Opinion
Civil Action 21-cv-02242-WJM-STV
05-11-2023
TVO Hospitality LLC, Plaintiff, v. Westchester Fire Insurance Company, Defendant.
RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
SCOTT T. VARHOLAK UNITED STATES MAGISTRATE JUDGE
This matter is before the Court on Plaintiff's Motion for Substitution of Real Party of Interest Pursuant to Rule 17(a) of the Federal Rules of Civil Procedure (the “Motion”) [#52]. The Motion has been referred to this Court. [#53] This Court has carefully considered the Motion, related briefing, the case file, oral argument held on November 29, 2022 [#57], and the applicable case law. For the following reasons, the Court respectfully RECOMMENDS that the Motion be DENIED.
I. BACKGROUND
A. Factual History
Defendant Westchester Fire Insurance Company (“Defendant” or “Westchester”) entered into ACE Advantage Miscellaneous Professional Liability Policy No. G24334272005 (the “Policy”) on December 31, 2016. [#1-2 at ¶¶ 5; see also #1-1 at 8- 33 (the Policy and its endorsements)] The Policy covered amounts its insured became obligated to pay because of a wrongful act committed by an insured, or by “any other person or entity for whom the Insured is legally liable in the performance of or failure to perform Professional Services.” [##1-1 at 11, 13, 1-2 at ¶ 8-9] The named insured under the Policy is “TVO North America, LLC” and subsidiaries of the named insureds are also insureds under the Policy. [##1-1 at 9, 12; 1-2 at ¶ 7] On December 31, 2016, the parties added by endorsement two additional insureds: TVO Groupe, LLC and TVO Management Services, LLC. [##1-1 at 21; 1-2 at ¶ 7]
On various dates, named insureds TVO Management Services, LLC and TVO Groupe, LLC entered into several property management agreements with various counterparties. [#31 at ¶7, 7-90, 96-112; see also #1-2 at ¶¶ 15-17] TVO Management Services, LLC also entered into a “Shared Services Agreement” with non-party TVO Hospitality LLC, an unincorporated entity organized in the state of Delaware with its primary place of business in El Paso, Texas, (“TVO Delaware”). [#31 at 91-95; see also ##42 at 9-10, 55-2] TVO Delaware was also party to some of the property management agreements. [#31 at 34, 62, 93; see also #1-2 at ¶¶ 15-17]
Not to be confused with the identically-named TVO Hospitality LLC, an unincorporated entity organized in the state of Colorado with its primary place of business in Colorado Springs (“TVO Colorado” or “Plaintiff”). [See #55-3] TVO Colorado is the current Plaintiff in this case. [#52] The Motion seeks to substitute TVO Delaware as the real party in interest. [Id.]
The exact nature and effect of these agreements is not clear from the Court's review of the case file. Plaintiff alleges that several hotels were owned, managed and operated by various TVO-affiliated entities. [See #1-2 at ¶¶ 13-17] Certain of these hotels were subsequently mismanaged, including the failure to pay taxes and the failure to meet other debt obligations. [#1-2 at ¶¶ 18, 21-26] Because of the similar names of many of the entities involved, it is difficult to identify who is alleged to have done what to whom. [See, e.g., #1-2 at ¶ 25 (“Then-TVO-subsidiary TVO Hospitality LLC acted negligently in its performance of professional services . . . leaving TVO with significant liability.”)]
The Complaint does not identify what entity it refers to simply as “TVO.” [See #1-2] From context, the Court believes this sentence may allege that proposed-real-party-in-interest TVO Delaware negligently mismanaged the Country Inn & Suites, leaving named insured TVO North America, LLC with liability. However, this reading is inconsistent with the use of “TVO” elsewhere in the Complaint to refer to Plaintiff TVO Colorado [see, e.g., id. at ¶¶ 27, 36], which did not yet exist at the time of the alleged hotel mismanagement [##1-2 at ¶ 18 (allegation that the mismanagement was discovered on October 25, 2017); 55-3 (TVO Colorado Articles of Organization dated November 10, 2017)].
