Lake County Trust Co., as Trustee for Lake County Trust 5434, James L. Gagan and Eugene H. Deutsch v. United Consumers Club, Inc. (mem. dec.)

MEMORANDUM DECISION
May 26 2015, 10:19 am
Pursuant to Ind. Appellate Rule 65(D), this
Memorandum Decision shall not be regarded as
precedent or cited before any court except for the
purpose of establishing the defense of res judicata,
collateral estoppel, or the law of the case.
ATTORNEYS FOR APPELLANTS ATTORNEYS FOR APPELLEE
Peter J. Rusthoven F. Joseph Jaskowiak
Barnes & Thornburg LLP Lauren K. Kroeger
Indianapolis, Indiana Hoeppner, Wagner & Evans LLP
Merrillville, Indiana
Brian Custy
Merrillville, Indiana Karl L. Mulvaney
Nana Quay-Smith
Bingham Greenebaum Doll LLP
Indianapolis, Indiana
IN THE
COURT OF APPEALS OF INDIANA
Lake County Trust Co., as Trustee May 26, 2015
for Lake County Trust 5434, James Court of Appeals Case No.
L. Gagan and Eugene H. Deutsch, 45A03-1407-PL-226
Appellants, Appeal from the Lake Superior
v. Court
The Honorable John M. Sedia,
United Consumers Club, INC., Judge
Appellee
Cause No. 45D01-1401-PL-11
Friedlander, Judge.
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[1] This is the second iteration of a legal dispute involving property owned by Lake
County Trust 5434 (the Trust) and leased by United Consumers Club (United),
with the primary difference between this one and the first lawsuit being the
addition of James L. Gagan and Eugene H. Deutsch (the Beneficiaries), who
are beneficiaries of the Trust, as parties to the lawsuit. In both actions, the
plaintiff(s) sued United for recovery of unpaid rent. In the first action, an
interlocutory appeal that we shall designate as United I, the action was brought
by Lake County Trust Co. (the Trustee) on behalf of the Trust. On grounds
that will be explained below, this court determined that the Trust did not have
standing to sue United and reversed the trial court’s order denying United’s
motion to dismiss for lack of standing. See Lake Cnty. Trust Co. v. United
Consumers Club, Inc., 45A03-1111-PL-527 (Ind. Ct. App. Sept. 11, 2012). The
case was dismissed after remand on March 13, 2013 pursuant to the Trust’s
motion to dismiss.
[2] The present lawsuit was filed in January 2014, and is essentially the same as the
first, with the exception that the Beneficiaries were added as plaintiffs. United
filed a Trial Rule 12(B)(6) to dismiss the January 2014 action on grounds of res
judicata. The Beneficiaries appeal the grant of that motion, presenting a single
issue for review: did the trial court err in holding that the ruling in United I
constituted a dismissal on the merits against the Beneficiaries, thus barring on
res judicata grounds the present case?
[3] We reverse.
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[4] The underlying facts were set out in United I, as follows:
Lake County Trust 5434 (“the Trust”) sued United Consumers
Club (“United”) for recovery of unpaid rent. The lawsuit was
brought by the Trustee only; the trust beneficiaries were not
named as plaintiffs even though the trust document explicitly
provided the Trust could not collect or receive the rents from the
trust property. …
The document creating the Trust provides in part:
It is further expressly understood and agreed that [the
Trust] has no right or power whatsoever to manage,
control or operate said real estate in any way or to any
extent and is not entitled at any time to collect or receive
for any purpose, directly or indirectly, the rents, issues,
profits or proceeds of said real estate or any mortgage or
any disposition thereof.
In May of 2009, the Trust, in the name of the Trustee only and
not the beneficiaries, sued United for recovery of unpaid rent. In
August 2009 the Trust amended its complaint to allege United
had not paid base rent, taxes, and operating expenses as required
under the lease agreement. United moved to dismiss, and its
motion was denied. In December 2009, United filed its amended
answer and counterclaim in which it alleged, among other things,
that the Trust was not the real party in interest or was otherwise
“not qualified to bring these claims per the terms of the lease,”
and “lacks standing to sue for the relief sought in the amended
complaint.”
