Petition — Holiday Mobile Home Resorts, Inc. v. Wood, 102 S. Ct. 115 (1981) (No. 80-1964)

a

Office -Surrame Couet, US.

80-1964 FiLED

In The MAY 19 1981

ALEXANDER L. STEVAS,

SUPREME COURT OF THE UNITED STATESotsex

No.

October Term, 1980

HOLIDAY MOBILE HOME RESORTS, INC.,

an Arizona Corporation, and

WILFRED O. DUNKEL,

Petitioners,

R. DIXON WOOD and DON W. HEIPLE,

Repondents.

On Writ of Certiorari to the Arizona Court

of Appeals Division One

PETITION FOR A WRIT OF CERTIORARI

UDALL, SHUMWAY, BLACKHURST,

ALLEN, LYONS & DAVIS, P.C.

By Dale Shumway

30 West First Street

Mesa, Arizona 85201

(602) 834-7200

Counsel of Record for Petitioners

Additiona! Counsel:

Barry C. Dickerson

UDALL, SHUMWAY, BLACKHURST,

ALLEN, LYONS & DAVIS, P.C.

30 West First Street

Mesa, Arizona 85201

(602) 834-7200

QUESTIONS PRESENTED FOR REVIEW

When the United States District Court in a Bankruptcy

proceeding has entered an order, which has become final,

granting a party a legal mortgage on property previously

subject to a Chapter X proceeding, which mortgage is

specified as to its terms, including interest, may a State

Court collaterally attack and interfere with a final Order

and Judgement of the United States District Court by

modifying the terms of such mortgage?

LIST OF ALL PARTIES

As filed in the Arizona Superior Court, in and for the

County of Maricopa, and as appealed to the Court of

Appeals of the State of Arizona, this action listed the

following parties:

R. DIXON WOOD and DON W. HEIPLE, Plaintiffs;

HOLIDAY MOBILE HOME RESORTS, INC., an Arizona

corporation, and WILFRED O. DUNKEL, Defendants.

In this petition for certiorari the parties are Holiday

Mobile Home Resorts, Inc., an Arizona corporation, and

Wilfred O. Dunkel, Petitioners v. R. Dixon Wood and Don

W. Heiple, Respondents.

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED FOR REVIEW ............. |

Sooge woke BA eee eer ee |

RE Oe CE TUIE UI AW acd dig kdleccadiec wen ec toscaace ll

ROE, HRRUROTUPED Sec ib bb cvcaciccevcccceers tT

EE i d'uiad cha dh bee Gewsecertcecsenns 2

EE TEE 5 6 a's adn 0cU8050-00b 005.060 pnccne oseue 2

CONSTITUTIONAL PROVISIONS AND STATUTES

PIRES s GG Riess evice sake bene deusteccansess 2

STATEMENT OF THE CASE ......ccsccsccccscccccns 2

REASONS FOR GRANTING THE WRIT .............. 5

The Actions of the Arizona Court of

Appeals, Division One, in modifying the

interest provisions and terms embodied ina

final Order of the United States District

Court, was a collateral attack on the federal

order, and enroached upon federal

authority.

SEIT Tab sev cccshnenedcebespGbed occcbe’ 9

APPENDIX A- Order of the United States A-1

District Court

APPENDIX B- Opinion of the Arizona B-1

Court of Appeals

A ee a eee B-22

tT)

TABLE OF AUTHORITIES

Cases: Page

CHICOT COUNTY DRAINAGE DISTRICT v. BAXTER

STATE BANK,

308 U.S. 76 60 S. Ct. 320 (1939) ............. eee 7

CUTTER v. HUSTON,

158 U.S. 423, 399 1E.d 1040, 15 S. Ct. 868 (1895) . 7

ROYAL INTERNATIONAL OPTICAL CO. v. TEXAS

STATE OPTICAL CO., 92.N.M. 237, 586 P.2d

BIS (TOTES) ciccccercctcvccissaceccossavcccsvccesie 7

WOOD v. HOLIDAY MOBILE RESORTS, iNC.

G25 P 20 SST (TSST) oie vevecvsscccacoscceceuscccs 2

Constitutional Provisions and Statutes

Section 1 of the Fourteenth Amendment’ ..-..------- 2

Article 3, Section 1 of the U.S. Constitution.......... 2

Article Vi, Paragraph 2 of the U.S. Constitution...... 3

SP A UO Nh: eid dae te ee aes « 2,8

No.

In The

SUPREME COURT OF THE UNITED STATES

October Term, 1980

HOLIDAY MOBILE HOME RESORTS, INC.,

an Arizona Corporation, and

WILFRED O. DUNKEL,

Petitioners,

v.

R. DIXON WOOD and DON W. HEIPLE,

Respondents.

On Writ of Certiorari to the

Arizona Court of Appeals,

Division One

PETITION FOR A WRIT OF CERTIORARI

Holiday Mobile Home Resorts, Inc., an Arizona

corporation, and Wilfred O. Dunkel, petition for a Writ of

Certiorari to review the judgment of the Arizona Court of

Appeals, Division One, entered in this case on December

26, 1980, with review denied by the Arizona Supreme

Court on February 18, 1981.

OPINIONS BELOW

The opinion below is reported as Wood v. Holiday Mobile

Resorts, Inc., 625 P.2d 337 (1981); review by the Arizona

Supreme Court was denied February 18, 1981.

JURISDICTION

The Petition for Certiorari seeks review of the decision

of the Arizona Court of Appeals, Division One, as filed on

December 26, 1980 and reported as Wood v. Holiday

Mobile Home Resorts, Inc., 625 P.2d 337 (1981). Petition

for Re-hearing was Genied on January 28, 1981. A

Petition for Review to the Arizona Supreme Court was

denied on February 18, 1981.

Jurisdiction in the United States Supreme Court is

provided by 28 U.S.C. §1257(3), and certiorari is sought by

Petitioners pursuant to Rule 17.1(c) of the Rules of the

Supreme Court of the United States.

ZONSTITUTIONAL PROVISIONS,

AND STATUTES INVOLVED

This case involves the due process clause of Section | of

the Fourteenth Amendment to the United States

Constitution which provides in pertinent part: “(N) or shall

any state deprive any person of life, liberty, or property,

without due process of law.” Further, the statute, 28 USC

§1334, is involved, which states: “The District Courts shall

have original jurisdiction, exclusive of the Courts of the

States, of all matters and proceedings in bankruptcy.

The supremacy of the Federal Court's Rulings over State

Court’s Rulings is also applicable as stated in Article 3, §1

of the Constitution, which says: “The judicial Powers of

the United States, shall be vested in one supreme Court,

and in such inferior Courts as the Congress may from time

to time ordain and establish.”

Article Vi, paragraph 2 states: This Constitution, and

the Laws of the United States which shall be made in

Pursuance thereof; and all Treaties made, or which shall

be made, under the Authority of the United States, shall be

the supreme Law of the Land; and the Judges in every

State shall be bound thereby, anything in the Constitution

or Laws of any State to the Contrary notwithstanding.

