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Heather J. Austin (Partner-Philadelphia) authored "Navigating the Interpleader Process" for DRI's For the Defense, published in March 2023. The article explains that Interpleader litigation.
United States Litigation, Mediation & Arbitration
It is difficult to conceive of a form of litigation that was intended to be less contentious (for the plaintiff, at least) than an Interpleader. Defined in the simplest terms by the Merriam-Webster Dictionary, "interpleader" is "a proceeding to enable a person to compel parties making the same claim against him to litigate the matter between themselves." The process "emerged in the fourteenth century" and has "evolved to become 'an affirmative remedy to be used against multiple claimants seeking relief upon a single obligation.'" Wells Fargo Bank, N.A. v. Mesh Suture, Inc., 31 F.4th 1300, 1308 (10th Cir. 2022) (internal citations omitted).
Ideally, interpleader allows "the stakeholder to avoid 'the expense and risk of defending two actions.'" Mesh Suture, Inc., 31 F.4th at 1309 (internal citations omitted). Historically, "the stakeholder avoided almost all expense because it was entitled to recover its attorney fees and costs." Mesh Suture, Inc., 31 F.4th at 309 (citing Mutual Life Ins. Co. of N.Y. v. Bondurant, 27 F.2d 464, 465 (6th Cir. 1928)). In addition to a myriad of state laws that allow for interpleader relief, "[t]oday, the interpleader procedure can be pursued in federal court under two different provisions," specifically rule interpleader and statutory interpleader, "which differ somewhat in practice and benefit." See AmGuard Ins. Co. v. SG Patel & Sons II LLC, 999 F.3d 238, 244 (4th Cir. 2021). Both provisions "recognize and incorporate the history of equitable interpleader, including the fundamental distinction between strict interpleader ("in which the 'plaintiff' is neutral and therefore a stakeholder with no interest in the corpus at issue") and actions in the nature of interpleader ("in which the 'plaintiff' claims an interest in all or part of the corpus"). See AmGuard, 999 F.3d at 245.
Rule Interpleader
Federal Rule of Civil Procedure 22 authorizes an action in Interpleader, stating:
(1) By a Plaintiff. Persons with claims that may expose a plaintiff to double or multiple liability may be joined as defendants and required to interplead. Joinder for interpleader is proper even though:
(A) the claims of the several claimants, or the titles on which their claims depend, lack a common origin or are adverse and independent rather than identical; or
(B) the plaintiff denies liability in whole or in part to any or all of the claimants.
(2) By a Defendant. A defendant exposed to similar liability may seek interpleader through a crossclaim or counterclaim.
(b) Relation to Other Rules and Statutes. This rule supplements—and does not limit—the joinder of parties allowed by Rule 20. The remedy this rule provides is in addition to—and does not supersede or limit—the remedy provided by 28 U.S.C. §§ 1335, 1397, and 2361. An action under those statutes must be conducted under these rules.
Rule Interpleader is only available when federal jurisdiction is otherwise established. See, e.g., AmGuard, 999 F.3d 238, 244; Guardian Life Ins. Co. of Am. v. Gonnella, 806 F. App'x 79, 81 (3d Cir. 2020). For example, Rule 22 interpleader of competing claims for benefits owed under an ERISA-governed plan is appropriate based on the presence of a federal question. See 29 U.S.C. §1132(d). See also Aetna Life Ins. Co. v. Bayona, 223 F.3d 1030, 1034 (9th Cir. 2000) ("[W]e hold that interpleader is a cognizable action under ERISA section 1132(a)(3)(B)(ii)). An interpleader plaintiff may also "invoke rule interpleader under a court's diversity jurisdiction, which requires complete diversity of citizenship between all plaintiffs and defendants and an amount in controversy exceeding $75,000." AmGuard, 999 F.3d 238, 244 (citing 28 U.S.C. § 1332). A prudent practitioner will plead both federal question and diversity jurisdiction, if applicable, and when proceeding under Rule 22.
Statutory Interpleader provides a less onerous path to federal court. Pursuant to 28 USC §1335:
(a) The district courts shall have original jurisdiction of any civil action of interpleader or in the nature of interpleader filed by any person, firm, or corporation, association, or society having in his or its custody or possession money or property of the value of $500 or more, or having issued a note, bond, certificate, policy of insurance, or other instrument of value or amount of $500 or more, or providing for the delivery or payment or the loan of money or property of such amount or value, or being under any obligation written or unwritten to the amount of $500 or more, if
(1) Two or more adverse claimants, of diverse citizenship as defined in subsection (a) or (d) of section 1332 of this title [28 USCS § 1332], are claiming or may claim to be entitled to such money or property, or to any one or more of the benefits arising by virtue of any note, bond, certificate, policy or other instrument, or arising by virtue of any such obligation; and if
(2) the plaintiff has deposited such money or property or has paid the amount of or the loan or other value of such instrument or the amount due under such obligation into the registry of the court, there to abide the judgment of the court, or has given bond payable to the clerk of the court in such amount and with such surety as the court or judge may deem proper, conditioned upon the compliance by the plaintiff with the future order or judgment of the court with respect to the subject matter of the controversy.
(b) Such an action may be entertained although the titles or claims of the conflicting claimants do not have a common origin, or are not identical, but are adverse to and independent of one another.
Unlike §1332 diversity jurisdiction, which again requires completely diverse citizenship of the plaintiffs and defendants, diversity is established for purposes of §1335, in relevant part, if there exists two or more adverse claimants of diverse citizenship. Compare 28 U.S.C. § 1332, with §1335. In a strict interpleader action, this will require a showing that the defendants are of diverse citizenship because the stakeholder's neutrality makes its citizenship a non-factor. But in an action in the nature of interpleader, §1335 diversity may be established by showing that the plaintiff and the defendants are of diverse citizenship.
When, in addition to facing competing claims to a common fund from multiple claimants, a stakeholder denies that all or part of the fund is payable to anyone, the stakeholder may file an action in the nature of interpleader. Rule 22(a)(1)(B) specifically allows for interpleader where "the plaintiff denies liability in whole or in part to any or all of the claimants." Similarly, 28 USC §1335 allows both an action in interpleader and an action in the nature of interpleader. In the latter, "the plaintiff is not merely a stakeholder but also has an interest in the money or property, and it may initially deny whether some or all of the property is owed to any or all claimants." AmGuard, 999 F.3d 238, 244.
In Charles Schwab & Co. v. Gomez, Nos. 21-1344, 21-2531, 2022 U.S. App. LEXIS 4698, at *4 (7th Cir. Feb. 22, 2022), Felipe Gomez "principally argue[d] that the district court lacked authority to proceed under 28 U.S.C. § 1335, the interpleader statute. because in his view. the two defendants are not 'adverse' in the way that §1335 requires. But Felipe did not argue that he and his son, the other defendant, were not diverse from Schwab, just as §1332 (rather than §1335) requires" and "the amount in controversy—$300,000—is well above the statutory minimum". Id. at *4. Therefore, the court had diversity jurisdiction pursuant to §1332 and a Rule 22 action was appropriate.
But, in AmGuard, the court considered whether §1335 "statutory interpleader's requirement of minimal diversity among adverse claimants can be satisfied when the defendants named in the interpleader are citizens of the same State but the plaintiff that commenced the action is a citizen of a different State and alleges an interest in the property". AmGuard, 999 F.3d 238, 245. Rejecting the analysis of several district courts that "answered in the negative," the court in AmGuard concluded "that the better reasoned position is that an interpleader plaintiff's citizenship may be considered to satisfy §1335's minimal diversity requirement when the action is inthe nature of interpleader." AmGuard, 999 F.3d 238, 245-246 (rejecting Am. Fam. Mut. Ins. Co. v. Roche, 830 F. Supp. 1241, 1246-49 (E.D. Wis. 1993); Travelers Ins. Co. v. Harville, 622 F. Supp. 68, 69 (S.D. Ala. 1985)) (additional citations omitted).
Because §1335 uses the term "plaintiff" rather than "stakeholder," the court in AmGuard concluded that distinct roles were anticipated. See AmGuard, 999 F.3d 238, 246. "[W]hen an interpleader plaintiff claims no interest in the corpus, it functions in the traditional role of stakeholder." AmGuard, 999 F.3d at 246. However, "when the plaintiff claims an interest in all or part of the corpus — as is the case in an action in the nature of interpleader — it stands in conflict or 'controversy' with the other claimants to the corpus such that the plaintiff and the defendant-claimants are adverse."AmGuard, 999 F.3d at 246. "Thus, when § 1335 confers jurisdiction on federal courts for controversies among 'adverse claimants, of diverse citizenship,' the term 'adverse claimants' includes a plaintiff who has an interest in the corpus, making its interest adverse to the other claimants." AmGuard, 999 F.3d at 246.