On May 1, 2017, non-party ASI Capital acquired a 50% interest in TVO Delaware. [##31 at 6; 42 at 15-35] On November 17, 2017, ASI Capital acquired the remaining interest in TVO Delaware and became that company's sole owner. [##31 at 6; 42 at 12- 13] Also on November 17, 2017, a claim was made under the Policy to recover losses related to the mismanagement of hotels. [##1-1 at 42-43; 1-2 at ¶ 19] Defendant has not paid on this claim. [#1-2 at ¶¶ 33, 39]
Plaintiff characterizes this, and two following amended claims, as having been made by “TVO.” [#1-2 at ¶¶ 19-20] The documents submitted by Plaintiff as attachments to its original state court Complaint reflect that they were submitted by Clem Borkowski, an individual identified as “Shareholder Claim Representative” for “Country Inn & Suites, Hilton Garden Inn, Courtyard by Marriott, The Clusters Apartments.” [#1-1 at 43, 46, 67] The claims state that they are made “on behalf of the following property partnerships.” [Id. at 42, 44, 63]
On November 10, 2017, TVO Colorado was formed. [#55-3] TVO Colorado has been wholly owned by ASI Capital since its creation. [##31 at 6; 52 at ¶ 1; 70 at 3] On an unspecified date, TVO Delaware updated its mailing address to one in Colorado Springs, Colorado. [##42 at 6; 70 at 3] Plaintiff represents that “[i]t was not the intent of ASI [Capital] to form a distinct separate entity referred to as TVO Hospitality Colorado. Rather, it was the intent of ASI Capital to recharter TVO Hospitality in Colorado, where they could effectively manage the operations of TVO Hospitality.” [#70 at 3 (citing #42 at 12-13); see also ##42 at 1-2; 52 at ¶ 1; 70 at 4]. Plaintiff represents that “TVO [ ] Colorado then mistakenly failed to merge TVO [ ] Delaware with TVO Colorado.” [#52 at ¶ 1; see also audio recording of November 29, 2022 Motion Hearing at 9:35:41-37:42, 9:51:29-54:39] Both TVO Delaware and TVO Colorado continue to exist. [##25 at 7; 31 at 6; 52 at ¶¶ 3, 4]
B. Procedural History
TVO Colorado initiated this lawsuit on June 30, 2021 by filing a Complaint in Denver County District Court, asserting claims for breach of contract and common law bad faith arising out of Defendant's non-payment under the Policy. [#1-2] Defendant removed the matter to federal court on August 18, 2021, invoking this Court's diversity jurisdiction. [#1] Defendant noted that “[a]s alleged in the Complaint, Plaintiff is a domestic limited liability corporation organized under the laws of Colorado. An attachment to the Complaint indicates that the Plaintiff is a limited liability corporation organized under the laws of Delaware.” [Id. at ¶ 5 (citation omitted)]
On October 20, 2021, Defendant filed “Defendant's Request for Continuance of Scheduling Conference and Issuance of Order to Show Cause to Plaintiff, in Lieu of Submission of a Scheduling Report and Proposed Scheduling Order” (the “Motion to Continue”). [#18] In the Motion to Continue, Defendant represented that, on October 5, 2021, its counsel communicated with counsel for Plaintiff, who “acknowledged that Plaintiff TVO Hospitality LLC, a Colorado entity, was not a party to the contracts at issue in the action for which coverage is sought, but stated he would shortly provide [Defendant] with documents establishing [P]laintiff's relationship to TVO Hospitality LLC, a Delaware entity, and by extension its right to bring this suit.” [Id. at 2] Following the October 5 meeting, however, Defendant stated that its counsel had been attempting to communicate with Plaintiff's counsel to no avail, including that Plaintiff's counsel has “not respond[ed] to any of [Defendant's] counsel's emails . . . and did not provide the promised documents which establish Plaintiff's relationship to TVO Hospitality LLC, a Delaware entity, and by extension its right to bring this action.” [Id. at 3] Based on these representations, Defendant requested that the Court issue an Order to Show Cause to Plaintiff. [Id. at 3- 4] The Court denied the Motion to Continue to the extent it sought an Order to Show Cause, noting that Defendant's representations had not been made on the record and were therefore an inappropriate basis for the Court to issue an Order to Show Cause. [#22]
On December 7, 2021, the Honorable Nina Y. Wang convened a scheduling conference in this matter, at which Plaintiff failed to appear. [#29] The same day, the Court ordered Plaintiff to show cause why the case should not be dismissed. [#30] The Court also ordered Plaintiff to produce to Defendant documents establishing the relationship between TVO Colorado and TVO Delaware. [Id.] In its response to the order to show cause, Plaintiff asserted that when TVO Delaware was acquired by ASI Capital in 2017, ASI had “decided to open a TVO Hospitality entity in Colorado in order to be able to manage the ongoing operations of the company more effectively. ASI Capital is located in Colorado, so it also made sense to move the domicile to Colorado.” [#31 at 6] Defendant further asserted that “ASI Capital continues to wholly own both TVO Hospitality entities.” [Id.] Based upon Plaintiff's response, the Court discharged the order to show cause. [#32]
