Carranza v. Madrigal – 7/22/2015

July 30, 2015

Arizona Supreme Court holds that a Rule 15(a) motion to amend a pleading must be filed in order to substitute a party and that the motion may be denied if the court finds undue delay or prejudice.

Mario and Martha Madrigal pursued a wrongful death action against the City of Mesa, represented by attorney Edward Fitzhugh, with whom they had signed a contingent fee agreement providing that if Fitzhugh withdrew for any reason, he would be entitled to 25% of any recovery obtained in the case.  Fitzhugh withdrew and the Madrigals’ new attorney ultimately settled the case.  Fitzhugh demanded 25% of the settlement and the Madrigals and their lawyer refused. 

Fitzhugh assigned his rights under the fee agreement to Al Carranza, who sued the Madrigals to enforce the fee agreement and also alleged other equitable claims.  The Madrigals asserted that the assignment was invalid.  While the Carranza action was pending, the Madrigals divorced and their divorce decree specified how funds remaining after the resolution of the Carranza action would be distributed.  Mario then entered into a settlement agreement with Carranza which the superior court approved.  The settlement agreement, however, was not consistent with the divorce decree and the Madrigals’ attorney, who had retained the disputed funds in his trust account, filed an interpleader action to resolve the conflict between the settlement agreement and the divorce decree. 

Carranza then moved pursuant to Rule 17(a) to substitute Fitzhugh as the real party in interest in his fee collection action as well as the interpleader action but did not move to amend the pleadings under Rule 15(a).  The trial court ultimately denied the motions in both actions, reasoning that it was Carranza who was party to the settlement agreement and was therefore the real party in interest in the interpleader action, and that the Madrigals had been prejudiced by Fitzhugh’s delay in seeking substitution in the fee collection action.  The trial court then granted summary judgment for Martha on the ground that both the fee agreement and the assignment were unethical and unenforceable.

The Court of Appeals upheld the grant of summary judgment but reversed the denial of Carranza’s motion to substitute, reasoning that Carranza only had standing to pursue claims brought under the fee agreement and that Fitzhugh was the real party in interest for equitable claims.  The Court of Appeals found that the motions to substitute should have been granted because Rule 17(a) requires actions to be prosecuted in the name of the real party in interest and does not require a showing that the initial failure to name the real party in interest resulted from an understandable mistake or difficulty in identifying the proper party. 

The Supreme Court reversed, noting that Rule 17(a) provides that actions must be “prosecuted in the name of the real party in interest” and limits a court’s ability to dismiss an action on the ground that it is not being prosecuted by the real party in interest until after reasonable time has been allowed for joinder or substitution of the real party in interest.  The Court found that Rule 17(a) is “not self-executing” and does not provide a mechanism for substitution of a party, which must be done pursuant to Rule 15(a).  The Court concluded that the Court of Appeals “erred in holding that Fitzhugh had a right to substitution merely because he was a real party in interest,” and found that Rule 17(a) did not preclude summary judgment “because the trial court granted the motion based on the unenforceability of the fee agreement and assignment – not Fitzhugh’s failure to prosecute the action as the real party in interest.” 

The Court further found that Carranza’s failure to move to amend the pleadings under Rule 15(a) was a sufficient basis to deny his motions to substitute.  The Court also concluded that even if Carranza had properly moved to amend, the trial court did not abuse its discretion in denying the substitutions.  A court may deny leave to amend “if it finds undue delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments or undue prejudice to the opposing party.”  “Denial of leave to amend is a proper exercise of the court’s discretion when the amendment comes late and raises new issues requiring preparation for factual discovery which would” delay the case.  Because Carranza, rather than Fitzhugh, was the party to the settlement agreement at issue in the interpleader action and the Madrigals would have been unfairly prejudiced by Fitzhugh’s substitution in the fee collection action more than one year after its commencement, the Court found that the trial court properly denied the motions to substitute Fitzhugh.  The Court noted that Fitzhugh knew all along he was the real party in interest but chose to have Carranza bring the fee collection action.  The Court affirmed the trial court’s order denying the motions to substitute and vacated the paragraphs of the Court of Appeals’ decision discussing the substitution issues. 

Justice Brutinel authored the unanimous opinion of the Court.