Prudential Ins. Co. of America v. Spencer's Kenosha Bowl Inc.

• Decision Date: 18 February 1987
• Docket Number: No. 86-0807,86-0807
• Parties: The PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation, Plaintiff-Respondent, v. SPENCER'S KENOSHA BOWL INC., a Wisconsin corporation, Defendant-Appellant, The Miller-Wohl Company, a Delaware corporation, Martin Yudell, a partner of Delco Development Co. of Kenosha, a co-partnership, Allen Yudell, a partner of Delco Development Co. of Kenosha, a co-partnership, Abraham A. Rosen, a partner of Delco Development Co. of Kenosha, a co-partnership, Max R. Lapofsky, a partner of Delco Development Co. of Kenosha, a co-partnership, Plaza 50 Property Association, an association of property owners, Hupp Co, an Oh Corp., a corporation, and State of Wisconsin, a sovereign state and body politic, Defendants.
• Court: Wisconsin Court of Appeals

Page 109

404 N.W.2d 109

137 Wis.2d 313

The PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation, Plaintiff-Respondent, v. SPENCER'S KENOSHA BOWL INC., a Wisconsin corporation Defendant-Appellant The Miller-Wohl Company, a Delaware corporation, Martin Yudell, a partner of Delco Development Co. of Kenosha, a co-partnership, Allen Yudell, a partner of Delco Development Co. of Kenosha, a co-partnership, Abraham A. Rosen, a partner of Delco Development Co. of Kenosha, a co-partnership, Max R. Lapofsky, a partner of Delco Development Co. of Kenosha, a co-partnership, Plaza 50 Property Association, an association of property owners Hupp Co, an Oh Corp., a corporation, and State of Wisconsin a sovereign state and body politic, Defendants.

No. 86-0807.

Court of Appeals of Wisconsin.

Submitted on Briefs Nov. 26, 1986.

Opinion Released Feb. 18, 1987.

Opinion Filed Feb. 18, 1987.

W.O. Kupfer of Kupfer & Kupfer, Kenosha, for defendant-appellant.

Charles Q. Kamps and John A. Rothstein of Quarles and Brady, Milwaukee, for plaintiff-respondent.

Before SCOTT, C.J., BROWN, P.J., and NETTESHEIM, J.

NETTESHEIM, Judge.

Spencer's Kenosha Bowl, Inc. (Spencer's) appeals from a judgment awarding $369,188.21 in damages to the Prudential Insurance Company of America (Prudential). The award is for waste committed by Spencer's upon real estate against which Prudential holds a mortgage. Spencer's raises four issues on appeal: (1) whether Spencer's, as a successor owner which did not assume the mortgage indebtedness, may be held liable for waste, including passive or permissive waste; (2) whether Prudential's waste claim was properly included in a foreclosure action; (3) whether the trial court properly calculated the amount of the waste judgment against Spencer's; and (4) whether the waste finding is sufficiently supported by the evidence. Because we resolve all of the issues against Spencer's, we affirm.

The property involved in this litigation is a commercial building constructed in 1970 and situated on real estate located in the city of Kenosha. Spencer's purchased the property in 1975 from Delco Development Co. (Delco) which had previously mortgaged the property to Prudential. It is undisputed that Spencer's did not assume Delco's mortgage indebtedness when it purchased the property. Prudential subsequently foreclosed on the property after the mortgage note was in default.

In April, 1983, the Honorable Frederick Kessler, the judge then assigned to the case, granted Prudential's request for foreclosure of the property. The amount owed on the mortgage note at the time of the sheriff's sale was fixed at $994,497.80. The property sold for $635,000 in May, 1984. Following the sale, the Honorable Richard G. Harvey, Jr., the judge subsequently assigned to the case, held a hearing on Prudential's claim that Spencer's had committed waste upon the property. In his decision on the waste issue, Judge Harvey found that Spencer's had committed waste in the following amounts:

                Property Taxes         $198,743.34
                Roof                     37,890.00
                Ceiling Tile and Grid   103,064.52
                Electric Facilities      14,647.16
                Drywall-wood             36,251.85
                Restroom                    766.66
                Exterior Canopy          13,090.83
                Cleanup Costs            16,381.00
                Floor Tile Damage        24,000.00
                                       -----------
                                       $444,835.36
                

However, because the amount of the waste exceeded the amount of the debt less the foreclosure sale proceeds, Judge Harvey lowered Prudential's waste award so that it equaled the amount of the debt deficiency. ¹

Spencer's initially argues that a grantee who does not assume the mortgage of a grantor-mortgagor cannot be held liable for any waste committed on the mortgaged property. Whether a mortgagor has a cause of action for waste is a question of law. See Williams v. Security Savings & Loan Ass'n, 120 Wis.2d 480, 482, 355 N.W.2d 370, 372 (Ct.App.1984). As a result, we review this question independently of any conclusions made by the trial court. Id.

Waste is a species of tort. See Jaffe-Spindler Co. v. Genesco, Inc., 747 F.2d 253, 256 (4th Cir.1984). It is defined as "the unreasonable conduct by the owner of a possessory estate that results in physical damage to the real estate and substantial diminution in the value of the estates in which others have an interest." Pleasure Time, Inc. v. Kuss, 78 Wis.2d 373, 381, 254 N.W.2d 463, 467 (1977). Although a mortgagee only has a lien on the mortgaged property, see sec. 708.01, Stats.; State v. Phillips, 99 Wis.2d 46, 50, 298 N.W.2d 239, 241 (Ct.App.1980), he or she is entitled to maintain a legal action for waste against a mortgagor. See Jones v. Costigan, 12 Wis. 757 (677), 760-65 (1860).

