Court Opinion

ID: 881948
Source: CourtListenerOpinion
Date Created: 2013-06-05 00:53:31.641947+00
Date Added: 2024-06-11T09:07:41.598848
License: Public Domain

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

                            submitted on Briefs:     November 7, 1991
                                          Decided:    December 19, 1991
Filed:
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 Courtlsorder
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 ~istrictCourt did
not err in dismissing the case. ~ccordingly,the judgment of the
District Court is affirmed.

We concur: