Morrison Informatics, Inc. v. Members 1st Fed. Credit Union

• Court: Pennsylvania Supreme Court
• Writing for the Court: Chief Justice SAYLOR.
• Citation: Morrison Informatics, Inc. v. Members 1st Fed. Credit Union, 139 A.3d 1241 (Pa. 2016)
• Decision Date: 25 May 2016
• Docket Number: No. 18 MAP 2015,18 MAP 2015
• Parties: MORRISON INFORMATICS, INC., Anthony M. Grigonis, and Malcolm H. Morrison v. MEMBERS 1ST FEDERAL CREDIT UNION, Mark Zampelli, and Scott Douglass. Appeal of Members 1st Federal Credit Union.

139 A.3d 1241

MORRISON INFORMATICS, INC., Anthony M. Grigonis, and Malcolm H. Morrison

v.MEMBERS 1ST FEDERAL CREDIT UNION, Mark Zampelli, and Scott Douglass.

Appeal of Members 1st Federal Credit Union.

No. 18 MAP 2015

Supreme Court of Pennsylvania.

Argued Nov. 17, 2015.

Resubmitted Jan. 20, 2016.

Decided May 25, 2016.

Steven Bruce Kantrowitz, Esq., Ellen Hatch Kueny, Esq., Kantrowitz & Phillippi, L.L.C., Philadelphia, for Mewbers 1st Federal Credit Union, Appellant.

James Joseph Franklin, Esq., McNees, Wallace & Nurick, LLC, Harrisburg, for Scott Douglass, Appellee.

Darryl J. Liguori, LeRoy Smigel, Esq., Smigel, Anderson & Sacks, L.L.P., Harrisburg, for Morrison Informatics, Inc., Anthony M. Grigonis and Malcolm H. Morrison, Appellees.

Mark Zampelli, Pro Se.

SAYLOR, C.J., BAER, TODD, DONOHUE, DOUGHERTY, WECHT, JJ.

OPINION

Chief Justice SAYLOR.¹

The central question presented concerns whether a federal bankruptcy trustee may be substituted as a plaintiff in a civil action previously commenced by the debtor in bankruptcy in a Pennsylvania state court, although the statutory limitations period expired prior to the attempted substitution.

Morrison Informatics, Inc. (the “Company”) filed a petition for relief under Chapter 7 of the United States Bankruptcy Code in September 2009. See 11 U.S.C. §§ 701 –784. In due course, Leon P. Haller, Esquire (the “Trustee”), was appointed as trustee. See id. § 701.

In May 2011, the Company and two shareholders (the “Shareholders”), who also apparently were officers of the corporation, commenced a civil action in the court of common pleas against Members 1st Federal Credit Union (the “Credit Union”), Mark Zampelli, and Scott Douglass by filing a praecipe for a writ of summons. See Pa.R.C.P. No. 1007. About a year later, at the Credit Union's instance, the common pleas court issued a rule requiring a complaint to be filed. See id. No. 1037(a).

In an ensuing complaint, the Company and the Shareholders asserted that, beginning sometime after January 2005 and continuing into 2009, the Company's finance manager, Zampelli, had colluded with a Credit Union relationships officer, Douglass, to embezzle Company funds. The complaint advanced claims against the Credit Union, Zampelli, and Douglass variously sounding in fraud, conversion, civil conspiracy, and negligence.²

The Credit Union interposed preliminary objections. This bid for dismissal was based, in material part, on the Company's lack of authorization to advance causes of action after seeking bankruptcy relief. According to the Credit Union, upon the filing of a Chapter 7 petition for relief, all equitable and legal interests—including causes of action which had previously arisen—became part of the bankruptcy estate subject to the Trustee's exclusive control.

The Trustee and the Shareholders responded with an amended complaint indicating, in the body of the pleading, that the action was being pursued by the Trustee.³ They simultaneously filed a motion seeking leave to amend the caption to substitute the Trustee for the Company as a plaintiff.

The Credit Union then lodged a second set of preliminary objections, in which it maintained, inter alia, that the Company's participation in the filing of the writ of summons was a ity, given the Trustee's succession to the Company's rights and interests. Further, according to the Credit Union, no new action could be commenced since the applicable statute of limitations had run. See 42 Pa.C.S. § 5524 (establishing a two-year limitations period for the commencement of actions, among others, seeking redress for injuries to persons or property founded on negligent, intentional, or otherwise tortious conduct, as well as certain other harms which may be remedied per theories sounding in trespass, including deceit or fraud).⁴

The common pleas court denied the motion to amend and sustained the preliminary objections. Initially, the court found that the Shareholders lacked standing to pursue civil redress against the Credit Union for injuries suffered by the Company. As to the Company's standing, the court agreed with the Credit Union's position that, when a debtor files a bankruptcy petition, its property becomes that of the estate, and the debtor loses all rights to it. See Morrison Informatics, Inc. v. Members 1st Fed. Credit Union, No. 2011–4636 Civ. Term, slip op. at 7, 2013 WL 9745522 (C.P. Cumberland Feb. 20, 2013) (citing Jones v. Cendant Mortg. Corp., 396 B.R. 638, 646 (Bankr.W.D.Pa.2008) ). While recognizing that the Trustee had become the real party in interest, the common pleas court determined that the action commenced by the Company must be deemed void ab initio given the Company's lack of standing to initiate it. See id. at 9 (citing Thompson v. Peck, 320 Pa. 27, 30, 181 A. 597, 598 (1935) (“There can be no amendment where there is nothing to amend.”)). In this regard, the court stressed that the Trustee must be considered as an entity separate and apart from the Company. See id. at 9–10 (“The trustee is not the same entity as the pre-bankruptcy debtor, but is a new entity with his own rights and duties.... The trustee acts as the representative of the estate, managing its funds for the benefit of its creditors.” (quoting In re Fid. Am. Fin. Corp., 43 B.R. 74, 77 (Bankr.E.D.Pa.1984), vacated on other grounds sub nom. In re Neshaminy Office Bldg. Assocs., 62 B.R. 798 (E.D.Pa.1986) )). For this reason, the court refused to treat the substitution of the Trustee as being merely in the nature of correcting a technical defect.

The common pleas court accepted that amendment in the circumstances presented might be appropriate under federal practice, per Federal Rule of Civil Procedure 17(a)(3), which prescribes that “[t]he court may not dismiss an action for failure to prosecute in the name of the real party in interest until, after an objection, a reasonable time has been allowed for the real party in interest to ratify, join, or be substituted into the action.” Fed.R.Civ.P. 17(a)(3). See generally Rousseau v. Diemer, 24 F.Supp.2d 137, 143–44 (D.Mass.1998) (applying Rule 17(a)(3) to permit substitution of a bankruptcy trustee as the plaintiff in an action which had been commenced by a discharged debtor, reasoning that “the axiom that substitution of the real party in interest to avoid injustice favors allowing the [t]rustee's motion”). The court stressed, however, that the closest analogue in the Pennsylvania Rules of Civil Procedure, Rule 1033, contains no such express prohibition.

On the Trustee's appeal, the Superior Court affirmed in part, vacated in part, and remanded with instructions. See Morrison Informatics, Inc. v. Members 1st Fed. Credit Union, 97 A.3d 1233, 1244 (Pa.Super.2014). Initially, the intermediate court agreed with the common pleas court's determination that both the Company and the Shareholders lacked standing to sue. See id. at 1239. As to the Trustee and his motion to amend the caption, however, the panel viewed the salient question as centering upon whether the Company continued to exist as a legal entity after the bankruptcy, not whether its institution of insolvency proceedings had deprived it of real-party-in-interest status relative to claims against the Credit Union. See, e.g., id. at 1239 n. 2. In this regard, the panel apprehended both that the Company's legal and equitable interests became property of the estate as of the commencement of the bankruptcy proceedings, see id. at 1239 (citing In re Emoral, Inc., 740 F.3d 875, 879 (3d Cir.2014) ), and that actions by and against “persons” or “entities” unrecognized at law are void ab initio, see id. at 1240–41 (discussing this Court's determination, in Thompson, that an action against a deceased person was a ity).

Nevertheless, the Superior Court noted that the Company did not cease to exist upon its filing of a Chapter 7 petition for relief. See id. at 1240 (“Neither [the Credit Union] nor the trial court cites authority for the proposition that a pending bankruptcy petition is the equivalent of death.”). Rather, the intermediate court highlighted, the Trustee succeeded to its rights and interests relative to the Credit Union. See id. (“The issue here is that the claims stated in the complaint were the property of the bankruptcy estate rather than that of [the Company]. Thus, the [Trustee], and not [the Company], was and is the real party in interest.”).

Given its position that the matter concerned real-party-in-interest status rather than a disability fatal to the action's commencement, the Superior Court rejected the common pleas court's rationale supporting dismissal. Rather, the intermediate court found the issue of whether a bankruptcy trustee may be substituted for a debtor when a case stating claims representing property of the estate was initiated by the debtor was one of first impression in Pennsylvania. In this regard, the court distinguished a decision involving an attempted post-limitations-period addition of a plaintiff (a municipal authority) in an action commenced by a distinct legal entity (a municipality), where the rights asserted were not derivative. See id. at 1243–44 (discussing Borough of Berwick v. Quandel Grp., Inc., 440 Pa.Super. 367, 655 A.2d 606 (1995) ).

Next, since the issue was a novel one, the Superior Court looked to the approaches of other jurisdictions. Upon such review, it found a tendency to permit a real party in interest to be substituted for an original plaintiff, so long as the modification does not alter the factual allegations asserted or otherwise cause prejudice to the defendant. See id. at 1241–42 (citing Cloud v. Northrop Grumman Corp., 67 Cal.App.4th 995, 79 Cal.Rptr.2d 544, 554 (1998) (“[A]n amendment to substitute in the real party in interest is entitled to relation-back effect.”); Miller v. Campbell, 164 Wash.2d 529, 192 P.3d 352, 356 (2008) (holding that the substitution of a bankruptcy trustee as a plaintiff related back to the original filing of an action by a...