STATEMENT OF THE CASE

in 1974, a limited partnership entitled Holiday Isle was

formed, with an Arizona Corporation, Holiday Mobile

Home Resorts, Inc., as a general partner, with various

individuals as limited partners. Holiday Isle owned and

managed a mobile home park in Tucson, Arizona. The

general partner, Holiday Mobile, at the time also

controlled two wholly-owned subsidiaries, Holiday Spa,

Inc., and Holiday Village, Inc., which were operated in

Maricopa County, Arizona.

Under the articles of partnership, Holiday Mobile, as a

general partner, was to be responsible for the overall

management and supervision of Holiday Isle. Almost from

the beginning, the limited partnership, Holiday Isle, had

financial difficulties in running the mobile home park. The

mortgage holder, Western Savings & Loan, threatened

foreciosure in 1966, and the limited partnership was

placed in a state of receivership. In 1971 a former

stockholder of Holiday Mobile, the general partner,

petitioned to place the corporation into federal bankruptcy

proceedings under Chapter X of the Bankruptcy Act.

A review of the official Bankruptcy Court files reveals

that the Court commenced to exercise jurisdiction over

Holiday Isle, Ltd. on March 23, 1971, when U.S. District

Judge Carl Muecke signed a General Stay Order. At that

time, Holiday Isle, Ltd., was characterized as a “subsidi-

ary” corporation and it’s property was refered to as "prop-

erty owned by the debtor.” Thereafter, in essentially every

pleading and document filed with the court, Holiday Isle is

referred to as a “subsidiary” corporation and it’s property

was referred to as property of the debtor. Notice was duly

mailed to the Respondents herein with respect to all of the

bankruptcy proceedings. In each of the mailings, Holiday

Isle is referred to as a “subsidiary” and any reasonable

reading of al! the notices reveals that it’s property was

subject to the Chapter X Bankruptcy proceedings.

During the Chapter X proceeings, the Trustee in Bank-

ruptcy was approached by Mr. Wilfred O. Dunkel, a major-

ity stockholder in two corporations, Consolidated Security

Corporation, a holding company, and National Mobile

Development Company, a company which owns and

manages several mobile home parks in Arizona and else-

where. Mr. Dunkel proposed to the Trustee in Bankruptcy

that he would provide him with a letter of credit of

$1,200,000.00 issued by the First National Bank of

Arizona, which was secured by a pledge of stock owned by

Mr. Dunkel, and $50,000.00 cash to liquidate or bring

current all of Holiday Mobile’s debts. In return, Consoli-

dated Security Corporation was to receive 66% of all the

common stock of Holiday Mobile, and was to acquire

mortgages on all the real property owned by Holiday

Mobile, and “it’s subsidiaries.”

The Dunkel proposal was accepted by the Trustee, and

subsequently approved by the Referee in Bankruptcy and

the Federal District Court by a formal written order dated

July 8, 1971, (see Appendix A). As a result of this trans-

action, a formal Realty Mortgage was prepared and exe-

cuted by the Trustee in Bankruptcy, and the general part-

ner, Holiday Mobile, which mortgage encumbered any

real property owned by Holiday Village, Inc., Holiday Spa,

Inc., and Holiday Isle, a limited partnership. This docu-

ment was then recorded in the Maricopa County Record-

er’s office on August 10, 1971, in Docket 8874, Pages 24-

47, and in the Pima County Recorder's Office on August

26, 1971, in Docket 4068, Pages 304-324. The salient

provisions of the Realty Mortgage and Court Order

provided that Mr. Dunkel would receive 12% interest on

any of the properties involved in the bankruptcy

proceedings.

The Trustee in Bankruptcy then used $191,676.00 of

the letter of credit furnished by Mr. Dunkel to pay off debts

and obligations of the limited partnership, Holiday Isle.

On April 8, 1974, the Responeents, as limited partners,

petitioned the Arizona Superior Court, Maricopa County,

for dissolution of the partnership. As part of their suit,

they also requested the Court that Mr. Dunkel’s mortgage

be invalidated as to the partnership property, Holiday Isle.

The Respondents also petitioned the United States Bank-

ruptcy Court, District of Arizona, to re-open the Chapter X

proceedings with the intent to invalidate the Dunkel mort-

gage. The District Court, upon the recommendation of the

Referee in Bankruptcy, dismissed the Respondent’s peti-

tion to re-open, and deferred any action to the State Court.

This matter was tried in the Arizona Superior Court,

Maricopa County, which judgment resulted in an appeal to

the Arizona Court of Appeals, Division One.

The opinion of the Court of Appeals, Division One, (see

Appendix B), held that Mr. Dunkel was entitled to an equi-

table mortgage on the partnership property, primarily be-

cause the partnership had received a benefit from the use

of Mr. Dunkel’s money. However, the Court of Appeais

limited interest on Mr. Dunkel’s mortgage to 6%, substan-

tially lower than the amount provided in the District Court

Order.

REASONS FOR GRANTING THE WRIT

The Arizona Court of Appeal’s decision

modified the clear and specific terms of the

order of the Federal District Court in the

bankruptcy proceedings, which thus im-

permissibly attacks the federal court order.

The contention of Respondents throughout the State

Court proceedings has been that since Holiday Isle, Ltd.,

was a partnership, it was not subject to the jurisdiction of

the Bankruptcy Court and that Respondents were not

“noticed” of the Chapter X proceedings. Therefore, the

Respondents contended that it was improper for a

mortgage to be executed on the partnership property.

As reiterated above, Mr. Wilfred O. Dunkel made a pro-

posal to the Trustee in Bankrupicy to advance certain

sums of money for the purpose of paying all debts (in-

cluding debts of the partnership property) to salvage the

estate from bankruptcy. As consideration for this pro-

posal, Mr. Dunkel would receive as security a mortgage on

all properties then involved in the bankruptcy proceeding.

On June 9, 1971, Vincent D. Maggiore, as special master,

recommended to the Honorable Carl A. Muecke, Judge of

the United States District Court, that an order be entered

pursuant to the proposal of Mr. Dunkel. The Court then

mailed copies of a Notice of the proposed order to all of the

parties involved, including the Respondents. In addition,

there appears in the Court's file an Affidavit of Publication

which reflects that the proposed order was duly published

in a newspaper of general circulation on January 11,

1971.

Throughout the bankruptcy court proceedings, the part-

nership property was treated as a subsidiary of the corpor-

ate general partner, and such partnership received the

benefit of Mr. Dunkel’s proposal.

The Arizona Court of Appeals apparently recognized the

benefit extended to the partnership property by Mr.

Dunkel in that it awarded Mr. Dunkel an equitable mort-

gage on such property. This equitable mortgage was con-

sistent with the bankruptcy court order, except that the

Court of Appeals reduced the interest on such equitable

mortgage to six percent (6%) per annum, which the Court

stated appeared to be the prevailing market rate at the

time of the transaction.

This very determination by the Court of Appeals as to

what the market rate was or was not encroaches directly

on the District Court’s Order. It is presumed that the Dis-

trict Court had available to it at the time it rendered its

Order sufficient evidence to justify a market rate of twelve

percent (12%) per annum.

It should be pointed out to the Court that Mr. Dunkel’s

mortgage was a second mortgage, junior to Western

Savings and Loan. It is therefore presumed that the Court

of Appeals ignored that it was literally impossible for a

bankrupt mobile home park to borrow funds at 6% on the

strength of a second mortgage as security for a loan.

There was considerable evidence at trial which indicated

that it would be very difficult for an individual to obtain a

second mortgage for anything less than 14-18%, plus at

least 5 points (Transcript of record, p. 62).

The bankruptcy proceedings were extensive. If the 12%

interest rate was unacceptable, then the Respondents

"should have raised that issue in the bankruptcy proceed-

ings. The Bankruptcy Court apparently had sufficient evi-

dence before it to conclude that the interest rate of 12%

proposed by Mr. Dunkel was both reasonable and

8

acceptable as consideration for salvaging the bankrupt

estate. For the Court of Appeals to modify the terms of the

Bankruptcy Court Order would be a collateral attack upon

the District Court’s Order.

In the case of Cutter v. Huston, 158 U.S. 423, 399 L. Ed

1040, 15 S.Ct. 868 (1895), judgment was obtained upon a

note in a Federal Circuit Court. However, there was a

question as to whether the Federal Court had jurisdiction

because of diversity to enter the judgment. Regardless of

this, this Court stated that such determination was not

subject to a collateral attack in a garnishment proceeding

brought in state court.

Further, the Supremacy Clause of the U.S. Constitution

has conferred certain powers on the Federal Court. When

decisions are made after a federal court has exercised its

proper jurisdiction, those decisions cannot be collaterally

attacked, except upon direct review. Chicot County

Drainage District v. Baxter State Bank, 308 U.S. 76, 60

S.Ct. 320 (1939); Royal International Optical Co. v. Texas

State Optical Co., 92 N.M. 237, 586 P.2d 318 (1978).

Finally, 28 U.S.C. §1334, cited above, confers upon the

District Court of the United States original jurisdiction, ex-

clusive of the state courts, of all matters and proceedings

in bankruptcy. Since the realty mortgage sought to be

invalidated by Respondents in the state court grew out of a

federal bankruptcy proceeding, was sanctioned by such

court, presumably with all competent evidence before it,

the state court encroached upon such federal authority by

attempting to modify the very terms of the federal bank-

ruptcy order. In this respect, the State Court has imper-

missibly collaterally modified the federal bankruptcy court

order by providing an alternate interest rate for the Dunkel

mortgage.

CONCLUSION

We respectfully submit that the Petition for Writ of

Certiorari should be granted.

Respectfully submitted,

Dale R. Shumway

UDALL, SHUMWAY, BLACKHURST, ALLEN

LYONS & DAVIS, P.C.

30 West First Street

Mesa, Arizona 85201

(602) 834-7200

Counsel of Record for Petitioners

Additional Counsel:

Barry C. Dickerson

UDALL, SHUMWAY, BLACKHURST,

ALLEN, LYONS & DAVIS, P.C.

30 West First Street

Mesa, Arizona 85201

(602) 834-7200

May, 1981.

Appendix A-1

DISTRICT COURT OF THE UNITED STATES

FOR THE DISTRICT OF ARIZONA

PHOENIX DIVISION

IN THE MATTER OF :

HOLIDAY MOBILE IN PROCEEDINGS FOR

HOME RESORTS, INC., THE REORGANIZATION

an Arizona corporation, OF A CORPORATION

Debtor. NO. B 71-442 PHX

ORDER

At Phoenix, in said District, on the 8th day of July, 1971,

the Court having received the recommendation of the

Honorable Vincent D. Maggiore, Special Master herein,

relative to the proposal by the debtor for payment of all its

debts and the termination of these proceedings under

Chapter X, and the Court having reviewed said proposal

and all matters on file herein, and objections to said pro-

posal having been filed by Western Savings & Loan

Association and First Federal Savings & Loan Association,

and the debtor and Wilfred O. Dunkel and each of the

objecting parties having stipulated in c,.wn Court to certain

modifications in the debtor's pronosal relative to increas-

ing the rate of interest on the first mortgages and modifi-

cation of other terms as hereinafter set forth, and said

objections thereafter having been withdrawn in open

Court, and it appearing that pursuant to said proposal, as

modified, all the known creditors of the debtor corporation

will be paid in full, together with the Trustee’s fees and

other expenses arising out of these proceedings, and that

such will be in the best interests of all creditors and stock-

Appendix A-2

holders of the debtor corporation and that none of them

will be prejudiced or damaged thereby, and Wilfred O.

Dunkel having heretofore deposited with the Trustee

herein the sum of $50,000.00 cash, and having caused to

be delivered to the Trustee an irrevocable letter of credit in

the amount of $1,200,000.00 issued by the First National

Bank of Arizona, and the Trustee having other funds now

on hand from his operation of the Mobile Home Park of the

debtor corporation and its subsidiaries in excess of

$25,500.00.

IT IS HEREBY ORDERED:

1. That the Trustee, David L. Roberts, forthwith give

notice by regular mail, postage prepaid, on or before July

15, 1971, to all creditors set forth on the list of creditors on

file herein or otherwise known to the Trustee, to file with

the Trustee (David L. Roberts, Trustee, 48 North

MacDonald Street, Mesa, Arizona 85201) proof of their

respective claims, in duplicate, on or before August 15,

1971, and any such creditor not so filing its claim herein

shall be forever barred from asserting said claim

thereafter.

2. That the said Wilfred O. Dunkel and the debtor corp-

oration, as well as the Trustee herein, shall have the right

to object to the allowance of any of the creditors’ claims

that may be filed herein, provided such objections are

made in writing and filed with the Court within 30 days

after the expiration of time allowed for the filing of such

claims, and any such objection shall be heard and

summarily determined by the Special Master.

3. That the possession and control of all of the assets of

the debtor corporation and its subsidiaries, except the sum

of $25,500.00 and an additional amount equai to the

amount of any taxes, utilities, debts or accounts incurred

by the Trustee since the time of his appointment herein

and presently unpaid be, and the same are hereby

Appendix A-3

returned to the debtor corporation at 12:01 A.M. on July

16, 1971, and the Trustee herein is directed to relinquish

his possession and control thereof to the debtor corpora-

tion as of said date and time, except that with respect to

cash, the Trustee shall havo a reasonable time to

determine the amount of cash to be retained by him as

above described, and the balance paid over to the debtor

corporation.

4. That the mortgages held by Western Savings and

Loan Association on Holiday Village Mobile Home Park

and Holiday Isle Mobile Home Park shall, upon payment by

the Trustee herein of all delinquent amounts due thereon

at the time of such payment, except claimed attorneys’

fees (said delinquent amounts to be reflected on an

approved claim filed herein) be reinstated without accel-

eration of the principal; provided, however, that the inter-

est rate on each of said mortgages shall be at the rate of

seven and one-half percent (742%) per annum com-

mencing as of the 5th day of the calendar month in which

reinstatement is made, and continuing for a period of

seven and one-half (7%) years (90 months) thereafter, and

commencing upon expiration of said seven and one-half

year period the interest rate thereon shall be at the rate of

eight percent (8%) per annum until paid, and provided

further, that either or both of said mortgages may at the

option of the debtor corporation be paid in full or at an ac-

celerated rate at any time without any prepayment penal-

ties. It is specifically provided that the monthly install-

ments of principal and interest on each of said mortgages

shall remain the same as originally provided in said mort-

gages and the notes secured thereby.

5. That the mortgage held by First Federal Savings and

Loan Association on Holiday Spa Mobile Home Park shall,

upon payment by the trustee herein of all delinquent

amounts due thereon at the time of such payment, except

any claimed attorneys’ fees (said delinquent amounts to

be reflected on an approved claim filed herein), be

Appendix A-4

reinstated without acceleration of principal; provided,

however, that the interest rate on said mortgage shall be

at the rate of seven and one-half percent (712%) per

annum commencing as of the 20th day of the calendar

month in which reinstatement is made. It is specifically

provided that the monthly installments of principal and

interest on said mortgage shall remain the same as

originally provided in said mortgage and the note secured

thereby.

6. That the said $50,000.00 heretofore deposited with

the Trustee by the said Wilfred O. Dunkel, plus the sum of

$25,500.00 to be withheld by the Trustee from the funds

he now has on hand, together with such amounts as the

Trustee may hereafter draw under the irrevocable letter of

credit referred to above, shall be known and hereafter

referred to as the Special Fund.

7. That each creditor's claim may be paid by the Trustee

herein from the Special Fund when such claim is allowed

by the Court or no objection is filed thereto within the

time allowed for such objections, or when objections to

such claim are waived by the debtor corporation and

Wilfred O. Dunkel, except that the mortgages held by

Western Savings & Loan Association and First Federal

Savings & Loan Association above described shall be paid

only the amount required to cover all delinquent amounts

then due thereon without acceleration of the principal.

8. That the Trustee's fees, Referee’s salary and expense

fund and other expenses arising out of these proceedings

be paid out of the Special Fund after approval by the Court.

9. That until final dismissal of these proceedings, the

monthly installments of principal, interest and

impoundment accruing on the Western Savings & Loan

Association mortgages after July 5, 1971, and accruing on

the First Federal Savings & Loan Association ,mortgage

after June 20, 1971, shall be paid by the debtor

corporation to the Trustee herein as a part of the Special

Fund or directly to the respective mortgages.

Appendix A-5

10. That this Court shall retain jurisdiction in these

proceedings until payment or settlement in full of all such

creditors’ claims, together with the Trustee’s fees

and other expenses arising out of these

proceedings,including the liabilities and expenses

incurred by the Trustee during these proceedings, and

that thereupon a final dismissal of these proceedings shall

be entered, and any surplus then remaining in said

Special Fund shall be returned to the said Wilfred O.

Dunkel.

11. That Wilfred O. Dunkel shall receive as security for

the total amount of money provided by him for the Special

Fund, mortgages on all property owned by the debtor

corporation and its subsidiaries, junior only to the

mortgages thereon presently held by Western Savings &

Loan Association and First Federal Savings & Loan

Association, providing for interest at the rate of 12% per

annum and an amortization period of fifteen years, andthe

Trustee is hereby directed to execute and deliver same.

WILLIAM P. COPPLE, Judge

William P. Copple, Judge

of the United States District Court

Appendix A-6

APPROVED AND ACCEPTED:

SHIMMEL, HILL & BISHOP, P. C.

Richard E. Norling

10th Floor, 111 West Monroe

Phoenix, Arizona 85003

Attorneys for Debtor

David L. Roberts, Trustee

48 North Macdonald

Mesa, Arizona

ASH & REEB

Fred J. Ash

8 W. Pepper Place

Mesa,Arizona 85201

Attorneys for Wilfred O. Dunkel

STREICH, LANG, WEEKS, CARDON,& FRENCH

567 First National Bank Bidg.

Phoenix, Arizona 85004

Attorneys for Western Savings & Loan

FIRST FEDERAL SAVINGS & LOAN

Michael L. Rubin, its Attorney

P.O. Box 2263

Phoenix, Arizona 85002

Appendix B-1

IN THE COURT OF APPEALS

STATE OF ARIZONA

DIVISION ONE

R. DIXON WOOD and DON W. HEIPLE,

Plaintiffs-Appellees

and Cross-Appellees, 1 CA-CIV 4591

v. DEPARTMENT B

HOLIDAY MOBILE HOME RESORTS, INC.,

an Arizona corporation,

and WILFRED O. DUNKEL, ) go pi NION

Defendants-Appellants

and Cross-Appellants

)

Appeal from the Superior Court of Maricopa County

Cause No. C-291070

The Honorable Harold D. Martin, Judge

AFFIRMED IN PART; REVERSED IN PART; REMANDED

Brown & Bain, P. A. Phoenix

by Philip P. Berelson

Attorneys for Plaintiffs-Appellees and

Cross-Appellants

Jack E. Evans, Ltd.

by Jack E. Evans

Attorney for Defendants-Appellants and

Cross-Appellees

Appendix B-2

JACOBSON, Acting Presiding Judge

The basic issue in this appeal is whether the trial court,

upon an advisory jury’s findings, properly ordered the

dissolution of a limited partnership, and an accounting.

The facts surrounding this litigation and the various

assertions of the various parties are complex and involved.

This action was commenced by plaintiffs-appellees, R.

Dixon Wood and Don W. Heiple (hereinafter referred to as

“limited partners”), against defendant-appellant, Holiday

Mobile Homes Resorts, Inc. (Holiday Mobile) and Wilfred

O. Dunkel (Dunkel), seeking a dissolution and an

accounting of the limited partnership known as Holiday

isle Mobile Home Park (Holiday Isle) and an adjudication of

the rights of the various parties assets of Holiday Isle.

The defendants, Holiday Mobile and Dunkel, filed

counterclaims in that action, which were subsequently

dismissed by way of summary judgment. The

counterclaims were based upon allegations of intentional

interference with contractual relationships.

After a timely request for findings of fact and

conclusions of law, the matter was tried to the court with

an advisory jury. The advisory jury returned a verdict in

favor of the limited partners and declared that the

partnership should be dissolved and that there should be

an accounting. Following the jury's verdict, the trial court

ordered an accounting and took under advisement the

jury’s verdict as to dissolution.‘ The limited partners

then made an application for attorney's fees, which was

denied.

The limited partners, following the jury’s verdict,

applied for the appointment of a special master to conduct

the accounting and for the appointment of a receiver.

While the trial court, by minute entry, granted those

motions, no further action was taken by the trial court for

the appointment of a receiver. The trial court did,

however, appoint J. Frank Sergent, a C.P.A.

Appendix B-3

recommended by the defendants, to conduct an

accounting.

Subsequently, Mr. Sergent submitted an audit report

which was the subject of an in-chambers hearing before

the trial judge on September 5, 1978. At that hearing, the

limited partners submitted proposed findings of fact and

conclusions of law, a proposed judgment and objections to

the Sergent audit report. The court took no action on these

matters at that hearing, except that the trial judge did

announce his intention to order the dissolution of the

limited partnership as requested by the limited partners.