To support its holding, the court in AmGuard relied on Treinies v. Sunshine Mining Co., 308 U.S. 66 (1939). In Treinies, the Supreme Court held that the plaintiff's citizenship is irrelevant in a strict interpleader action because the "deposit and discharge effectually demonstrates the applicant's disinterestedness as between the claimants and as to the property in dispute." Id. at 72. However, the corollary, according to AmGuard, is also suggested: "that an interested plaintiff's citizenship is relevant, as the plaintiff is not disinterested in the money or property deposited with the court." AmGuard, 999 F.3d 245, 246-247.
Although interpleader actions are designed to relieve a stakeholder of the burden of protracted litigation, disputes still arise, and they can begin with early challenges to the plaintiff's right to interplead. In New York Life Insurance Co. v. Lee, 232 F.2d 811 (9th Cir. 1956), the court stated "[t]here is no doubt. that an asserted adverse claim may be so wanting in substance that interpleader under the statute may not be justified." Id, at 813 (citing John Hancock Mut. Life Ins. Co. v. Beardslee, 216 F.2d 457, 460 (7th Cir. 1954)).
In Michelman v. Lincoln National Life Insurance Co., 685 F.3d 887, 894 (9th Cir. 2012), the court "expressly h[e]ld that in order to avail itself of the interpleader remedy, a stakeholder must have a good faith belief that there are or may be colorable competing claims to the stake" and stated that "[t]his is not an onerous requirement." (Internal citations omitted). According to Michelman, "[t]he threshold to establish good faith is necessarily low so as not to conflict with interpleader's pragmatic purpose, which is 'for the stakeholder to 'protect itself against the problems posed by multiple claimants to a single fund.''" Id. at 894 (internal citations omitted).
The stakeholder need not make a determination regarding the underlying merits of the claim. To the contrary, "[i]n an interpleader action, the stakeholder is often neutral as to the outcome". Philippines v. Pimentel, 553 U.S. 851, 854, 128 S. Ct. 2180, 2184, 171 L.Ed.2d 131, 131 (2008). "[G]ood faith requires a real and reasonable fear of exposure to double liability or the vexation of conflicting claims." Michelman, 685 F.3d 887, 894 (citing Union Cent. Life Ins. Co. v. Hamilton Steel Prods., Inc., 448 F.2d 501, 504 (7th Cir. 1971); Wash. Elec. Co-op., Inc. v. Paterson, Walke & Pratt, P.C., 985 F.2d 677, 679 (2d Cir. 1993)).
"[T]o support an interpleader action, the adverse claims need attain only 'a minimal threshold level of substantiality.'" Equitable Life Assurance Soc'y of the U.S. v. Porter-Englehart, 867 F.2d 79, 84 (1st Cir. 1989). "It is not necessarily the 'likelihood of duplicative liability,' but rather the 'threat of possible multiple litigation,' that justifies resort to interpleader." Sevelitte v. Guardian Life Ins. Co. of Am., 55 F.4th 71, 80 (1st Cir. 2022) (internal citations omitted). From a commonsense perspective, the court in Michelman, explained that "[o]f course, the claims of some interpleaded parties will ultimately be determined to be without merit" and "it would make little sense in terms either of protecting the stakeholder or of doing justice expeditiously to dismiss one possible claimant because another possible claimant asserts the claim of the first is without merit." Michelman, 685 F.3d at 894-95. However, "[t]he adverse claim—whether actual or potential—must be at least colorable." Michelman, 685 F.3d at 895 (citing Fonseca v. Regan, 734 F.2d 944, 948-50 (2d Cir. 1984); Dunbar v. U.S., 502 F.2d 506, 511 (5th Cir. 1974); Bauer v. Uniroyal Tire Co., 630 F.2d 1287, 1292 (8th Cir. 1980)). See also Minnesota Mutual Life Ins. Co. v. Ensley 174 F.3d 977 (9th Cir. 1999); Mack v. Kuckenmeister, 619 F.3d 1010 (9th Cir. 2010) (citing John Hancock Mut. Life Ins. Co. v. Kraft, 200 F.2d 952, 954 (2d Cir. 1953)). "[T]he threshold showing is not exacting." Michelman, 685 F.3d at 896.
