Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_11-cv-01943/USCOURTS-azd-2_11-cv-01943-0/pdf.json

Nature of Suit Code: 370
Nature of Suit: Other Fraud
Cause of Action: 28:1441 Petition for Removal- Fraud

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WO 

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF ARIZONA 

Phoenix Van Buren Partners, LLC, an 

Arizona limited liability company, 

Plaintiff, 

vs. 

Moulding & Millwork, Inc., Pacific, a 

Washington corporation, 

Defendant.

No. CV 11-01943-PHX-NVW

ORDER 

Before the Court are Plaintiff’s motion for summary judgment (Doc. 11) and 

Defendant’s cross-motion for summary judgment (Doc. 17). Having reviewed the briefs, 

and having heard oral argument, Defendant’s motion will be denied and Plaintiff’s 

motion will be granted on Plaintiff’s alter ego theory. In light of this disposition, the 

remainder of both Plaintiff’s and Defendant’s contentions need not be decided. 

I. LEGAL STANDARD 

Summary judgment is warranted if the evidence shows there is no genuine issue as 

to any material fact and the moving party is entitled to judgment as a matter of law. Fed. 

R. Civ. P. 56(a). The moving party bears the initial burden of identifying those portions 

of the pleadings, depositions, answers to interrogatories, and admissions on file, together 

with the affidavits, if any, which it believes demonstrate the absence of any genuine issue 

of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the 

nonmoving party would bear the burden of persuasion at trial, the moving party may 

carry its initial burden of production by submitting admissible “evidence negating an 

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essential element of the nonmoving party’s case,” or by showing, “after suitable 

discovery,” that the “nonmoving party does not have enough evidence of an essential 

element of its claim or defense to carry its ultimate burden of persuasion at trial.” Nissan 

Fire & Marine Ins. Co., Ltd. v. Fritz Cos., Inc., 210 F.3d 1099, 1105–06 (9th Cir. 2000). 

When the moving party has carried its burden, the nonmoving party must respond 

with specific facts, supported by admissible evidence, showing a genuine issue for trial. 

See Fed. R. Civ. P. 56(c). But allegedly disputed facts must be material — the existence 

of only “some alleged factual dispute between the parties will not defeat an otherwise 

properly supported motion for summary judgment.” Anderson v. Liberty Lobby, Inc., 477 

U.S. 242, 247–48 (1986) (emphasis in original). 

Where the record, taken as a whole, could not lead a rational trier of fact to find 

for the nonmoving party, there is no genuine issue of material fact for trial. Matsushita 

Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). However, the 

nonmoving party’s properly presented evidence is presumed to be true and all inferences 

from the evidence are drawn in the light most favorable to that party. Eisenberg v. Ins. 

Co. of N. Am., 815 F.2d 1285, 1289 (9th Cir. 1987). 

II. BACKGROUND 

The following facts are undisputed unless attributed to one party or the other or 

otherwise specified. 

A. The Stock Purchase and Sale Agreement 

Plaintiff Phoenix Van Buren Partners owns a commercial property in Phoenix, 

Arizona. Beginning in 2006, Phoenix Van Buren leased that property to non-party Smith 

Moulding Wholesale (an Arizona corporation), for its moulding and custom door shop 

business. 

In early 2008, Defendant Moulding & Millwork — which operated a business 

similar to that of Smith Moulding, save for the door shop — approached the owners of 

Smith Moulding, Jerome Smith and Blaine Jarvis, about buying out their interests. In 

February 2008, Moulding & Millwork reached an agreement with Smith and Jarvis 

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embodied in a “Stock Purchase and Sale Agreement.” (Doc. 12-1 at 34.) Smith 

Moulding itself was not a party to this agreement. The agreement set up a transaction 

through which Moulding & Millwork would pay off Smith Moulding’s creditors (who 

had security interests in all or substantially all of Smith Moulding’s assets) and also pay 

cash to Smith and Jarvis (who had personally guaranteed Smith Moulding’s liabilities) 

for their stock.1

The lease between Phoenix Van Buren and Smith Moulding prohibited “any 

change in the ownership of a controlling interest of the voting stock” of Smith Moulding 

without Phoenix Van Buren’s consent. (Doc. 12-1 at 23.) On February 22, 2008, a 

Smith Moulding officer obtained Phoenix Van Buren’s written consent to Moulding & 

Millwork’s proposed purchase “of all the issued and outstanding capital stock of Smith 

Moulding.” (Doc. 18-1 at 12.) Moulding & Millwork was not involved in obtaining this 

consent, nor did Moulding & Millwork guarantee the lease. 