Subsequently, on September 6, 1978, the defendants

lodged a proposed form of judgment with the trial court

which was immediately signed, without hearing and

without any findings of fact or conclusions of law being

entered. Although the limited partners objected to

portions of the Sergent audit report which they contended

were beyond the scope of the audit, the trial court denied

them a hearing on these objections. Nevertheless, in the

September 6, 1978, judgment signed by the trial judge

and submitted by the defendant, the Sergent report was

“approved by the Court.”

The limited partners then filed objections to the

defendant’s form of judgment, a motion to amend

judgment, and a motion to make additional findings.

Without hearing, the trial judge denied all the limited

partners’ objections and motions.

The defendants then filed their notice of appeal and the

limited partners their cross-appeal. While the trial court's

judgment has ordered dissolution of the limited

partnership, no receiver has been appointed. This court is

unaware of: how the trial court treated the Sergent audit

report except that it was “approved”; whether various

legal contentions of the parties have been ruled upon by

the trial court; and whether the trial court’s judgment has

disposed of all the legal issues presented by the parties

Apparently, the defendant has continued the active

Appendix B-4

management of the limited partnership assets since the

trial of this matter.

Simply by way of preface, the judges of this court, in

their appellate experience, have not seen a more complete

abrogation of judicial responsibility than is presented by

the trial judge’s inaction in this case. This matter was

simply allowed to drift in spite of a trial and the fact finding

efforts of the advisory jury.

The facts show that the Holiday Isle limited partnership

was formed in 1964, with the corporation, Holiday Mobile,

as the general partner and various individuals as limited

partners. Holiday Isle was to own and manage a mobile

home park in Tucson, Arizona. The mobile home park was

financed by Western Savings & Loan Association, which

took a mortgage on the limited partnership real property.

The general partner, Holiday Mobile, at this time also

controlled two wholly-owned subsidiaries, Holiday Spa,

Inc. and Holiday Village, Inc. These wholly-owned

subsidiaries owned and operated mobile home parks in

Maricopa County.

Under the articles of partnership, Holiday Mobile, as the

general partner, was to be responsible for the overall

management and supervision of the mobile home park “all

without fee; provided, however, that the general partner

shall be reimbursed for any actual costs or expenses

incurred in performing these tasks,”such actual costs and

expenses to be a partnership expense.

Moreover, the articles of partnership required the

general partner to provide the limited partners with a

detailed monthly accounting and to provide an annual

audit prepared by a certified public accountant. These

reports had not been provided for some 10 years prior to

this litigation.

Almost immediately following the formation of the

limited partnership, financial difficulties were

encountered. The mortgage holder threatened

foreclosure and in 1966 the limited partnership was

placed in a state receivership. In 1971, a former

Appendix B-5

stockholder of Holiday Mobile petitioned to place that

corporation into federal bankruptcy proceedings under

Chapter X of the Bankruptcy Act. Holiday Mobile

consented to these proceedings and David Roberts was

appointed as trustee of Holiday Mobile. As such trustee,

Mr. Roberts undertook the management of Holiday Isle,

the limited partnership.

At this point, the defendant Dunkel entered the scene.

Dunkel is the chairman of the board, president, and owner

of a majority of the stock in two corporations, Consolidated

Security Corporation, a holding company, and National

Mobile Development Company, a company which owns

and manages several mobile home parks in Arizona and

elsewhere.

Dunkel made a proposal to the trustee in bankruptcy

whereby he would provide the trustee with a $1,200,000

letter of credit issued by First National Bank of Arizona,

which was secured by a pledge of stock owned by Dunkel,

and $50,000 cash to liquidate or bring current all of

Holiday Mobile’s debts. In return, Consolidated Security

Corporation was to receive 66% of all the common stock

of Holiday Mobile and was to acquire mortgages on all the

real property owned by Holiday Mobile and "its

subsidiaries.”

The Dunkel proposa! was accepted by the trustee and

subsequently approved by the referee in bankruptcy and

the federal district court. As the result of this

transaction, Dunkel not only received a mortgage from

Holiday Mobile on the real property owned by it and its

subsidiaries, Holiday Spa, Inc. and Holiday Village, Inc.,

but in addition, Holiday Mobile, as general partner,

executed a mortgage on the real property owned by

Holiday Isle, the limited partnership. The Dunkel

mortgage on all three properties is in the face amount of

$1,250,000, although Dunkel through accounting

procedures has prorated this amount based upon the

market value of the three properties. There is no question

but that the limited partners did not approve the

Appendix B-6

encumbering of the limited partnership property.

However, there is a sharp conflict in the evidence as to

whether the limited partners by reason of their

participation in the federal bankruptcy proceedings were

aware that as part of the Dunkel financing plan, the

Holiday Isle property was to be encumbered. Their

subsequent failure to make any objection, it is argued,

leads to an estoppel. The trial court's judgment does not

resolve this issue.

In any event, it is clear that the funds generated by

Dunkel were used by the trustee to pay off the obligations

of the limited partnership, Holiday Isle, in the sum of

$191,676.60' This sum consists of paying $138,624.20

to Western Savings to bring the Holiday Isle mortgage

current; $29,621.14 owed creditors of Holiday Isle; and

$23,431.26 in back taxes owed by Holiday Isle.

Dunkel, following the approval of the bankruptcy court,

entered into the active management, through the general

partner, Holiday Mobile, of the limited partnership. This

management took the form of having National Mobile

Development Company, in which Dunkel owns 63% of the

common stock, receive a $75,000 loan from Holiday Isle.

Holiday Mobile in turn entered into a management

agreement with National Mobile Development whereby

National Mobile was to receive 6% of the Holiday Isle

partnership gross receipts as “management fees” to be

offset against National Mobile’s $75,000 indebtedness

to Holiday Isle.

Under this management agreement the limited

partnership, at least on paper, has flourished; its debts are

current; the mobile park is filled to 100% capacity; and the

value of its underlying real property has appreciated.

However, as of the time of trial none of the limited partners

had received one cent. The limited partnership, however,

1 The sum of $220,123 is carried on the Holiday Isle books as being

received under this transaction. The difference in these two sums

represents expenses of the trustee in bankruptcy which we deem not to

be payment of expenses or liabilities of Holiday Isle.

Appendix B-7

has paid out $232,252 to Dunkel in principal and interest

on the Dunkel mortgage and National Mobile

Development has received $63,341.52 in “management

fees.”

What precipitated this litigation was a letter sent by

Holiday Mobile in July, 1973, to each of the limited

partners of Holiday Isle. This letter requested the consent

of the limited partners to the sale of Holiday Isle for the

sum of $1,400,000. The letter went on to explain that

after paying the Western Savings mortgage and the

Dunkel mortgage, no monies would be left over for the

limited partners. The letter also indicates that because of

the deteriorating condition of the mobile home park, the

offer of sale should be accepted. The letter concluded:

... if we fail to obtain your consent, we will

have no alternative but to take immediate legal

action to recover on the debt obligation from the

limited partnership, and foreclose the park so

that it might be sold... .

Attached to the letter was a financial statement of

Holiday Isle which showed that the limited partnership

owed an indebtedness to the general partner, Holiday

Mobile, inthe sum of $362,559. This statement was false.

The $362,559 figure represented a capital account deficit

of Holiday Mobile, not a debt owed to it.

Upon receipt of this letter, the limited partners (Wood

being a C.P.A.) concluded that the financial statement was

incorrect and that in fact, if the partnership asset was sold,

the limited partners would receive approximately

$384,000. At this point, a sharp conflict in the facts exists.

Holiday Mobile contends that Heiple and Wood,after

ascertaining the true financial picture of the limited

partnership, and without telling their fellow limited

partners, proceeded to buy up all the remaining limited

partnership interests for approximately five cents on the

dollar. On the other hand, Wood and Heiple contend that

after making full disclosure to all the limited partners, they

Appendix B-8

offered to either purchase the other limited partners

interests for 5% of their investment or the limited partne:

could contribute that same 5% towards the payment of

attorney's fees to seek a dissolution of the limited

partnership and a distribution of its assets. The trial

judge’s judgment leaves unresolved this factual dispute.?

In any event, seven of the limited partners executed

powers of attorney to Wood and Heiple, authorizing the

commencement of this litigation and contributed towards

the cost thereof.

Prior to filing suit, the limited partners met with Dunkel,

pointed out the error in the financial statement, stated

they represented all of the limited partners and requested

that the proposed sale be completed. Dunkel refused on

the basis that a sale at that time would have “adverse tax

consequences” for Holiday Mobile. This litigation ensued.

The limited partners sought dissolution of the

partnership on the following bases:

(1) that Holiday Mobile had not complied with

the articles of partnership which required the

general partner to render monthly and annual

accountings;

(2) that Holiday Mobile had misrepresented

the financial condition of the partnership by

listing $362,559 as a debt of the partnership

when in fact it was a capital deficit of Holiday

Mobile;

(3) that Holiday Mobile had improperly

caused a $1,250,000 mortgage to be placed

upon the partnership's assets;

2 The advisory jury's verdict is also not particularly helpful. Although

specific interrogatories were requested to be answered by the jury, the

trial judge refused to submit them.

Appendix B-9

(4) that Holiday Mobile had breached the

articles of partnership by entering into the

management fee agreement with National

Mobile Homes Development Company; and

(5) that they were entitled to dissolution under

the Uniform Partnership Act.

Several of the major issues that should have been

resolved by this litigation were:

(1) whether the limited partnership should be

dissolved;

(2) whether the proper financial positions of

the respective parties in the limited partnership

are reflected in the audit;

(3) whether the Dunkel mortgage on the

Holiday Isle property was valid; and,

(4) whether the payment of “management

fees” to National Mobile was proper under the

articles of partnership.

As previously indicated, although specifically and

repeatedly requested to do so, the trial judge simply failed

to resolve these issues, except to order a dissolution of the

partnership.

On appeal, Holiday Mobile and Dunkel raise the

following issues:

(1) whether the trial court properly ordered

dissolution of the partnership;

(2) whether the trial court erred in ordering

Holiday Mobile to pay the cost of the Sergent

audit report; and

(3) whether the trial court erred in dismissing

the counterclaim of Dunkel and Holiday Mobile.

The cross-appeal of the limited partners raises these

issues:

Appendix B-10

(1) whether the trial court erred in failing to

award them attorneys’ fees;

(2) whether the trial court erred in not

providing for the manner in which the affairs of

the partnership are to be wound up;

(3) whether the trial court erred in not

declaring the Dunkel mortgage invalid;

(4) whether the trial court erred in failing to

determine that both Dunkel and Holiday Mobile

were liable to the limited partnership for the

management fees paid to National; and

(5) whether the trial court erred in not

ordering Holiday Mobile to supply monthly

and annual accountings.

DISSOLUTION OF THE PARTNERSHIP

The appellants first contend that since the trial judge

failed to make findings of fact and conclusions of law, the

Sergent report must be considered as a “Special Master”

report and must constitute the findings and conclusions of

the trial judge. From this premise, they argue that since

the Sergent report contains conclusions concerning the

propriety of the Dunkel mortgage, the payment of

management fees and the profitability of the limited

partnership, these findings are inconsistent with the

dissolution of the partnership and therefore the

dissolution order must be reversed as unsupported by the

evidence.

While the report of a master may constitute findings of

fact andconclusions of law,see Rule 52(a), Rules of Civil

Procedure, it is only those reports of masters which are

appointed and function under the auspices of Rule 53,

Rules of Civil Procedure, which are entitled to that status.

Here, the trial court made no attempt to comply with this

Rule of Civil Procedure. For example, Rule 53(h) provides:

Appendix B-11

The court shall accept the master’s findings of

fact unless clearly erroneous. Within ten days

after being served with notice of the filing of the

report any party may serve written objections

thereto upon the other parties.Application to the

court for action upon the report and upon

objections thereto shall be by motion and upon

notices prescribed \;; Rule 6(c). The court after

hearing may adopt the report or may modify it or

may reject it in whole or in part or may receive

further evidence or may recommit it with

instructions. (Emphasis added).

Notwithstanding the mandatory language that in the

event objections are made to the report it will only be

approved “after hearing,” the trial judge afforded no

hearing to the limited partners, and dismissed out of hand

their objections before his approval. Under these

circumstances, to afford the Sergent report the status of a

master’s findings of fact would thwart the Rules of Civil

Procedure, and would deny the objectors due process.

Moreover, the legal conclusions of the report that the

Dunkel mortgage was valid, that the management fee

agreement was valid and that a sua sponte adjustment in

the capital account of the general partner should occur

were completely outside the delegation of responsibility

to the auditor. These issues involve legal determinations

based upon disputed factual positions, none of which the

auditor heard or was qualified to rule upon. In short, the

Sergent report cannot substitute for the failure of the trial

judge to perform his judicial obligations.*

3 Rule 52(a), Rules of Civil Procedure, provides in part: “In all actions

tried upon the facts without a jury or with an advisory jury, the court, if

requested before trial, sha// find the facts specifically and state

separately its conclusions of law.....” (Emphasis added).

A timely request was made in this case, but the trial judge refused to

perform his required functions.

Appendix B-12

The most that can be said of the Sergent report is that it

is to be afforded the status conferred upon it by the limited

partners. The financial portion of the report is an

acceptable recap of what appears on the books of Holiday

Isle.

Holiday Mobile, in any event, contends that the

evidence does not support a dissolution of the limited

partnership. This argument is based primarily upon an

assertion that the limited partnership is operating at a

profit and that the limited partners waived any breach of

partnership agreement concerning accountings.

It is clear that upon breach of the partnership

agreement, one of the rights possessed by a limited

partner under the Limited Partnership Act is to “have

dissolution and winding up by decree of court.”

A.R.S. § 29-310 (A) (3).

However, an action of a partner which is merely trifling

in nature or a temporary grievance without permanent

damage does not form adequate grounds for dissolution.