While, as discussed below, there are circumstances under which interpleader has been deemed inappropriate, a stakeholder is well advised to interplead as soon as it has knowledge of competing claims. Waiting until after a claimant initiates litigation is neither necessary nor advised, as both rule and statutory interpleader "may be invoked not only when claimants have already made a claim to the stakeholder's property but also when the claimants may make such a claim in the future." AmGuard, 999 F.3d at 245 and 248 (citing California v. Texas, 457 U.S. 164, 166 n.1, 102 S. Ct. 2335, 72 L. Ed. 2d 755 (1982) (per curiam) (emphasis added) (cleaned up) (quoting Texas, 306 U.S. at 406)) ("the Supreme Court has consistently held that 'to bring an interpleader suit, "a plaintiff need not await institution of independent suits"'"). See also Lexington Ins. Co. v. Jacob Indus. Maint. Co., 435 F. App'x 144 (3d Cir. 2011).
Although the plaintiff's burden of proving colorable adverse claims is not significant, it was long ago established that the burden should not be ignored. The insured in Beardslee changed the beneficiary designation on several occasions, alternating between his children and his wife. When, the insured sought again, to change the designation to his daughters, they were told by the insurer that the designation could not be changed. The representation was inaccurate, and as a result, the insured's wife remained the named beneficiary when he died. The insured's daughter asked that the insurer cover the cost of the medical and burial expenses that had been incurred – an amount that was approximately the same as the value of the policy. She referred to the insurer's inaccurate representation as justification for the request. The insurer responded by initiating an interpleader action. Beardslee, 216 F.2d 457.
The insured's daughter never appeared in the interpleader and default judgment was entered against her at the request of the insured's surviving wife. The insurer appealed to the Seventh Circuit Court of Appeals after the district court not only entered judgment in favor of the wife but also assessed fees against the insurer due to the delay caused in paying the proceeds. The Seventh Circuit affirmed the judgment of the district court in relevant part, concluding that the insured's daughter had no viable claim to the policy proceeds. Rather, the daughter's only potential claim was against the insurer in relation to the misinformation provided prior to her father's death. Even if the insured's daughter prevailed on a tort claim against the insurer, the insured's daughter would not be entitled to the policy proceeds. The insurer had no reasonable fear of multiple and competing claims to the policy proceeds and interpleader was therefore inappropriate. Id.
Relative to the insured's wife's fee claim, however, the Seventh Circuit held that "[s]ince [the insured's daughter] was not a claimant within the meaning of the Interpleader Act, the District Court properly found that the delay by the company in paying the proceeds of the policy to [the insured's wife] was vexatious and unreasonable, and that she was, therefore, entitled to recover reasonable attorney's fees as part of the costs of the action" as well as interest. Id. at 461. Other courts have also determined that fees may be assessed against a stakeholder that acts in bad faith when initiating an interpleader action. See Michelman v. Lincoln Nat'l Life Ins. Co., 685 F.3d 887, 893-96 (9th Cir. 2012) (citing Gelfgren v. Republic Nat'l Life Ins. Co., 680 F.2d 79, 81 (9th Cir. 1982) (citing Murphy v. Travelers Ins. Co., 534 F.2d 1155, 1164 (5th Cir. 1976))).
"Interpleader is a procedural device not intended to alter substantive rights. It is not the function of an interpleader rule to bestow upon the stakeholder immunity from liability for damages that are unrelated to the act of interpleading, such as negligence in preserving the fund." 44B Am Jur 2d Interpleader § 4. The Supreme Court addressed this issue in State Farm Fire & Casualty Co. v. Tashire, 386 U.S. 523, 87 S. Ct. 1199, 18 L. Ed. 2d 270 (1967), where the insurer of a truck driver (who was a citizen of Oregon) initiated an interpleader action in federal court in Oregon when its insured was involved in a motor vehicle accident in California with a bus carrying passengers (including citizens of five states and Canada).
The insurer anticipated that pending tort claims, if successful, would result in damage assessments that would exceed the limits of its liability under the policy. The insurer, therefore, deposited the funds into the court's registry and sought an order relieving it of any further liability. The insurer specifically asked that the court require all claimants to proceed against the driver and the carrier in a single proceeding and that it be discharged from any further obligations under the policy, including the defense of the driver in any other lawsuits. The district court granted the relief requested. On appeal, the Ninth Circuit held that the insurer was not entitled to interpleader relief unless and until a judgment was entered against the tortfeasor; however, the Supreme Court disagreed, in part, reasoning instead that: "[w]ere an insurance company required to await reduction of claims to judgment, the first claimant to obtain such a judgment or to negotiate a settlement might appropriate all or a disproportionate slice of the fund before his fellow claimants were able to establish their claims" and that "[t]he difficulties such a race to judgment pose for the insurer, and the unfairness which may result to some claimants, were among the principal evils the interpleader device was intended to remedy. Id. at 533, 87 S. Ct. at 1205, 18 L.Ed.2d at 277.
