Gordon v. Hedman

No. 95-432
IN THE SUPREME COURT OF THE STATE OF MONTANA
1996

KENNETH GORDON,
Plaintiff and Appellant,
v.
DONALD E. "GENE" HEDMAN and
HEDMAN, HILEMAN & LACOSTA,
Defendants and Respondents

APPEAL FROM: District Court of the Eleventh Judicial District,
In and for the County of Flathead,
The Honorable Ted 0. Lympus, Judge presiding.

COUNSEL OF RECORD:
For Appellant:
Sara R. Sexe, Jason G. Dykstra, Marra, Wenz, Johnson
& Hopkins, Great Falls, Montana
For Respondent:
Tracy Axelberg, Axelberg & Kalkstein, Missoula,
Montana

Submitted on Briefs: March 2, 1996
Decided: June 25, 1996
Filed:
Justice William E. Hunt, Sr. delivered the Opinion of the Court.

Appellant, Kenneth Gordon, filed a complaint in the Eleventh
Judicial District Court, Flathead County, alleging professional

malpractice by respondent and his law firm. Respondent filed a
motion to dismiss which the District Court granted. Appellant
appeals that decision.

We reverse and remand.

We restate the dispositive issues as follows:
1. Did the District Court err in ruling that absent a

relationship of subrogation, Home Insurance Company was unable to

substitute itself as the real party in interest pursuant to Rule

17(a), M.R.Civ.P.?

2. Did the District Court err in dismissing the action for
failure to state a claim upon which relief could be granted?

FACTS

The facts and allegations as set forth in appellant's

complaint are as follows: All parties to this action are residents

of Flathead County, Montana. Appellant and respondent began their

attorney-client relationship in the fall of 1990 when respondent

agreed to represent appellant in an action arising from the

termination of appellant's disability benefits from the Anaconda

Aluminum/ARC0 Long-Term Disability Plan.

Appellant's complaint alleges that respondent failed to timely

or properly pursue an action for breach of fiduciary duty by Thomas

L. Jacobs, the administrator of the disability plan. The complaint

asserts that, although respondent did file an action on behalf of

2
appellant, it was filed after the time allowed by the applicable
statute of limitations. Moreover, the complaint alleges that
respondent improperly filed in State District Court, rather than in
Federal District Court, and that respondent failed to invoke the
appropriate sections of the Employees Retirement Income Security
Act (ERISA), 29 U.S.C. 5 1001, et seq. Appellant asserts that this
claim, if successful, would have provided certain equitable,
remedial, and legal remedies.
The complaint further alleges that, because of the attorney-
client relationship, respondent had a duty to represent appellant
with the reasonable care, skill and diligence possessed and
exercised by an ordinary attorney under similar circumstances.
Appellant asserts that respondent breached his professional duty by
failing to adequately represent appellant's interests and that,
consequently, appellant suffered damages.
In May 1995, respondent filed a motion to dismiss appellant's
complaint. In his brief in support of the motion, respondent
alleges that appellant had made similar claims in an earlier
proceeding against another attorney who had represented appellant.
Respondent attached a copy of the compliant. According to
respondent, that action was ultimately settled and dismissed with
prejudice. Respondent contends that as part of the settlement,
appellant signed a release by which he unconditionally assigned any
and all claims he had against respondent and the respondent law
firm to the Home Insurance Company, the first attorney's
malpractice carrier. The issue of whether a professional

3
negligence claim can be assigned is not raised by the parties or

addressed by this Court.
Respondent alleges the proper plaintiff is Home Insurance

Company as the purported assignee of any rights held by appellant

and that, accordingly, appellant does not have standing to pursue

this claim and the complaint should be dismissed.

Moreover, respondent argues that, even if appellant could

proceed, he had signed an unequivocal release of any and all

damages. Therefore, appellant had nothing to assign to the Home

Insurance Company for the purpose of future action and,

accordingly, the complaint- failed to state a claim upon which

relief could be granted.

Following the submission of the motion to dismiss, appellant

filed two ratifications of the present action pursuant to Rule

17(a), M.R.Civ.P. The law firm that first represented appellant

and the Home Insurance Company filed documents reflecting

ratification of the action brought by appellant. Both parties

agreed to be bound by the result.
Following submission of the ratifications, the District Court

granted respondent's motion to dismiss. In the order, the court

found that the release appellant signed in conjunction with the

settlement of the earlier- lawsuit did not create a right of

subrogation in Home Insurance Company. Absent subrogation, the

court concluded that "the substitution/ratification provision of

Rule 17(a)" did not apply. Moreover, the District Court concluded

4
that appellant could not state a claim upon which relief could have

been granted.
Appellant appeals.

ISSUE ONE

Did the District court err in ruling that absent a

relationship of subrogation that Home Insurance Company was unable

to substitute itself as the real party in interest pursuant to Rule

17 (a) , M.R.Civ.P.?
An action must be prosecuted by the real party in interest.

Rule 17(a), M.R.Civ.P. Rule 17 also provides that no action will

be dismissed until a reasonable time has been allowed for

ratification, substitution or joinder of the real party. The rule

reads, in part, as follows:

Rule 17(a). Real party in interest. Every action shall
be prosecuted in the name of the real party in interest.
A personal representative, guardian, bailee, trustee of
an express trust, a party with whom or in whose name a
contract has been made-for the benefit of another, or a
party authorized by statute may sue in that person's own
name without joining the party for whose benefit the
action is brought; . . . No action shall be dismissed on
the ground that it is not prosecuted in the name of the
real party in interest until a reasonable time has been
allowed after objection for ratification of commencement
of the action by, or joinder, or substitution of, the
real party in interest; and such ratification, joinder,
or substitution, shall have the same effect as if the
action had been commenced in the name of the real party
in interest.