We conclude that the waste doctrine permits a mortgagee to maintain an action for waste against a nonassuming grantee of a mortgagor. In Scott v. Webster, 50 Wis. 53, 6 N.W. 363 (1880), the supreme court held that senior mortgagees in possession of property were accountable to a junior mortgagee for waste committed on the property. Id. at 64, 6 N.W. at 365. There, the senior mortgagees removed a large amount of timber from the property which substantially diminished its value. Id. at 60-61, 6 N.W. at 363. Prior to the timber removal, the senior mortgagees purchased an equity of redemption which entitled them to possession of the property. Id. at 62, 6 N.W. at 364. Consequently, the senior mortgagees were both owners and mortgagees of the property. Id. at 63, 6 N.W. at 364-65. The court reasoned that with respect to the junior mortgagee, the senior mortgagees were mortgagees in possession and as such must be held liable for the waste they committed while in possession of the property. Id. at 63-64, 6 N.W. at 365.

Here, as in Scott, Spencer's legally had possession of the property and, under the trial court's findings, committed acts which resulted in a substantial diminution in the property's value. It is undisputed that Prudential, as a mortgagee, had an interest in the property. See Phillips, 99 Wis.2d at 50, 298 N.W.2d at 241. As a result, all of the essential ingredients for a waste cause of action as set out in Pleasure Time are met. See Pleasure Time, 78 Wis.2d at 381, 254 N.W.2d at 467. Moreover, we consider the court's reasoning in Scott as an indication of the liberality to be allowed a mortgagee when enforcing or protecting the lien interest. See also Atkinson v. Hewett, 63 Wis. 396, 23 N.W. 889 (1885) (mortgagee allowed to recover for wasteful conduct of trespasser). We do not deem the nonassuming grantee's status so unique that it warrants insulation from a waste action and prevents the mortgagee from preserving and protecting a security interest.

Our conclusion is also supported by the supreme court's language in Edler v. Hasche, 67 Wis. 653, 659-61, 31 N.W. 57, 59-61 (1887). There, Edler and Brandt were mortgagee and mortgagor, respectively. As in this case, Hasche purchased the mortgaged property from Brandt "subject to the mortgage." Id. at 659, 31 N.W. at 59. While the court left for a later proceeding the question of Hasche's liability for the mortgage debt and strongly suggested that the evidence might not support a finding that Hasche had assumed the mortgage, the court nonetheless recognized that Hasche's removal of a building was waste for which he was liable to Edler. The court stated that "Hasche's liability for waste ... upon every principle of justice is clear and must be affirmed." Id. at 661, 31 N.W. at 60-61.

The import of Edler on this case is clear. Regardless of successor liability on the mortgage debt, the court in Edler affirms the principle that a nonassuming grantee can be liable to a mortgagee for waste committed to the secured property. Consequently, Spencer's nonassuming grantee status does not affect its liability for waste.

As an extension of this issue, Spencer's attempts to draw a distinction between its liability for active and passive waste. ² Passive or permissive waste results from negligence or omission to do that which would prevent injury. See Finley v. Chain, 176 Ind.App. 66, 374 N.E.2d 67, 79 (1978) (overruled on other grounds by Morris v. Weigle, 383 N.E.2d 341, 345 n. 3 (Ind.1978)). Active or voluntary waste requires an affirmative act which results in the destruction or alteration of property. See Jowdy v. Guerin, 10 Ariz.App. 205, 457 P.2d 745, 748 (1969). At common law, an individual could be held liable for waste only if the acts were tortious and intentional. See Leipziger, The Mortgagee's Remedies for Waste, 64 Calif.L.Rev. 1086, 1093-94 (1976). No waste cause of action lay for negligent waste. Id. at 1094, 1130-32.

Whether a particular act is waste depends upon the circumstances. Pleasure Time, 78 Wis.2d at 381, 254 N.W.2d at 467. Modern Wisconsin law does not distinguish between passive and active waste. However, early Wisconsin law recognized that waste could "be either voluntary or permissive." Melms v. Pabst Brewing Co., 104 Wis. 7, 9, 79 N.W. 738, 739 (1899). Moreover, Wisconsin law has dealt with fact situations where the actions characterized as waste can be described as either active or passive. See, e.g., Scott, 50 Wis. at 53, 6 N.W. at 363 (waste resulting from removal of timber); Jones, 12 Wis. at 757 (removal of doors and windows from house); Pleasure Time, 78 Wis.2d at 381, 254 N.W.2d at 467-68 (waste alleged involved demolished and deteriorated buildings); First Nat'l Bank v. Clark & Lund Boat Co., 68 Wis.2d 738, 741, 229 N.W.2d 221, 223 (1975) (failure to pay taxes).

We conclude that the modern waste definition is broad enough in Wisconsin to include both active and passive waste. The common law "limitations are not well rationalized in the cases and seem to have come about largely by accident." Leipziger, supra, at 1094. Conduct which results either in active or passive waste "may injure or threaten property rendering the debt unsafe." Finley, 374...