L i f e , H e a lt h a n d D i s a b i l i t y
The Vexation of
Conflicting Claims
By E. Ford Stephens
At the end of the day,
interpleader remains
a valuable tool for
stakeholders to avoid
the expense of double
litigation and the risk
of double liability.
Rule and Statutory
Interpleaders in
Federal Court
Entities such as banks, escrow agents, and insurers that
hold assets or proceeds on behalf of others can find themselves dealing with claimants competing for the same
funds. An interpleader allows a stakeholder that “fears the
prospect of multiple liability to file suit,
deposit the property with the court, and
withdraw from the proceedings.” Metropolitan Life Ins. Co. v. Price, 501 F.3d 271,
275 (3d Cir. 2007).
The typical interpleader action has
two distinct stages. A court determines
whether the interpleader action is proper
and whether to discharge the filing party,
known as the stakeholder, from liability.
Then, the court determines the rights of
the claimants, who the stakeholder names
as defendants in the action. This article
focuses on the first stage of federal interpleader actions.
There are two types of interpleaders in
the federal courts. Perhaps the more commonly known interpleader is provided by
Federal Rule of Civil Procedures 22 and
known as “rule interpleader.” The other is
authorized by 28 U.S.C. §1335, and known
as “statutory interpleader.”
These interpleaders share some of the
same characteristics, such as the circum-
stances under which a stakeholder may file
an action. However, they differ significantly
regarding subject matter jurisdiction, personal jurisdiction, and service of process.
Similarities exist between the two types
of interpleaders when it comes to claimant
counterclaims, possible reimbursement for
costs and attorneys’ fees, and discharging a
stakeholder from further liability.
Fear of Exposure to Double Liability
or the Vexation of Conflicting Claims
As reflected in both rule interpleader and
statutory interpleader, a stakeholder facing competing claims may bring an action
against the claimants to require them to
interplead their claims in one action. See
Fed. R. Civ. P. 22 (“Persons with claims that
may expose a plaintiff to double or multiple
liability may be joined as defendants and
required to interplead”); 28 U.S.C. §1335
(authorizing an interpleader when “[t]wo
or more adverse claimants, of diverse citizenship as defined in subsection (a) or (d)
■ E. Ford Stephens is a partner at Christian & Barton, LLP, in Richmond, Virginia, focusing on insurance litigation and appeals.
He has handled insurance-­related appeals in the Fourth Circuit, the Fifth Circuit, and the Supreme Court of Virginia. Mr. Stephens is listed in Virginia Super Lawyers Magazine for business litigation, and is a frequent speaker and author on insurance
topics. He is active in several DRI committees, recently having been named as vice chair of the Life, Health and Disability Committee, and is a member of the International Association of Defense Counsel.
60 For The Defense October 2012
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© 2012 DRI. All rights reserved.
of [28 U.S.C. §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”). Courts
may entertain an interpleader even though
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. Id.
The “purpose of an interpleader bill is as
much to protect a stakeholder from the expense of double litigation, however groundless, as it is to protect him from the risk of
double liability.” Metropolitan Life Ins. Co.
v. Segaritis, 20 F. Supp. 739, 741 (E.D. Pa.
1937). As a result, courts typically describe
the threshold for bringing such an action
this way: “So long as there exists a ‘real and
reasonable fear of exposure to double liability or the vexation of conflicting claims,
jurisdiction in interpleader is not dependent
upon the merits of the claims of the parties
interpleaded.’” The Union Central Life Ins.
Co. v. Hamilton Steel Products, 448 F.2d
501, 504 (7th Cir. 1971) (quoting Bierman
v. Marcus, 246 F.2d 200, 202 (3d Cir. 1957),
cert. denied sub nom., Milmar Estate, Inc.
v. Marcus, 356 U.S. 933 (1958)).
This holds true even when a stakeholder
believes that only one of the competing
claims is meritorious, assuming that the
stakeholder acts in good faith. Hunter v.