In light of later filings, the Court construes this second sentence to assert that ASI Capital decided to move the domicile of TVO Delaware to Colorado. [See #52 at ¶¶ 1-2 (“Plaintiff, TVO Hospitality [Delaware] is owned by ASI [ ] Capital and upon assignment it was the intent of the parties to change the company headquarters to the State of Colorado, where a majority of the LLC's members reside. Upon assignment of rights by . . . the former owner of TVO Hospitality (Delaware) to ASI Capital, ASI registered TVO Hospitality [Colorado] in the state of Colorado on November 10, 2017 and filed a change of address [for TVO Delaware] to the IRS to reflect the change of address.”); see also #42 at 6]
On April 13, 2022, Defendant moved for judgment on the pleadings under Federal Rule of Evidence 12(c). [#39] In that motion, Defendant asserted that Plaintiff TVO Colorado was not the insured under the policy at issue. [Id. at 3] In response, Plaintiff argued that “TVO Hospitality Colorado retained the IRS EIN or Entity Identification Number from TVO Hospitality Delaware and that therefore they are the same entity and have merely changed company headquarters.” [#42 at ¶ 5] The motion for judgment on the pleadings remains pending before the Honorable William J. Martinez.
On November 7, 2022, Plaintiff filed the instant Motion. [#52] Through the Motion Plaintiff seeks to substitute TVO Delaware as the real party in interest in place of TVO Colorado. [Id.] Plaintiff asserts that “TVO [ ] Colorado [ ] mistakenly failed to merge TVO [ ] Delaware with TVO Colorado.” [Id. at ¶ 3] Plaintiff also argues that “[a]s both entities are owned by ASI Capital there is no material change to the complaint but only a substitution of the proper Party.” [Id. at ¶ 4] Defendant has filed a response. [#55] Plaintiff has not filed a reply, and the time for doing so has now expired. [See #54] The Court held a telephonic hearing on the Motion on November 29, 2022. [#57] On March 30, 2023, the Court ordered the parties to submit supplemental briefing on the issue of standing [#69] and both parties complied with that order [##70, 71].
II. LEGAL STANDARD
“An action must be prosecuted in the name of the real party in interest.” Fed.R.Civ.P. 17(a)(1). “[T]he real party in interest is the one who, under applicable substantive law, has the right to bring the suit.” Fed. Deposit Ins. Corp. v. Geldermann Inc., 975 F.2d 695, 698 (10th Cir. 1992) (quotation marks and citation omitted).
Federal Rule of Civil Procedure 17(a)(3) 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.
A literal reading of Rule 17(a)(3) would “appear to require that a party always be given a reasonable time to substitute the real party in interest where an objection has been made,” but such a literal reading may lead to conduct violating the spirit of the Federal Rules of Civil Procedure. Esposito v. United States, 368 F.3d 1271, 1275 (10th Cir. 2004) (emphasis omitted). Therefore, the Tenth Circuit looks to the Advisory Committee Notes to “provide parameters for [Rule 17(a)(3)'s] application.” Id. The Advisory Committee Notes indicate that substitution is only required when necessary to prevent a forfeiture or injustice. Id. (citing Fed.R.Civ.P. 17 advisory committee's note to 1966 amendment).
In determining whether substitution should be allowed, a court is to look to “whether the plaintiff engaged in deliberate tactical maneuvering (i.e. whether his mistake was ‘honest'), and [ ] whether the defendant was prejudiced thereby.” Id. at 1276. Even if a mistake should have been obvious to the plaintiff, a substitution is not automatically foreclosed if the plaintiff did not act in bad faith and the defendant was not prejudiced. Metro. Paving Co. v. Int'l Union of Operating Eng'rs, 439 F.2d 300, 306 (10th Cir. 1971). When “a mistake in naming the correct party is ‘honest,' there is no additional requirement that the mistake also be ‘understandable.'” Fairfield Dev., Inc. v. J.D.I. Contractor & Supply, Inc., 782 F.Supp.2d 1205, 1208 (D. Colo. 2011) (citing Esposito, 368 F.3d at 1277). And a defendant must show “tangible” prejudice from changing the named plaintiff. See Scheufler v. Gen. Host Corp., 126 F.3d 1261, 1270 (10th Cir. 1997) (finding no prejudice where defendant was “well aware” of relevant parties and issues and would not be surprised by joinder); Garcia v. Hall, 624 F.2d 150, 151 n.3 (10th Cir. 1980) (stating that defendants would not be prejudiced by changing named plaintiff because “[t]hey knew the persons and the issues involved before the statute of limitations ran”).