B. The Closing & Subsequent Events 

The transaction between Moulding & Millwork, Smith, and Jarvis closed on 

February 28, 2008. Moulding & Millwork’s parent company then wired approximately 

$5.4 million directly to Smith Moulding’s creditors. Moulding & Millwork characterizes 

this as “caus[ing] Smith [Moulding] to pay . . . off [the liabilities]” (Doc. 17 at 4), but this 

is inaccurate. The payoff money went directly from Moulding & Millwork’s parent 

company’s account to Smith Moulding’s creditors’ accounts.2

 Smith and Jarvis then 

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 Moulding & Millwork asserts that Smith and Jarvis insisted on a buy-out 

structure that would minimize their taxable gains while at the same time paying off the 

Smith Moulding liabilities that Smith and Jarvis had personally guaranteed. According to 

Moulding & Millwork, Smith and Jarvis believed that a purchase price sufficient to 

compensate them for the value of their stock and to pay off outstanding liabilities would 

be taxed entirely as profit, so Smith and Jarvis therefore insisted on a stock purchase 

price exclusive of Smith Moulding’s liabilities, with such liabilities to be paid directly by 

Moulding & Millwork. Phoenix Van Buren disputes these assertions. This dispute is 

irrelevant given the disposition below. 

2

 Moulding & Millwork later terminated the Uniform Commercial Code financing 

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received approximately $2.1 million, and all of their stock in Smith Moulding was 

transferred to Moulding & Millwork. 

On its accounting records, Moulding & Millwork booked the $5.4 million creditor 

payoff as a loan from Moulding & Millwork to Smith Moulding. No documentation for 

such a loan is in the record. At oral argument, counsel for Moulding & Millwork stated 

that he was aware of no loan agreement between Smith Moulding and Moulding & 

Millwork. Moulding & Millwork, however, credited certain Smith Moulding assets 

(inventory, accounts receivable, equipment, and vehicles) against the loan in the amount 

of $4.3 million, its view of their value, rather than their book value of $4.7 million. 

Shortly after closing, Moulding & Millwork closed Smith Moulding’s bank 

accounts, replaced Smith Moulding’s officers and directors with persons who were also 

Moulding & Millwork officers and directors, closed a separate Arizona warehouse from 

which Moulding & Millwork had been operating, and moved into the premises Smith 

Moulding was leasing from Phoenix Van Buren. Smith Moulding had no employees of 

its own after this point. 

Around this time, Moulding & Millwork sent a letter to its customers under both 

its own and Smith Moulding’s logos displayed side-by-side as follows: 

(Doc. 12-3 at 15.) The letter announced itself to be from “Moulding & Millwork, Inc., 

Pacific dba Smith Moulding Wholesale” and informed its recipients that “Smith 

Wholesale Moulding [sic] with Moulding & Millwork are pleased to announce the 

 

statements of Smith Moulding’s largest creditors, and it allowed other financing 

statements related to Smith Moulding’s assets to expire. 

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partnering of the two companies. The Moulding and Millwork branch office and 

warehouse have been relocated to join the team at Smith Moulding.” (Id.) 

Around the same time, Moulding & Millwork prepared a memorandum for its 

employees announcing, “With the Smith Wholesale Moulding name being so recognized 

in the local marketplace we will run our business under this name for the foreseeable 

future.” (Doc. 12-1 at 14.) Moulding & Millwork made this choice in part because it 

believed it would be easier to sell inventory and collect accounts receivable. 

Upon moving into Smith Moulding’s facility, Moulding & Millwork added Smith 

Moulding’s inventory to its own and ceased to keep records for Smith Moulding 

generally, although Moulding & Millwork claims that it kept separate records for Smith 

Moulding’s door shop for a brief time. As Moulding & Millwork sold off inventory, it 

did not separately track whether that inventory had originally come from Smith 

Moulding, unless related to the door shop. Moulding & Millwork deposited the proceeds 

from these sales into its own general operating account. Moulding & Millwork cannot 

retrospectively account for the proceeds it received from Smith Moulding’s inventory, 

save for inventory items that Moulding & Millwork had not otherwise carried, and for 

sales made from the door shop for the time when it continued to keep separate records. 

As with the inventory, the proceeds from Smith Moulding’s vehicles and 

equipment were deposited into Moulding & Millwork’s general operating account. 

C. The Door Shop’s Demise 

After the purchase, Moulding & Millwork learned that Smith Moulding’s door 

shop was not successful. In August 2008, Moulding & Millwork sent a letter to 

customers (with its own logo just above Smith Moulding’s logo) announcing that the 

door shop would be shut down. The letter was signed “Smith Moulding & Millwork.” 

(Doc. 12-3 at 62.) Moulding & Millwork then liquidated the door shop’s assets and 

claims to have applied the proceeds against its loan to Smith Moulding. 

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D. Smith Moulding’s Goodwill and Going Concern Value 

As noted above, Moulding & Millwork used Smith Moulding’s name (along with 

its own name) and represented to the public that it was doing business as Smith 

Moulding. Moulding & Millwork also used Smith Moulding’s customer and supplier 

lists, and took its goodwill. Moulding & Millwork has presented no licensing agreement 

from Smith Moulding permitting such use (counsel at oral argument was not aware of 

any such agreement), and it never paid anything to Smith Moulding for use of these 

assets. It instead claims that these assets became nearly valueless due to the decline in 

the Phoenix-area home-building economy. 