Federal Life Ins. Co., 111 F.2d 551, 556 (8th
Cir. 1940); National Life Ins. Co. v. Alembik-­
Eisner, 582 F. Supp. 2d 1362, 1367 (N.D. Ga.
2008) (“The fact that one claimant eventually disclaimed any right to the proceeds did not make the interpleader action
inappropriate.”).
Moreover, at least one treatise has
stated that “courts should not dismiss an
interpleader action simply because the
claims confronting plaintiff have not been
asserted.” 7 Charles Alan Wright, Arthur
R. Miller & Mary Kay Kane, Federal Practice & Procedure §1701 (2001). See also
Alembik-­Eisner, 582 F. Supp. 2d at 1366
(“an actual claim need not exist but rather
only the possibility that more than one person will claim”). Finally, a stakeholder can
file an interpleader even if it asserts some
interest in the res or denies liability in
whole or in part to any or all of the claimants. Fed. R. Civ. P. 22; Reliance National
Ins. Co. v. Great Lakes Aviation, Ltd., 430
F.3d 412, 417 (7th Cir. 2005).
Yet, some courts have defined an outer
limit for filing an interpleader, as when an
“adverse claim may be so wanting in substance that interpleader may not be justified.” Bierman v. Marcus, 246 F.2d 200, 202
(3d Cir. 1957) (dismissing an interpleader
complaint as not predicated upon any bona
fide fear of vexatious conflicting claims). In
addition, a stakeholder typically cannot file
an interpleader after it already has paid the
funds at issue. See Lincoln National Life Ins.
Co. v. Barton, 250 F.R.D. 388 (S.D. Ill. 2008).
In sum, if a stakeholder has contested
assets or funds in its possession and it can
articulate a reasonable fear of exposure to
double liability or the vexation of conflicting claims to such funds, it typically can
file an interpleader.
Key Differences Between Rule
and Statutory Interpleaders
When it comes to subject matter jurisdiction, personal jurisdiction, and service of
process, significant differences exist between rule interpleader and statutory interpleader. Practitioners not familiar with the
latter type of interpleader may be pleasantly
surprised by the advantages that it offers.
An interpleader action based upon Federal Rule of Civil Procedure 22 “does not
provide an independent basis for jurisdiction….” Correspondent Services Corp.
v. First Equities Corp. of Florida, 338 F.3d
119, 124 (2d Cir. 2003). To exercise its powers under rule interpleader, a federal court
must first have subject matter jurisdiction, such as diversity jurisdiction under
28 U.S.C. §1332. In other words, without a
federal question, a stakeholder must establish diversity jurisdiction; i.e., complete
diversity of citizenship between it and the
claimants, and that the amount in controversy exceeds the sum or value of $75,000,
exclusive of interest and costs. See, e.g., St.
Louis Union Trust Co. v. Stone, 570 F.2d 833,
835 (8th Cir. 1978).
On the other hand, as explained below,
statutory interpleader (1) has a lower
threshold for the amount in controversy;
(2) requires only “minimal” diversity
among the claimants; (3) requires a stakeholder to deposit the funds at issue or a
bond with the court; and (4) allows nationwide service of process.
First, with statutory interpleader, the
amount in controversy can be less than
$75,000; the res can be as small as $500. 28
U.S.C. §1335(a).
Second, a stakeholder does not need
to establish complete diversity for statutory interpleader. There need be only two
adverse claimants of diverse citizenship
as defined in 28 U.S.C. §1332, who are
claiming or may claim to be entitled to the
funds at issue. 28 U.S.C. §1335(a)(1). This
is referred to as minimal diversity, “[t]hat
is, diversity of citizenship between two or
more claimants without regard to the circumstances that other rival claimants may
be cocitizens.” State Farm Fire & Casualty Co. v. Tashire, 386 U.S. 523, 530 (1967).
Indeed, courts have noted that there need
not be diversity between the stakeholder
and all of the claimants as long as minimal diversity exists between at least two of
the claimants. See, e.g., Blue Cross & Blue
Shield v. Nooney Krombach Co., 170 F.R.D.
467, 471 (E.D. Mo. 1997).
Third, a prerequisite for jurisdiction under 28 U.S.C. §1335(a)(2) is that a stakeholder must deposit with the court either
the funds at issue or a bond payable to the
clerk of the court in such amount and with
surety as required by the court. It creates
a jurisdictional defect when a stakeholder
fails to deposit the funds in question into
the registry of a court, but the stakeholder
can cure that defect. Lincoln Gen’l Ins. Co.
v. State Farm Mut. Auto. Ins. Co., 425 F.
Supp. 2d 738, 742 (E.D. Va. 2006). This simultaneous deposit requirement can present a bit of a “chicken and egg” situation; the
funds must be deposited into the court, 28
U.S.C. §1335(a)(2), for the court to have jurisdiction, but Federal Rule of Civil Procedure 67, which governs the deposit of funds
into court, requires that the party making
such a deposit provide “notice to every other
party” and secure “leave of court.”
One way to deal with this situation is to
file, along with a complaint for interpleader,
a draft order to deposit the funds as well as
the funds themselves. Counsel should consider contacting the clerk’s office before filing to make sure that the draft order has the
necessary language about how the court
will hold the funds. Also, if the court’s local rules do not require a separate motion
and supporting brief under Federal Rule of
Civil Procedure 67, counsel should consider
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explaining the deposit requirement of 28
U.S.C. §1335 in the cover letter to the court
when filing the complaint. It also may be a
good idea for the stakeholder to serve copies of the pleadings regarding the deposit of
the funds on the claimants along with copies of the complaint.
The fourth difference between rule
interpleader and statutory interpleader is
Once the… defendants
are before a court, it is time
for the stakeholder to begin
making its exit from the case.
nationwide service. As noted above, a district court may issue its process, which
“shall be addressed to and served by the
United States marshals for the respective
districts where the claimants reside or may
be found.” 28 U.S.C. §2361.
As one court has noted, “28 U.S.C. §1335,
and the nationwide service of process provision of 28 U.S.C. §2361, empowers federal
district courts to entertain interpleader
actions irrespective of an individual claimant’s contacts (or lack of contacts) with the
forum state.” McGuckin v. Metropolitan
Life Ins. Co., 1996 U.S. Dist. Lexis 2826,
at *3 (E.D. Pa. 1996). See also The Equitable Life Assur. Society v. Miller, 229 F. Supp.
1018, 1020 (D. Minn. 1964) (“The availability of nationwide service of process under
the Federal interpleader (28 U.S.C. §2361)
provides a party who may be subjected to
multiple liability with a remedy in Federal
courts which would be otherwise unavailable to him in any State court”). Whereas a
stakeholder might have difficulty rounding
up the claimants if it were to rely solely on
a state long arm statute or state law means
of service, it should have no such difficulty
with a statutory interpleader in a federal
court under 28 U.S.C. §2361.
Service under 28 U.S.C. §2361 probably can be made through a waiver of
service of summons. The statute provides
that defendants are to be served by “the
United States marshals for the respective
districts where the claimants reside or may
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be found.” Id. This is not the typical means
of service under Federal Rule of Civil Procedure 4. See, e.g., Fed. R. Civ. P. 4(c)(3)
(service by U.S. marshal is only allowed
by court order). However, under Federal
Rule of Civil Procedure 4(k)(1)(C), “filing a
waiver of service establishes personal jurisdiction over a defendant… when authorized by federal statute.” Id. As one court
has explained:
[U]nder the Rules Enabling Act [28
U.S.C. §2072], all federal statutes that
are inconsistent with the Federal Rules
of Civil Procedure are to be considered
modified to the extent necessary to harmonize the two. Thus, when the federal
interpleader statute provides for service
by a U.S. Marshal, “that statute should
be considered modified by the 1983 revision of Federal Rule of Civil Procedure 4
to authorize service by adult nonparties
under Rule 4(c)(2)(A)… by mail under
Rule 4(c)(2)(C)(ii).”