Rather the conduct must be legally substantial and

evidence either gross misconduct or want of good faith or

cause serious and permanent injury to the partnership.

Fuller v. Brough, 159 Colo. 147, 411 P. 2d 18 (1966).

Obviously, a breach of statutory duties imposed upon a

general partner in a limited partnership, see A.R.S. § 29-

309, would suffice to allow a court to dissolve a limited

partnership.

A.R.S. § 29-309 provides in part that a general partner,

without the consent of the limited partners, has no

authority to:

1. Do any act in contravention of the

certificate.

Appendix B-13

4. Possess partnership property, or assign

their rights in the specific partnership property,

for other than a partnership purpose.

As previously indicated, the limited partnership

agreement provided that the general partner, Holiday

Mobile, was to provide management of the limited

partnership “all without fee.” In direct contravention of

this provision, Holiday Mobile entered into a

“management fee” arrangement with National Mobile

whereby 6% of the gross receipts of the limited

partnership were paid for “management.” This

arrangement, of course, enures to the ultimate benefit of

Dunkel, who was a 66% owner of Consolidated Securities

and a 65% owner of National Mobile.

While we appreciate Holiday Mobile's assertion that

this management arrangement may ultimately be

beneficial to the limited partnership by providing an

incentive to National Mobile to funnel renters to the

Holiday Isle Mobile Home Park, the fact remains that this

action is in contravention of the articles of partnership and

was undertaken without prior approval of the limited

partners.

Moreover, Dunkel caused the general partner, Holiday

Mobile, to granthima mortgage on the limited partnership

property in the sum of $1,250,000. Even if that libality is

prorated, a mortgage in the approximate sum of $330,000

was placed on the limited partnership assets at 12%

interest. At the most, the limited partnership received a

benefit from Dunkel’s action of only $191,676.60 and

money could be borrowed at that time for approximately

6% per annum. Aside from any orders of the bankruptcy

court, which may or may not have approved of the placing

of the mortgage on the limited partnership property,

Holiday Mobile, as a general partner having complete

Appendix B-14

authority to deal with the partnership business, * stands in

a fiduciary position to the limited partners. Bassan v.

Investment Exchange Corporation, 83 Wash. 2d 922, 524

P. 2d 233 (1974).

Under the facts presented to the trial court, the placing

of a mortgage on the limited partnership property greatly

in excess of the value received and at a substantially

higher rate of interest than was required resulted in a

breach of the high standard of conduct required of a

general partner when dealing with the limited partnership

business. This breach of the fiduciary relationship

resulted in substantial harm to the limited partnership.

While the advisory jury and the trial court may have

found additional conduct of the general partner which

would justify dissolution, we find these continuing

substantial breaches of the articles of partnership and

fiduciary relationship sufficient to uphold the order of

dissolution.

We therefore conclude, regardless of the profitability of

the limited partnership business overall, sufficient

grounds existed to terminate the limited partnership.

COST OF ACCOUNTING

Following the jury’s verdict in this matter the trial court

ordered that an accounting of the partnership be prepared.

The cost of this accounting was $4,500 and the trial court

ordered this sum to be paid by Holiday Mobile. Holiday

Mobile objects to this cost, contending that the accounting

was superfluous, was improvidently sought, and

therefore should, if anything, be a limited partnership

expense rather than an expense to the general partner.

4/ We do not mean to intimate that the mortgage placed upon the

limited partnership property was in fact a valid action of the general

partner, a subject dealt with later in this opinion.

Appendix B-15

The assessment of the cost of an accounting in a

partnership dissolution is a matter within the trial court's

sound discretion. Hurst v. Hurst, 1 Ariz. App. 227, 401

P.2d 232 (1965). In view of the general partner’s failure to

render monthly or annual accountings to the limited

partners for a period of over 10 years, its failure to keep

complete records and its failure to allow the limited

partners access to the books of the partnership, the trial

court did not abuse its discretion in ordering the cost of

accounting to be borne by the general partner.

PROPRIETY OF THE DISMISSAL OF COUNTERCLAIM

in this action, Holiday Mobile and Dunkel filed

counterclaims alleging that the limited partners had

unlawfully interfered with the limited partnership's

contractual relationships or its property. As to Holiday

Mobile, the trial court dismissed its counterclaim on the

theory that prior to a dissolution or accounting one partner

may not sue another for a transaction arising out of the

partnership business. See Catron v. Watson, 12 Ariz. App.

132, 468 P. 2d 399 (1970). As to Dunkel, the trial court

dismissed on the basis of a failure .o state a claim.

In regard to the counterclaim of Holiday Mobile, it is

clear in Arizona that insofar as a general partnership is

concerned, the rule applied by the trial court was correct.

Jacob v. Cherry, 65 Ariz. 307, 180 P. 2d 217 (1947);

Pejsa v. Bridges, 69 Ariz. 315, 213 P. 2d 473 (1950);

Bohmfalk v. Vaughan, 89 Ariz. 33, 357 P.2d 617 (1960).

(See, however, specially concurring opinion in Catron v.

Watson, supra, criticizing this result). Whether this rule

should be applied to limited partnerships is less clear.

Whatever the reasons underlying the rule as applied to

general partnerships, we see no reason to extend that rule

to limited partnerships. Limited partners may be added

without affecting continuation of the partnership. A.R.S.§

29-308. Limited partners have no liability to creditors of

Appendix B-16

the partnership. A.R.S. § 29-307. Limited partners have

no right to control the business of the partnership and

have limited rights in the partnership assets. A.R.S. § 29-

316.

In short, the “oneness” associated with general

partners certainly does not exist in a limited partnership ®

Seeing no reason to treat the members of a limited

partnership differently from the other litigants in civil

actions, we conclude the trial court erred in dismissing

Holiday Mobile’s counterclaim solely on the basis of the

status of the parties.

In regard to Dunkel’s position on the counterclaim, we

conclude the trial court acted properly. Nowhere in that

counterclaim is it alleged that any injury was suffered by

Dunkel, nor was any relief prayed for in his behalf.

Because injury to the plaintiff is an essential element of

the tort of wrongful interference with contractual

relationships, the counterclaim as to Dunkel failed to state

a claim for relief. Chanay v. Chittenden, 115 Ariz. 32,563

P.2d 287 (1977).

We now turn to those issues raised by the limited

partners’ cross-appeal.

VALIDITY OF THE DUNKEL MORTGAGE

The Dunkel mortgage grew out of the Chapter X

bankruptcy of Holiday Mobile. The order of the bankruptcy

court purportedly authorizing the mortgage on the limited

partnership property stated: “That Wilfred O. Dunkel shall

receive as security for the total amount of money provided

by him for the Special Fund, mortgages on all property

5 / Most jurisdictions recognize that general and limited partners may

sue each other to enforce the partnership agreements, without first

resorting to a dissolution. See generally, 68 C.J. S., Partnerships, §

485, page 1037.

Appendix B-17

owned by the debtor corporation and its subsidiaries . .

.“(Emphasis added).