The parties then filed cross-motions for summary judgment, and
in September of 2011 the trial court granted summary judgment
for the Trust on certain issues and for United on one issue. In its
summary judgment order, it concluded the Trust had standing to
bring the lawsuit. The trial court certified its order for
interlocutory appeal, and we accepted jurisdiction.
[5] Id., slip op. at 1 (internal citations and footnote omitted).
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[6] On appeal, this court noted that an allegation of lack of standing is treated as a
motion to dismiss under T.R. 12(B)(6). The main purpose of standing is to
insure that the party before the court has a substantive right to enforce the claim
that is being made in the litigation. See Lunsford v. Deutsche Bank Trust Co.
Americas as Tr., 996 N.E.2d 815 (Ind. Ct. App. 2013). We further noted that “a
court has no jurisdiction over a particular case unless a party with standing is
participating in the case.” Lake Cnty. Trust Co. v. United Consumers Club, Inc.,
45A03-1111-PL-527, slip op. at 1. Based upon the following rationale, we
concluded that the Trust did not have standing to sue United for unpaid rent
and therefore that its lawsuit should have been dismissed:
The trust document is explicit that the Trust “is not entitled at
any time to collect or receive for any purpose, directly or
indirectly, the rents, issues, profits or proceeds of said real
estate,” … and we agree with United that “[u]sing the words that
the Trust had ‘no power to collect rents,’ also left the Trustee
with no power to bring a lawsuit to collect rent.”
[7] Id. (internal footnote and citations omitted).
[8] This brings us to the present case. As indicated above, this lawsuit is essentially
the same as the first, with the exception of the addition of the Beneficiaries as
plaintiffs. United contends that the dismissal of United I constituted a decision
on the merits against the Beneficiaries of the dispute over nonpayment of rent
and therefore is res judicata with respect to the present case. The trial court
agreed, citing Indiana Trial Rule 41(B), “which provides that any dismissal
other than a dismissal for lack of jurisdiction, operates as an adjudication on the
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merits [.]” Appellant’s Appendix at 6. The Beneficiaries challenge that
determination.
[9] We begin by briefly addressing the trial court’s citation to T.R. 41(B) in support
of its ruling. The relevant portion of that provision states, “Unless the court in
its order for dismissal otherwise specifies, a dismissal under this subdivision or
subdivision (E) of this rule and any dismissal not provided for in this rule, other
than a dismissal for lack of jurisdiction, operates as an adjudication upon the
merits.” T.R. 41(B). Clearly, the premise of the trial court’s ruling is that the
dismissal of the case in United I was something “other than a dismissal for lack
of jurisdiction.” Although the dismissal was based technically upon T.R.
12(B)(6), the specific reasoning for dismissal was that the Trust lacked standing
to sue United for unpaid rent. As this court stated in United I, “a court has no
jurisdiction over a particular case unless a party with standing is participating in
the case.” Lake Cnty. Trust Co. v. United Consumers Club, Inc., 45A03-1111-PL-
527, slip op. at 1 (citing In re Custody of G.J., 796 N.E.2d 756 (Ind. Ct. App.
2003), trans. denied). In short, the lawsuit in United I was dismissed for lack of
standing, which had jurisdictional implications. For this reason, on the facts of
this case, the exception in the quoted portion of T.R. 41(B) applies and thus, as
to all parties except the Trust, it did not constitute an adjudication on the merits
within the meaning of T.R. 41(B).
[10] A T.R. 12(B)(6) motion to dismiss for failure to state a claim upon which relief
can be granted tests the legal sufficiency of a claim, not the facts supporting it.
Godby v. Whitehead, 837 N.E.2d 146 (Ind. Ct. App. 2005), trans. denied.
