15, 1921.

Report from Supreme Judicial Court, Bristol County.

Bill by the E. S. Parks Shellac Company against Frederick Harris and others, resulting in overruling of defendants' pleas and demurrer. On report by a single justice of the Supreme Judicial Court for the determination of the full court. Defendants ordered to answer.

John W. & Charles R. Cummings, of Fall River, for plaintiff.

Paul D. Turner, of Boston, for defendant Dickinson Mfg. Co.

Lee M. Friedman and Friedman & Atherton, all of Boston, for defendant Harris.

JENNY, J.

By St. 1903, c. 437, § 34, as amended by St. 1911, c. 488, § 1, the president, treasurer, and directors of every Massachusetts corporation coming within the purview of the general corporation act of 1903 are made jointly and severally liable for its debts and contracts contracted or entered into while they are officers, if any statement or report required by the provisions of the chapter first referred to is made and signed by them which is false in any material representation, and which they know, or on reasonable examination could have known, to be false. The liability extends to obligations existing at the time the false statement or report is made, and to those thereafter arising while they hold office. Felker v. Standard Yarn Co., 148 Mass. 226, 19 N. E. 220.

The liability under statutes in force prior to 1911 did not exist, except as hereinafter stated, until a judgment founded on the debt or contract had been recovered against the corporation. R. L. c. 110, § 60; St. 1903, c. 437, § 36; Train v. Marshall Paper Co., 180 Mass. 513, 62 N. E. 967;Old Colony Boot & Shoe Co. v. Parker-Sampson-Adams Co., 183 Mass. 557, 67 N. E. 870. In the case of Train v. Marshall Paper Co., supra, it was held that, where the corporation had obtained a discharge in bankruptcy, no general or special judgment could be entered upon which proceedings to enforce the statutory liability might be based. The necessity of recovering a judgment before the institution of a suit to enforce the stated statutory liability ceased when St. 1911, c. 488, took effect. This statute provided that an officer of a corporation should ‘not be held liable * * * unless before a suit to enforce the liability * * * * is brought by a creditor * * * a demand in writing by or on behalf of the creditor’ has been made upon the corporation for payment of the claim, and it has for ten days thereafter neglected to pay it, or unless it has been duly adjudicated bankrupt.

In this proceeding in equity, instituted July 5, 1919, to enforce the liability of Frederick Harris, a director and president of the Dickinson Manufacturing Company, that corporation has pleaded that the debt and claim of the plaintiff against it was on February 11, 1919, discharged by virtue of the confirmation of a composition offer in bankruptcy. The defendant Harris has filed a more detailed plea of like import, and, without waiving his plea, also has been permitted to demur, on the ground that the plaintiff's cause of action is barred by R. L. c. 202, § 5, limiting the commencement of actions for ‘penalties or forfeitures under penal statutes if brought by a person to whom penalty of forfeiture is given in whole or in part’ to ‘one year next after the offense is committed.’

The facts, as found at the hearing upon the pleas, are in small compass. On April 30, 1918, the defendant corporation owed the plaintiff $10,330.30 for merchandise sold between November 27, 1915, and April 7, 1918. On October 3, 1918, the corporation was adjudicated a bankrupt upon an involuntary petition filed August 1 of that year. In said proceedings the offer of composition made by said corporation under terms of the United States Bankruptcy Act (U. S. Comp. St. §§ 9585-9656) was duly confirmed on February 11, 1919. The plaintiff's claim was proved in bankruptcy, and it received from the clerk of the United States District Court for the District of Massachusetts $4,132.12 ‘in accordance with the offer of composition upon its confirmation.’

The two questions presented for decision are: (1) The effect of the discharge in bankruptcy of the defendant corporation upon the liability of the defendant Harris, and upon the joinder of the defendant corporation; and (2) that of the statute of limitations relating to penal actions.

It is unnecessary to consider the allegations of the bill critically. It is succinctly stated that there is an unpaid undebtedness of the defendant corporation arising during Harris' term of office; that the defendant corporation was adjudicated a bankrupt upon the date before given; that on or about February 21, 1916, and on or about April 7, 1917, Harris, the president and director of the defendant corporation signed certificates of its condition as required by St. 1903, c. 437, § 45, which certificates were filed with the secretary of the commonwealth on February 24, 1916, and on April 9, 1917. It is also alleged that said certificates were ‘false in certain material representations, which the defendant Harris on reasonable examination could have known, and did know, to be false.’ These statements related to the assets and liabilities of the corporation.

