In re Evergreen Ventures, Bankruptcy No. B-89-11380-PHX-GBN

CourtU.S. Bankruptcy Court — District of Arizona
Citation147 BR 751
Docket NumberAdv. No. 91-343.,Bankruptcy No. B-89-11380-PHX-GBN
PartiesIn re EVERGREEN VENTURES, a California limited partnership, Debtor. John K. MICUDA and Marylouise Micuda, husband and wife, Plaintiffs, v. Ralph McDONALD, Chapter 7 Trustee, Defendant. Ralph McDONALD, Chapter 7 Trustee, Counterclaimant, v. John K. MICUDA and Marylouise Micuda, husband and wife, Counterdefendants.
Decision Date24 November 1992

147 B.R. 751 (1992)

In re EVERGREEN VENTURES, a California limited partnership, Debtor.
John K. MICUDA and Marylouise Micuda, husband and wife, Plaintiffs,
Ralph McDONALD, Chapter 7 Trustee, Defendant.

Ralph McDONALD, Chapter 7 Trustee, Counterclaimant,
John K. MICUDA and Marylouise Micuda, husband and wife, Counterdefendants.

Bankruptcy No. B-89-11380-PHX-GBN, Adv. No. 91-343.

United States Bankruptcy Court, D. Arizona.

November 24, 1992.

147 BR 752
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Paul Crane, and Marvin Johnson, Phoenix, Ariz., for plaintiffs/counterdefendants

John J. Fries, James F. Wees, and Guy D. Kidd, Phoenix, Ariz., for the Fines.

Michael W. Carmel, Phoenix, Ariz., for defendant/counterclaimant.


DONALD MacDONALD IV, Bankruptcy Judge.

This case was tried in Phoenix in June. The record was left open for the submission of additional expert testimony. That testimony, along with extensive post-trial briefs, has been received by the court and the case is ready for decision.

John K. Micuda (Micuda), general partner of the Evergreen Ventures Limited Partnership (Evergreen), and his wife, Marylouise, filed a complaint in April of 1991 against Ralph McDonald, Evergreen's chapter 7 trustee, seeking a declaratory judgment for the amount of Micuda's liability under 11 U.S.C. § 723. Section 723(a) allows a bankruptcy trustee to proceed against the general partners of a partnership for the full amount of any "deficiency of property of the estate to pay in full all claims." McDonald has counterclaimed against the Micudas for the full amount of all unpaid claims and expenses, including a claim submitted by Jeffrey N. Fine and Mildred Fine, as trustees of the Mildred Fine Revocable Trust and successor to the Adolph Fine Revocable Trust (the Fines). Micuda has in turn objected to allowance of the Fine claim. The "amended and revised comprehensive proof of claim" of the Fines totaled $782,707.83. It has since been revised upward to in excess of $1.8 million. The thrust of the Fines' claim is Micuda's alleged waste to an apartment complex which they repossessed. The Fines also seek damages for conversion of certain property.

I find for the Fines on the proof of claim in the sum of $1,233,521.39 together with additional attorney's fees and costs. Consequently, liability of the Micudas to the trustee is fixed at the same sum.


This court has jurisdiction over this controversy primarily under 28 U.S.C. § 157(b)(2)(B) as the fundamental basis of the disputes revolve around the Fines' proof of claim. Jurisdiction is also established pursuant to 28 U.S.C. § 157(b)(2)(A), (C), (F), and (O).

Factual Background

The Fines owned and operated the "Evergreen Terrace," a 182-unit, 35-building apartment complex in Tempe, Arizona, from 1977 to May 1983. Evergreen Ventures, a limited partnership with Micuda as general partner, purchased the complex in May of 1983 for $4.1 million. At the time of the purchase, most of the complex was about 20 years old. A portion known as the "College Court" was about 12 years old. The occupancy percentages were good and the property was well maintained. Evergreen paid $1 million down on the property with the balance financed by the Fines through a deed of trust. This instrument "wrapped" underlying encumbrances of $1.88 million.

After five years of relatively successful operation and roughly $478,975.00 in dividends to the Evergreen limited partners, occupancy declined substantially. Evergreen reduced its debt payments to the Fines in 1988. In early 1989, Evergreen made about $95,000.00 in repairs to the property, primarily for roofing. Per Micuda's request, roofing repairs were improperly made. New plywood decking was placed over old, rotten roofing, producing unstable roofs and short-lived repairs. These repairs were performed in anticipation of a workout with the Fines, but the parties never completed an agreement. Despite the limited repairs, general maintenance

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of the facilities declined markedly. Micuda, desperately searching for a purchaser, "sold" the property to Veeravalli Krishnan in June of 1989. Mr. Krishnan placed nothing down on the property, controlled its cash flow, and allowed further deterioration of the failing project during his tenure. Micuda recovered the property from Krishnan in September and filed for chapter 11 relief in November of 1989

Because of his concern over the condition of the property, Jeffrey Fine had the property inspected in late January and early February of 1990. The property was in very poor condition. Due to Micuda's inept management of the property, the Fines moved for appointment of a chapter 11 trustee. The United States Trustee supported appointment of a trustee. Ralph McDonald was appointed chapter 11 trustee in May of 1990. He controlled the property from May of 1990 through January 31, 1991. The bankruptcy case was converted to a chapter 7 on December 14, 1990. The Fines obtained relief from the automatic stay and held a foreclosure sale on January 31, 1991. At that time, they obtained possession of the property. Since then, the Fines have been restoring the project.

