AZK Resources Inc. v. Solar Petroleum Inc., 936 F.2d 576 (9th Cir. 1983)

MEMORANDUM^*

AZL Resources, Inc. (AZL) appeals from the order granting summary judgment in favor of Solar Resources, Inc. (Solar) and the other defendants (collectively, Purchasers) in this action. AZL makes three arguments in support of its appeal. First, it argues that the parties intended to reserve the refund to AZL. Second, it asserts that Solar and the Purchasers are estopped from claiming that the refund was transferred to the Purchasers. Third, it contends that Solar and the Purchasers would be unjustly enriched if allowed to keep the refund.

* WHETHER THE PARTIES INTENDED TO RESERVE THE REFUND TO AZL

AZL's first argument is that the agreement shows that the parties intended to reserve the refund to AZL. AZL makes three sub-arguments in support of this contention. (A) It contends that Solar's representation in paragraph 5.03 of the sale agreement, that all its assets were listed on the December 31, 1983 balance sheet, shows the intent of the parties that only those assets were to be transferred. Since the refund was not shown, AZL asserts it was retained by AZL. (B) It asserts that the contract's provision, that AZL would be responsible for tax liabilities for the pre-sale years, shows the intent of the parties that they would have the benefit of any tax benefits for those years. (C) AZL argues that the parties' pre-dispute behavior evidences their intent that AZL would have the benefit of net operating loss carrybacks.

A. Failure to show the refund on the December 31, 1983, balance sheet.

It is hornbook law that the transfer of all of the stock of a corporation divests the seller of any rights in the corporation or its assets. See, e.g., R. Clark Corporate Law 405 (1986) ("Unless transferred or gotten rid of before the [transfer of stock], all assets and liabilities of [the company] will become assets and liabilities of [the buyer].... This automatic transfer includes assets and liabilities of which the acquiring corporation had no knowledge, as well as unliquidated and contingent assets and liabilities.") (emphasis in original). Thus, the fact that the sale was structured as a sale of stock shows that the parties' intent was to transfer all assets, unless specifically reserved. The cited language of the contract does not specifically reserve any assets.

AZL expresses this argument in an alternative form: that AZL should obtain damages because Solar breached its representation in paragraph 5.03 of the sale agreement that all of Solar's assets were listed on the December 31, 1983, balance sheet. AZL may not now assert a claim for damages based on a breach of the representation of paragraph 5.03 because the contract of sale clearly states, in paragraph 12, that there may be no liability for breach of representations, with some exceptions, after one year from the sale. This action was not commenced within that time, so it is time barred. Since the asset at issue here is a tax benefit, rather than a tax liability, it does not fall within the exception from this one-year limit for "liabilities for taxes and related deficiencies and penalties."

B. The provision that AZL would be responsible for pre-sale tax liabilities

AZL argues that the allocation of prior year tax refunds to AZL is "implicit" in paragraph 8.02 of the agreement, which provides that "AZL shall be responsible for the payment of federal and state income tax liability, if any, of Solar (including deferred taxes) for the short tax year ending on the closing date and all preceding tax periods."

Tax benefits may be allocated separately from tax liabilities. Therefore, the allocation of benefits is not implicit in the allocation of liabilities.

The contract is silent as to the allocation of tax benefits. By structuring the transaction as the transfer of 100% of the stock, the sale agreement demonstrates the parties' intent to transfer all assets to the Purchasers unless they were specifically reserved to AZL. This includes tax benefits.

AZL argues that Solar's pre-dispute behavior demonstrates that the contract allocated pre-closing tax benefits to AZL. This argument is no more than speculation as to the possible reasons for certain actions. This speculation does not raise a genuine issue of material fact as to whether the contract allocated the tax benefit to Solar.

II

ESTOPPEL

AZL argues that the Purchasers should be estopped from asserting that AZL has no right to the refund because Solar misrepresented the existence of the asset at the time of the sale.

AZL did not make this argument in the district court. Ordinarily federal appellate courts will not consider issues not raised below. Singleton v. Wulff, 428 U.S. 106, 120 (1976); Michael-Regan Co. v. Lindell, 527 F.2d 653, 659 (9th Cir. 1975). Estoppel is a factual issue. As such, it would be inappropriate for us to consider the issue when it has not been presented to the district court.

III

UNJUST ENRICHMENT

AZL argued, both here and in the district court, that Solar and the Purchasers would be unjustly enriched if allowed to keep the refund. The district court determined, alternatively, that AZL did not properly plead unjust enrichment and that it had failed to raise a genuine issue of material fact as to the claim.

Solar and the Purchasers have been given sufficient notice of AZL's reliance on the theory and they have not argued that they would be prejudiced by amendment of the pleadings to conform to the proof offered by AZL. Thus, AZL should be allowed to pursue this theory. See Consol. Data Terminals v. Applied Digital Data Systems, Inc., 708 F.2d 385, 396 (9th Cir. 1983) (even if pleadings are never amended, a judgment may stand "if the issue has been tried by express or implied consent").

The district court was correct in concluding that there was no unjust enrichment. There is nothing inherently unjust in allocating tax liabilities and tax benefits differently. Likewise, the fact that AZL was unlikely to collect on the note does not mean that no consideration was given for the transfer of all the stock of Solar to the Purchasers. Solar was rapidly losing large quantities of money. The reality of the sale was that AZL transferred Solar to the Purchasers in exchange for the Purchasers' assumption of the liability for future losses. There is nothing unjust in the fact that those losses were not as great as AZL may have anticipated because Solar discovered that it could obtain a refund on past taxes.

AFFIRMED.