From Kuelbs v. Hill, 2010 U.S. App. LEXIS 15757 (8th Cir. July 30, 2010):

We first address who became the real party in interest after Kuelbs was declared incompetent. "In a diversity action, state law determines the issue of who is a real party in interest." Jaramillo v. Burkhart, 999 F.2d 1241, 1246 (8th Cir. 1993). When Kuelbs was declared incompetent, the state court appointed both a guardian of her person and a guardian of her estate. When a guardian of the estate is appointed, Arkansas law requires the guardian of the estate to pursue a lawsuit seeking monetary damages that will benefit the incompetent person's estate. See Ark. Code Ann. § 28-65-305 ("When there is a guardian of the estate, all actions between the ward . . . and third persons in which it is sought to . . . benefit the estate of the ward shall be prosecuted by . . . the guardian of the estate[.]") (emphasis added). At all relevant times, the Community First Trust Company was the guardian of Kuelbs's estate, and thus was the real party in interest for purposes of pursuing the tort claims in this case. The district court therefore correctly determined Kuelbs was not the real party in interest. The district court also correctly determined the Irrevocable Trust was not the real party in interest, because neither tort claims nor the proceeds of tort claims are assignable under Arkansas law. See Mallory v. Hartsfield, Almand & Grisham, LLP, 86 S.W.3d 863, 866 (Ark. 2002). ****

Although Arkansas law governed who the real party in interest became after Kuelbs was declared incompetent, federal law governs the substitution procedure the district court followed. See, e.g., Ashley County, Ark. v. Pfizer, Inc., 552 F.3d 659, 665 (8th Cir. 2009) (indicating federal procedural rules apply to procedural issues in diversity actions, while state law applies to substantive issues). The federal rules are not permissive, but mandatory, in requiring an action to be prosecuted by the real party in interest. See Fed. R. Civ. P. 17(a) ("An action must be prosecuted in the name of the real party in interest.") (emphasis added).

Rule 25 of the Federal Rules of Civil Procedure sets forth the substitution procedure to be followed when a party becomes incompetent while an action is pending. The rule governs four situations: (1) when a party dies, (2) when a party becomes incompetent, (3) when a party transfers its interest in the lawsuit to someone else, and (4) when a public officer is a party and dies, resigns, or otherwise ceases to hold office. See Fed. R. Civ. P. 25(a), (b), (c) and (d). A party's obligation to request substitution, and the corresponding ability of the court to allow substitution, are somewhat different in each situation. While our concern is only with the second situation, a party's obligation to bring a substitution motion in that situation (and the corresponding limits on the court's authority) becomes more evident by comparing all four situations to each other.

When a party dies, a motion for substitution must be brought before the court may order substitution, and "[i]f the motion is not made within 90 days after service of a statement noting the death, the action by or against the decedent must be dismissed." Id. at 25(a)(1) (emphasis added). Similarly, when a party becomes incompetent, a motion for substitution is required before a court may order substitution. See id. at 25(b) ("If a party becomes incompetent, the court may, on motion, permit the action to be continued by or against the party's representative.") (emphasis added). Thus, when reading Rule 25(b) in conjunction with Rule 17(a)'s requirement that an action must be prosecuted by the real party in interest, the court has no power to permit such an action to continue without the real party in interest unless a motion for substitution is brought under Rule 25(b). Cf. Younts v. Fremont County, Iowa, 370 F.3d 748, 752 (8th Cir. 2004) (construing Rule 25(a) and explaining that "a motion for substitution must be filed by the proper person [in order for] a court to order a substitution of a proper party," and directing the district court to dismiss the claims brought by a party who died while the action was pending if a "motion for substitution under Rule 25 [is] not filed promptly with the district court[.]").

In contrast, if a party transfers an interest while a case is pending, "the action may be continued by or against the original party[.]" Fed. R. Civ. P. 25(c). While the court, upon motion, may order "the transferee to be substituted in the action or joined with the original party," id., a substitution motion is not required for the action to continue. Similarly, when a party is a public officer who dies, resigns, or otherwise ceases to hold office while a case is pending, a substitution motion is not required. Rather, "[t]he officer's successor is automatically substituted as a party" and "the absence of [a substitution order] does not affect the substitution." Id. at 25(d).

In sum, in an action in which a party becomes incompetent while the action is pending, a motion for substitution must be brought under Rule 25(b) for the action to continue. Consequently, a district court does not err in dismissing such an action after an objection has been made that the person deemed incompetent is not the real party in interest, so long as the district court allows a reasonable time for the real party in interest to be substituted. See Fed. R. Civ. P. 17(a)(3) ("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."); see also Consul Gen. of Republic of Indonesia v. Bill's Rentals, Inc., 330 F.3d 1041, 1047-48 (8th Cir. 2003) (computing the "reasonable time" under Rule 17(a)(3) from the time an objection is first made until the district court enters an order dismissing the case).