Opinion
No. 3-99-CV-2552-M.
December 8, 2000.
MEMORANDUM OPINION AND ORDER
Finova Capital Corporation and John H. Litzler, Chapter 7 Trustee for the bankruptcy estates of AmeriTruck Distribution Corporation and its subsidiaries, have filed a motion to substitute the Trustee as plaintiff in this case. For the reasons stated herein, the motion is granted in part.
A motion to substitute parties is a non-dispositive pretrial matter that can be determined by a magistrate judge under 28 U.S.C. § 636 (b)(1)(A). See United Independent Insurance Agencies v. Bank of Honolulu, 1992 WL 102570 at *1-2 (9th Cir. May 15, 1992); Kasting v. American Family Mutual Insurance Co., 196 F.R.D. 595, 597-98 (D. Kan. 2000).
I.
This is a civil action brought by Finova Capital Corporation against 11 former officers and directors of AmeriTruck Distribution Corporation. Finova accuses defendants of negligent misrepresentation and breach of fiduciary duties in connection with a $58 million loan made to AmeriTruck. (Plf. Compl. ¶¶ 20-23, 41). Under the terms of the loan agreement, AmeriTruck was required to submit accurate daily and monthly financial reports to Finova. ( Id. ¶ 24). Instead, defendants allegedly "provided erroneous Borrowing Base Reports, Financial Statements and other financial information to Finova without taking appropriate steps to ensure that they accurately reflected the Companies' true financial condition." ( Id. ¶ 27). AmeriTruck and its subsidiaries eventually filed for protection under Chapter 11 of the Bankruptcy Code. ( Id. ¶ 38). According to Finova, defendants caused the debtors-in-possession to enter into additional transactions and monetary transfers rather than preserve the assets for creditors. ( Id. ¶¶ 39-40). Finova contends that it has sustained damages in excess of $60 million as a result of this conduct. ( Id. ¶ 1).The AmeriTruck bankruptcy was coverted to a Chapter 7 liquidation proceeding on November 12, 1999. (Plf. Motion, Exh. A). John H. Litzler was appointed as Trustee of the bankruptcy estate. In February 2000, Finova and two other creditors entered into a Compromise and Settlement Agreement with the Trustee. This agreement provides, inter alia, that:
The other creditors, Ron's Dream, Inc. and Sandy's Dream, Inc., purchased certain operating assets of AmeriTruck after the automatic stay was lifted. (Plf. Motion, Exh. B § I, ¶ J).
[T]he Trustee shall have the right, option and authority to pursue and be the holder of all claims of Finova . . . against the former officers and directors of the Debtors or any insurance policies with respect thereto, and Finova . . . agree[s] to assign, transfer or otherwise convey, without representation, warranty or recourse, any and all rights they may have with regard to such claims to the Trustee.
( Id., Exh. B § II, ¶ 9).
Finova and the Trustee now move to substitute the Trustee as the plaintiff in this action. Defendants oppose the motion. The issues have been briefed by the parties and this matter is ripe for determination.
II.
Rule 25 of the Federal Rules of Civil Procedure governs the substitution of parties in civil cases. This rule provides, in relevant part:
In case of any transfer of interest, the action may be continued by or against the original party, unless the court upon motion directs the person to whom the interest is transferred to be substituted in the action or joined with the original party.
FED. R. Civ. P. 25(c). Because successors-in-interest are always bound by a judgment even if not named as parties, substitution is never mandatory. Kloster Speedsteel AB v. Crucible Inc., 793 F.2d 1565, 1582 (Fed. Cir. 1986), cert. denied, 107 S.Ct. 882 (1987); FSLIC v. McLean, 1988 WL 220584 *2 (N.D. Tex. Nov. 14, 1988), citing 7C C. WRIGHT, A. MILLER M. KANE, FEDERAL PRACTICE AND PROCEDURE § 1958 (Rev. ed. 1986). Rather, the district court has broad discretion to order substitution, deny substitution, or direct that the transferee be joined as an additional party. Jazzland, Ltd. v. Bordenave, 1999 WL 243820 at *1 (E.D. La. Apr. 22, 1999); Barker v. Jackson National Life Insurance Co., 163 F.R.D. 364, 366 (N.D. Fla. 1995).
Finova and the Trustee suggest that the district court's discretion is limited to whether the original party is retained in the case, not whether the assignee is joined. (Plf. Reply at 7). However, this argument is based on dicta in two cases from other circuits. See Panther Pumps Equipment Co. v. Hydrocraft, Inc., 566 F.2d 8, 23 (7th Cir. 1977), cert. denied, 98 S.C.t 1887 (1978); Trombino v. Transit Casualty Co., 110 F.R.D. 139, 147-48 (D.R.I. 1986) (putting forth the argument, but then determining that case was governed by Rule 19), The Court finds no authoritative decision limiting the exercise of discretion under Rule 25 in such a manner.
III.