McGuckin, 1996 U.S. Dist. Lexis 2826,
at *4–5 (citations omitted). As a result,
according to Federal Rule of Civil Procedure 4(d)(4), when an interpleader stakeholder as plaintiff files a waiver executed by
a defendant, proof of service should not be
required, and the federal rules should apply
as if a summons and complaint had been
served at the time of the filing of the waiver.
The Responses—Answers,
Counterclaims, and Defaults
Once they have been served as defendants in either a rule interpleader or a statutory interpleader, claimants typically file
answers asserting their claims over the
funds in dispute.
Sometimes claimants also assert counterclaims against the stakeholder. Fortunately, the interpleader process can offer
a stakeholder some protection from affirmative claims if they are based on a claimant’s assertion that the stakeholder should
have paid him or her as opposed to the
other claimants.
For instance, in The Prudential Ins. Co.
of Am. v. Hovis, 553 F.3d 258 (3d Cir. 2009),
the Third Circuit held that bringing a valid
interpleader action can shield a stakeholder
from further liability to the claimants, not
only with respect to the amount owed, but
also with respect to counterclaims when
the stakeholder bears no blame for the ex-
istence of the ownership controversy and
the counterclaims are directly related to the
stakeholder’s failure to resolve the underlying dispute in favor of one of the claimants. As the court observed, “[t]o allow [the
insurer] to be exposed to liability under
these circumstances would run counter to
the very idea behind the interpleader remedy—namely, that a ‘stakeholder should not
be obliged at his peril to determine which
claimant has the better claim.’” Id. at 265.
The Third Circuit went on to explain:
“Put another way, where a stakeholder is
allowed to bring an interpleader action,
rather than choosing between adverse
claimants, its failure to choose between
the adverse claimants (rather than bringing an interpleader action) cannot itself
be a breach of a legal duty.” Id. at 265 (citations omitted). See also Lexington Ins. Co.
v. Jacobs Industrial Maintenance Co., 435
F. App’x 144, 149 (3d Cir. 2011) (“counterclaims [that] merely recapitulate the
ownership dispute… fall within the discharge of liability”). If a stakeholder properly brings an interpleader, the stakeholder
should enjoy some protection from counterclaims based on an assertion by one
claimant that the stakeholder should have
paid him or her in the first place.
Yet the interpleader process is less likely
to afford a stakeholder protection if a
claimant asserts a claim that is based on
liability other than a contention that the
stakeholder should have made a decision
to pay him or her. For example, in United
States of America v. High Technology Products, Inc., 497 F.3d 637 (6th Cir. 2007), the
Sixth Circuit concluded that although the
United States had properly brought an
interpleader seeking the determination of
which claimant owned certain isotopes in
its custody, the court held that the interpleader process did not shield the United
States from a claim by one of the defendants that the isotopes had been damaged
while in its possession.
Although less likely, in some instances,
especially when the amount in controversy is low or the claimants are pro se, the
claimants might not file any responses at
all. As the Fourth Circuit has noted, “[i]t is
presumably not often that every named defendant to an interpleader action declines
to appear and accept his share of a fund
incontestably put at his disposal.” Nation-
wide v. Eason, 736 F.2d 130, 132 (4th Cir.
1984). In Eason, the court noted that one
possible disposition of the insurance funds
in that case might have been as abandoned
property that would escheat to the state. Id.
at 134. The court would not order returning
the funds to the insurer because the insurer
had disclaimed interest in them when it
filed the interpleader. Id.
Reimbursement of the
Stakeholder, Amount of Such
Awards, and Dismissal
Once the claimant defendants are before a
court, it is time for the stakeholder to begin
making its exit from the case. Unless it
brought the interpleader under 28 U.S.C.
