Kuelbs v. Hill

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 09-2697
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Kristin Hill Brasser Kuelbs; *
Kristin N. Kuelbs Irrevocable *
Trust, *
*
Appellants, *
*
v. * Appeal from the United States
* District Court for the
Kimberly Hill; Jeffrey Hill; Carol * Western District of Arkansas.
Hill; Lynn Welk (Hill); Lawrence *
Welk, Jr.; Ryan Benson; American *
Century Services, LLC; American *
Century Investments; Rita Abernathy; *
Anne Tuttle; John Does 1-10, *
*
Appellees. *
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Submitted: April 13, 2009
Filed: July 30, 2010
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Before BYE, COLLOTON, and GRUENDER, Circuit Judges.
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BYE, Circuit Judge.

Kristin Kuelbs and the Kristin N. Kuelbs Irrevocable Trust appeal the dismissal
of the claims they brought against several defendants alleging embezzlement of
Kuelbs's assets. The claims brought by Kuelbs were dismissed because the district
court1 determined she was not the proper party to pursue the action due to her
incompetency, and she did not move to substitute the proper party after being put on
notice of the need for substitution. The tort claims Kuelbs assigned to the Irrevocable
Trust were dismissed on the grounds they were not assignable under Arkansas law.
We affirm.

I

Kuelbs suffered a brain injury in a car accident in March 2001. Her subsequent
behavior caused problems in her marriage, and her husband divorced her in December
2005. She received a property settlement in excess of $250,000, and an ongoing
award of monthly spousal support. Her ex-husband received custody of the couple's
two daughters, with Kuelbs entitled to visitation every other weekend. After the
daughters expressed concerns about their mother's behavior while they were in her
care, Kuelbs's ex-husband successfully petitioned the divorce court to have Kuelbs's
visitation rights limited to supervised visitation. Members of Kuelbs's family also
became concerned about her erratic behavior. Her mother (Carol Hill), a sister
(Kimberly Hill), and a brother (Jeffrey Hill) petitioned a Wisconsin state court to have
Kuelbs committed to a mental facility. In November 2006 she was committed to a
mental facility for a period of six months.

While in the mental facility, Kuelbs contacted her oldest brother, Donald Hill,
a lawyer, and asked for help in obtaining her release. A Wisconsin court determined
Kuelbs could receive care in a less restrictive setting, and released her to Donald based
on his representation he could provide her with shelter, food, and medical support at
his home in Arkansas. Kuelbs moved to Arkansas to live with Donald and his wife,
Dena, on February 19, 2007.

1
The Honorable Robert T. Dawson, United States District Judge for the Western
District of Arkansas.

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 After Kuelbs moved to Arkansas, Donald discovered some irregularities in her
American Century Investment account, the account in which her property settlement
had been placed. A check dated February 21, 2007 (after Kuelbs had already moved
to Arkansas) was purportedly signed by her and made payable to her brother, Jeffrey
Hill, in the amount of $73,000. The check had "House Construction Deposit" written
in the memo line.2 Two other checks were also suspect in that they were written or
cashed when Kuelbs was in the mental facility in Wisconsin. One check, dated
October 28, 2006, was in the amount of $13,738.75 and made payable to Burnsville
Volkswagen. Another check, dated November 24, 2006, was in the amount of
$23,225.54 and made payable to Chase.

A dispute arose between Donald and the rest of Kuelbs's family about her well-
being, with both sides accusing the other side of taking advantage of her. For
example, in August 2007, Lynn Welk, another of Kuelbs's sisters, contacted the police
department in Hot Springs Village, Arkansas, asking them to conduct a welfare check
on Kuelbs. Welk wanted the police to tell Kuelbs her checking account with
American Century Investments had been emptied. She also asked the police to
positively identify Kuelbs before relaying the message, claiming her sister-in-law,
Dena, posed as Kuelbs at times. Welk claimed Kuelbs was not taking her medication
and was not mentally stable. When the police tried to conduct a welfare check,
Kuelbs refused to talk to the officers and called the police. She still refused to talk to
the officers even when the dispatcher confirmed the officers were police officers.

