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Home > Journals > Michigan Law Review > MLR > Volume 31 > Issue 2 (1932)

 

Abstract

The case of Coombes v. Getz, recently decided by the United States Supreme Court, raises in a crucial way the question of what is a contract within the meaning of Article I, section 10 of the Constitution, forbidding States to pass laws impairing the obligations of contracts. A provision of the California Constitution in force at the time the plaintiffs brought this action in the state court below made directors of corporations jointly and severally liable to the creditors and stockholders for all moneys embezzled or misappropriated by the officers of the corporation during the term of office of such directors. The plaintiffs, as creditors of a corporation of which the defendant Getz was a director, brought action to enforce the liability imposed by the constitution, but while the suit was pending on appeal, the provision of the constitution creating this liability was repealed by the California electorate. The state supreme court held that the cause of action had abated because of the repeal, the court relying upon the familiar doctrine that a statutory cause of action not reduced to final judgment falls with repeal of the statute. Subsequently, in denying a petition for rehearing, the state supreme court abandoned the argument that the liability imposed by the constitutional provision was derived solely from statute, conceded that the directors' liability was contractual in its nature, but declared that in view of the reserved power to alter or repeal laws "concerning corporations," as provided in the state constitution, the repeal of the constitutional provision did not impair the obligations of contracts. On appeal to the United States Supreme Court it was held by the majority speaking through Justice Sutherland that the repeal of the constitutional provision did impair the obligations of contracts with respect to the plaintiffs in the case at bar. In a dissenting opinion Justice Cardozo, speaking also for Justices Brandeis and Stone, denied that the contracts clause had been violated. The question at issue between the majority and minority judges of the Supreme Court was this: Was the directors' liability to creditors for misappropriation by officers a liability arising from contract within the meaning of Article I, section 10, of the Constitution? The majority proceeded on the assumption that the directors' liability under the California constitutional provision was contractual in its nature. On this point the dissenting judges disagreed, Justice Cardozo asserting that despite what the California court had said, the directors' liability did not result from contract, but was derived from statute instead.

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