E. Moulding & Millwork’s Abandonment of Phoenix Van Buren’s 

Premises 

For about twenty months after acquiring Smith Moulding, Moulding & Millwork 

used the Phoenix Van Buren property and paid the periodic rents. Moulding & Millwork 

says that it made these payments on behalf of Smith Moulding. The record contains no 

sublease agreement between Smith Moulding and Moulding & Millwork, or agreement to 

assign the lease, and Moulding & Millwork’s counsel at oral argument again stated that 

he was aware of no such agreements. (Cf. Doc. 12-1 at 23 (lease provision permitting 

Smith Moulding to sublet, or assign the lease, to a parent company without Phoenix Van 

Buren’s permission, but requiring the parent company to “assume in writing all of 

Tenant’s obligations under this Lease”).) Moulding & Millwork eventually decided the 

Phoenix Van Buren property was not profitable. It removed all assets and equipment, 

abandoned the property, and made no further rent payments to Phoenix Van Buren. 

F. Phoenix Van Buren’s Lawsuits 

After Moulding & Millwork vacated Phoenix Van Buren’s premises and stopped 

paying rent, Phoenix Van Buren sued Smith Moulding in Maricopa County Superior 

Court for breach of the lease. Geoffrey Hamilton, general manager of special projects at 

both Moulding & Millwork and Smith Moulding, was Smith Moulding’s designated 

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corporate representative, testifying on Smith Moulding’s behalf at the trial. Moulding & 

Millwork’s current counsel represented Smith Moulding in that action. 

On July 27, 2011, Phoenix Van Buren obtained a judgment against Smith 

Moulding for $4,276,246.45 (comprising damages of $4,203,546.00, attorney’s fees of 

$71,636.50, and taxable costs of $1,063.95), plus judgment interest at ten percent per 

annum. At a judgment debtor’s exam, Hamilton once again testified on Smith 

Moulding’s behalf, represented by Moulding & Millwork’s current counsel. Because 

Smith Moulding no longer had any assets, Phoenix Van Buren then filed the current 

action against Moulding & Millwork to enforce the judgment on theories of fraudulent 

transfer, alter ego, successor liability, and the trust fund doctrine. Phoenix Van Buren has 

now moved for summary judgment to establish its causes of action, and Moulding & 

Millwork has cross-moved to defeat them. 

III. VEIL-PIERCING THROUGH AN ALTER EGO THEORY 

A. Alter Ego Standard and Application 

“[A]lter-ego status is said to exist when there is such unity of interest and 

ownership that the separate personalities of the corporation and owners cease to exist.” 

Dietel v. Day, 16 Ariz. App. 206, 208, 492 P.2d 455, 457 (1972). If the corporation has 

become the shareholders’ alter ego and honoring the separateness between the 

shareholders and corporation would sanction a fraud or promote injustice, courts will 

pierce the corporate veil and hold the shareholders responsible for the corporation’s 

liabilities. Gatecliff v. Great Republic Life Ins. Co., 170 Ariz. 34, 37–38, 821 P.2d 725, 

728–29 (1991). 

In Arizona, alter ego claims comprise two elements: (1) the parent company’s 

substantially total control of the subsidiary, and (2) that honoring the separateness 

between the parent and subsidiary would sanction a fraud or promote injustice. Id. at 37–

38, 821 P.2d at 728–29. These elements will be addressed in order, but with an equitable 

subrogation interlude occasioned by Moulding & Millwork’s argument in that regard. 

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1. Substantially Total Control 

Moulding & Millwork exercised substantially total control over Smith Moulding. 

All of Smith Moulding’s officers and directors were Moulding & Millwork employees. 

Moulding & Millwork closed Smith Moulding’s bank accounts and transferred its funds 

into Moulding & Millwork’s own accounts. Inventory was intermingled as well, to 

Moulding & Millwork’s sole benefit. Moulding & Millwork appropriated Smith 

Moulding’s goodwill and took to itself the going concern value of Smith Moulding with 

no pretense of compensation. Moulding & Millwork stripped Smith Moulding of 

everything to meet the obligations of the business Moulding & Millwork conducted in 

Smith Moulding’s name for Moulding & Millwork’s benefit. Moulding & Millwork paid 

the rent to Phoenix Van Buren as long as it benefited Moulding & Millwork, and paid all 

of Smith Moulding’s other expenses. 

Further, none of the foregoing was documented. On its own accounting records, 

Moulding & Millwork booked its $5.4 million creditor payoff as an intercompany loan, 

but there is no known loan agreement between the two companies. Moulding & 

Millwork moved into the space leased by Smith Moulding, but there is no known 

sublease agreement or written assumption of the lease (as the lease itself required). 

Moulding & Millwork used Smith Moulding’s good will — by using its name and 

letterhead — but there is no known licensing agreement permitting such use.3

 It kept no 

 3

 Moulding & Millwork claims that Smith Moulding’s goodwill had no value. 