While State Farm "properly invoked the interpleader jurisdiction under §1335," the Supreme Court concluded that the statute did not "entitle it to an order both enjoining prosecution of suits against it outside the confines of the interpleader proceeding and also extending such protection to its insured, the alleged tortfeasor." Id. at 533, 87 S. Ct. at 1205, 18 L.Ed.2d at 277. The court "h[e]ld that the interpleader statute did not authorize the injunction entered in the present case." Id. at 537, 87 S. Ct. at 1207, 18 L.Ed. at 279. The court reasoned that "[t]hirty-five passengers or their representatives have claims which they wish to press against a variety of defendants" and "[t]he circumstance that one of the prospective defendants happens to have an insurance policy is a fortuitous event which should not of itself shape the nature of the ensuing litigation." Id. at 534-35, 87 S. Ct. at 1205-06, 18 L.Ed. at 277-78. There was nothing, for example, in the interpleader statute that could compel a California resident who was injured aboard a bus in California to file suit anywhere other than California. Id. at 534-35, 87 S. Ct. at 1205-06, 18 L.Ed. at 277-78.
The need to ensure that there exists colorable competing claims should be weighed against the risk of delay or failure to file an interpleader. The stakeholder will want to win any race to the courthouse to avoid, for example, having to defend against baseless claims that (i) it seeks to delay payment of benefits otherwise payable or (ii) that it is not entitled to fees and costs that it could have sought if it had filed an action in interpleader.
In Sevelitte v. Guardian Life Insurance Co. of America, 55 F.4th 71, 81-82 (1st Cir. 2022), the plaintiff sued Guardian for an amount in excess of the death benefit at issue, arguing that Guardian "wrongfully instigated the dispute by '[seeking] and encourag[ing] the application for the beneficial interest by' the competing claimant. She alleged breach of contract and argued against the discharge of Guardian from the proceedings. As one might expect, a "stakeholder who has 'acted in bad faith to create a controversy over the stake may not claim the protection of interpleader.'" Id. at 81. However, in this case, the plaintiff "failed to plausibly allege any bad faith by Guardian," as the court concluded that Guardian never denied liability but merely sought to resolve an ambiguity created by a divorce agreement at issue by making the insured's estate aware of its potential claim and ultimately seeking interpleader." Id. at 81.
The court in Sevelitte acknowledged that "where the stakeholder may be independently liable to one or more claimants, interpleader does not shield the stakeholder from. liability in excess of the stake." Id. at 81 (internal citations omitted). However, "such liability must be 'truly independent' to prevent dismissal of the stakeholder." Id. at 81 (citing Lexington, 435 F. App'x 144, 148; Berry v. Banner Life Ins. Co., 718 F. App'x 259, 262 (5th Cir. 2018)). Such was not the case in Sevelitte, as there was no evidence that the defendant engaged in an unfair claim practice. Id. at 81. Similarly, in Primerica Life Insurance Co. v. Woodall, 38 F.4th 724, 725-27 (8th Cir. 2022), the district court granted summary judgment in favor of the plaintiff on a counterclaim filed by the claimants, finding that Primerica was not liable for initiating an interpleader. "The district court recognized that while Primerica's 'missteps' contributed to causing competing claims, there was no evidence Primerica acted in 'bad faith' or otherwise 'transgress[ed] equitable standards of conduct.'" Id. at 727. "The district court did not abuse its discretion when making this decision." Id. at 727.
When, as was the case in Berry, a claimant files suit first, the stakeholder may (if grounds exist) remove the matter to federal court. Recall, however, that most states have their own interpleader rules or statutes under which a stakeholder may proceed if there is no basis for removal. Additionally, "[t]he Federal Rules of Civil Procedure, including their joinder provisions, apply in interpleader cases just as they would in any other civil action in federal court." N.Y. Life Ins. Co. v. Deshotel, 142 F.3d 873, 881 (5th Cir. 1998) (internal citations omitted). Therefore, "[a] defendant exposed to similar liability may [also] seek interpleader through a crossclaim or counterclaim." Fed. R. Civ. P. 22(a)(2). Whether defending against a claim in state or federal court, the stakeholder should proceed by filing a counterclaim in interpleader and by joining (if necessary) and filing interpleader cross-claims against any and all other existing or potential claimants.
Filing and Service of Process
Again, rule interpleader "can be invoked only when federal jurisdiction is otherwise established" by the existence of a federal question or diversity of citizenship. AmGuard, 999 F.3d 238, 244 (internal citation omitted). However, relative to statutory interpleader actions, 28 U.S.C. §1397 provides that "[a]ny civil action of interpleader or in the nature of interpleader under section 1335 of this title may be brought in the judicial district in which one or more of the claimants reside."
Once suit is filed, the interpleader plaintiff must satisfy certain requirements and consideration should be given to these obligations before the complaint is filed. The first is service of process. Federal Rule of Civil Procedure 4(m) imposes a "time limit for service" and states that "[i]f a defendant is not served within 90 days after the complaint is filed, the court – on motion or on its own after notice to the plaintiff – must dismiss the action without prejudice against that defendant or order that service be made within a specified time" and the court is only required to extend the time to perfect service upon a showing of good cause.
As explained above, it is not necessary to delay an interpleader until the claimants have already made a claim. Lexington, 435 F. Appx 144; AmGuard, 999 F.3d 238. Because interpleader is appropriate when the claimants may make such a claim in the future, it is possible that the plaintiff may not know the whereabouts of the potential claimants. This, for example, may occur when a child challenges a former spouse for life insurance benefits payable upon the death of the insured. If the child prevails, a portion of the benefit may be subject to distribution to other surviving children who may not have asserted a claim. Their whereabouts may not be known. They may be located in a country subject to Hague Convention requirements. Language barriers may hinder communication efforts. Because these individuals will nonetheless need to be served within the 90-day deadline, pre-litigation investigation may be appropriate in order to ensure that the plaintiff can perfect service as required, move to extend the deadline or lay the groundwork for a due diligence argument that may be necessary for any motion for leave to perfect service by publication.
28 U.S.C. §1335, unlike Rule 22, imposes an affirmative obligation to deposit the interpleader funds with the Court or post bond. Statutory interpleader is permissible "if (2) the plaintiff has deposited such money or property or has paid the amount of or the loan or other value of such instrument or the amount due under such obligation into the registry of the court. or has given bond payable to the clerk of the court." However, even when proceeding solely pursuant to Rule 22, a prudent practitioner will nonetheless deposit the interpleader funds with the court as soon as possible.
Failure to deposit the funds can create another point of contention in an otherwise simple interpleader action. In United States Life Insurance Co. v. Holtzman, 723 F. App'x 141 (3d Cir. 2018), Holtzman argued that the plaintiff was required to deposit the funds with the court when the complaint was filed in order to satisfy the requirements of 28 U.S.C. §1335. The district court allowed the plaintiff to cure the defect and perfect jurisdiction by depositing the funds, and on appeal, Holtzman argued that this delayed deposit was impermissible. The argument ignored the fact that, as a practical matter, the plaintiff was not procedurally able to deposit the funds when the complaint was filed. The Third Circuit Court of Appeals noted that "[u]nder the local rules, U.S. Life could not have deposited the funds absent a court order to do so." Id. at 145. Only "[o]nce U.S. Life responded to the Court's directive to deposit, the District Court had subject matter jurisdiction: its order discharging U.S. Life took effect, and it properly considered the merits of the adverse claims to the funds."Id. at 145.
The defendant in Wells Fargo Bank, N.A. v. Mesh Suture, Inc., 31 F.4th 1300, 1308-11 (10th Cir. 2022) made a similar argument. However, the court "reject[ed] this challenge of Mr. Schwartz to the district court's jurisdiction. As we proceed to explain, it was sufficient for statutory-interpleader purposes that the district court appointed a receiver who, as ordered by the court, took possession of and managed the account." Id. at 1309. "Court-appointed receivers are officers of the court and may be empowered to assume the control, custody, and management of property involved in litigation." Id. at 1311 (internal citations omitted). "Here the district court secured possession of, and exclusive control over, the Wells Fargo account through its receiver. The disputed property was thereby deposited with the court, at its disposal, and ready to be distributed to the prevailing claimant. This was a sufficient deposit for the purposes of establishing statutory-interpleader jurisdiction." Id. at 1311.