The defendant Harris, hereinafter called the defendant except when the context otherwise requires, contends that, inasmuch as the debt of the Dickinson Manufacturing Company was discharged by confirmation of the offer in composition, the plaintiff was not a creditor of that company when suit was commenced and therefore cannot maintain its bill. Such a contention, if successful, might result in the destruction of liability in cases where it is most needed. A cause of action does not come into existence until the corporation either has been adjudicated a bankrupt, or unless it has failed to pay the claim after demand and within the time fixed in the statute. Relief is only of substantial importance when the corporation fails to perform its obligations and is financially unable to respond thereto. Under the construction claimed by the defendant, if financial irresponsibility is followed by bankruptcy in which there has been a discharge under the United States Bankruptcy Law, all right of action is barred against the officer who would otherwise have been liable under Massachusetts statutes hitherto referred to. It also follows that, although under our own statute the adjudication in bankruptcy of the corporation is sufficient to permit the institution of proceedings to enforce the statutory liability of one of its officers, that proceeding must be instituted before the corporation has received a discharge in bankruptcy. The statute expresses no such limitation and none can be posited on Train v. Marshall Paper Co., supra (decided in 1902), which was based on the then existing requirement of the recovery of a judgment and the neglect after demand made on execution to pay the amount due thereon. The discharge in bankruptcy was only of importance in that case because it prevented the entry of a judgment. Barry v. New York Holding & Construction Co., 229 Mass. 308, 118 N. E. 639. The very next year after the decision in Train v. Marshall Paper Co. the recovery of a judgment became unnecessary where the corporation had been duly adjudged bankrupt (St. 1903, c. 437, § 36); and it was also provided by an amendment to the Bankruptcy Law that--

‘The bankruptcy of a corporation shall not release its officers, directors, or stockholders, as such, from any liability under the laws of a state or territory or of the United States.’ U. S. St. 1903, c. 487, § 3 (32 U. S. St. at Large, 797 [U. S. Comp. St. § 9588]).

The Bankruptcy Act also states:

‘The liability of a person who is a codebtor with, or guarantor or in any manner a surety for, a bankrupt shall not be altered by the discharge of such bankrupt.’ U. S. St. 1898, c. 541, § 16 (30 U. S. St. at Large, 550 [U. S. Comp. St. § 9600]).

Upon the adjudication in bankruptcy of the Dickinson Manufacturing Company, the plaintiff's cause of action against the defendant came into existence, under the plain words of the statute, and it was not destroyed by the discharge in bankruptcy of that company. None of the elements necessary to establish liability is dependent upon or controlled by the operation of a discharge, and nothing based upon any fact, whose existence is either created or destroyed by the discharge, remains to be done. Way v. Barney, 116 Minn. 285, 133 N. W. 801,38 L. R. A. (N. S.) 648, Ann. Cas. 1913A, 719. ‘A debt is not extinguished by a discharge in bankruptcy. The remedy upon the debt, and the legal, but not the moral, obligation to pay is at an end. The obligation itself is not canceled.’ Citizens' Loan Association v. Boston & Maine Railroad, 196 Mass. 528, 530, 82 N. E. 696, 697 (14 L. R. A. [N. S.] 1025, 124 Am. St. Rep. 584,13 Ann. Cas. 965);Champion v. Buckingham, 165 Mass. 76, 42 N. E. 498. The secondary obligation of the officers is expressly preserved by the bankruptcy act as amended; and it is unnecessary to decide whether those so liable are codebtors with or guarantors or in any manner sureties for the bankrupt. See Great Western Machinery Co. v. Smith, 87 Kan. 331, 332, 124 Pac. 414,41 L. R. A. (N. S.) 379, Ann. Cas. 1913E, 243,

The Dickinson Manufacturing Company was properly made a defendant, notwithstanding its discharge in bankruptcy. The statute requires that it be so joined, and that is the only, but sufficient necessity therefor. First National Bank v. Hingham Mfg. Co., 127 Mass. 563, 567;Westinghouse Electric & Mfg. Co. v. Reed, 194 Mass. 590, 594, 80 N. E. 621,120 Am. St. Rep. 576.

The demurrer of the defendant rests wholly on the proposition that the liability is for the recovery of a penalty, and hence an action must be brought within one year next after the commission of the wrongful act. The word ‘penalty’ in...