Common Law Waste

Locating the line between what the possessory tenant could, and could not, reasonably do over the objection of his prospective successor in possession has been the chief task of the courts during the seven centuries of waste litigation since the 13th century.

5 Powell, The Law of Real Property ¶ 637, 56-6 (1992). The task faced here is a familiar one. A review of the law's development gives this case some perspective.

The rationale behind waste actions throughout the centuries lay in the need for the protection of succeeding estates against improper conduct by the person in possession. The Statute of Marlbridge, enacted in 1267, restricted the use of estates for years or for life for the protection of future owners of the land. The Statute of Gloucester, enacted in 1278, provided for treble damages for waste. A third English statute on waste, the Statute of Westminster II, enacted in 1285, expanded remedies for waste to joint tenants and tenants in common. 5 Powell, supra, at 56-3-6.

Claims for waste have evolved far beyond the original English statutes and common law claims. No longer do courts require that a plaintiff in a waste action hold a future interest. Rather, the holder of a current interest, such as a vendor of real property, a lessor of real property, or a mortgagee, may maintain an action for waste. 5 Powell, supra, ¶ 644. For instance, in Meyer v. Hansen, 373 N.W.2d 392 (N.D.1985), a vendor on a contract for deed successfully initiated an action for waste against the purchaser of a hotel. In Western Assets Corp. v. Goodyear, 759 F.2d 595 (7th Cir.1985), a lessor was awarded damages for waste to premises leased by Goodyear. The Supreme Court recognized the right of a mortgagee to sue for waste in Waterman v. MacKenzie, 138 U.S. 252, 259, 11 S.Ct. 334, 336-37, 34 L.Ed. 923 (1891). "Even against a mortgagor in possession, the mortgagee may obtain an injunction or damages for such cutting of timber as tends to impair the value of the mortgage security. . . ."

Waste is not strictly limited to real property. It can apply to items of personal property when such property is attached and intertwined with the real property premises. Meyer v. Hansen, 373 N.W.2d at 395.

Arizona law is the "applicable law" under 11 U.S.C. § 502(b)(1) for determination of the validity of the Fine claim. A.R.S. § 33-806 B provides:

B. The trustee or beneficiary shall have a right to maintain an action against any person, including the trustor, for a claim for relief where damage or injury occurs or may occur to the trust property or interests therein, including but not limited to actions for damages or to prevent:
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1. Physical abuse to or destruction of the trust property, or any portion thereof.
2. Waste.
3. Impairment of the security provided by the trust deed. In any such action the trustee or beneficiary, or both, shall also be entitled to recover costs and reasonable attorney\'s fees and shall be entitled to all remedies available. Recovery of damages under this section shall be limited to damages or injuries incurred during the time the trustor is in possession or control of the trust property. The provisions of § 33-814 shall in no manner restrict or limit the provisions of this section.

Thus, under Arizona law, a trust deed beneficiary, like a mortgagee, has an unequivocal statutory right to maintain an action for waste, physical abuse to or destruction of the trust property, or impairment of the security, despite the nonrecourse provisions of A.R.S. § 33-814.

Arizona's leading case on waste is Jowdy v. Guerin, 10 Ariz.App. 205, 457 P.2d 745 (1969). That case involved a waste claim arising out of a vendor/purchaser relationship. Jowdy was an assignee of the original purchaser; Guerin was the assignee of the original vendor. After Jowdy became the owner of a small home, he did not live in the home or maintain it. Someone destroyed the home. Jowdy argued that there was no evidence he actively wasted the property. The Arizona Court of Appeals found permissive waste. It stated:

Finding very little law in Arizona on the subject of waste, we are compelled to look elsewhere. The definition of waste as found in 56 Am.Jur., Waste, § 2, Page 450 (1947), reads as follows:
`Waste . . . is a species of tort, which may be briefly and very generally defined as the destruction, misuse, alteration, or neglect of premises by one lawfully in possession thereof, to the prejudice of the estate or interest therein of another.\'

And at § 4, Page 452:

`Waste is classified as voluntary or actual (sometimes called commissive), and permissive or negligent waste. Voluntary waste may be done by such acts as destroying, altering, or removing buildings, or cutting down timber trees. The failure of the tenant to

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