No. 8 5 - 3 5 7
IN THE SUPREME COURT OF THE STATE OF MONTANA
1986
FIRST SECURITY BANK OF GLENDIVE,
a Montana. Banking corp.,
Plaintiff and Respondent,
LARRY J. GARY and BmFY GARY, husband
and wife ;
Defendants and Appellants,
R.H. SCHWARTZ CONSTRUCTION
SPECIALTIES, INC., a Montana
corp. of Glendive, Montana;
Defendant and Respondent.
FIRST SECURITY BANK OF GLENDIVE,
a Montana Banking corp. of Glendive,
Montana,
Plaintiff and Respondent,
GARY DATSUN, INC., a Montana corp.,
of Glendive, Montana
Defendant and Appellant.
APPEAL FROM: District Court of the Seventh Judicial District,
In and for the County of Dawson,
The Honorable H. R. Obert, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Huntley & Eakin; Gene Huntley, Baker, Montana
Charles W. Hingle, Billings, Montana
Nye & Meyer, Billings, Montana
For Respondent :
Lucas & Monaghan; Thomas Monaghan, Miles City,
lulontana.
Submitted on Briefs: March 6, 1 9 8 6
Decided: MaY 2 0 1 1986
Filed: MAY 2 0 1986
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Clerk
Mr. Justice John C. Sheehy delivered the Opinion of the
Court.
Appellants, Larry J. Gary and Mary Gary, husband and
wife, and Gary Datsun, Inc. a Montana corporation appeal from
the judgment of the District Court, Seventh Judicial
District, County of Dawson, denying the Garys' motion to
allow an amendment to their pleadings in Civil No. DV 79-174
to add Gary Datsun, Inc. as a party plaintiff and granting
their motion to consolidate Civil No. DV 79-173 and DV 79-174
for purposes of trial.
On December 14, 1978 the First Security Bank of
Glendive, Montana committed to loan the Garys $168,000 for
the purpose of building an automobile sales facility in
GI-endive. The original promissory note signed by the Garys
was due to be paid and converted to a long term note by June
14, 1979. The Bank recommended R. H. Schwartz Construction
Specialities, Inc. to the Garys as a building contractor. On
December 27, 1978, Larry Gary and Schwartz entered into a
building contract. The Bank apparently did not tell the
Garys that Schwartz was one of its customers. It was only
during discovery that the Garys learned Schwartz was rather
heavily indebted to the Bank. After receiving verification
that a written construction contract had been entered with
Schwartz the Bank deposited into a building fund account the
proceeds of the note in the sum of $168,000.
During the course of construction, the Garys
incorporated their business into Gary Datsun, Inc. It is
sufficient for our purposes to state that construction of the
building did not flow smoothly. By June 1979, the Garys and
Schwartz had reached an impasse. The building had not been
completed by the scheduled date, the interim mortgage was
due, and the Garys and Schwartz were unable to resolve their
differences regarding the construction of the building. As a
result, on June 19, 1979, officers of First Security Bank of
Glendive met with Larry Gary and advised him that the Bank
would have to call his promissory note because of the
numerous difficulties.
The Bank brought suit against the Garys, individually,
to foreclose the interim mortgage on December 12, 1979 in
Dawson County Civil No. DV 79-174. The Bank also sued Gary
Datsun, Inc. to recover for a separate loan which had been
made to it for $7,000 in Dawson County Civil No. DV 79-173.
In the suit filed against the Garys individually,
DV 79-174, the Garys filed a timely response and
counterclaimed for damages to them as individuals arising
from the Bank's breach of the loan agreement and breach of
its duty to act in good faith and in fair dealing. In the
suit against Gary Datsun, Inc., DV 79-173, a timely answer
was filed but no counterclaim was made against the Bank.
Thereafter, a considerable amount of discovery was done and
the case against the Garys for foreclosure and the
counterclaim against the Bank was set for trial on April 29,
1985.
On January 31, 1985, however, the Bank filed its
pretrial memorandum in DV 79-174, wherein it contended that
the bulk of the damages being claimed by the Garys on their
counterclaim belong to Gary Datsun, Inc. because they
occurred after the incorporation, that the corporation was
not a party to the counterclaim, and that the statute of
limitations had elapsed as to Gary Datsun, Inc. As a result,
the District Court requested the parties to brief the above
issues.