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Accordingly, we view the complaint in the light most favorable to the non-
moving party and draw every reasonable inference in that party’s favor. Id. We
will affirm a grant of such a motion to dismiss if it is apparent that the facts
alleged in the complaint are incapable of supporting relief under any set of
circumstances. Id. “In determining whether any facts will support the claim,
we look only to the complaint and may not resort to any other evidence in the
record.” Id. at 149. Finally, we apply a de novo standard of review in appeals
from the grant of a motion to dismiss under T.R. 12(B)(6). Godby v. Whitehead,
837 N.E.2d 146.
[11] Both parties agree that this case turns on the question of whether res judicata
properly applies. More specifically, the issue is whether, with respect to the
Beneficiaries, the former judgment satisfies the element of res judicata that it
was “rendered on the merits.”1 The parties’ competing positions on that
question are as follows: quoting Schultz v. State, 731 N.E.2d 1041, 1043 (Ind. Ct.
1
Res judicata is appropriate only where the following four elements are present:
1. the former judgment must have been rendered by a court of
competent jurisdiction;
2. the former judgment must have been rendered on the merits;
3. the matter now in issue was or might have been determined in the
former suit; and
4. the controversy adjudicated in the former suit must have been
between the parties to the present action or their privies.
Indiana State Ethics Comm’n v. Sanchez, 18 N.E.3d 988, 993 (Ind. 2014) (quoting Chemco
Transp., Inc. v. Conn., 527 N.E.2d 179, 181 (Ind. 1988)).
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Ohio App. 2000), trans. denied, United argues “[a] decision that a party lacks standing
pursuant to Trial Rule 12(B)(6) operates as an adjudication on the merits.”
This quote from Schultz cites Lake Cnty. Council v. State Bd. of Tax Comm’rs, 706
N.E.2d 270, 280 (Ind. T.C. 1999) adhered to on reconsideration sub nom.
Montgomery v. State Bd. of Tax Comm’rs, 708 N.E.2d 936 (Ind. T.C. 1999), rev’d,
730 N.E.2d 680 (Ind. 2000), as its source authority. Lake County Council,
however, adds an important qualifier that the panel in Schultz chose not to
include, i.e., “[a] decision that a party lacks standing pursuant to Trial Rule
12(B)(6) operates as an adjudication on the merits … as to the party seeking to
invoke the court’s jurisdiction.” Lake Cnty. Council v. State Bd. of Tax Comm’rs, 706
N.E.2d at 280 (emphasis supplied). In light of the full quote from Lake Cnty.
Council v. State Bd. of Tax Comm’rs, the granting of United’s motion in the
present case clearly acted as an adjudication on the merits against the Trust.
The question is, was this ruling also binding upon the Beneficiaries?
[12] “Not all judgments of dismissal on the grounds stated in Ind. Rules of
Procedure, Trial Rule 12(B) constitute an adjudication on the merits so as to bar
presentation of the same issues in a subsequent action.” Ragnar Benson, Inc. v.
Wm. P. Jungclaus Co., 352 N.E.2d 817, 820 (Ind. Ct. App. 1976). In this case,
United I was dismissed upon the determination that the Trust lacked standing to
bring the lawsuit. The Beneficiaries contend this was tantamount to a dismissal
on grounds that the Trust was not the real party in interest. This, in turn,
would justify application of the rule that “dismissal for want of a real party in
interest is not on the merits and would not bar any action which the real party
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in interest might decide to bring at a later time.” State v. Rankin, 260 Ind. 228,
233, 294 N.E.2d 604, 607 (1973).
[13] The concepts of standing and real party in interest often are understandably
considered one and the same. Hammes v. Brumley, 659 N.E.2d 1021 (Ind. 1995).