§1335, the stakeholder would need to
deposit the contested funds with the court
as specified by Federal Rule of Civil Procedure 67. The stakeholder may want to seek
reimbursement of its interpleader costs and
expenses from the funds.
Although neither Federal Rule of Civil
Procedure 22 nor 28 U.S.C. §1335 contains an express provision authorizing the
reimbursement of interpleader costs and
expenses, most courts recognize that they
have the discretion to do so. See, e.g., Trustees of the Plumbers & Pipefitters Nat’l Pension Fund v. Sprague, 251 F. App’x 155, 156
(4th Cir. 2007) (“federal courts have held
that it is proper for an interpleader plaintiff
to be reimbursed for costs associated with
bringing the action forward”).
Courts reimbursing stakeholders have
done so for several reasons. Some courts
have recognized that a stakeholder “by
seeking resolution of the multiple claims
to the proceeds, benefits the claimants,
and should not have to absorb attorneys’
fees in avoiding the possibility of multiple litigation.” Sun Life Assur. Co. of Canada v. Bew, 530 F. Supp. 2d 773, 775 (E.D.
Va. 2007) (citation omitted). Similarly, an
interpleader is “brought for the benefit of
resolving the dispute between the claimants and Plaintiff is a disinterested party.”
Jefferson Pilot Fin. Ins. Co. v. Buckley, 2005
U.S. Dist. Lexis 44067, at *6 (E.D. Va. 2005).
Other courts have cited these reasons,
as well as others, in forming a test that
they use to determine whether reimbursing costs and fees is appropriate. See, e.g.,
Prudential Ins. Co. v. Robinson-­Downs,
2011 U.S. Dist. Lexis 30563 (M.D. La. 2011)
(noting the following as the relevant factors
to consider: “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 benefitted the interpleader-­
plaintiff, and 5) whether the claimants
improperly protracted the proceedings.”).
Lawyers representing a stakeholder seeking reimbursement should emphasize the
stakeholder’s good faith in bringing an
interpleader and the benefits that the process affords to the claimants.
Other courts have declined to reimburse
a stakeholder when they have found that
the expenses to interplead funds are the
ordinary cost of doing business. See, e.g.,
Travelers Indem. Co. 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 of their insureds by
bringing an action for interpleader.”).
Rather than benefiting the claimants by
filing an interpleader, some courts view
stakeholders as having benefited themselves. See, e.g., Companion Life Ins. Co.
v. Schaffer, 442 F. Supp. 826, 830 (S.D.N.Y.
1977) (“[c]onflicting 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.”).
Accord, N.Y. Life Ins. Co. v. Apostolidis, 2012
U.S. Dist. Lexis 7995 (E.D.N.Y. 2012); Unum
Life Ins. Co. of Am. v. Scott, 2012 U.S. Dist.
Lexis 8869 (D. Conn. 2012). These cases
tend to involve insurance companies as
stakeholders, as opposed to other entities.
If a court reimburses a stakeholder, an
award typically does not involve a great
deal of money because “all that is necessary is the preparation of a petition, the deposit in court or posting of a bond, service
on the claimants, and the preparation of an
order discharging the stakeholder.” Federal Practice and Procedure, §1719. Courts
have also noted that “there is an important
policy interest in seeing that the fee award
does not deplete the fund at the expense of
the party who is ultimately deemed entitled
to it.” Trustees of Directors Guild of America-­
Producer Pension Benefits Plans v. Tise, 234
F.3d 415, 426 (9th Cir. 2000). As a result,
some courts have reduced the fees requested.
See Allianz Life Ins. v. Agorio, 2012 U.S. Dist.
Lexis 16949 (N.D. Cal. 2012) (granting only
$3,581 of a request for $45,111.24, basing the
award on reductions of both the requested
rate and the amount of time expended).
Sometimes courts will expressly limit
awards to a percentage of the funds at
issue, even if the stakeholder’s actual fees
and costs were higher. Robinson-­Downs,
2011 U.S. Dist. Lexis 30563, at *4 (noting
that the request was about one-third of the
amount in controversy and reducing it to
25 percent of the amount). On the other
hand, courts have awarded the full amount
requested when the case was not simple,
the insurer acted in good faith, and a claimant’s counterclaim protracted the litigation. See Alembik-­Eisner, 582 F. Supp. 2d, at
1372 (awarding the full request of approximately $48,000 in costs and fees incurred
by the insurer).
Instead of immediately seeking to litigate
the issue of reimbursement, a stakeholder’s counsel first should consider seeking
an agreement with the claimants’ lawyers
regarding an award. Counsel should document whatever added costs were incurred
because of the actions of claimants in litigation, such as filing a counterclaim that
merely recapitulated the ownership dispute. Yet, stakeholders should consider
reducing the amount of their requests if the
costs and fees exceed 25–30 percent of the
contested funds.
The benefits for a stakeholder’s counsel of
approaching opposing counsel first are that
it can save on the costs and fees of moving
for an award, and the stakeholder may find
that “a bird in hand is worth more than two
in the bush.” Likewise, the claimants may
realize that reaching an agreement has advantages. Not only would an agreement
stop the stakeholder from incurring more
potentially reimbursable costs and fees, the
claimants also would save fees and costs associated with litigating the reimbursement
issue. The parties can include such an agreement in a consent order, which would also
dismiss the stakeholder.
The last step is for a court to dismiss the
stakeholder from the interpleader, which
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concludes the first stage of an interpleader
action. A court “‘may issue an order discharging the stakeholder, if the stakeholder
is disinterested, enjoining the parties from
prosecuting any other proceeding related to
the same subject matter, and directing the
claimants to interplead….’” United States of
America v. High Technology Products, Inc.,
497 F.3d 637, 641 (6th Cir. 2007) (citation
omitted). Under 28 U.S.C. §2361, a dismissal
can include a discharge of the stakeholder
from further liability and an order permanently “restraining [the claimants] from
instituting or prosecuting any proceeding
in any State or United States court affecting the property, instrument or obligation
involved in the interpleader action….” Id.
One final note, the dismissal of the
stakeholder will not likely disturb a court’s
jurisdiction under 28 U.S.C. §1335 because
it is based on the minimal diversity of
the claimants. Similarly, under rule inter-
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pleader, a court typically can dismiss a
stakeholder without destroying the court’s
diversity jurisdiction. See, e.g., Leimbach
v. Allen, 976 F.2d 912, 917 (4th Cir. 1992)
(“We know of no reason not to follow the
standard rule in diversity cases that if jurisdiction is present when the case is filed,
a change in citizenship will not destroy
jurisdiction. We think the dismissal of the
insurers in this case should have no greater
effect….”).
Conclusion
Interpleaders in the federal courts can offer
relief to stakeholders as long as the stakeholders can articulate a reasonable fear of
exposure to double liability or the vexation
of conflicting claims. Between rule interpleader and statutory interpleader, the latter offers the advantages of a lower amount
of the res, minimal diversity, and nationwide service. The one potentially compli-
cating factor of statutory interpleader is the
need to deposit the contested funds with
the court immediately upon filing the action, but counsel can address that by simultaneously filing a motion to deposit and a
supporting brief or a motion to deposit and
a cover letter to explain why the proceeds
have accompanied the complaint.
Once in a stakeholder has filed an interpleader, it typically is protected from counterclaims based on a claimant’s contention
that the stakeholder should have conveyed
the contested assets to him or her. Most
courts will reimburse a stakeholder for the
costs and fees associated with filing an interpleader, but the reimbursement can amount
to less than the total that a stakeholder actually incurred. At the end of the day, even
without full reimbursement, interpleader
remains a valuable tool for stakeholders to
avoid the expense of double litigation and
the risk of double liability.