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Court Holds That Filing An Interpleader Complaint Is Not An Actionable Wrong

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  • Posted on: May 7 2018

It is not uncommon for a person or entity holding money to be placed in a situation where multiple parties claim entitlement to the funds being held. Given the competing claims to the funds, the holder can wait for the parties to resolve their dispute or file an interpleader action asking the court to decide who should get the funds being held.

An interpleader action “is an equitable proceeding” brought by a third party to have a court determine the ownership rights of multiple claimants to the same asset or property that is held by that third party. Truck-A-Tune, Inc. v. Re, 23 F.3d 60, 63 (2d Cir. 1994); William Penn Life Ins. Co. v. Viscuso, 569 F. Supp. 2d 355, 362 (S.D.N.Y. 2008) (“Although sanctioned by statute, interpleader is fundamentally an equitable remedy.”). The property in question is called the stake or “res”, and the third party who has custody of the stake is called the stakeholder. In the absence of an interpleader action, the stakeholder must either give the asset or property to one of the parties claiming ownership or face a lawsuit for wrongfully giving the asset or property to the other claimant. An interpleader action, therefore, enables the stakeholder to turn the dispute over to a court. It is designed to eliminate multiple lawsuits over the same stake and to protect the stakeholder from actual or potential liability.

To initiate an interpleader action, the stakeholder must file a complaint alleging that it has no claim to the asset or property in dispute and does not know to which claimant the stake should be delivered. The stakeholder must also establish the possibility of multiple lawsuits. The stakeholder may be required to deposit the stake with the court and must notify the claimants that they can assert their ownership claims in court for determination.

The court must then decide whether the interpleader is proper. It has discretion to allow the interpleader and may deny the relief if the stakeholder is guilty of wrongdoing. If the court grants the interpleader, the stakeholder is dismissed from the action. The claimants are given the right to litigate their claims and will be bound by the decision of the court.

Under federal law, there are two forms of interpleader: rule interpleader, under Federal Rule of Civil Procedure 22; and statutory interpleader, under 28 U.S.C. § 1335. Both serve the same function of joining two or more adverse claimants to a single proceeding in order to promote efficiency and protect the stakeholder from multiple lawsuits. District Attorney of N.Y. County v. The Republic of The Philippines, No. 14 Civ. 890 (KPF) (S.D.N.Y. Mar. 29, 2018) (citing Bradley v. Kochenash, 44 F.3d 166, 168 (2d Cir. 1995)). Differences between the two forms of interpleader concern personal and subject matter jurisdiction, service of process, and venue. Id. See also 4 J. Moore et al., Moore’s Federal Practice § 22.04[1] (3d ed. 2017). The most important distinction involves the requirements for subject matter jurisdiction. For interpleader under Rule 22, subject matter jurisdiction must be based on Article III of the Constitution and the jurisdictional statutes. In other words, “a traditional basis for subject matter jurisdiction must exist.” 6247 Atlas Corp. v. Marine Ins. Co., Ltd., No. 2A/C, 155 F.R.D. 454, 465 (S.D.N.Y. 1994). Statutory interpleader, by contrast, requires only minimal diversity — “that is, diversity of citizenship between two or more claimants, without regard to the circumstance that other rival claimants may be co-citizens.” State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 530 (1967).

In New York, interpleader is governed by CPLR § 1006. Like its federal counterparts, CPLR § 1006(a) enables a stakeholder who faces liability as a result of conflicting claims to an asset, but has no interest in that asset, to commence an interpleader action against the competing claimants, and compel them to litigate the matter among themselves. American Intern. Life Assur. Co. of N.Y. v. Ansel, 273 A.D.2d 421 (2d Dept. 2000). However, when there are adverse claims to a particular fund, but those claims do not expose the interpleader party to liability, the interpleader party is not a stakeholder within the meaning of CPLR §1006(a) and, therefore, may not proceed by way of interpleader. See Royal Bank of Canada v. Weiss, 172 A.D.2d 167 (1st Dept. 1991). Therefore, under New York law, the interpleader remedy is available only to a stakeholder. Bankers Trust Co. v. Hogan, 196 A.D.2d 469 (1st Dept. 1993).