Our Supreme Court has indicated, however, that they are not. “Although they
are quite similar, they are indeed different concepts.” Id. at 1029. Standing
refers to the question of whether a party has an actual demonstrable injury for
purposes of a lawsuit. Barnette v. U.S. Architects, LLP, 15 N.E.3d 1 (Ind. Ct.
App. 2014). “To establish standing, the plaintiff must ‘demonstrate a personal
stake in the outcome of the lawsuit and must show that he or she has sustained
or was in immediate danger of sustaining, some direct injury as a result of the
conduct at issue.’” Vectren Energy Mktg. & Serv., Inc. v. Exec. Risk Specialty Ins.
Co., 875 N.E.2d 774, 777 (Ind. Ct. App. 2007) (quoting Shourek v. Stirling, 621
N.E.2d 1107, 1109 (Ind. 1993)). On the other hand, our Supreme Court has
explained that a real party in interest “is the person who is the true owner of the
right sought to be enforced.” Hammes v. Brumley, 659 N.E.2d at 1030. Put
another way, the real party in interest is the one who is “entitled to the fruits of
the action.” Id.
[14] In the present case, the Trust manages the property for the benefit of the
Beneficiaries, and normally would therefore be authorized to file a lawsuit for
recovery of unpaid rent pertaining to the trust property. Thus, the Trust would
usually have standing to file this lawsuit. See Ind. Code Ann. § 30-4-3-3(a)(11)
(West, Westlaw current with legislation of the 2015 First Regular Session of the
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119th General Assembly effective through April 23, 2015) (“a trustee has the
power to … prosecute or defend actions, claims, or proceedings for the
protection of … trust property”). We determined in United I, however, that
because of a provision in the lease governing this particular property, the Trust
lacks standing. Whether the Trust did or did not have standing, the
Beneficiaries were the real party in interest, as they were entitled to the fruits of
the action, viz., the unpaid rent.2 See Hammes v. Brumley, 659 N.E.2d 1021.
[15] Both sides of this dispute seem to acknowledge that the Beneficiaries could have
been substituted for the Trust as the real parties in interest in the lawsuit that
was ultimately dismissed pursuant to our holding in United I. United contends
that the failure to do that was a strategic decision on the part of the Trust and
the Beneficiaries that was calculated “to avoid United’s counterclaims against
the beneficiaries individually.” Appellee’s Brief at 23. United further contends
the Beneficiaries “participated in the prior litigation”, Appellee’s Brief at 17, and
actively resisted joining in that lawsuit. Indeed, this court indicated in United I
that there was “strenuous[]” resistance to the joinder of the Beneficiaries in that
lawsuit. Lake Cnty. Trust Co. v. United Consumers Club, Inc., 45A03-1111-PL-527,
slip op. at 2. United claims that in choosing not to substitute the Beneficiaries
as the real party in interest in the first lawsuit, the Trust and the Beneficiaries
2
Indeed, were it not for the lease provision divesting the Trust of standing, the “real party in interest”
requirement would not represent an impediment to the Trust prosecuting this action. See Trial Rule 17 (A)(1)
(addressing the real party in interest) (“(the) trustee of an express trust … may sue in his own name without
joining with him the party for whose benefit the action is brought, but stating his relationship and the
capacity in which he sues”).
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were manipulating the process, and further that the present lawsuit represents a
subversion of the Trial Rules, and specifically a “circumvention” of the
Appellants’ failure to comply with T.R. 17.
[16] United’s T.R. 17 argument presumes that T.R. 17 required the Appellants to
substitute the Beneficiaries for the Trust in United I after the Trust was
determined to lack standing. We can find no authority for this proposition.
T.R. 17(A) does provide that a real party in interest has “a reasonable time”
after an objection has been lodged against the original party to ratify the action
or be joined or substituted in the action. The rule further provides that when
such does occur, the ratification, joinder, or substitution “shall have the same
effect as if the action had been commenced initially in the name of the real
party in interest.” T.R. 17(A). We can find no language, however, that may be
interpreted as mandating that ratification, substitution, or joinder of the real
party in interest must occur after a court has determined that the party bringing
the action lacks standing or is determined not to be the real party in interest.
