Al Carranza, a married man Plaintiff/Cross-Defendant/Appellant,
Mario A. Madrigal, an individual; Martha C. Madrigal, Defendants/Cross-Defendants/Appellees and Bryant C. Madrigal, Defendant/Cross-Claimant/Appellee, Investigation Services, Inc., Intervenor/Appellee.
Appeal from the Superior Court in Maricopa County The Honorable Emmet J. Ronan, Judge Nos. CV2010-092356, CV2011-004777.
Memorandum Decision of the Court of Appeals, Division One 1 CA-CV 12-0359 1 CA-CV 12-0643 (Consolidated) Filed March 18, 2014.
Edward D. Fitzhugh (argued), Tempe, Attorney for Al Carranza Ben R. Jemsek (argued), Thrasher Jemsek PLLC, Phoenix, Attorney for Martha and Bryant Madrigal
JUSTICE BRUTINEL authored the opinion of the Court, in which CHIEF JUSTICE BALES, VICE CHIEF JUSTICE PELANDER, and JUSTICES BERCH and TIMMER joined.
¶1 Arizona Rule of
Civil Procedure 17(a) requires a trial court to allow a reasonable opportunity
to substitute parties before it dismisses an action for lack of prosecution by
the real party in interest. We hold that in order to substitute a party, one
must file a Rule 15(a) motion to amend, and the motion may be denied if the
court finds undue delay or prejudice.
¶2 Martha and Mario Madrigal brought a wrongful death action against the City of Mesa. Attorney Edward Fitzhugh represented the Madrigals, but later withdrew. The contingent fee agreement between Fitzhugh and the Madrigals provided that if Fitzhugh withdrew for any reason, he would be entitled to 25% of any recovery the Madrigals later obtained in the case. The Madrigals hired another lawyer, Raymond Slomski, who settled the case for $3 million.
¶3 Fitzhugh demanded 25% of the settlement pursuant to the agreement. Slomski and the Madrigals rejected the demand, but Slomski retained the disputed amount in his client trust account pending a final resolution. Instead of suing the Madrigals, Fitzhugh assigned his rights under the fee agreement to Al Carranza. Carranza sued the Madrigals for the claimed contingency amount, asserting claims for breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, and quantum meruit ("fee-collection action"). The Madrigals asserted, among other defenses, that the assignment to Carranza was invalid.
¶4 The Madrigals subsequently divorced. The divorce decree provided that, upon resolution of the fee-collection action, any remaining funds would be split equally among Martha, Mario, and their son, Bryant. Later, Mario and Carranza entered into a settlement agreement that called for $300, 000 of the disputed funds to be released to Mario and Carranza ("settlement agreement"). The Joint Notice of Settlement erroneously stated that the divorce decree did not allocate the proceeds of the fee-collection action and that Mario was entitled to half of the proceeds as community property. The superior court approved the settlement and ordered Slomski to pay $300, 000 to Mario and Carranza. To resolve the conflicting claims, Slomski filed an interpleader action.
¶5 Martha Madrigal moved for reconsideration and to set aside the order approving the settlement agreement. The superior court granted relief under Rule 60(c), Arizona Rules of Civil Procedure, and vacated the order releasing the funds. Martha then moved for summary judgment in the fee-collection action.
¶6 The following day, Carranza moved to substitute Fitzhugh as the real party in interest in both the fee-collection action and the interpleader action pursuant to Rule 17(a). He did not seek to amend the pleadings in either case under Rule 15(a). The superior court initially granted the motion in the interpleader action, but later vacated that order and denied the substitution request in both actions. The court reasoned that, in the interpleader case, Carranza was the real party in interest because he-and not Fitzhugh-was a party to the settlement agreement and the beneficiary of the order releasing the $300, 000. As to the fee-collection action, the court reasoned that the Madrigals had objected to the validity of the assignment from Fitzhugh to Carranza for well over a year. It found that Fitzhugh made a "conscious decision" not to name himself as the real party in interest, there was no understandable mistake or difficulty determining the proper party, and the Madrigals had been prejudiced by Fitzhugh's lengthy and deliberate delay in seeking substitution. The court granted summary judgment in favor of Martha Madrigal in the fee-collection action, reasoning that both the contingent fee agreement between Fitzhugh and the Madrigals and Fitzhugh's assignment of his claim against the Madrigals were unethical and therefore unenforceable.
¶7 The court of appeals agreed that the fee agreement was unenforceable and affirmed summary judgment, but it reversed the denial of Carranza's motion to substitute, presumably in the fee-collection action. Carranza v. Madrigal, 1 CA-CV 12-0359, at *6, ¶ 32 (Ariz. App. Mar. 18, 2014) (mem. decision). The court reasoned that Carranza, as assignee of "all rights, title and interest" under the fee agreement, had standing to pursue only those claims brought under the agreement. Id. at *5-6, ¶¶ 28-29. Therefore, Fitzhugh was the real party in interest for equitable claims such as unjust enrichment or quantum meruit, and Rule 17(a) requires every action to be prosecuted in the name of the real party in interest. Id. at *6, ¶¶ 29-30. Relying on our opinion in Preston v. Kindred Hospitals West, LLC, the court noted that substitution of a real party in interest "does not require a plaintiff to show that an initial failure to name the real party in interest resulted from an understandable mistake or difficulty in identifying the proper party." Id. at *6, ¶ 31 (quoting Preston v. Kindred Hospitals W., LLC, 226 Ariz. 391, 392, ¶ 1, 249 P.3d 771, 772 (2011)).
¶8 We granted review to clarify the meaning of Rules 17(a) and 15(a), an issue of statewide importance. We have jurisdiction pursuant to Article 6, Section 5(3) of the Arizona ...