Moulding & Millwork has cited no authority for the proposition that corporate formalities 

may be disregarded with respect to property that has no value. But in any event, 

Moulding & Millwork contradicts its own assertion when it says that it continued to use 

Smith Moulding’s name because doing otherwise could harm efforts to collect accounts 

receivable and sell assets at a fair price. If true, the Smith Moulding name certainly had 

value. Going concern value is, by definition, the value of the business over and above its 

liquidation value. See Black’s Law Dictionary 1587 (8th ed. 2004). 

In this same regard, Moulding & Millwork purchased Smith Moulding for $2.1 

million more than its outstanding debts, and it asserts that those outstanding debts were 

undersecured by Smith Moulding’s assets. This again suggests that Smith Moulding had 

value above its liquidation value, even if that value declined due to the collapse of the 

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separate books or records for Smith Moulding, save for a limited time with respect to the 

door shop. In sum, it operated Smith Moulding in name only, otherwise absorbing all of 

Smith Moulding into itself without regard for its separate existence. 

This set of facts easily satisfies the substantially total control test. As noted in 

Gatecliff, 

Substantially total control may be proved by showing, among 

other things: stock ownership by the parent; common officers 

or directors; financing of subsidiary by the parent; payment of 

salaries and other expenses of subsidiary by the parent; failure 

of subsidiary to maintain formalities of separate corporate 

existence; similarity of logo; and plaintiff’s lack of 

knowledge of subsidiary’s separate corporate existence. 

Gatecliff, 170 Ariz. at 37, 821 P.2d at 728. All of these factors have been established 

beyond genuine dispute, save for the last two — but five of seven was good enough in 

Gatecliff, see id., as it is here. 

Moulding & Millwork challenges to these factors are without merit. Regarding 

“financing of subsidiary by the parent” and “payment of salaries and other expenses of 

subsidiary by the parent,” Moulding & Millwork claims that Phoenix Van Buren “alleges 

the exact opposite . . . , not that [Moulding & Millwork] financed and paid salaries and 

expenses of Smith [Moulding], but that money and assets flowed the other way, from 

Smith [Moulding] to [Moulding & Millwork] for no consideration.” (Doc. 17 at 8.) This 

argument makes little sense on its own terms, and on the facts of the case. Phoenix Van 

Buren indeed believes that “money and assets flowed the other way” — all of Smith 

Moulding’s money and assets, leaving it with nothing. Only Moulding & Millwork could 

cover Smith Moulding’s ongoing expenses. 

Concerning the same factors, Moulding & Millwork argues that “loans to Smith 

[Moulding] after the transaction . . . do[] not make the two companies alter egos of one 

another.” (Id.) But the record discloses no loans to Smith Moulding after the transaction. 

 

Phoenix-area construction industry. 

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The record discloses only one arguable loan, i.e., the $5.4 million creditor payoff, booked 

by Moulding & Millwork after closing as a loan to Smith Moulding. To the extent 

Moulding & Millwork now implies that its payment of Smith Moulding’s ongoing 

expenses amounted to additional loans, that argument is forfeited. In any event, a 

properly developed record of such loans would not avoid the third factor. Such loans 

would have been necessary because Smith Moulding had no money of its own to meet 

“normal obligations forseeable [sic] in a business of its size and character.” Wash. Nat’l 

Corp. v. Thomas, 117 Ariz. 95, 101, 570 P.2d 1268, 1274 (Ct. App. 1977) (internal 

quotation marks omitted), disapproved on others grounds in Greenfield v. Cheek, 122 

Ariz. 57, 593 P.2d 280 (1979). In other words, under these circumstances, loans to Smith 

Moulding after the February 2008 transaction would likely establish rather than refute the 

third factor. 

Finally, as to the “formalities of separate corporate existence,” Moulding & 

Millwork has only one response: “Smith [Moulding] is an Arizona corporation — 

[Moulding & Millwork] is a Washington corporation.” (Doc. 17 at 8.) The irrelevance 

of this assertion is apparent on its face. Accordingly, considering all of the factors, 

Moulding & Millwork exercised “substantially total control” over Smith Moulding. 

2. Equitable Subrogation 

a. Summary of Argument 

Moulding & Millwork does not dispute that it mingled Smith Moulding’s 

inventory with its own indiscriminately, and likewise mingled the funds obtained from 

that inventory with its own. It does not dispute using Smith Moulding’s name and paying 

all of Smith Moulding’s expenses. It also does not dispute that Smith Moulding 

neglected most — perhaps all — corporate formalities while under Moulding & 

Millwork’s control. 

Moulding & Millwork’s only real counterargument is that it was entitled to do as it 

pleased with Smith Moulding’s assets under the doctrine of equitable subrogation. 