In November 2007, Kuelbs's sister Kimberly filed a petition in Arkansas state
court requesting a determination of Kuelbs's mental competency. While the
competency action was pending, Donald filed this action in Arkansas state court
against his mother Carol, brother Jeffrey, sisters Kimberly and Lynn, brother-in-law

2
From the record it appears Jeffrey Hill and his brother-in-law, Lawrence Welk,
Jr., used the $73,000 to purchase a property at 2888 Sibley Hills Drive in Eagan,
Minnesota, which they developed into a subdivision called "Sammy Sweet Cheeks."

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Lawrence Welk, Jr., American Century, and others alleging tort claims of outrage,
abuse of process, fraud/misrepresentation, deceit, breach of fiduciary duty, and civil
conspiracy. The gravamen of the suit alleged a conspiracy between the family
members and others to embezzle Kuelbs's money, and included allegations against
Jeffrey Hill regarding the three suspect checks written on the American Century
Investment account. The suit was brought in Kristin Kuelbs's name personally, as
well as in the name of an "Irrevocable Trust" Donald created for the purpose of
accepting an assignment of Kuelbs's tort claims.

Shortly after Donald commenced this suit, Kuelbs was declared incompetent
pursuant to the petition filed by her sister, Kimberly. The state court initially
appointed the Trust Department of First National Bank in Hot Springs as the guardian
of Kuelbs's estate. Later, the Community First Trust Company (First National Bank's
trust subsidiary) was substituted as the guardian of her estate. The court initially
appointed an individual by the name of Valerie Swearingen to be a limited guardian
of Kuelbs's person. The court subsequently changed the guardian of Kuelbs's person
a number of times.

The defendants in this action removed it from Arkansas state court to federal
district court and filed motions to dismiss asserting lack of personal jurisdiction. The
defendant members of the Hill family further asserted the action should be dismissed
because Kuelbs and the Irrevocable Trust were not the proper parties due to Kuelbs's
incompetency.

Donald then requested leave of court to file an amended complaint, and was
granted leave. To the tort claims originally asserted in the first complaint, he added
claims for civil racketeering under the federal RICO statute, 18 U.S.C. § 1961, and a
securities claim under Ark. Code Ann. § 23-42-103. The amended complaint
responded to some, but not all, of the defendants' personal jurisdiction assertions. It
failed, however, to address the contention that Kuelbs and the Irrevocable Trust were

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not proper parties. All of the defendants responded to the amended complaint by
renewing their motions to dismiss and arguing, in relevant part, that Kuelbs and the
Irrevocable Trust were not the real parties in interest because Kuelbs had been
declared incompetent.

On April 14, 2009, the district court entered an order which stated in part that
the amended complaint "failed to address Defendants' contention that Plaintiffs lack
the capacity to sue and are not authorized to bring this action due to the appointment
of a guardian in Garland County Circuit Court. Plaintiffs are directed to supplement
their responses by April 27, 2009, to address this issue[.]" On April 22, 2009, Donald
filed a response which raised issues regarding a purported conflict of interest
involving the guardian of Kuelbs's person, but which failed to discuss or address
whether the guardian of Kuelbs's estate may be the proper party to pursue a lawsuit
seeking monetary damages.

On June 17, 2009, the district court granted the motions to dismiss. The district
court indicated the plaintiffs had been given notice the defendants had objected to
their status as the real parties in interest, and no attempt was thereafter made to
substitute the real party in interest. The district court further determined the tort
claims purportedly assigned to the Irrevocable Trust were not assignable under
Arkansas law, and thus the Irrevocable Trust was not a proper party either. This
timely appeal followed.