[17] Still, we do not necessarily disagree with United’s contention that “a real party
in interest which manipulates the named plaintiff for strategic reasons does so at
its own peril.” Appellee’s Brief at 22 (citing Metal Forming Techs., Inc v. Marsh &
McLennan Co., 224 F.R.D. 431 (S.D. Ind. 2004)). The question is whether that
situation is present in this case. In addition to Metal Forming Techs., United cites
Posley v. Clarian Health, 2012 WL 3886328 (S.D. Ind. Sept. 6, 2012) in support
of its contention that T.R. 17 should be construed so as to require joinder,
ratification, or substitution of the real party in interest in the original action
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where the original plaintiff has been determined not to be the real party in
interest. In those two cases, the question was whether the case should be
dismissed on the defendant’s motion.
[18] In Posley, an individual filed a lawsuit against a health-care entity. Subsequent
to that, the individual filed for Chapter 7 bankruptcy protection. The health-
care provider filed a motion to dismiss the complaint on grounds that the
bankruptcy trustee, not the individual, was the real party in interest. The
individual argued that ratification was the proper course of action. The court
ultimately agreed that ratification was appropriate after applying the “honest
mistake test” to determine whether the real party in interest had engaged in a
“sleight of hand” by filing the complaint in the name of a different party. Posley
v. Clarian Health, 21012 WL 3886328, slip op. at 3. The “honest mistake test”
requires a party wishing to substitute another party to establish that “when he
brought this action in his own name, he did so as the result of an honest and
understandable mistake.” Id. at 2 (citing Feist v. Consol. Freightways Corp., 100 F.
Supp.2d 273, 276 (E.D. Pa. 1999), aff’d, 216 F.3d 1075 (3d Cir. 2000), cert.
denied, 532 U.S. 920 (2001)). The Posley court determined that the original
named plaintiff, at the time she filed the lawsuit in her own name, exercised her
only legal choice at the time, and therefore permitted ratification.
[19] In Metal Forming Techs., Inc. v. Marsh & McLennan Co., the plaintiffs leased a
premises that was subsequently damaged by a fire. The landlord’s primary
insurer paid property damages to the landlord pursuant to an insurance policy.
The primary insurer brought a subrogation action against the plaintiffs to
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recover expenses it paid to the landlord as a result of the fire. Prior to the fire,
the plaintiffs had purchased two separate liability insurance policies from two
separate companies. One of those insurers denied coverage after the fire, and
the other, Travelers Insurance, informed the plaintiffs that their coverage was
limited to $100,000, one-tenth of what the plaintiffs believed they had
purchased, and significantly less than the primary insurer’s subrogation claim.
The plaintiffs and the primary insurer reached a settlement agreement
concerning the primary insurer’s subrogation claims. In that agreement, the
plaintiffs agreed to have judgment for $1,500,000 entered against them in favor
of the primary insurer. The primary insurer would receive the $100,000
proceeds from the Travelers policy, and the primary insurer further agreed that
it would not take any steps or pursue any action to collect or execute that
judgment against the plaintiffs. The plaintiffs agreed to assign to the primary
insurer all of its claims against Marsh & McLennan Company, through which
the plaintiffs had purchased their two insurance policies. Finally, as part of the
agreement, the plaintiffs agreed to permit the primary insurer to sue Marsh in
the plaintiffs’ names and to assist in the prosecution of the assigned claims
against Marsh.
