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decided: April 11, 1932.



Hughes, Van Devanter, McReynolds, Brandeis, Sutherland, Butler, Stone, Roberts, Cardozo

Author: Sutherland

[ 285 U.S. Page 439]

 MR. JUSTICE SUTHERLAND delivered the opinion of the Court.

This is a suit brought in a California superior court by petitioner, on behalf of himself and other creditors, to recover from respondent, a director in Getz Bros. & Company, a California corporation, the amount of an indebtedness upon an open account for goods sold to the corporation by petitioner's assignor. The basis of the liability sought to be enforced is found in the following provision of § 3, Art. XII, of the California Constitution of 1879:

"The directors or trustees of corporations and jointstock associations shall be jointly and severally liable to

[ 285 U.S. Page 440]

     the creditors and stockholders for all moneys embezzled or misappropriated by the officers of such corporation or joint-stock association, during the term of office of such director or trustee."

The bill alleges misappropriation and embezzlement of moneys of the corporation by its officers, with appropriate details to bring the respondent within the terms of the foregoing provision. The superior court sustained a demurrer to the complaint, for reasons not material here, and rendered final judgment accordingly. An appeal was taken to the state supreme court; and, while that appeal was pending, the provision of the state constitution above quoted was repealed. Thereupon, respondent moved to dismiss the appeal, on the ground that the cause of action had abated by reason of the repeal of the provision of law upon which it was based. The court sustained the motion and dismissed the appeal [ Coombes v. Franklin ] 1 P. 2d 992; and subsequently denied a petition for rehearing, 4 P. 2d 157.

In substance, it was held that the right accorded to corporate creditors was created by, and dependent alone upon, the constitutional provision, said to have the force of a statute; and that when that was repealed, the right fell with it, being still inchoate, not reduced to possession nor perfected by final judgment. It was conceded that the liability created by the constitution was in its nature contractual and, as a matter of law, entered into and became a part of every contract between the corporation and its creditors. But this contractual liability, it was said, was conditioned by the power reserved over corporate laws by § 1, Art. XII, of the constitution, as follows:

"All laws now in force in this state concerning corporations, and all laws that may be hereafter passed pursuant to this section, may be altered from time to time or repealed."

[ 285 U.S. Page 441]

     In virtue of this reservation of power, the state court held that the repeal of the liability provision was a known contingency constituting a part of the contract as much as the provision which imposed the liability.

The decision of the supreme court of a state construing and applying its own constitution and laws generally is binding upon this court; but that is not so where the contract clause of the Federal Constitution is involved. In that case this court will give careful and respectful consideration and all due weight to the adjudication of the state court, but will determine independently thereof whether there be a contract, the obligation of which is within the protection of the contract clause, and whether that obligation has been impaired; and, likewise, will determine for itself the meaning and application of state constitutional or statutory provisions said to create the contract or by which it is asserted an impairment has been effected. Scott v. McNeal, 154 U.S. 34, 45; Mobile & Ohio R. Co. v. Tennessee, 153 U.S. 486, 492 et seq.; Stearns v. Minnesota, 179 U.S. 223, 232-233; Louisiana Ry. & Nav. Co. v. New Orleans, 235 U.S. 164, 170; Huntington v. Attrill, 146 U.S. 657, 684; New Orleans Waterworks v. La. Sugar Rfg. Co., 125 U.S. 18, 38; Bridge Proprietors v. Hoboken Co., 1 Wall. 116, 144; Jefferson Branch Bank v. Skelly, 1 Black 436, 443.

In substance, the contention of respondent here is that the reserved power provision, read into the contract as one of its terms, authorizes an extinction by repeal of the creditor's cause of action, unless previously reduced to final judgment.

The authority of a state under the so-called reserved power is wide; but it is not unlimited. The corporate charter may be repealed or amended, and, within limits not now necessary to define, the interrelations of state, corporation and stockholders may be changed; but

[ 285 U.S. Page 442]

     neither vested property rights nor the obligation of contracts of third persons may be destroyed or impaired. Tomlinson v. Jessup, 15 Wall. 454, 459; Lake Shore & M. S. Ry. Co. v. Smith, 173 U.S. 684, 690. Compare Greenwood v. Freight Co., 105 U.S. 13, 17, 19; Shields v. Ohio, 95 U.S. 319, 324. 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. Ettor v. Tacoma, supra; Hawthorne v. Calef, 2 Wall. 10; Steamship Co. v. Joliffe, 2 Wall. 450; Ochiltree v. Railroad Co., 21 Wall. 249, 252-253; Harrison v. Remington Paper Co., 140 Fed. 385, 390 et seq.; Knickerbocker Trust Co. v. Myers, 133 Fed. 764, 767.

The Ettor case, supra, involved a statute of the State of Washington which required municipalities to compensate for consequential damages. While that statute was in force actions were brought to recover for damages inflicted upon abutting property in consequence of street grading done by the authority and direction of the City of Tacoma. While these actions were being heard, the statute in respect of this liability was repealed; and the ...

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