We agree with the limited partners that this order on its

fact did not authorize the placing of a mortgage on the

limited partnership property. First, the limited partnership

property was not owned by the general partner, Holiday

Mobile, but is considered to be owned by the limited

partnership firm. State v. E/sbury, 63 Nev. 463, 175 P. 2d

430 (1946). Second, Holiday Isle is not a “subsidiary” of

the general partners, as the word “subsidiary” was

defined at the time by the Bankruptcy Act as a

“corporation” which is substantially owned or controlled

by the bankrupt. 11 U.S.C. § 506 (13) (1970 ed.,

subsequently amended).

Dunkel argues, however, that because of various

notices received by the limited partners, and conferences

between the trustee and the limited partners, they had

knowledge that the limited partnership property was to be

encumbered under the Dunkel financial plan, that the

financial plan would not have gone through without this

encumbrance and that the limited partnership property

would have been lost without the Dunkel infusion of cash.

From these premises, Dunkel argues that either the

limited partners are estoppel to deny the validity of the

mortgage or he is entitled to an equitable mortgage on the

property.

The limited partners in the other hand argue that the

facts before the trial court do not support a finding that

they had prior knowledge of the actions of the trustee and

that an equitable mortgage would in fact allow a general

partner to encumber limited partnership property in

payment of the general partner's obligation, contrary to

the provisions of the limited partnership act.

Appendix B-18

While the trial court’s judgment did not resolve the

factual dispute, we do not consider this failure to be fatal

to a resolution of this issue. The evidence is clear that at

the time of the Dunkel offer to bail Holiday Isle out of its

financial difficulties, the Western Savings mortgage on

the partnership property was in arrearage in the sum of

$138,624.20, and that Holiday Isle owed general creditors

the sum of $29,621.14 and owed back taxes in the sum of

$23,431.26. It is equally clear that the limited partners

were not in a position to pay these debts.

While technically, as to creditors, these debts were an

obligation of the general partners and the limited partners

had no obligation to pay the same, A.R.S. § 29-307, the

failure of the general partner to pay these obligations,

particularly the Western Savings mortgage and the back

taxes, would have resulted in the loss of the only asset of

the limited partnership.

Thus, whether we consider the Dunkel financial aid to

be a loan to the trustee in bankruptcy or a loan to the

general partner, Holiday Mobile, is somewhat immaterial,

for the fact remains that Dunkel’s action bestowed a

benefit upon the limited partnership which allowed it to

continue in existence. yatie,

Under these circumstances, the trustee’s authorization

to Holiday Mobile to place a mortgage on the Holiday

Isie property and Dunkel’s reliance upon that

authorization can properly be characterized as a "mistake

of law,” that is, "a mistake as to the legal consequences of

an assumed state of fact.” Restatement, Restitution § 7

By reason of that mistake of law, Dunkel is, at least,

entitled to restitution. Restatement, Restitution § 52(1);

Harline v. Daines, 567 P2d 1120(Utah 1977). Restitution

in this case should take the form od an equitable mortgage

on the limited partnership real property. However, that

Appendix B-19

equitable mortgage must be limited to the amount of

benefits actually bestowed upon the limited partnership,

the sum of $191,676.60. Moreover, equity would require

that the equitable mortgage bear interest at the market

rate at the time of the transaction, in this case, 6% per

annum.

We therefore hold that the Dunkel mortgage on the

limited partnership is valid in the principal sum of

$191,676.60, which sum shall bear interest at the rate of

6% per annum from the date of its inception.

All payments previously made by the limited partnership

on the mortgage shall be credited and upon remand the

trial court shall determine the balance due and owing on

this mortgage. In the event the mortgage has been

overpaid, the trial court shall declare the mortgage lien

satisfied and shall enter judgment in favor of the limited

partnership against Dunkel for such overage.

ATTORNEYS’ FEES

The limited partners contend they are entitled to

attorneys'’fee under A.R.S. § 12-341 01A, which provides

in part: “In any contested action arising out of a contract,

express or implied, the court may award the successful

party reasonable attorney's fees.” This section was

effective as of September 1, 1976. The limited partners’

action was commenced prior to that date. Under these

circumstances, we have held that A.R.S. § 12-341 O1A is

not applicable. US Life Title co. v. Soule Steel Co.,

122 Ariz.79, 593 P.2d 302 (App.1977). The trial court

properly denied the limited partners’ application for

attorneys’ fees.

Appendix B-20

MANAGEMENT FEES

The limited partners next complain that the trial court

failed to find Dunkel and Holiday Mobile personally liable

for the payment of “management fees” to the National

Mobile Development Company in contravention to the

articles of limited partnership. We have previously held

that these payments were a breach by the general partner

of the partnership agreement. !t must necessarily follow

therefrom that these expenditures by the general partner

were improper, and in any final accounting, the amount of

such unauthorized expenditures must be deducted from

the general partner's capital account.

However, we find that the evidence before the trial court

was insufficient to allow the piercing of the corporate veil

necessary to impose personal liability upon Dunkel for

these expenditures or for any other debts that the general

partner may owe to the limited partnership. In this regard,

the trial court's failure to impose personal liability upon

Dunkel was proper.

WINDING UP AND ACCOUNTING

Since we have upheld the dissolution of this limited

partnership, upon remand the trial court shall make such

orders as it deems advisable to effectuate the speedy

winding up of the partnership affairs, the dissolution of

the partnership, and the distribution of the proceeds to the

parties. In this regard, it would appear that the

appointment of a receiver to accomplish this end would be

in order. In addition, the trial court should consider

ordering a new accounting to bring financial affairs of the

limited partnership current and to give effect to any

changes required by this decision.

Appendix B-21

The judgment dissolving the limited partnership is

affirmed. The judgment dismissing the counterclaim of

Holiday Mobile is reversed and this matter is remanded for

trial. The judgment dismissing the Dunkel counterclaim is

affirmed . This entire matter is remanded to the trial court

for such orders and further proceedings as are necessary

to conform to this opinion.

EINO M. JACOBSON

Eino M. Jacobson, Acting Presiding Judge

CONCURRING:

WILLIAM E. EUBANK

William E. Eubank, Judge

JACK L. OGG

Jack L. Ogg, Chief Judge Division 1

B-22

CERTIFICATE OF SERVICE

STATE OF ARIZONA )

i

County of Maricopa )

DALE R. SHUMWAY, being first duly sworn upon his

oath deposes and says that he is a member of the Bar of

this Court and one of the counsel of record for petitioners

in this cause, that on this 19th day of May, 1981, he

mailed three copies of the Petition for Writ of Certiorari in

this cause by depositing the Petition in the United States

mail, first class postage paid, to:

Mr. Philip Berelson

BROWN & BAIN, P.A.

222 North Central

Phoenix, Arizona 85004

and that he also then mailed 40 copies of the Petition to

the Clerk of this Court, first-class postage prepaid, which

mailing took place on the 19th day of May, 1981, which

was in time permitted for bringing this Petition, all in

compliance wi

DALE R. SHUMWAY

SUBSCRIBED AND SWORN TO before me this

day of May, 1981.

Notaryfublic

My Commission Expires:

+¥-LE