NO. 90-341 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1991 

DON BYRON REILLY and MARY LOU REILLY, 

Plaintiffs and Appellants, 

CITIZENS STATE BANK, IDAHO 

FIRST NATIONAL BANK and 

FARMERS AND MERCHANTS BANK, 

Defendants and Respondents. 

APPEAL FROM: District Court of the Fourth Judicial District, 

In and for the County of Ravalli, 

The Honorable Ed McLean, Judge presiding. 

COUNSEL OF RECORD: 

For Appellants: 

James P. OfBrien, Attorney at Law, Missoula, 

Montana 

For Respondents: 

Randy J. Cox; Boone, Karlberg & Haddon, Missoula, 

Montana 

Bruce Hussey, Attorney at Law, Missoula, Montana 

Filed: 

submitted on Briefs: November 7, 1991 

Decided: December 19, 1991 
Justice John Conway Harrison delivered the Opinion of the Court. 

This is an appeal from the order of the Fourth Judicial 

District Court, Ravalli County, denying appellants1 motion to set 

aside a stipulation and order dismissing their case. We affirm. 

The issue is whether the District Court erred when it 

dismissed appellants1 tort action with prejudice based upon a 

stipulation entered into between respondents and a bankruptcy 

trustee, which lacked notice or consent of a named party. 

Appellants filed this lender liability lawsuit on March 25, 

1987, almost one and a half years after they filed a bankruptcy 

petition under Chapter 11 of the United States Bankruptcy Code. 

After several unsuccessful attempts to complete the Chapter 11 

bankruptcy, appellants moved the Bankruptcy Court to dismiss their 

case. However, on motion of appellants1 creditors the Bankruptcy 

Court converted the case from Chapter 11 to Chapter 7 liquidation 

over appellants1 objections. The Bankruptcy Appellate Panel of the 

Ninth Circuit Court of Appeals affirmed. 

Upon conversion to a Chapter 7 liquidation case, an estate was 

created consisting of all of the appellants' non-exempt property. 

The Bankruptcy Court appointed a trustee to manage the estate, 

placing appellants1 property in the control of the trustee. The 

trustee's duties included evaluating appellants1 lender liability 

claim against Citizens State Bank. Upon receiving advice from 

independent counsel, the trustee settled the claim with Citizens 

State Bank. The Bankruptcy Court approved the settlement and 
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dismissal from the instant lawsuit, despite appellants1 objection. 

In its order, the Bankruptcy Court declared that the cause of 

action pending in state court was an asset of the estate, not an 

asset of the individual debtors, and that it was in the best 

interest of the estate to settle the claim. 

The trustee presented a stipulation for dismissal of the state 

court proceeding, along with a copy of the Bankruptcy Courtls order 

approving the settlement, to the District Court. The District 

Court dismissed the lawsuit with prejudice, deeming it fully 

settled on the merits. Appellants appeal the District Courtls 

denial of their motion to set aside the stipulation and order for 

dismissal. 

Appellants contend that the District Court erred when it 

dismissed appellants1 case with prejudice based upon a stipulation 

entered into between the respondents and the bankruptcy trustee. 

Appellants claim error because: (1) the trustee was not a party to 

the lawsuit; and (2) appellants were not notified of the dismissal 

nor did they consent to it. Appellants assert that without their 

consent the District Court lacked the authority to dismiss this 

lawsuit until the bankruptcy estate was officially substituted as 

a party to the litigation. We disagree. 

Pursuant to federal bankruptcy law, when appellants1 Chapter 

11 case was involuntarily converted to a Chapter 7 liquidation 

case, appellants1 state cause of action became part of the 

bankruptcy estate pursuant to 11 U.S.C. 5 541(a), and appellants 

were divested of all right and interest in the lawsuit. Control of 
the lawsuit vested with the bankruptcy trustee. Sierra Switchboard 

Co. v. Westinghouse Elec. Corp. (9th Cir. 1986), 789 F.2d 705. As 

such, the trustee possessed the authority to settle the case. In 

re Sible (Bankr. D. Mont. 1989), 95 Bankr. 192. The trustee and 

the Bankruptcy Court concluded that settlement was in the best 

interest of the estate, disposing of the case on its merits. 

Since the instant lawsuit was still pending in state district 

court, the parties were required to dispose of the case in that 

forum. The trustee and the respondents entered into a stipulation 

to dismiss the state court proceeding which was so ordered by the 

District Court. 

Appellants are unsatisfied with the settlement reached between 

the trustee and Citizens State Bank, and are attempting to use this 

forum to circumvent adverse Bankruptcy Court proceedings. 

Appellants' attempts fail because this Court does not have the 

authority to review issues which are appropriately before the 

Bankruptcy Court. Federal Land Bank of Spokane v. Reilly (1989), 

240 Mont. 147, 149, 783 P.2d 917, 918. 

The only issue we are concerned with is whether dismissal of 

a settled state cause of action, which was pending before a state 

district court, was appropriate without first giving appellants 

notice. We conclude that the trustee and respondents were not 

required to give notice to the appellants regarding the stipulation 

for dismissal. As previously noted, although appellants remained 

the named party plaintiffs, conversion of their bankruptcy case 

from Chapter 11 to Chapter 7 liquidation divested them of all of 
their rights in the state court litigation. As a result, 

appellants lacked standing to object to dismissal. 

Appellants contend that they did not lack standing in the 

state court proceeding and that the trustee was required to 

substitute the bankruptcy estate as the real party in interest to 

validate the order of dismissal pursuant to Rules 17 (a) and 25(c), 

M.R.Civ.P. Appellants argue that the District Court's failure to 

do so constitutes an abuse of discretion warranting reversal. 

Upon reviewing the rules cited by appellants, it is evident 

that Rule 17(a), M.R.Civ.P., is inapplicable and Rule 25(c), 

M.R.Civ.P., does not mandate substitution. McComb v. Row River 

Lumber Co. (9th Cir. 1949), 177 F.2d 129, 130. Rule 17(a), 

M.R.Civ.P., applies when the interest in a case transfers prior to 

commencement of the case; Rule 25(c), M.R.Civ.P., applies when the 

interest in a case transfers during the action. 3B Moore's Federal 

Practice, 1 25.08, p. 25-77; Hilbrands v. Far East Trading Co. (9th 

Cir. 1975), 509 F.2d 1321, 1323. 

In the case at bar, since the bankruptcy case was converted 

after the commencement of the state court litigation, the interest 

in the action transferred to the bankruptcy trustee during the 

course of the action making Rule 25 (c) , M.R.Civ.P., rather than 

Rule 17 (a) , M.R. Civ. P., applicable. Rule 25 (c) , M.R. Civ. P., 

states: 

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. . . . 
a I 

Substitution is a matter of convenience within the district court's 

discretion depending on the exigencies of the situation. 3B 

Moore's Federal Practice 1 25.08, p. 25-77. 

The matter presented to the District Court was not exigent. 

The parties presented a signed stipulation to dismiss the case 

based upon the Bankruptcy Court's approval of the settlement. 

Substitution was not necessary since the parties agreed to dismiss 

the case and the order of dismissal terminated the case. 

Based on the foregoing, we hold that the ~istrict Court did 

not err in dismissing the case. ~ccordingly, the judgment of the 

District Court is affirmed. 

We concur: