Tag Archives: interpleader remedy

Interpleader Not a Defense To Negligence

When Stakeholder Causes Dispute It Can Still Be Sued For Negligence Not Related to Dispute
The Ninth Circuit Court of Appeal was asked to determine whether the federal interpleader remedy shields a negligent stakeholder from tort liability for its creation of a conflict over entitlement to the interpleaded funds? The Ninth Circuit resolved the issue in Robert S. Lee; Gina Stevens; Laura Stevens v. West Coast Life Insurance Company, No. 11-55026 (9th Cir. 07/31/2012).

Facts
On March 13, 1998, West Coast Life Insurance Company (“West Coast”) issued a life insurance policy with a death benefit of $800,000 to the late Steve Lee, Sr. Steve Sr. was the original owner of the policy. William Lee, Steve Sr.’s brother, was the original beneficiary. In the subsequent years, West Coast received numerous changes of ownership and beneficiary forms from members of the Lee family. At issue is a policy change form signed and executed in July 2005, purporting to change the ownership and beneficiaries of the policy to Robert Lee, Bobbie Bill Lee, and Steve Lee, Jr. Bobbie and Steve Jr. are Steve Sr.’s nephews. Robert is Steve Sr.’s grandson.

Robert, Bobbie, and Steve Jr. executed the aforementioned change forms in West Coast’s San Francisco office with the help of West Coast’s Director of Policy Administration, James Davis. Davis erroneously instructed Bobbie and Robert to sign as the existing owners of the policy, when in fact Steve Jr. was an existing owner and Robert was not. Davis also erroneously failed to ask Steve Jr. to sign a change of beneficiary form which would have transferred a 62.5% interest to Robert as a beneficiary.

The Lee family members made several additional, subsequent changes to the policy’s ownership and beneficiaries. The final change occurred in December of 2008 when Robert Lee and Gina Stevens became the sole beneficiaries. Steve Sr. died in January 2009. Robert and Gina then submitted claim forms to West Coast. In response, West Coast informed Robert and Gina that the July 2005 changes were improperly executed, and therefore that they had no interest in the policy. In March 2009, upon learning that he retained the interest in the policy that he held in 2005, Bobbie submitted a claim form to West Coast. In April of 2009, West Coast responded by contacting all parties involved regarding the disputed claims, urging them to reach a mutual agreement regarding payment of the insurance policy benefits, and informing them that it would file an interpleader action if no agreement could be reached. The parties were unable to reach an agreement.

In August of 2009, Steve Jr., Bobbie, and William Lee (collectively, “plaintiffs”) filed suit against West Coast in the Los Angeles Superior Court alleging claims for breach of contract and breach of the covenant of good faith and fair dealing under California law. West Coast removed the case to federal court invoking diversity jurisdiction, filed an answer and counterclaim in interpleader, deposited $800,000 plus accrued interest with the district court, and added Gina and Laura Stevens as counterdefendants. Robert, Gina, and Laura (collectively, “counterclaimants”) filed counterclaims for negligence and declaratory relief against West Coast, and cross-claims against the plaintiffs.

West Coast moved for partial summary judgment, which the district court granted in West Coast’s favor as to its interpleader claim and on the claims sounding in contract. The plaintiffs and counterclaimants then reached a settlement to distribute the interpleaded funds amongst themselves, and the district court entered an order approving the distribution. The district court concluded that counterclaimants’ negligence claim against West Coast was the only claim remaining to be tried. The court did not address the merits of counterclaimants’ negligence claim, reasoning that they had failed to allege any cognizable damages flowing from West Coast’s alleged negligent conduct.

The Purpose of Interpleader
Both Rule 22 and the interpleader statute allow a party to file a claim for interpleader if there is a possibility of exposure to double or multiple liability. The purpose of interpleader is for the stakeholder to protect itself against the problems posed by multiple claimants to a single fund. This includes protecting against the possibility of court-imposed liability to a second claimant where the stakeholder has already voluntarily paid a first claimant. But it also includes limiting litigation expenses, which is not dependent on the merits of adverse claims, only their existence.

The protection afforded by interpleader takes several forms. Most significantly, it prevents the stakeholder from being obliged to determine at his peril which claimant has the better claim. It is thought that the stakeholder should not be compelled to run the risk of guessing which claimants may recover from the fund.

The stake marks the outer limits of the stakeholder’s potential liability where the respective claimants’ entitlement to the stake is the sole contested issue; however, where the stakeholder may be independently liable to one or more claimants, interpleader does not shield the stakeholder from tort liability, nor from liability in excess of the stake. Congress, in the enactment of the interpleader statute, did not intend thus to wipe out the substantial claims of persons asserting rights against insurance companies. The purpose of the interpleader statute was to give the stakeholder protection, but in nowise to change the rights of the claimants by its operation. Congress had no intention to permit destruction of acquired rights under state law, if indeed it had power so to do.

Many courts have held that those who have acted in bad faith to create a controversy over the stake may not claim the protection of interpleader. Interpleader, which is an equitable remedy, is not available to one who has voluntarily accepted funds knowing they are subject to competing claims. It is the general rule that a party seeking interpleader must be free from blame in causing the controversy, and where he stands as a wrongdoer with respect to the subject matter of the suit or any of the claimants, he cannot have relief by interpleader.

Counterclaimants did not allege that West Coast acted in bad faith, nor do they contend that the interpleader remedy was, or should have been, unavailable. Rather, they allege that West Coast’s negligent actions in 2005 caused the instant controversy, and claim damages flowing from that negligence. The district court’s conclusion that counterclaimants were required to show that West Coast acted in bad faith in order to claim attorney’s fees as damages that flow from West Coast’s negligence is without support.

Nor does counterclaimants’ negligence claim arise from West Coast’s failure to resolve the controversy over entitlement to the insurance proceeds in their favor. But for Davis’ erroneous recording of the July 2005 change forms, counterclaimants allege that they would not have been forced to litigate their adverse claims against the plaintiffs. In other words, West Coast’s alleged negligence directly and proximately caused counterclaimants to forgo $290,000 to which they claim they were rightfully entitled, and caused them to incur attorney’s fees in litigating this action. Their damages flowed not from West Coast’s filing of an interpleader claim but from its alleged negligent conduct.

Conclusion
Interpleader is an important tool to insurers who have competing claims against a particular benefit where it would not be safe to pay the sums out to one only to be sued by the other. It protects the stakeholder – if filed in good faith – against the competing claims. It does not protect the insurer from independent claims of negligence.

In this case the insurer negligently dealt with the request of the parties to change the beneficiaries and owners of the life insurance policy. As a result of its negligence there was a dispute that was only resolved by litigating the interpleader. The plaintiffs — after resolving the interpleader — had the right to sue and prove damages against the insurer for its negligence.

If, on the other hand, the insurer had done nothing other than determine that there existed multiple claims from disparate parties to the benefits of the life insurance policy and could not safely determine which were entitled to the benefits, the interpleader would have resolved all disputes between those seeking benefits and the insurer.