In the Garys' memorandum, filed March 11, 1985, the
Garys argued that the two cases, DV 79-173 and DV 79-174,
should be consolidated for purposes of trial and that they
should be allowed an amendment to DV 79-174 to add Gary
Datsun, Inc. as a party plaintiff. In its order on arch 24,
1985, the District Court consolidated the two actions for
purposes of trial but refused to allow the addition of Gary
Datsun, Inc. as a party plaintiff on the Garys' counterclaim
against the Bank. In its memorandum opinion the District
Court stated its reasons as foll-ows:
With reference to the Court's denial of the Motion
to add a party plaintiff in the cause filed by
Larry J. Gary and Mary Gary in Civil Number DV
79-174 that ruling on the part of the Court would
give new life to an action that the Court believes
is barred by the Statute of Limitations.
It is the position of the Court that any
.
counterclaim of Gary Datsun Inc against Plaintiff
is barred by the statute of limitations and the
motion is an effort to resurrect a counterclaim
through procedural means and these procedural means
are not permitted to resurrect a claim barred by
the statute of limitations. A Montana case that
seems to be directly in point is Engine Builders
Inc. versus Seven Seas Import and Mercantile Inc.
(Montana 1980), 615 P.2d 871. In that case the
Court found that there are two periods of time that
determine the period of limitation of actions and
when that limitation has expired. One is when the
cause of action which gave rise to the suit
occurred. The second time is when the action
commenced.
The Court further analyzed that case by saying that
under Rule 3, Montana Rules of Civil Procedure, " A
civil action is commenced by filing a complaint
with the Court.". In the instant case by First
Security Bank against Gary Datsun Inc., all of the
alleged wrongful acts of the Plaintiff took place
on or before December 12, 1979. Therefore Gary
Datsun Inc. had time within the applicable statute
of limitations from that date within which to file
his counterclaim for damages. The effect now to
amend the pleadings is an effort to extend the
statute of limitation as prohibited by the Montana
Supreme Court in Engine Builders.
From December 1.2, 1979, for a period of at least
three years thereafter, Plaintiff was seeking
relief against Gary Datsun, Inc. in Dawson County
Civil No. DV 79-173.
Gary Datsun Inc. ha.d the right in that action to
file an appropriate counter claim against Plaintiff
but failed to do so within the time allowed by
statute. It is the opinion of the Court that to
authorize adding Gary Datsun Inc. as a party in
Dawson Civil DV 79-174 would be to allow indirectly
what is specifically prohibited as a direct course
of action and would in effect create a new cause of
action in Gary Datsun, Inc.
The Garys raise one issue for our review: Where it
appears that a real party in interest has not been joined as
a counterclaimant on a counterclaim, should the District
Court, after the statute of limitations has run, allow the
joinder of the omitted party or refuse to allow the
counterclaim to be proved.
The Garys contend that Gary Datsun, Inc. should have
been allowed to join their counterclaim against the Bank in
DV 79-174 as the real party in interest pursuant to Rule
17(a), M.R.Civ.P., which provides in pertinent part:
Every action shall be prosecuted. in the name of the
real party in interest .. . .
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.
It is the Ba.nkls
contention that the Garys are liable as
individuals to the Bank on the $168,000 promissory note but
are not entitled to a substantial portion of the relief
requested in their counterclaim because the Bank's refusal to
extend further credit to the Garys occurred after the
incorporation of Gary Datsun, Inc. wherein the Garys
transferred most of their assets to the corporation.
The record of this case indicates that the Garys sought
to join Gary Datsun, Inc. in the counterclaim they had timely
filed against the Bank in DV 79-174. The first sentence of
Rule 17 (a), M.R.Civ.P. requires that an action be brought in
the name of the party who possesses the substantive right
being asserted under the applicable law. McNeil Construction
Company v. Livingston State Bank (9th Cir. 1.962), 300 F.2d
88, 90 n. 5. Furthermore, the requirement that an action
must be prosecuted in the name of the real party in interest
is not limited to original plaintiffs but must also be
satisfied for purposes of asserting a counterclaim.
