A bankruptcy trustee may be substituted as the real party in interest even after the statute of limitations has run, according to District Judge David M. Lawson of Detroit. In other words, substituting a new plaintiff does not amount to amending the complaint.

The debtor had filed a chapter 7 petition that was converted to chapter 13. While in chapter 13, a fire damaged her home. The debtor filed a claim that the insurance company denied. Later, the case reconverted to chapter 7.

The chapter 7 trustee received court permission to retain counsel and pursue the insurance claim. At the trustee’s request, the debtor filed a timely complaint in her own name in district court.

After the statute of limitations had run, the trustee realized that he should have sued in his name as trustee. So, the trustee filed a motion for his substitution as plaintiff under F.R.C.P. 17.

The insurance company resisted the motion, contending that the trustee was attempting to file an amended complaint under Rule 15 that would be barred by the statute of limitations.

The trustee won, and the insurance company lost in Judge Lawson’s September 22 opinion.

Judge Lawson first explained that the debtor had constitutional standing because she had sustained an injury in fact and had shown a causal relationship between the defendant’s conduct and the injury. However, having constitutional standing does not mean that the debtor was the real party in interest.

Because the injury occurred while the debtor was in bankruptcy, the claim belonged to the bankrupt estate, making the trustee the real party in interest. Therefore, the outcome was governed by Rule 17(a)(3). It provides:

The 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. After ratification, joinder, or substitution, the action proceeds as if it had been originally commenced by the real party in interest.

Judge Lawson said the rule “requires” the court to permit the substitution of the real party in interest.

The insurance company contended that substituting the trustee was an attempt at amending the complaint by adding a new party under F.R.C.P. 15, where a claim by the new party would not relate back to a time before the expiration of the statute of limitations.

A “careful reading” of Sixth Circuit authority on Rule 15, Judge Lawson said, “does not bar the substitution of a party to allow ‘corrections of misnomers or misdescriptions.’” [Emphasis in original.]

By contrast, substitution under Rule 17 permits the suit to proceed “as if it had been originally commenced by the real party in interest.” The Wright & Miller treatise interprets the rule to mean that “a correction in parties is permitted even after the statute of limitations governing the action has run.” 6A Charles A. Wright & Arthur R. Miller, Fed. Prac. and Proc., § 1555 (3d ed. 2020).

Before granting the substitution motion, Judge Lawson had a final hurdle to jump: The Michigan state courts have a procedural rule prohibiting the substitution of a bankruptcy trustee after the statute of limitations has run.

Citing Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938), Judge Lawson declined to invoke the state procedural rule. He said that federal courts apply state substantive law in diversity cases but “apply federal law for procedural issues.”

Judge Lawson therefore ordered the substitution of the trustee as plaintiff.