An Action in Interpleader Will Proceed in Two Stages
Once the court accepts that the requirements for rule or statutory interpleader have been satisfied, the litigation will proceed to a second stage, during which the court will determine the respective rights of the claimants. See Auto Parts Mfg. Miss., Inc. v. King Constr. of Houston, L.L.C., 782 F.3d 186, 193 (5th Cir. 2015) (citing Rhoades v. Casey, 196 F.3d 592, 600 (5th Cir. 1999)). See also Guardian Life Ins. Co. of Am. v. Gonnella, 806 F. App'x 79, 81 (3d Cir. 2020) (citing Prudential Ins. Co. of Am. v. Hovis, 553 F.3d 258, 262 (3d Cir. 2009)). "After entering a judgment in the interpleader action the district court also has the power to make all appropriate orders to enforce its judgment. 28 U.S.C. § 2361. The two-stage process applies to both rule and statutory interpleader proceedings. See Metro. Life Ins. Co. v. Little, No. 13 cv 1059 (BMC), 2013 U.S. Dist. LEXIS 116817, at *2 (E.D.N.Y. Aug. 17, 2013) (citing New York Life Ins. Co. v. Connecticut Development Authority, 700 F.2d 91 (2d Cir. 1983)).
Discharge
In an interpleader action the district court may also enter an order restraining the claimants from instituting any proceeding affecting the property until further order of the court." Rhoades, 196 F.3d 592, 600-01. However, statutory interpleader offers more expansive protections than Rule 22. Specifically, pursuant to 28 U.S.C. §2361, "[i]n any civil action of interpleader or in the nature of interpleader under section 1335. a district court may issue its process for all claimants and enter its order restraining them from instituting or prosecuting any proceeding in any State or United States court affecting the property, instrument or obligation involved in the interpleader action until further order of the court." The district court is further authorized, pursuant to 28 U.S.C. §2361, to "discharge the plaintiff from further liability, make the injunction permanent, and make all appropriate orders to enforce its judgment."
While such expansive relief is not provided for in Rule 22, some courts will nonetheless grant injunctive relief in a rule interpleader action. In Unum Life Ins. Co. of Am. v. Smith, No. 2:17-cv-489-WKW, 2018 U.S. Dist. LEXIS 53245, at *9-10 (M.D. Ala. Mar. 28, 2018), the court was "satisfied that, even in a rule interpleader case, it can afford the injunctive relief sought." Critical of courts that have ruled otherwise, the court in Smith wrote "these cases solely view the injunction through the lens of injunctions issued under 28 U.S.C. §2361 or even a Rule 65 restraining order. Re-litigation 'would be judicially wasteful and raise the possibility of inconsistent results' and 'would also defeat the purpose of the [plaintiff's] interpleader action.'" Id, at *11.
Fee Claims
"Although not required under the interpleader statute or the Federal Rules of Civil Procedure, '[i]t is well settled that a district court has the authority to award costs, including reasonable attorney's fees, in interpleader actions.'" John Hancock Life Ins. Co. (U.S.A.) v. Estate of Wheatley, No. 21-20508, 2022 U.S. App. LEXIS 25102, at *9 (5th Cir. Sep. 7, 2022). As noted above, interpleader cannot be used as a shield from liability for the stakeholder's own misdeeds. "A district court can abuse its discretion by awarding attorneys' fees to an interpleader-plaintiff who is in 'substantial controversy with one of the claimants.'" Id. at *10. (citing Rhoades v. Casey, 196 F.3d 592, 603 (5th Cir. 1999)). Further, "where an interpleader-plaintiff is 'in part responsible for causing [the] litigation' and 'in part responsible for protracting [the] litigation,' a district court's award of fees is an abuse of discretion." Id. at *10 (citing Royal Indem. Co., 307 F. App'x at 806).
Absent any impropriety, relief in the form of fees "is generally available. whether [interpleader] is statutory under 28 U.S.C. §1335 or a Rule 22 interpleader with other jurisdictional grounds." See Metro. Life Ins. Co. v. Little, No. 13 cv 1059 (BMC), 2013 U.S. Dist. LEXIS 116817, at *9 (E.D.N.Y. Aug. 17, 2013) (citing Septembertide Pub., B.V. v. Stein and Day, Inc., 884 F.2d 675 (2d Cir. 1989)). The factors used to assess a fee claim, however, vary by jurisdiction. CompareRoyal Indem. Co. v. Bates, 307 F. App'x 801, 806 (5th Cir. 2009) (considering: "(1) whether the case is simple; (2) whether the interpleader-plaintiff performed any unique services for the claimants or the court; (3) whether the interpleader-plaintiff acted in good faith and with diligence; (4) whether the services rendered benefited the interpleader-plaintiff; and (5) whether the claimants improperly protracted the proceedings"), with Septembertide, 884 F.2d 675, 683 (considering if: the plaintiff is "(1) a disinterested stakeholder, (2) who had conceded liability, (3) has deposited the disputed funds into court, and (4) has sought a discharge from liability").