III. ANALYSIS
The Court first analyzes the question of standing because that issue bears on this Court's jurisdiction. See Santa Fe All. for Pub. Health & Safety v. City of Santa Fe, New Mexico, 993 F.3d 802, 813 (10th Cir. 2021), cert. denied 142 S.Ct. 1228 (2022) (“The issue of Article III standing implicates federal jurisdiction and is a matter this court must consider sua sponte.” (citing Rector v. City & Cnty. of Denver, 348 F.3d 935, 942 n.5 (10th Cir. 2003) (emphasis removed)). The Court then analyzes the Rule 17 standard and considers whether Plaintiff made an honest mistake and whether Defendant would suffer tangible prejudice from substitution. See Esposito, 368 F.3d at 1276.
A. Standing
Defendant's response to the Motion first argues that “[b]ecause Plaintiff TVO[ ] Colorado lacks standing to bring this action, [P]laintiff also lacks standing to move [to] substitute in another plaintiff under Rule 17(a).” [#55 at 3 (citing Zurich Ins. Co. v. Logitrans, Inc., 297 F.3d 528, 531 (6th Cir. 2002))] Plaintiff did not file a reply, and therefore did not address this argument, nor was it argued at the motion hearing on November 29, 2022. [#57] The Court ordered the parties to file supplemental briefing on the question of standing. [#69] Both parties timely filed their supplemental briefs. [##70, 71] The Court first addresses the question of Plaintiff's standing in the first instance, and then the question of whether Plaintiff could properly file the instant Motion.
1. Plaintiff TVO Colorado's Standing
“Article III of the Constitution confines the judicial power of federal courts to deciding actual ‘Cases' or ‘Controversies.'” Hollingsworth v. Perry, 570 U.S. 693, 704 (2013) (quoting U.S. Const. art. III, § 2). To satisfy this requirement, plaintiffs must establish standing-they “must show they have sustained or are immediately in danger of sustaining some direct injury, and the injury or threat of injury must be real and immediate, not conjectural or hypothetical.” Faustin v. City & Cty. of Denver, 268 F.3d 942, 947 (10th Cir. 2001). As a result, “[t]o establish standing, plaintiffs must show injury in fact, a causal relationship between the injury and the challenged action of the defendant, and a likelihood that the injury will be redressed by a favorable decision.” Id. “Standing is determined as of the time the action is brought.” Nova Health Sys. v. Gandy, 416 F.3d 1149, 1154 (10th Cir. 2005).
Here, the injury pled is Defendant's non-payment of benefits it allegedly owed under the Policy. [#1-2 at ¶¶ 5, 27-35] At the time of the events giving rise to the claim under the Policy, TVO Delaware was apparently a subsidiary of named-insured TVO North America. [#1-2 at ¶ 16 (“Country Inn & Suites was managed and operated by then- TVO-subsidiary TVO Hospitality LLC.”), recording of November 29, 2022 Motion Hearing at 9:42:06-42:17 (“TVO[ ] Delaware was a subsidiary of an entity which was the actual named insured under the policy, which is TVO North America.” (assertion of Defendant, undisputed at the time by Plaintiff))] But Plaintiff has not shown or alleged that TVO Colorado has ever been a named insured under the Policy, a subsidiary of a named insured, or the assignee or successor in interest to any named insured or subsidiary thereof. [See ##1-2, 31, 42, 52, 70] Plaintiff has therefore failed to allege or plead facts that have any tendency to show that Plaintiff TVO Colorado has suffered any injury in fact caused by Defendant's non-payment. [See also recording of November 29, 2022 Motion Hearing at 9:37:05-37:22 (“I have to agree with [Defendant] that TVO [ ] Delaware is still the proper entity, as the corporations are not merged and never have been merged.”)]
Again, the Complaint is unclear about which entity it refers to here as “TVO.” The Court interprets this sentence as asserting that “Country Inn & Suites was managed and operated by then-TVO [North America, LLC]-subsidiary TVO [Delaware].”