Defendants oppose substitution of the Trustee for three reasons. They argue that: (1) the Trustee has no standing to prosecute claims on behalf of an individual creditor; (2) the motion is premature because the assignment is not yet final; and (3) the substitution would prejudice them and create inefficiencies in discovery. The Court will examine these arguments in turn.
A.
Under the Bankruptcy Code, a trustee is empowered to collect and preserve "property of the estate." 11 U.S.C. § 704(1). Claims belonging to the debtor are property of the estate. See Matter of Wischan, 77 F.3d 875, 877 (5th Cir. 1996); Lawrence v. Jackson Mack Sales, Inc., 837 F. Supp. 771, 779 (S.D. Miss. 1992), aff'd, 42 F.3d 642 (5th Cir. 1994). This includes causes of actions acquired by way of assignment after commencement of a bankruptcy case. See In re Ben Franklin Retail Stores, Inc., 225 B.R. 646, 650 (Bankr. N.D. Ill. 1998), aff'd in relevant part, 2000 WL 28266 (N.D. Ill. Jan. 12, 2000).
However, a trustee does not have standing to pursue actions on behalf of individual creditors. See Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir. 1991); In re Ozark Restaurant Equipment Co., 816 F.2d 1222, 1228 (8th Cir.), cert. denied, 108 S.Ct. 147 (1987). When a creditor assigns its claims against the debtor to the trustee, the assignment must make the claims property of the estate. It cannot serve merely as a vehicle to allow the trustee to prosecute claims on behalf of a creditor. This distinction was illustrated in Williams v. California 1st Bank, 859 F.2d 664 (9th Cir. 1988). In Williams, the Ninth Circuit held that a purported assignment was insufficient to confer standing on the bankruptcy trustee to prosecute creditors' claims against a third party. The court considered three factors in reaching this conclusion: (1) the trustee received only administrative fees under the assignment and was required to disburse the majority of proceeds to the assignors-creditors; (2) the debtor had no claim of its own against the third party; and (3) there was the potential for inconsistent actions by creditors who did not assign their claims to the trustee. Id. at 666-67.
The assignment in this case is vastly different than the one in Williams. Here, the Trustee must recover sufficient funds to pay all administrative claims and provide for a $2 million distribution to unsecured creditors before Finova receives any proceeds. Even then, Finova is entitled to just 25% of the next $1 million recovered by the Trustee. The remaining 75% must be paid to unsecured creditors. (Plf. Motion, Exh. B § II, ¶ 6). Contrary to defendants' argument, this arrangement does not "disproportionately benefit Finova." Nor is there any real likelihood of inconsistent actions by other creditors. The Court concludes that the Trustee has standing to prosecute this claim against defendants on behalf of the bankruptcy estate.
B.
Defendants further argue that the motion is premature because the assignment is not yet final. Indeed, the Compromise and Settlement Agreement allows the Trustee to void the assignment if administrative claims exceed $2.5 million. ( Id., Exh. B § II, ¶ 23). Defendants suggest that the substitution of parties at this stage of the litigation may lead to "inefficiencies" if the Trustee exercises his rights under the opt-out provision.
Finova counters that it no longer has the right to prosecute these claims because the assignment has been approved by the bankruptcy court. (Plf. Reply at 6). However, the order approving the Compromise and Settlement Agreement provides that:
[I]n the event that the Trustee elects to "opt-out" pursuant to Section 23 of the Agreement, all findings and rulings of this Court set forth in this Order (except for those findings and rulings supporting the approval of the Agreement itself), together with such releases, assignments, and settlement payments provided for in the Agreement, shall be of no force and effect, and the specific provisions of Section 23 of the Agreement and other "opt-out" provisions and protections in the Agreement shall thereafter govern the relationship between and among the Parties . . .
( Id., Exh. A ¶ 7) (emphasis added). Thus, the order itself specifically contemplates that the assignment of Finova's claims against defendants will no longer be effective in the event the Trustee opts-out of the settlement agreement. Although Finova may not currently have the right to prosecute those claims, it may in the future. This consideration weighs against substitution of the Trustee. See EP Operating Ltd. Partnership v. Placid Oil Co., 1994 WL 589687 at *1 (E.D. La. Oct. 26, 1994) (denying motion for substitution where transfer of interest was not yet final).
C.
Finally, defendants argue that substituting the Trustee as plaintiff based on a revocable assignment of rights would disrupt discovery and prejudice their ability to obtain relevant information. Defendants do not make a specific showing of prejudice. Rather, they fear the possibility of repeating depositions taken during Finova's absence and the difficulties associated with third-party discovery. These unsubstantiated concerns will not prevent the Court from authorizing an otherwise proper substitution of parties.
Defendants' arguments also appear to be based on a misconception of the limits imposed on third-party discovery. In their response, defendants state that "[i]f the numerous depositions of Finova agents are considered depositions of non-parties, then Defendants will not be permitted to prepare an adequate defense with the current limit of 10 depositions per side." (Def. Response at 9). However, the limitation on the number of depositions to be taken without leave of court applies to all depositions, regardless of whether the deponent is a party or non-party. See FED. R. Civ. P. 30(2)(A).