“Subrogation is the substitution of another person in the place of a creditor, so that the 

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person in whose favor it is exercised succeeds to the rights of the creditor in relation to 

the debt.” Mosher v. Conway, 45 Ariz. 463, 468, 46 P.2d 110, 112 (1935). Moulding & 

Millwork argues that its $5.4 million creditor payoff loan subrogated it to the rights of 

Smith Moulding’s secured creditors (who had security interests in all or nearly all of 

Smith Moulding’s assets), thus entitling Moulding & Millwork to treat Smith Moulding’s 

assets as collateral for the loan and to satisfy the loan through the value realized from the 

collateral. 

b. Lack of Analogous Authority 

The Court has located no equitable subrogation case similar to the situation 

presented in this action. Equitable subrogation typically involves a claim to property that 

still exists. See, e.g., Mosher, supra; Sun Valley Fin. Servs. of Phoenix, L.L.C. v. 

Guzman, 212 Ariz. 495, 134 P.3d 400 (Ct. App. 2006); Lamb Excavation, Inc. v. Chase 

Manhattan Mortg. Corp., 208 Ariz. 478, 95 P.3d 542 (Ct. App. 2004); Del E. Webb Hotel 

Co. v. Bentley, 8 Ariz. App. 408, 446 P.2d 687 (1968). The property over which 

Moulding & Millwork claims an equitably subrogated interest no longer exists. 

Moulding & Millwork liquidated it and seeks to justify such liquidation after the fact. In 

other words, Moulding & Millwork treats equitable subrogation as a matter of right once 

one has paid another’s debt. However, equitable subrogation “is not a matter of absolute 

right but rather, a matter of grace to be granted or withheld as the equities of the case may 

demand.” Del E. Webb, 8 Ariz. App. at 411, 446 P.2d at 690 (internal quotation marks 

removed; alterations incorporated). “Whether it is applicable or not depends upon the 

particular facts and circumstances of each case as it arises.” Mosher, 45 Ariz. at 468, 46 

P.2d at 112 (emphasis added). 

Moulding & Millwork leans heavily on a recent Arizona Court of Appeals case, 

Sourcecorp, Inc. v. Norcutt, ___ Ariz. ___, 258 P.3d 281 (Ct. App. 2011). In Sourcecorp, 

the Norcutts paid cash to buy a home from a third party, the Shill family, and in the 

process paid off the Shills’ debt on that home. Unfortunately, the Norcutts’ title company 

overlooked Sourcecorp’s judgment lien on the home. Sourcecorp soon initiated sheriff’s 

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sale proceedings and the Norcutts moved to quash the execution writ on various theories. 

One such theory was equitable subrogation — i.e., that when the Norcutts paid off the 

Shills’ debt, they succeeded to the Shills’ creditor’s first-position lien, ahead of 

Sourcecorp’s judgment lien. 

The trial court rejected this argument because it would mean that the Norcutts 

would “hold a lien on their own house.” Id. ¶ 9, 258 P.3d at 283 (quoting trial court’s 

order). The Court of Appeals, however, accepted the argument, reasoning that under the 

circumstances there was no reason that an equitable doctrine like equitable subrogation 

should not allow the Norcutts to step into the shoes of the Shills’ prior creditor. Id.

¶¶ 33–36, 258 P.3d at 288–89. The Court of Appeals was substantially influenced by the 

unique and irreplaceable nature of real estate. Id. ¶ 35, 258 P.3d at 289 (reasoning that 

the Norcutts’ obvious remedy in damages against their title company could not make up 

for losing the home they wanted). 

On the morning of oral argument in this action, the Arizona Supreme Court 

affirmed Sourcecorp, but on slightly different grounds. Sourcecorp, Inc. v Norcutt, ___ 

Ariz. ___, ___ P.2d ___, 2012 WL 1138251 (Ariz. Apr. 6, 2012), slip opinion available 

at http://www.azcourts.gov/Portals/23/pdf2012/CV110269PR.pdf. Rather than focusing 

on the unique nature of real estate, the Supreme Court noted that refusing equitable 

subrogation would result in a windfall to Sourcecorp because it only moved into first 

position through a mistake (i.e., assuming that the Norcutts never would have bought the 

home and paid off the first position lien but for the title company’s failure to find the 

judgment lien). Id. ¶¶ 23–24. However, addressing the unfair possibilities inherent in 

giving an owner a lien on his or her own property, the Supreme Court affirmed that 

“equitable subrogation depends on the facts of the particular case” and held that, as to the 

Norcutts, it was “not appropriate to confer on [them] a right to ‘foreclose’ on the interest 

to which they are subrogated.” Id. ¶ 29. Thus, the Norcutts had first position to the 

extent they could prevent Sourcecorp from foreclosing, but they could not themselves 

foreclose. 

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Although a narrow expansion of equitable subrogation, Sourcecorp is nonetheless 

similar to other equitable subrogation cases to the extent it resolves claims to stillexisting property. That is not this case. 