[20] The plaintiffs then sued Marsh alleging that Marsh had failed to procure
adequate insurance coverage for them. Marsh filed a motion for summary
judgment contending that the plaintiffs were not the real parties in interest
because they had assigned their claims to the primary insurer. The court
concluded that the plaintiffs were not the real parties in interest and that the
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primary insurer filed this action “in disguise, using Plaintiffs’ names while
knowing that Plaintiffs no longer owned the claims that were brought.” Metal
Forming Techs., Inc. v. Marsh & McLennan Co., 224 F.R.D. at 432. Moreover, the
court concluded that the primary insurer’s decision to sue in the plaintiffs’
names “was a strategic and tactical decision in contravention of Rule 17(a).”3
Id. at 437. Ultimately, the court denied a motion to substitute under Rule 17(a)
because the plaintiffs and the primary insurer had failed to demonstrate that
there was “an honest or understandable mistake or difficulty in naming the
proper party.” Id.
[21] The outcomes in Posley and Metal Forming Techs., Inc. both turned at least in part
on the issue of whether the failure to identify the real party in interest in the
complaint was motivated by tactical considerations, or instead was a product of
honest mistake or difficulty in naming the proper party. Assuming for the sake
of argument that those holdings apply in the present case, United has not
presented a compelling argument that the action in United I was prosecuted in
the name of the Trustee on behalf of the Trust rather than the Beneficiaries as a
strategic or tactical matter, or was anything other than an honest or
understandable mistake. Having said that, we note United’s claim that the first
lawsuit was brought in the name of the Trust in order to “avoid United’s
3
The court opined that the primary insurers’ “decision to sue in Plaintiff’s names was made “to make the
Plaintiffs more sympathetic to a jury,” and to “make this suit about a company ravaged by fire and not about
an insurance company that paid for the fire’s damage.” Metal Forming Techs., Inc v. Marsh & McLennan Co.,
224 F.R.D. at 437.
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counterclaims against the beneficiaries individually.” Appellee’s Brief at 23.
United does not further illuminate the nature of these counterclaims or the
manner in which they could have been avoided by substituting the Trust for the
Beneficiaries as named plaintiff. We simply are not convinced that the Trust or
the Beneficiaries would fail the “honest mistake test” discussed in Posley and
Metal Forming Techs., Inc.
[22] In any event, neither Posley nor Metal Forming Techs., Inc. suggests that where a
court has determined that the plaintiff was not a real party in interest, the real
party in interest must be substituted in that action or suffer an adverse decision
on the merits. Neither can we find any language in T.R. 17 that mandates such
a result. Simply put, T.R. 17 indicates that substitution, ratification, or joinder
are permissible, but gives no indication that they are mandatory steps that must
be taken in the event it is determined that the party originally filing the action is
not the real party in interest. We are reluctant to engraft such a requirement,
especially in light of our Supreme Court’s statement in Lake Cnty. Council v. State
Bd. of Tax Comm’rs, 706 N.E.2d at 280 that a “decision that a party lacks
standing pursuant to Trial Rule 12(B)(6) operates as an adjudication on the
merits … as to the party seeking to invoke the court’s jurisdiction.” Dicta or
not, it bespeaks the Supreme Court’s view that dismissal of a plaintiff’s action
on grounds of lack of standing operates only against that party, and does not
implicate the interests of an unnamed real party in interest, especially where the
failure to name the real party in interest in the complaint was not motivated by
procedural or tactical skullduggery.
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[23] In summary, the dismissal of United I on grounds that the Trust was not the real
party in interest because of a provision in the lease governing United’s tenancy
constituted a judgment on the merits only against the Trust. It did not operate
as a judgment on the merits against the real parties in interest, i.e., the
Beneficiaries. Moreover, although T.R. 17 authorized substitution of the
Beneficiaries when it was determined that they, not the Trust, were the real
parties in interest, it did not mandate that action. Neither the authority nor the
equitable arguments presented by United convince us otherwise. Because the
Beneficiaries are real parties in interest in the dispute with United involving
alleged unpaid rent, and because that dispute has not yet been resolved against
them on the merits, the trial court erred in dismissing on res judicata grounds
the Beneficiaries’ action for recovery of unpaid rent.
[24] Judgment reversed.
Kirsch, J., and Crone, J., concur.
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