II

We review a district court's decision to grant a motion to dismiss de novo. See,
e.g., Anderson-Tully Co. v. McDaniel, 571 F.3d 760, 762 (8th Cir. 2009).3 We also

3
When dismissal is granted on the grounds a suit is not being prosecuted by the
real party in interest, at least one court has applied abuse-of-discretion review to the
ultimate question whether dismissal of the action was appropriate. See Magallon v.

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review de novo both the district court's interpretation of the Federal Rules of Civil
Procedure, Ind. Lumbermens Mut. Ins. Co. v. Timberland Pallet & Lumber Co., 195
F.3d 368, 374 (8th Cir. 1999), as well as its interpretation of Arkansas state law.
Mountain Pure, LLC v. Turner Holdings, LLC, 439 F.3d 920, 923 (8th Cir. 2006).

We first address who became the real party in interest after Kuelbs was declared
incompetent.4 "In a diversity action, state law determines the issue of who is a real
party in interest." Jaramillo v. Burkhart, 999 F.2d 1241, 1246 (8th Cir. 1993). When
Kuelbs was declared incompetent, the state court appointed both a guardian of her
person and a guardian of her estate. When a guardian of the estate is appointed,
Arkansas law requires the guardian of the estate to pursue a lawsuit seeking monetary
damages that will benefit the incompetent person's estate. See Ark. Code Ann. § 28-
65-305 ("When there is a guardian of the estate, all actions between the ward . . . and
third persons in which it is sought to . . . benefit the estate of the ward shall be
prosecuted by . . . the guardian of the estate[.]") (emphasis added). At all relevant
times, the Community First Trust Company was the guardian of Kuelbs's estate, and
thus was the real party in interest for purposes of pursuing the tort claims in this case.
The district court therefore correctly determined Kuelbs was not the real party in
interest.5 The district court also correctly determined the Irrevocable Trust was not
the real party in interest, because neither tort claims nor the proceeds of tort claims are

Livingston, 453 F.3d 268, 271 (5th Cir. 2006) (reviewing de novo the preliminary
question whether a party is a real party in interest, but then reviewing whether
dismissal of the action was appropriate for an abuse of discretion). Because we
conclude the district court properly dismissed this action even under the more
stringent de novo standard, we do not need to decide whether an abuse-of-discretion
standard should apply.
4
The pending motion to supplement the record is granted.
5
The appellants' contentions regarding purported conflicts-of-interest involving
the guardian of Kuelbs's person are irrelevant, because the personal guardian is not the
real party in interest. As a result, there is no need to address the contentions.

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assignable under Arkansas law. See Mallory v. Hartsfield, Almand & Grisham, LLP,
86 S.W.3d 863, 866 (Ark. 2002).

The appellants argue that, even assuming the guardian of the estate was the real
party in interest, the district court still erred in dismissing this action. They contend
that substituting the guardian of the estate was permissive, rather than mandatory,
under Arkansas law. See Ark. Code Ann. § 16-61-107 ("Where a party is judicially
found to be of unsound mind during the pendency of an action . . . his or her guardian
may be joined with him or her in the action as such.") (emphasis added). This reliance
upon Arkansas law is misplaced. Although Arkansas law governed who the real party
in interest became after Kuelbs was declared incompetent, federal law governs the
substitution procedure the district court followed. See, e.g., Ashley County, Ark. v.
Pfizer, Inc., 552 F.3d 659, 665 (8th Cir. 2009) (indicating federal procedural rules
apply to procedural issues in diversity actions, while state law applies to substantive
issues). The federal rules are not permissive, but mandatory, in requiring an action
to be prosecuted by the real party in interest. See Fed. R. Civ. P. 17(a) ("An action
must be prosecuted in the name of the real party in interest.") (emphasis added).