Moulding & Millwork nonetheless believes that Sourcecorp justifies its course of 

action here, analogizing itself to the Norcutts, who ended up owning both the property 

and a lien on that property. But even on that account, Moulding & Millwork misses a 

crucial distinction: Moulding & Millwork did not own the property. Moulding & 

Millwork bought Smith Moulding’s stock, not its assets. “It is elementary that a 

corporation is for most purposes an entity distinct from its individual members or 

stockholders. By the very nature of a corporation the corporate property is vested in the 

corporation itself and not in the stockholders.” Corp. Comm’n v. Consolidated Stage Co., 

63 Ariz. 257, 259, 161 P.2d 110, 111 (1945); see also 1 William Meade Fletcher, 

Fletcher Cyclopedia of the Law of Private Corporations § 31 (perm. ed.) (“The property 

of the corporation is its property and not that of the shareholders as owners, even if there 

is only one shareholder . . . .” (footnote omitted)) (“Fletcher Cyclopedia”). Further, as 

the Arizona Supreme Court demonstrated in affirming Sourcecorp, even if Moulding & 

Millwork had managed to obtain both possession of and a lien on those assets, it would 

not be automatically entitled to foreclose. It would instead depend on the facts of the 

particular case. Accordingly, the Court could find no case discussing (much less 

permitting) equitable subrogation in circumstances similar to those here. 

c. Lack of Equitable Justification for Subrogation 

Even if Moulding & Millwork could theoretically qualify for equitable 

subrogation, equity would not authorize it on the facts of this particular case. First, 

Moulding & Millwork has already disposed of the property at issue, thus leaving the 

Court with no interests to adjust other than who pays whom. Second, Moulding & 

Millwork disposed of the property without telling Phoenix Van Buren that it was 

emptying Smith Moulding of all ability to operate as a going concern on its own. Third, 

Moulding & Millwork took the benefits of the lease for as long as was convenient and 

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then abandoned the property, thus displaying unclean hands. In these circumstances, 

equitable subrogation is not justified. 

d. Additional Failure to Respect Corporate Separateness 

Moulding & Millwork’s claim of equitable subrogation to the position of Smith 

Moulding’s secured creditors fails as a matter of law. But even if equitable subrogation 

applied from the closing of the February 2008 transaction, Moulding & Millwork’s 

undisputed conduct thereafter further proves Phoenix Van Buren’s claims for piercing 

Smith Moulding’s corporate veil to reach Moulding & Millwork. 

Moulding & Millwork says that it “received certain Smith [Moulding] assets or 

proceeds from the disposition of [such] assets” as in-kind partial satisfaction of the $5.4 

million loan that supposedly subrogated it to the secured creditors’ rights. (Doc. 17 at 4.) 

If true, such in-kind satisfaction could only have happened in one of two ways. First, 

Moulding & Millwork could have foreclosed on prior creditors’ security interests, bid in 

the debt, and seized the assets. Moulding & Millwork makes no argument that it pursued 

this approach. In fact, it did the opposite: it terminated the relevant financing statements 

or allowed them to expire. At that point, the property subject to the financing statements 

was unquestionably Smith Moulding’s, free and clear — not Moulding & Millwork’s. 

The second method through which Moulding & Millwork could have obtained inkind satisfaction would have been for Smith Moulding to agree to transfer its assets as 

payment on the debt. Moulding & Millwork’s briefs invite the reader to assume that 

Smith Moulding took this course of action, but Moulding & Millwork does not actually 

say that Smith Moulding made this choice, it submits no evidence showing that such a 

choice was made, and counsel at oral argument knew of none. For instance, Moulding & 

Millwork fails to provide documentation of the procedures Smith Moulding would be 

required to follow if it had agreed to surrender all of its assets to Moulding & Millwork. 

An Arizona corporation may not “dispose of all or substantially all of its property . . . 

other than in the usual and regular course of business” without a proposal from the board 

of directors and shareholder approval. A.R.S. § 10-1202(A)–(B). Moulding & Millwork 

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has submitted no evidence suggesting that Smith Moulding observed this requirement. 

And even if it did not apply, prudence would demand some sort of documentation — 

from both Smith Moulding and Moulding & Millwork — memorializing an agreement to 

exchange $4 million in assets (supposedly all of Smith Moulding’s assets) for credit 

against a debt. Moulding & Millwork has submitted no such documentation. 

Moulding & Millwork simply seized Smith Moulding’s assets, which would not 

be permissible for any secured creditor. Thus, even if equitably subrogated to Smith 

Moulding’s prior creditors’ security interests, Moulding & Millwork’s failure to behave 

like a secured creditor further evinces the lack of respect for the separateness between 

itself and its subsidiary. 