The rule was intended to protect individuals from harassment and

multiple suits by persons not bound by the claim. See 6 Wright,

Miller and Kane, Federal Practice and Procedure 51543 (1990).

5
 Here, respondent correctly objected to appellant's role as

plaintiff. Following respondent's objection, Bothe & Lauridsen and
the Home Insurance Company both executed ratifications of Gordon's

action. These documents were submitted prior to the court's ruling

on respondent's motion to dismiss. In the order dismissing the

complaint, the court concluded that neither substitution or

ratification of this action was possible under Rule 17 (a) ,
M.R.Civ.P., because of the nature of the relationship between

appellant and the insurance company.

Appellant argues that the District Court erred in this

conclusion. In support of his argument, appellant refers to the

last sentence of Rule 17(a), M.R.Civ.P.: 'I No action shall be
dismissed . until a reasonable time has been allowed after

objection for ratification . . . " Appellant contends that Rule

17 (a) , M.R.Civ.P., was satisfied because the purported real party
in interest, Home Insurance Company, ratified the action.

Furthermore, appellant argues that a decision regarding the method

of compliance with Rule 17(a), M.R.Civ.P., rests solely with the

real party. In support of this argument, appellant cites State ex.

rel. Nawd's T.V. v. District Court (1975), 168 Mont. 456, 543 P.Zd

1336.

In Nawd's, the plaintiff sought a writ of supervisory control

after the district court had issued an order requiring

"substitution and joinder" of the plaintiff's insurer in the

action. We held that Rule 17(a), M.R.Civ.P., "plainly provides

that a reasonable time will be given to allow the real party in

6
interest to bind himself to the suit by ratification, joinder, or

substitution." Nawd's, 543 P.2d at 1339 (emphasis omitted).

This Court reviewed the question of whether a district court

had the discretion to decide which method a real party had to use

in order to bind itself to litigation under Rule 17(a), M.R.Civ.P.

In that decision, the parties included fully and partially

subrogated insurance carriers, and this Court held that partially

subrogated insurance carriers had the option of choosing the method

of ratification. Nawd's, 543 P.2d at 1339.

In this case, the District Court concluded that despite
appellant's efforts to create a right of subrogation through

assignment, appellant and the Home Insurance Company were not in

the position of subrogor to subrogee, and, therefore, the action

was not amenable to substitution or ratification pursuant to Rule

17(a), M.R.Civ.P., citing to State ex. Rel. Slovak v. District

Court (1975), 166 Mont. 485, 534 P.2d 850. Consequently, the court

granted respondent's motion, and dismissed appellant's complaint.

According to the release document, appellant assigned all of

his interest in the present action to Home Insurance Company,

Bothe, and Bothe and Lauridsen as part of the settlement in the

earlier lawsuit. Since appellant had assigned his entire claim to

the Home Insurance Company, this Court agrees with the District

Court that appellant had no claim to file. Absent a claim to file,

Home Insurance does not have a claim to ratify.
However, just because Home Insurance Company may not be able

to ratify the current action does not mean it cannot substitute

7
itself as the real party in interest pursuant to Rule 17(a),
M.R.Civ.P. The rule provides that no action shall be dismissed on
the ground that it is not prosecuted in the name of the real party

in interest until a reasonable time has been allowed after
objection for ratification of commencement of the action by, or

joinder, or substitution of, the real party in interest. Rule

17 (a) , M.R.Civ.P., does not distinguish between the party who has

obtained an interest in an action through subrogation and the party

who has obtained an interest through assignment by contract.

The plain language of Rule 17(a), M.R.Civ.P., gives the real
party in interest the option of binding itself to litigation by

"ratification, joinder, or substitution." State ex. rel. Bohrer v.

District Court (1976), 171 Mont. 116, 118, 556 P.2d 899, 900.

Although the real party in interest did not have the option of

ratification as the assignee of plaintiff's claim, the role of the
district court is to make sure that one of these methods has been

adhered to after an objection has been made under Rule 17. Bohrer,

556 P.2d at 900. Once the objection to appellant as plaintiff was

made, the real party had the option of binding itself to the suit

through substitution. Bohrer, 556 P.2d at 900.

Following Home Insurance Company's attempt at ratification,

the court simply granted respondent's motion to dismiss. Home

Insurance Company was not given an opportunity to substitute itself

as the real party in interest. Accordingly, we reverse the

District Court in order to allow the real party in interest a

8
reasonable time in which to substitute itself as the real party in

the present action.

ISSUE TWO

Did the District Court err in dismissing this action for

failure to state a claim upon which relief could be granted?

In the present action, the court looked to documents outside

of the original pleadings. By doing so, the court constructively

converted respondent's motion to dismiss into a motion for summary

judgment without notice. See Rule 12(b) (6), M.R.Civ.P. This Court
has consistently held that it is incumbent upon a district court to

give parties formal notice of a conversion to summary judgment.

Gebhardt v. D.A. Davidson & Co. (198X), 203 Mont. 384, 661 P.2d

855. After a party has been notified of the court's intentions,

the parties then have a reasonable opportunity to present all

material made pertinent to such a motion. State ex rel. Dept. of

H. & E. S. v. City of Livingston (19761, 169 Mont. 431, 435, 548

P.2d 155, 157.

However, since we are reversing in order to allow the real

party in interest the opportunity for substitution, the court's

error in failing to notify the parties of its intent to convert the

Rule 12(b) (61, M.R.C~V.P. motion to one for summary judgment is

harmless error.

We Concur:

Chief Justice
10