Despite not suffering any apparent injury, in Plaintiff's Supplemental Briefing for Article III Standing and Substitution of Real Party of Interest Pursuant to Rule 17(a) of the Federal Rules of Civil Procedure (Plaintiff's “Supplemental Brief”), Plaintiff argues that it nonetheless has standing to bring the present suit. [#70 at 1-3] This argument is well summarized by its last sentence: “ASI [Capital], as parent company to TVO Hospitality,has demonstrated its personal stake in the outcome and that they are the proper party.” [#70 at 3] However, the Court need not address whether ASI Capital, as owner of TVO Delaware [##1-2 at ¶ 13, 31 at 6], might have had standing to bring the present suit, because ASI Capital is neither the current plaintiff in this case nor the party sought to be substituted in. [#52] An assertion of ASI Capital's standing is unresponsive to the Court's question regarding whether “Plaintiff TVO Hospitality, LLC (a registered LLC in the State of Colorado) ha[d] standing under Article III to bring the present suit[.]” [#69]
Throughout its Supplemental Brief, Plaintiff persists in referring to “TVO Hospitality” without delineating clearly between the identically-named entities organized under the laws of Colorado and Delaware. In this context, the Court interprets the filing as referring to TVO Delaware. In the interest of clarity, the Court respectfully requests that Plaintiff clearly delineate between distinct legal entities in future filings.
Because Plaintiff TVO Colorado has asserted no injury to itself, this Court cannot find that it had standing to sue in this case.
2. Plaintiff TVO Colorado's Motion to Substitute
Federal courts have come to differing conclusions on whether a plaintiff who brings suit without standing may subsequently move to remedy that defect through substitution of a party with standing through Rule 17(a). In Zurich Ins. Co. v. Logitrans, Inc., two insurance companies-Zurich Switzerland and American Guarantee-shared a parent company. 297 F.3d 528, 533 (6th Cir. 2002) (Gilman, J., concurring). A client insured by American Guarantee suffered a loss. Id. at 530. American Guarantee paid the claim for damages, and became the insured's subrogee regarding any claims it had against the party allegedly responsible for the damages. Id. Zurich Switzerland brought action as the purported subrogee, even though it had neither issued the insurance policy nor paid out any money on the claim. Id. Shortly before trial, the defendant filed a motion in limine, in which it first asserted that Zurich Switzerland was not insured's true subrogee. Id. Zurich Switzerland did not dispute that it was not the proper plaintiff, and responded by filing a motion to substitute American Guarantee as the real party in interest pursuant to Fed.R.Civ.P. 17(a). Id. The district court denied the motion to substitute on the grounds that Zurich Switzerland had failed to show that the prosecution of the case in Zurich Switzerland's name as opposed to American Guarantee's name was an understandable mistake, and dismissed under Rule 12(b)(6). Id.
The Sixth Circuit affirmed, holding that “[w]hereas [the original plaintiff] admittedly has not suffered injury in fact by the defendants, it had no standing to bring this action and no standing to make a motion to substitute the real party in interest.” Id. at 531. The court reasoned that because “[t]he Federal Rules of Civil Procedure cannot expand the subject matter jurisdiction of federal courts beyond the limits of [the] U.S. Constitution . . . a federal district court must, at a minimum arguably have subject matter jurisdiction over the original claims.” Id. Relying upon the advisory committee's notes to Rule 17, the Zurich court concluded that when an attorney's error causes an action to be brought by a Plaintiff with “no claims whatsoever against the defendants, and no Article III standing to sue,” then “a totally separate entity, which was not vigilant in protecting its claims, cannot now benefit from [the initial plaintiff's] mistake so as to take advantage of the suspension of the limitations period." Id. at 532; see also House v. Mitra QSR KNE LLC, 796 Fed.Appx. 783, 789 (4th Cir. 2019) (adopting the Zurich rule and collecting cases adopting the Zurich rule); CPI Card Grp., Inc. v. Multi Packaging Sols., Inc., No. 16-CV-02536-MEH, 2017 WL 5714320, at *5 (D. Colo. Nov. 28, 2017) (adopting the Zurich rule); In re Spree.com Corp., 295 B.R. 762, 775 (Bankr. E.D. Pa. 2003) (after plaintiff lacking standing invoked Rule 17(a) to substitute a plaintiff with standing in his stead, the court opined that “it seems almost unnecessary to state that the Federal Rules of Civil Procedure cannot be used to expand the subject matter jurisdiction of the district courts[;] [i]f [Plaintiff] had no constitutional standing to even enter the realm of the federal courts, it stands a fortiori that he also lacks standing to invoke the procedural rules of that realm” (citations omitted, alteration incorporated)).