3. Sanctioning a Fraud or Promoting Injustice 

Phoenix Van Buren has established a lack of genuine dispute regarding the 

“substantially total control” element of the veil-piercing analysis. To prevail fully at this 

summary judgment stage, Phoenix Van Buren must also establish that honoring the 

separateness between the parent and subsidiary would sanction a fraud or promote 

injustice. Gatecliff, 170 Ariz. at 37–38, 821 P.2d at 728–29. The analysis here is similar 

to the equitable reasons for denying subrogation. Specifically, refusing to pierce the 

corporate veil in this case would promote injustice by permitting Moulding & Millwork 

to take the benefits of the lease (premises from which to do business, along with whatever 

advantages it may have gained from doing business in that specific location) without its 

corresponding burdens (the remedies provided to Phoenix Van Buren against a tenant 

who abandons the lease). Moreover, when Phoenix Van Buren consented to Moulding & 

Millwork’s takeover, it was not informed that the transfer “of all the issued and 

outstanding capital stock of Smith Moulding” (Doc. 18-1 at 12) would also involve an 

intercompany loan to be satisfied in-kind through all Smith Moulding assets, leaving it 

with nothing. Had Phoenix Van Buren known how Moulding & Millwork planned to 

operate Smith Moulding, it very likely would not have consented to the change in control. 

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Moulding & Millwork cannot, in such circumstances, keep the limited liability benefit of 

the corporate form. 

In opposition, however, Moulding & Millwork claims: 

[Phoenix Van Buren] is in no worse position now than it 

would have been if [Moulding & Millwork] had not appeared 

on the scene. In fact, [Phoenix Van Buren] is better off as a 

result of the transaction. As of the closing, Smith [Moulding] 

owed [Phoenix Van Buren] $33,635.03 in past due rent, 

which was paid with [Moulding & Millwork]’s funds. After 

the closing, [Moulding & Millwork] funded additional rent 

payments on behalf of Smith [Moulding] totaling $1,053,360. 

If the transaction had not occurred, Smith [Moulding] would 

have defaulted on the lease long before it eventually did. 

[Phoenix Van Buren] would not have had any claim against 

the prior owners, as shareholders, or against the encumbered 

assets of Smith [Moulding] pledged to secured creditors. 

(Doc. 17 at 16 (citations omitted).) Even if relevant, the argument is misdirected because 

it focuses entirely on the immediate effect of February 2008 takeover, rather than 

abandonment of the lease months later. One can assume that Moulding & Millwork’s 

takeover of Smith Moulding benefited Phoenix Van Buren for the months in which 

Moulding & Millwork continued to pay the rent. But the fact remains that Moulding & 

Millwork eventually stopped paying the rent, after having emptied Smith Moulding of all 

ability to do so on its own. Benefitting from corporate separateness at that point, after 

having disregarded it since the takeover, would be unjust. 

In addition, there is no evidence in the record that “Smith [Moulding] would have 

defaulted on the lease long before it eventually did.” It is only speculation. If Smith 

Moulding was indeed going under before Moulding & Millwork arrived, it may have 

defaulted, or it may have renegotiated the lease, or it may have found a sublessor, or any 

number of other possibilities. But no evidence purports to establish that Smith Moulding 

would have failed absent Moulding & Millwork’s intervention. Nor has Moulding 

& Millwork cited any authority establishing the relevance of this consideration. As 

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noted, saving Smith Moulding from collapsing in February 2008 does not excuse 

Moulding & Millwork’s subsequent conduct. 

Finally, it is also no defense that Moulding & Millwork may have been able to put 

Phoenix Van Buren in the same position lawfully (e.g., by observing the necessary 

formalities to document the $5.4 million loan, causing Smith Moulding’s board to resolve 

to transfer all of its assets to Moulding & Millwork in satisfaction of that loan, and so 

forth). In every veil-piercing case, the plaintiff would be left without a meaningful 

remedy had the shareholder respected the separateness of the corporate form. 

Phoenix Van Buren has established that observing the corporate form would 

sanction a fraud or promote injustice. Accordingly, Phoenix Van Buren has satisfied 

both elements of the alter ego test. See Gatecliff, 170 Ariz. at 37–38, 821 P.2d at 728–29. 

B. Whether Fact Issues Remain 

Moulding & Millwork argues that, even if liable on an alter ego theory, fact issues 

remain that preclude summary judgment. Specifically: “If [Phoenix Van Buren] had a 

breach of lease claim against [Moulding & Millwork], it should have asserted it. If that is 

the case, then [Moulding & Millwork] should be afforded the opportunity to present all 

defenses to that claim, including but not limited to the duty to mitigate damages, not 

simply accept a number derived in a separate litigation against Smith [Moulding].” (Doc. 

17 at 16–17.) 

Moulding & Millwork mischaracterizes the issue. Establishing lack of corporate 

separateness is a different inquiry than breach of the lease. Successfully holding a 

shareholder liable for the corporation’s acts does not give the shareholder the right to 

relitigate the underlying case against the corporation. Cf. 1 Fletcher Cyclopedia § 41.10 

(“A finding of fact of alter ego . . . furnishes a means for a complainant to reach a second 

corporation or individual upon a cause of action that otherwise would have existed only 

against the first corporation. An attempt to pierce the corporate veil is a means of 

imposing liability on an underlying cause of action such as a tort or breach of contract.” 

(footnotes omitted)). 

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In any event, a claim preclusion or issue preclusion analysis would lead to the 

same result. This Court must give the Superior Court judgment “the same full faith and 

credit . . . as [it has] by Law or usage in the courts of [Arizona].” 28 U.S.C. § 1738. 