Successful fee claims are not generally assessed against any individual claimant but are instead recovered from the fund. See Septembertide, 884 F.2d 675, 683. Where all of the factors weigh in favor of the plaintiff, the court may still deny an otherwise reasonable fee request if it will deplete the fund. See, e.g., Travelers Indemnity Company v. Israel, 354 F.2d 488, 490 (2d Cir. 1965) ("We are not impressed with the notion that whenever a minor problem arises in the payment of insurance policies, insurers may, as a matter of course, transfer a part of their ordinary cost of doing business to their insureds by bringing an action for interpleader"). See also Unum Life Ins. Co. of Am. v. Scott, No. 3:10CV00538 (DJS), 2012 U.S. Dist. LEXIS 8869, at *7-8 (D. Conn. Jan. 24, 2012) ("Such is a cost of doing business which should not be transferred by invoking interpleader. Conflicting claims to the proceeds of a policy are inevitable and normal risks of the insurance business. Interpleader relieves the insurance company of multiple suits and eventuates in its discharge. Accordingly, the action is brought primarily in the company's own self-interest"). But see Locals 40, 361 & 417 Pension Fund & v. McInerney, 2007 U.S. Dist. LEXIS 1974, at *17 (S.D.N.Y. Jan. 9, 2007) (awarding reasonable fees to the plaintiff); Aetna Life Ins. Co. v. Bayona, 223 F.3d 1030, 1034 (9th Cir. 2000); Principal Life Ins. Co. v. Brooks, No. 1:19-CV-00450, 2020 U.S. Dist. LEXIS 111435, at *8 (M.D. Pa. June 25, 2020) ("Fees and costs are appropriate because Principal is a disinterested stakeholder that has conceded liability under the policy and has sought discharge from further liability").
The amount of fees is also within the discretion of the court. In Crew Inc. v. Walker, No. 5:20-cv-01946-SVW-SP, 2022 U.S. Dist. LEXIS 25463, at *33 (C.D. Cal. Jan. 6, 2022), the plaintiff requested $205,000 in fees. The court awarded fees but substantially reduced the amount to $15,000, writing that even this amount is "generous to Crew." Id. at *32. "Crew's complaint was a relatively-short ten page complaint, which was unlikely to have required extensive research or analysis for an experienced ERISA firm". Id. at *32. Additionally, "Crew did not face any difficulties in service of process." Id. at *32. Crew also, "at no point filed an order seeking to discharge it from liability and dismiss it from the action; rather, Crew waited to do so until filing the instant motion, months after the case itself had been resolved." Id. at *32-33. Crew also cited "no persuasive authority for the proposition that its requested fee award of nearly $205,000 is reasonable on this record." Id. at 833 (stating that the decision was "consistent with relevant authorities' treatment of fees awarded to plaintiffs-in-interpleader" and citing Schirmer Stevedoring Co. v. Seaboard Stevedoring Corp., 306 F.2d 188, 190 (9th Cir. 1962) (remand with instruction to reduce a $48,000 fee award to $5,000); Prudential Ins. Co. v. Boyd, 781 F.2d 1494 (11th Cir. 1986 (awarding $1,300 from a $63,000 fund at issue); In re Technical Equities Corp., 163 B.R. 350, 360-361 (Bkrtcy. N.D. Cal. 1993 (collecting cases)).
As noted above, in addition to the federal rule and statutory interpleader authority, many states have their own interpleader rules and statutes. Practices and procedures will vary from court to court. However, there are certain "best practices" that should be employed regardless of the jurisdiction. First, when presented with competing claims or when made aware of the potential for colorable competing claims, interplead and do so without delay. Simultaneously move to deposit the funds with the court – especially when pursuing statutory interpleader relief, as an order granting leave to deposit will likely be required. A reasonable fee claim may also be presented; however, before proceeding, consider whether such a motion would be futile (i.e., if the courts in your jurisdiction deem interpleader to be a cost of doing business). As some courts will not allow for any fee recovery and other courts will substantially reduce fee award requests, it is prudent to limit the fees incurred by seeking discharge as early as practicably possible.
Originally published by DRI's For the Defense
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