Rule 25 of the Federal Rules of Civil Procedure sets forth the substitution
procedure to be followed when a party becomes incompetent while an action is
pending. The rule governs four situations: (1) when a party dies, (2) when a party
becomes incompetent, (3) when a party transfers its interest in the lawsuit to someone
else, and (4) when a public officer is a party and dies, resigns, or otherwise ceases to
hold office. See Fed. R. Civ. P. 25(a), (b), (c) and (d). A party's obligation to request
substitution, and the corresponding ability of the court to allow substitution, are
somewhat different in each situation. While our concern is only with the second
situation, a party's obligation to bring a substitution motion in that situation (and the
corresponding limits on the court's authority) becomes more evident by comparing all
four situations to each other.

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 When a party dies, a motion for substitution must be brought before the court
may order substitution, and "[i]f the motion is not made within 90 days after service
of a statement noting the death, the action by or against the decedent must be
dismissed." Id. at 25(a)(1) (emphasis added). Similarly, when a party becomes
incompetent, a motion for substitution is required before a court may order
substitution. See id. at 25(b) ("If a party becomes incompetent, the court may, on
motion, permit the action to be continued by or against the party's representative.")
(emphasis added). Thus, when reading Rule 25(b) in conjunction with Rule 17(a)'s
requirement that an action must be prosecuted by the real party in interest, the court
has no power to permit such an action to continue without the real party in interest
unless a motion for substitution is brought under Rule 25(b). Cf. Younts v. Fremont
County, Iowa, 370 F.3d 748, 752 (8th Cir. 2004) (construing Rule 25(a) and
explaining that "a motion for substitution must be filed by the proper person [in order
for] a court to order a substitution of a proper party," and directing the district court
to dismiss the claims brought by a party who died while the action was pending if a
"motion for substitution under Rule 25 [is] not filed promptly with the district
court[.]").

In contrast, if a party transfers an interest while a case is pending, "the action
may be continued by or against the original party[.]" Fed. R. Civ. P. 25(c). While the
court, upon motion, may order "the transferee to be substituted in the action or joined
with the original party," id., a substitution motion is not required for the action to
continue. Similarly, when a party is a public officer who dies, resigns, or otherwise
ceases to hold office while a case is pending, a substitution motion is not required.
Rather, "[t]he officer's successor is automatically substituted as a party" and "the
absence of [a substitution order] does not affect the substitution." Id. at 25(d).

In sum, in an action in which a party becomes incompetent while the action is
pending, a motion for substitution must be brought under Rule 25(b) for the action to
continue. Consequently, a district court does not err in dismissing such an action after

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an objection has been made that the person deemed incompetent is not the real party
in interest, so long as the district court allows a reasonable time for the real party in
interest to be substituted. See Fed. R. Civ. P. 17(a)(3) ("The court may not dismiss
an action for failure to prosecute in the name of the real party in interest until, after an
objection, a reasonable time has been allowed for the real party in interest to ratify,
join, or be substituted into the action."); see also Consul Gen. of Republic of Indonesia
v. Bill's Rentals, Inc., 330 F.3d 1041, 1047-48 (8th Cir. 2003) (computing the
"reasonable time" under Rule 17(a)(3) from the time an objection is first made until
the district court enters an order dismissing the case).

The defendant members of the Hill family contended Kuelbs was not the real
party in interest in their first motion to dismiss filed on December 19, 2008. On April
14, 2009, the district court directed the plaintiffs to address the issue of Kuelbs's
incompetency. The order put the plaintiffs on notice that a substitution motion may
be required, and gave them time to substitute the real party. On June 17, 2009, six
months after the Hill defendants first objected that Kuelbs and the Irrevocable Trust
were not the real parties in interest, the district court dismissed the action because a
substitution motion still had not been filed.6 The procedure followed by the district
court was consistent with, and required by, Rules 17 and 25 of the Federal Rules of
Civil Procedure. Thus, the district court did not err in dismissing this action.

III

We affirm the judgment of the district court.
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6
The appellants do not argue on appeal that six months was not a "reasonable
time" under Rule 17(a)(3), and thus we do not address that issue.

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