Prudential Oil & Minerals Company v. Hamlin (10th Cir. 1960),
277 F.2d 384.
The District Court relied on our decision in Engine
Rebuilders, Inc. v. Seven Seas Import-Export & Merc. Inc.
(Mont. 1980), 615 P.2d 871, 37 St.Rep. 1406, for its
conclusion that any counterclaim that Gary Datsun, Inc. had
against the Bank was barred by the applicable statute of
limitations. Our holding in Engine Rebuilders, however, is
limited to the original filing of a counterclaim. Thus, as
the District Court and the parties recognized, Gary Datsun,
Inc. was barred by the statute of limitations from asserting
its own separate counterclaim in DV 79-173 as well as being
joined as a party in DV 79-174 and asserting an independent
counterclaim against the Bank. The rule, however, is
different when a real party in interest objection is made as
to a claim timely filed.
In 6 Wright and Miller, Federal Practice and Procedure,
S 1555 (1971) this procedural dilemma is discussed in detail,
as follows:
Rule 17 (a) was amended in 1966 to add the last
sentence, which provides that an action shall not
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 * * *." The provision goes
on to state that ratification, joinder, or
substitution is to have the same effect as if the
action had been commenced in the name of the real
party in interest. This provision originally was
developed by the Advisory Committee on Admiralty
and, as initially drafted, was limited to certain
maritime actions for which the statute of
limitations is very short and the identity of the
party entitled to sue often is difficult to
determine. However, because the proposed amendment
also restated the practice of many federal courts
and was thought consistent with the better reasoned
decisions in both civil actions and admiralty, it
was made applicable to all cases.
The final sentence in Rule 17 (a) is designed to
avoid forfeiture and injustice when an
understandable mistake has been made in selecting
the party in whose name the action should be
brought. Thus, a correction in parties is
permitted even after the statute of limitations
governing the action has run. This provision
reflects the general policy of the draftsmen of the
federal rules that the choice of a party at the
pleading stage ought not have to be made at the
risk of a final dismissal of the action should it
later appear that there had been an error. In this
respect the rule is consistent with the liberal
relation back provision in Rule 15 (c). Indeed,
Rule 15(c) has been used in conjunction with Rule
17 (a) to enable an amendment substituting the real
party in interest to relate back to the time the
original action was filed. The same result could
have been reached solely on the basis of the last
sentence in Rule 17 (a) .
In their brief the Garys state that the District Court
"ruled that Gary Datsun, Inc. is the real party in interest
on the counterclaims originally pleaded by the Garys, but
that the statute of limitations bars it from being
substituted or joined in that action." Nowhere in the record
of this case can we find a ruling by the District Court that
Gary Datsun, Inc. is a real party in interest on the
counterclaim originally filed by the Garys. It is also
difficult, based on the record before us, to determine
whether Gary Datsun., Inc. is in fact a real party in interest
on the counterclaim filed by the Garys. We therefore find it
necessary to remand this case to the District Court to
determine whether Gary Datsun, Inc. is a real party in
interest on the counterclaim. We also note that the District
Court did not dismiss the Garys' counterclaim, but if Gary
Datsun, Inc. is in fact a real party in interest, on the
Garys' counterclaim, the District Court's decision denying
joinder of Gary Datsun, Inc. to the Garys' counterclaim
substantively served as a dismissal all or part of the
counterclaim. In the event that the District Court finds
Gary Datsun, Inc. to be a real party in interest, then
ratification, joinder or substitution of the counterclaim
should be allowed by Gary Datsun, Inc. and such action will
have the same effect as if the counterclaim had been
commenced in the name of Gary Datsun, Inc. If, however, Gary
Gatsun, Inc. is not a real party in interest on the
counterclaim filed in DV 79-174, the corporation is barred by
the statute of limitations based on our decision in Engine
Rebuilders from asserting an independent counterclaim against
the Bank.
We, therefore, remand to the District Court for further
proceedings consistent with this opinion.
We Concur: