Real party in interest defense can be waived

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If a defendant does not timely object that the plaintiff is not the real party in interest, the defense can be waived.

A Sept. 22 opinion from the Seventh Circuit found the defense waived, when the defendant did not raise it until mid-trial, seven years after the case had originally been filed.

Harvard Scientific Corporation and its founder, Jackie R. See, represented to investors that they were developing a new product to treat male and female sexual dysfunction.

The investment vehicle of Robert Krilich, called RK Company, invested $500,000 in the venture. In 1999, after HSC went bankrupt, RK Company sued See, alleging violations of federal securities laws, among other claims.

The case finally went before the magistrate judge for a bench trial seven years later.

After the testimony of Krilich, See finally investigated the legal capacity of “RK company,” and discovered it was not a legally registered corporation. The next day, he moved for judgment, claiming that RK Company was not the real party in interest.

The magistrate judge denied the motion, and See appealed, but the Seventh Circuit affirmed in an opinion by Judge Ann Claire Williams.

The court found that the defense had been waived, because it was not raised in a timely fashion.

Pursuant to Rule 17(a)(3) of the Federal Rules of Civil Procedure, “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.”

An issue of first impression in the Seventh Circuit, the court found authority from other circuits that the defense must be raised when it is still practical and convenient to name the proper parties.

Other authority it cited held that the defense is waived it is first raised during or shortly before trial.

Agreeing that the defense can be waived, the court held that it was in this case, because See did not raise it until mid-trial, seven years after the complaint was filed.

Case analysis

The court’s holding provides little guidance to lower courts, not for dearth of analysis, but simply because the defense in this case was raised so late in the proceedings – mid-trial, seven years after the case began.

Any respective plaintiff or defendant can find something in the opinion to support an argument that any given objection was either waived or timely.

Any defendant who raises the issue before trial begins, and less than seven years after the complaint was filed, can plausibly argue that the case is distinguishable for that reason.

But any plaintiff can find support in the opinion that any defense was untimely raised, unless the defendant asserted it in its answer, and filed a prompt motion to dismiss.

The court wrote, “Dr. See could have, as he did the evening of Krilich’s testimony, uncovered this information by a simple search of Illinois’s public records. He could also have filed discovery requests about the authenticity of RK’s identity and incorporation. He did not, and his mid-trial objection was far too late.”

The same rationale will be applicable in most cases, even when the defendant did not wait until mid-trial to raise the objection. The plaintiff will always be able to plausibly argue that the defendant could have, and should have, searched the public records before even filing an answer.

What the court held

Case: RK Company v. See, No. 07-3984

Issues: Is a defense based on real party in interest subject to waiver?

Holdings: Yes. Where the defendant waited until mid-trial to raise the defense, it is waived.