Coombes v. Getz

Background

A creditor, suing for money owed by Getz Bros. & Company, brought a claim against one of the company’s directors under a California constitutional rule that made directors liable for officers’ embezzlement. The state trial court sustained a demurrer and entered final judgment for the director. While the creditor’s appeal was pending, California repealed the constitutional provision and the state supreme court dismissed the appeal as if the cause of action had died with the repeal.

Reasoning

The key question was whether the creditor’s right to recover from the director had already become a vested agreement that survived the later repeal. The U.S. Supreme Court’s majority explained that although the director’s liability originated in the state constitutional rule, the liability became part of the contract relationship when the creditor extended credit. That contractual right had vested before repeal. Relying on earlier decisions, the Court held that the state could not destroy or impair already vested contract rights by repealing the creating provision, so the dismissal by the state court was reversed.

Real world impact

The ruling means that people and businesses who extend credit to corporations may still enforce director obligations that had already vested, even if the state later removes the law that created those obligations. It narrows the power of a state to defeat existing claims by repealing the source rule and reinforces that vested contractual rights receive federal protection.

Dissents or concurrances

Justice Cardozo (joined by Justices Brandeis and Stone) dissented, arguing the liability was contingent and defeasible under California law and therefore subject to repeal before it ripened into a judgment.