But while the Zurich rule appears to be the majority rule, not all courts have adopted it. In Cortlandt St. Recovery Corp. v. Hellas Telecommunications, S.à.r.l, for example, the Second Circuit noted that the Zurich “decision has been met with some criticism.” 790 F.3d 411, 423 (2d Cir. 2015) (citing to Park B. Smith, Inc. v. CHF Indus. Inc., 811 F.Supp.2d 766, 773-74 (S.D.N.Y. 2011) for the proposition that the Zurich rule is “an unnecessarily ‘rigid' approach” and to 13A Charles Alan Wright et al., Fed. Prac. & Proc. Civ. § 3531 n. 61 (3d ed. 2014) for its characterization of Zurich as “particularly troubling”). Ultimately, however, the Second Circuit declined to decide the standing issue because the district court had correctly ruled that the Rule 17(a)(3) motion had been deficient.
The closest the Tenth Circuit has come to addressing this issue was in Esposito. In that case, the named plaintiff had died as a result of the alleged negligence of United States government employees. 368 F.3d at 1272. The deceased, through his counsel, brought a wrongful death action pursuant to the Federal Tort Claims Act (“FTCA”). Id. But, under Kansas law made applicable to the decedent's FTCA suit, a decedent lacks capacity to sue or be sued. Id. at 1273-74. The action thus should have been brought by the decedent's heirs. Id. at 1274.
The district court dismissed the action for lack of subject matter jurisdiction. Id. at 1272. When the plaintiff argued that the decedent's heirs should be substituted as the plaintiff, the district court denied that request because while the attorney's mistake in naming the decedent was “honest,” it was not “understandable.” Id. at 1273. The Tenth Circuit reversed, concluding:
While the commentary to [Rule 17] refers to “honest” and “understandable” mistakes in naming the appropriate party, we have never barred a party from substitution merely because his “honest” mistake was not also “understandable.” The commentary to the Rule should not be applied in an overly formalistic manner where, as here, the interests of justice may be compromised by failure to grant leave to amend.Id. at 1272. In reaching this conclusion, the Tenth Circuit did not address the constitutionality of allowing the substitution or refer to Zurich, which had been decided two years earlier.
Nor does Esposito align exactly with Zurich. In Esposito, the named plaintiff certainly suffered an injury in fact-he was killed by the defendant's alleged negligence-he simply lacked capacity to sue pursuant to Kansas law. See CPI Card Grp., Inc. v. Multi Packaging Sols., Inc., No. 16-CV-02536-MEH, 2017 WL 5714320, at *5 (D. Colo. Nov. 28, 2017) (“In other words, Mr. Esposito had constitutional standing, but may not have had prudential standing to bring his claims.”).
Ultimately, this Court need not decide whether to adopt the Zurich rule in order to issue its recommendation on the Motion. As detailed below, the Court concludes that Plaintiff has failed to satisfy Rule 17(a). Thus, because the Court concludes that Plaintiff has failed to satisfy the procedural requirements for the relief it seeks, the Court need not determine whether Plaintiff has the constitutional standing to seek such relief. See Cortlandt St. Recovery Corp., 790 F.3d at 423 (affirming a district court's dismissal of a case without deciding whether to apply Zurich because “neither of the requests made by [the named plaintiff] in its effort to cure the standing problem would have been consistent with Rule 17(a)(3)”).
B. Rule 17(a)
In determining whether substitution should be allowed under Rule 17, courts consider “whether the plaintiff engaged in deliberate tactical maneuvering (i.e. whether his mistake was ‘honest'), and [ ] whether the defendant was prejudiced thereby.” Esposito, 368 F.3d at 1276. The Court analyzes each prong of this standard below.
1. Honest Mistake
The Court first considers whether Plaintiff engaged in deliberate tactical maneuvering by bringing the instant suit in its own name rather than in the name of TVO Delaware, or whether this was an “honest mistake.” Esposito, 368 F.3d at 1276. While a mistake need not be understandable to be honest, the Tenth Circuit “d[id] not foreclose the possibility that a party's mistake in naming the plaintiff . . . could be so inexplicable and irrational as to raise an inference that it was not an ‘honest' mistake.” Esposito, 368 F.3d at 1276-77. Courts may find a lack of honest mistake when a plaintiff “do[es] not explain how [its] decision could be anything other than ‘deliberate tactical maneuvering.'” Ostin v. State Farm Fire & Cas. Co., No. 19-CV-02579-PAB-SKC, 2021 WL 1087715, at *3 (D. Colo. Mar. 22, 2021) (quoting Esposito, 368 F.3d at 1276).