Arizona follows the Restatement (Second) of Judgments § 39 on this issue. See Indus. 

Park Corp. v. U.S.I.F. Palo Verde Corp., 26 Ariz. App. 204, 209, 547 P.2d 56, 61 (1976) 

(citing with approval Restatement (Second) of Judgments § 83 (Tent. Draft No. 2, 1975), 

which was eventually codified at § 39). According to the Restatement, “A person who is 

not a party to an action but who controls or substantially participates in the control of the 

presentation on behalf of a party is bound by the determination of issues decided as 

though he were a party.” Restatement (Second) of Judgments § 39 (1982). 

To have control of litigation requires that a person have 

effective choice as to the legal theories and proofs to be 

advanced in behalf of the party to the action. . . . Whether his 

involvement in the action is extensive enough to constitute 

control is a question of fact, to be resolved with reference to 

these criteria. It is sufficient that the choices were in the 

hands of counsel responsible to the controlling person; 

moreover, the requisite opportunity may exist even when it is 

shared with other persons. It is not sufficient, however, that 

the person merely contributed funds or advice in support of 

the party, supplied counsel to the party, or appeared as amicus 

curiae. 

Id. cmt. c. 

The evidence already considered suffices to answer this question. As a matter of 

common sense, a shareholder that disregards corporate separateness is per se in control of 

the corporation and its litigation and therefore bound as though a party. Even if this were 

not the case, it is beyond dispute here that Moulding & Millwork in fact controlled Smith 

Moulding’s litigation. Smith Moulding could do nothing except as animated by 

Moulding & Millwork because Smith Moulding had no employees of its own, or money. 

Geoffrey Hamilton took the title of general manager of special projects at Smith 

Moulding — the same title he held at Moulding & Millwork — and acted as Smith 

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Moulding’s representative in the Superior Court action, with Moulding & Millwork’s 

current counsel representing Smith Moulding. If Smith Moulding did not, at that time, 

present defenses such as mitigation, Moulding & Millwork can blame only itself. 

Phoenix Van Buren’s motion for summary judgment will be granted, and 

Moulding & Millwork’s cross-motion denied, on Phoenix Van Buren’s alter ego cause of 

action. 

IV. REMAINING ISSUES 

Phoenix Van Buren’s success on its alter ego claim makes consideration of its 

other theories unnecessary. None of those other theories could afford more relief than 

piercing the corporate veil. Thus, the Court does not address whether either side has 

proved or disproved Phoenix Van Buren’s fraudulent transfer, successor liability, and 

trust fund theories. 

V. FORM OF JUDGMENT 

Having operated Smith Moulding as an alter ego, the judgment against Moulding 

& Millwork should be the same as the judgment Phoenix Van Buren obtained in the 

Superior Court. See 1 Fletcher Cyclopedia § 41.10. However, the issue of postjudgment interest requires some discussion. Before July 20, 2011, the Arizona statutory 

judgment rate was ten percent per annum. A.R.S. § 44-1201(A) (2003 & Supp. 2010). 

Since that date, the judgment rate is prime-plus-one-percent. 2011 Ariz. Sess. Laws., ch. 

99 § 15. Phoenix Van Buren obtained its judgment on July 27, 2011. It therefore should 

have received prime-plus-one-percent on the principal judgment. It instead received ten 

percent. 

At oral argument, counsel for Phoenix Van Buren clarified that he had submitted a 

form of judgment before the interest rate change took effect, but the Superior Court did 

not act on it until after the change. When the Superior Court did act, it approved the form 

of judgment without modification. 

At oral argument, counsel for both sides agreed, under the authority of McBride v. 

Superior Court, 130 Ariz. 193, 635 P.2d 178 (1981), that the new interest rate controls 

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regardless of the mistake. Counsel for Phoenix Van Buren represented that the 

appropriate interest rate on July 27, 2011 was 4.25 percent, and counsel for Moulding & 

Millwork accepted that representation. The judgment will therefore bear that interest 

rate. 

IT IS THEREFORE ORDERED that Plaintiff’s motion for summary judgment 

(Doc. 11) is GRANTED with respect to Plaintiff’s second cause of action (alter ego) and 

DENIED in all other respects as moot. 

IT IS FURTHER ORDERED that Defendant’s cross-motion for summary 

judgment (Doc. 17) is DENIED with respect to Plaintiff’s second cause of action (alter 

ego) and DENIED in all other respects as moot. 

IT IS FURTHER ORDERED that the Clerk shall enter judgment in favor of 

Plaintiff and against Defendant in the amount of $4,276,246.45, with post-judgment 

interest accruing at 4.25 percent per annum from July 27, 2011 until paid in full. The 

judgment shall also contain this sentence: “This judgment is concurrent with, and not 

cumulative to, the July 27, 2011 judgment entered by the Maricopa County Superior 

Court in civil case number 2009-037646.” The Clerk shall terminate this case. 

Dated this 10th day of April, 2012. 

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