Schmidt v. Financial Resources Corp.
1984 Ariz. App. LEXIS 384, 140 Ariz. 135, 680 P.2d 845 (1984)
Rule of Law:
Under Arizona law, a corporation surviving a merger assumes full responsibility for all the debts and liabilities of the merged corporation, including punitive damages, and this liability is not limited by the value of the assets transferred from the merged entity.
Facts:
- Walter H. Schmidt sued American Leasco for damages stemming from an agency agreement.
- On March 29, 1982, American Leasco formally merged into Financial Resources Corporation, with Financial Resources Corporation being the surviving entity.
- On November 4, 1982, a jury returned a verdict in favor of Schmidt and against American Leasco for damages totaling $30,000, which included $25,000 in punitive damages.
- Upon learning of the merger, Schmidt sought to collect his $30,000 judgment from Financial Resources Corporation.
- Financial Resources Corporation denied liability for the judgment against American Leasco.
Procedural Posture:
- Walter H. Schmidt sued American Leasco in Pima County Superior Court (trial court) for damages arising out of an agency agreement.
- After a trial, a jury returned a verdict in favor of Schmidt and against American Leasco.
- The judgment against American Leasco was affirmed on appeal by the Arizona Court of Appeals.
- Schmidt filed a complaint against Financial Resources Corporation in the superior court, seeking payment of the $30,000 judgment rendered against American Leasco.
- The superior court granted Schmidt’s motion for summary judgment, which was entered on June 21, 1983.
- Financial Resources Corporation appealed the superior court's entry of summary judgment to the Arizona Court of Appeals, Division Two.
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Issue:
Does a successor corporation resulting from a merger, under Arizona law, assume full responsibility for all the liabilities and obligations of the merged corporation, including punitive damages, regardless of the merged corporation's assets at the time of the merger?
Opinions:
Majority - BIRDSALL, Chief Judge
Yes, a successor corporation resulting from a merger assumes full responsibility for all the liabilities and obligations of the merged corporation, including punitive damages, and regardless of the merged corporation's assets at the time of the merger. The court reasoned that Arizona law, specifically A.R.S. § 10-076(B)(5), explicitly states that a surviving or new corporation "shall thenceforth be responsible and liable for all the liabilities and obligations of each of the corporations so merged or consolidated." This statutory language makes no distinction between compensatory and punitive damages, thereby including both. The court rejected Financial Resources Corporation's argument that liability should be limited to the value of the transferred assets, distinguishing Valley Bank v. Malcolm as a case involving a corporate sale of assets rather than a merger and noting that it predated the enactment of A.R.S. § 10-076. The court emphasized that in a merger, the merged corporation and its assets continue to function as part of the successor corporation, thus preventing the successor from shrugging off liabilities.
Analysis:
This case clarifies the broad scope of successor liability in corporate mergers under Arizona law, establishing that the surviving entity comprehensively assumes all debts and obligations of the merged corporation. By affirming that liability extends to punitive damages and is not capped by the value of transferred assets, the decision provides significant protection for creditors. This ruling reinforces the principle that corporations cannot use mergers to evade existing liabilities, ensuring continuity of obligations through corporate restructuring and providing clear guidance for future cases involving corporate reorganizations and creditor rights.