Plaintiff represents that, upon the assignment of rights by the former owner of TVO Delaware to ASI Capital, “ASI registered TVO Hospitality in the state of Colorado on November 10, 2017 and filed a change of address to the IRS to reflect the change of address” for TVO Delaware. [#52 at ¶ 2] “TVO [ ] Colorado then mistakenly failed to merge TVO [ ] Delaware with TVO Colorado.” [Id. at ¶ 3] At the hearing on November 29, 2022, Plaintiff implicitly ascribed this apparent failure to merge the two companies to “former” counsel. [Audio recording of November 29, 2022 Motion Hearing at 9:54:40- 55:09] To date, the companies have not been merged. [##31 at 6; 52 at ¶¶ 3-4]
The Court notes that Mr. Sharifi remains counsel of record for Plaintiff. See D.C.COLO.LAttyR 5(b) (“Withdrawal shall be effective only on court order entered after” meeting procedural and substantive requirements.).
Defendant represents that it made Plaintiff aware that TVO Colorado was not the proper party to bring suit at least as early as the Rule 26(f) meeting on October 5, 2021. [#18 at 1-2] And it made this representation in an October 20, 2021 court filing that was served on Plaintiff's counsel. [Id.] Plaintiff acknowledged the continued existence of both TVO Colorado and TVO Delaware at least as early as December 15, 2021. [#31 at 3, 6] Nearly a year passed before Plaintiff filed the Motion to substitute on November 1, 2022. [#52] When asked by the Court why Plaintiff did not move for substitution or amendment of the complaint when the issue was first pointed out at the beginning of the case, Plaintiff's counsel responded “Your honor, I don't have an answer for you on that” beyond an assertion that Plaintiff's other counsel “was operating under the idea that TVO had been relocated to Colorado.” [Audio recording of November 29, 2022 Motion Hearing at 9:52:23-55:16] And while Plaintiff asserted that “I'm not sure if there's this gamesmanship that the Defendant keeps on iterating” [id. at 9:51:28-51:37] the Court notes that this statement falls short of a clear and direct denial of tactical maneuvering.
Even assuming without deciding that the failure to merge TVO Delaware and TVO Colorado in 2017 and the subsequent filing of this case by TVO Colorado in the first instance did not constitute tactical maneuvering, the Court still cannot conclude that Plaintiff's unexplained 11-month delay in seeking to rectify was an honest mistake. See Ostin, 2021 WL 1087715, at *3 (finding no honest mistake when a plaintiff did not seek to bring in an alleged real party in interest “at the outset or some time before a year had passed” when “the proper party in interest was clear to plaintiffs and plaintiffs' counsel,” and noting that “[p]laintiffs do not explain how this decision could be anything other than ‘deliberate tactical maneuvering'”); see also Esposito, 368 F.3d at 1276-77 (“We do not foreclose the possibility that a party's mistake in naming the plaintiff . . . could be so inexplicable and irrational as to raise an inference that it was not an ‘honest' mistake.”) Absent any explanation apart from the alleged incompetence of counsel, a full-throated denial of any tactical maneuvering in the delay in filing a motion to amend or substitute, or even a clear assertion of honest mistake in the Motion [see #52], the Court cannot find Plaintiff has committed an honest mistake.
2. Tangible Prejudice
The Court also concludes that allowing substitution at this stage of the litigation would cause tangible prejudice to Plaintiff. “The prejudice that can arise by allowing a third party to join a lawsuit typically involves being ‘unable to conduct discovery on possible defenses' and not knowing ‘the relevant parties in th[e] action and what the critical issues would be.'” Ostin, 2021 WL 1087715, at *4 (quoting Chung v. Lamb, No. 14-cv-03244-WYD-KLM, 2018 WL 6429922, at *8 (D. Colo. Nov. 14, 2018)). For example, a defendant may be prejudiced when it is unable to conduct discovery against the proper party. Cf. Scheufler, 126 F.3d at 1270 (finding no prejudice when the defendant had ample opportunity to conduct discovery on new plaintiffs). Prejudice may also attach when a new plaintiff is added at a “late stage, after defendant has expended significant resources, [ ] by essentially allowing plaintiffs to start over.” Ostin, 2021 WL 1087715, at *4; see also Williams v. Am. Fam. Mut. Ins. Co., No. 19-CV-02694-REB-NRN, 2021 WL 1192947, at *4 (D. Colo. Mar. 30, 2021) (“To allow the plaintiffs to add [a new plaintiff] at this late stage, after [the defendant] has expended significant resources, would prejudice [the defendant] by essentially allowing the plaintiffs to start over with a different plaintiff and, ineluctably, more litigation of pretrial issues.”).
Plaintiff contends that because “both entities are owned by ASI Capital there is no material change to the complaint but only a substitution of the proper Party.” [#52 at ¶ 4; see also #70 at 4 (“Should the court grant Plaintiff's [M]otion . . . [t]he parent company, ASI [Capital], would remain the same and the facts stated in all prior filings would remain the same because they have all been legally assigned to ASI Capital.”)] However, Plaintiff cites to no authority for the proposition that “sibling” entities sharing a common parent or owner are effectively interchangeable parties, such that the substitution of one for the other creates no prejudice. [See id.] Nor has the Court found any. To the contrary, the bulk of authority suggests that parent and subsidiary organizations cannot automatically be substituted under Rule 17, let alone two entirely distinct organizations that merely share a common owner. See, e.g., Centra, Inc. v. Chandler Ins. Co., 229 F.3d 1162, 2000 WL 1277672, at *9 (10th Cir. 2000) (unpublished table opinion) (“A parent corporation may not pierce its own corporate veil to render it the real party in interest.” (citing cases)); Classic Commc'ns, Inc. v. Rural Tel. Serv. Co., 956 F.Supp. 910, 916 (D. Kan. 1997) (“injury arising solely out of harm done to a subsidiary corporation is generally insufficient to confer standing or status as real party in interest on a parent corporation” (citing K-B Trucking Co. v. Riss Int'l Corp., 763 F.2d 1148, 1154 (10th Cir.1985))); see also Zurich Ins. Co., 297 F.3d 528 (disallowing the substitution of one subsidiary for another subsidiary of the same parent corporation).
Defendant's primary defense of this case to date has been that Plaintiff TVO Colorado has no claim under the Policy. [#39] All of the discovery in this case has been directed against Plaintiff TVO Colorado. [#55 at 10-11] Discovery has now closed and the dispositive motions deadline has passed. [#43] For a new plaintiff to be substituted in at this late date would require essentially starting the case over, resulting in significant expense and prejudice to Defendant. See Ostin, 2021 WL 1087715, at *4; Williams, 2021 WL 1192947, at *4.
IV. CONCLUSION
For the reasons stated above, the Court respectfully RECOMMENDS that Plaintiff's Motion for Substitution of Real Party of Interest Pursuant to Rule 17(a) of the Federal Rules of Civil Procedure [#52] be DENIED.
Within fourteen days after service of a copy of this Recommendation, any party may serve and file written objections to the magistrate judge's proposed findings of fact, legal conclusions, and recommendations with the Clerk of the United States District Court for the District of Colorado. 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72(b); Griego v. Padilla (In re Griego), 64 F.3d 580, 583 (10th Cir. 1995). A general objection that does not put the district court on notice of the basis for the objection will not preserve the objection for de novo review. “[A] party's objections to the magistrate judge's report and recommendation must be both timely and specific to preserve an issue for de novo review by the district court or for appellate review.” United States v. 2121 East 30th Street, 73 F.3d 1057, 1060 (10th Cir. 1996). Failure to make timely objections may bar de novo review by the district judge of the magistrate judge's proposed findings of fact, legal conclusions, and recommendations and will result in a waiver of the right to appeal from a judgment of the district court based on the proposed findings of fact, legal conclusions, and recommendations of the magistrate judge. See Vega v. Suthers, 195 F.3d 573, 579-80 (10th Cir. 1999) (holding that the district court's decision to review magistrate judge's recommendation de novo despite lack of an objection does not preclude application of “firm waiver rule”); Int'l Surplus Lines Ins. Co. v. Wyo. Coal Refining Sys., Inc., 52 F.3d 901, 904 (10th Cir. 1995) (finding that cross-claimant waived right to appeal certain portions of magistrate judge's order by failing to object to those portions); Ayala v. United States, 980 F.2d 1342, 1352 (10th Cir. 1992) (finding that plaintiffs waived their right to appeal the magistrate judge's ruling by failing to file objections). But see, Morales-Fernandez v. INS, 418 F.3d 1116, 1122 (10th Cir. 2005) (holding that firm waiver rule does not apply when the interests of justice require review).