When a claimant alleges that the stakeholder is liable for an independent wrong, such party is not a mere stakeholder, notwithstanding its assertion that it has no interest in the disputed funds. The key is that the “claim[ ] for relief . . . must be based on wrongful conduct independent from the filing of an interpleader, or the retention of interpleaded assets pending direction from the court.” Bank of New York v. First Millennium, Inc., No. 06 Civ. 13388 (CSH), 2008 WL 953619, at *7 (S.D.N.Y. Apr. 8, 2008) (internal quotation marks and citation omitted); Inovlotska v. Greenpoint Bank, 8 A.D.3d 623 (2d Dept. 2004). Under such circumstances, it is an improvident exercise of discretion for a court to discharge the stakeholder before the question of its alleged liability has been adjudicated. Inovlotska, 8 A.D.3d at 624-25; Birnbaum v. Marine Midland Bank, 96 A.D.2d 776 (1st Dept. 1983).

On April 16, 2018, Justice Scarpulla of the Supreme Court, New York County, Commercial Division, addressed the foregoing principles in a decision in which the Court declined to hold a stakeholder liable for tortious interference with contract due to the filing of an interpleader action.  SPV-LS LLC v. Citron, 2018 N.Y. Slip Op. 30681(U) (Sup. Ct., N.Y. County Apr. 16, 2018) (here).

SPV-LS LLC v. Citron

Background

SPV-LS arose out of a dispute over proceeds of a stranger-originated life insurance policy (the “Policy”), which insured the life of Nancy Bergman (“Nancy”) for ten million dollars.

Nancy obtained the Policy from Transamerica Life Insurance Company (“Transamerica”) in October 2006. Nancy, as grantor, and Nacham Bergman (“Nacham”), as trustee, thereafter created the N. Bergman Insurance Trust (the “Trust”) to which Nancy transferred ownership of the Policy. Premium payments for the Policy were allegedly funded by a group of investors (“Investors”) in exchange for either a portion of the proceeds from the sale of the Policy or Nancy’s death benefits if she died before the Policy was sold.

In November 2009, Nacham, as trustee, entered into a Life Insurance Policy Purchase and Sales Agreement (the “Sale Agreement”) with Plaintiff, Financial Life Services, LLC (“FLS”), whereby FLS agreed to purchase the Policy from the Trust for $1,350,000. Pursuant to the Sales Agreement, if any of the Trust’s representations or warranties were false, FLS could either require the Trust to repurchase the Policy or move forward with the transaction but at a reduced purchase price.

In December 2009, FLS learned that the Trust failed to make a required premium payment to Transamerica, causing the Policy to enter a grace period, and that some of the Trust’s representations and warranties were false at the time of the sale. Upon learning this information, FLS attempted to exercise its remedies under the Sale Agreement (e.g., rescind the agreement or proceed with the purchase at a reduced price). The Trust refused to comply.

As a result, in October 2010, FLS filed a lawsuit in the Eastern District of New York against the Trust seeking specific performance under the Sale Agreement. On January 9, 2012, the court issued an order directing that the sale of the Policy occur by auction on or before February 7, 2012.

One day before the auction, the Trust filed a voluntary bankruptcy petition in the Eastern District of New York (“Bankruptcy Action”). Thereafter, the automatic stay in the Bankruptcy Action was lifted, and the Bankruptcy Action was dismissed. Subsequently, FLS purchased the Policy through an auction for $1,194,522. The Policy was later transferred to Plaintiff, SPV-LS LLC (“SPV”).

While the foregoing proceedings were taking place, Transamerica received competing claims to the Policy proceeds. On April 22, 2014, Nachman sent Transamerica a letter in which Nachman claimed that he was the rightful Policy beneficiary, that he never transferred ownership of the Policy, and that he commenced legal proceedings to establish his ownership. In May 2014, Malka Silberman (“Malka”), the wife of one of the Investors, asserted a claim to the Policy, claiming that she was a successor trustee of the Trust.

Because of the competing claims to the Policy proceeds, Transamerica refused to distribute the proceeds. On June 13, 2014, SPV initiated a breach of contract action against Transamerica to recover the Policy proceeds in the United States District Court for the District of South Dakota (“South Dakota Action”). On June 17, 2014, Transamerica answered the complaint by commencing a third-party interpleader action pursuant to 28 USC § 1335 against Plaintiffs, Nachman as the Trust’s trustee, Malka as the Trust’s successor trustee, and Nancy’s Estate.

Shortly thereafter, Transamerica deposited the proceeds of the Policy into the court pursuant to 28 USC §13325(a)(2). On March 30, 2015, Transamerica’s motion to be discharged from the action was preliminarily granted “to the extent that Plaintiff SPV and all Third-Party Defendants are enjoined from instituting any action or other proceeding against Transamerica with regard to the Policy benefits at issue here.” By order dated June 14, 2016, the court discharged Transamerica from liability as Defendant and Third-Party Plaintiff and awarded it attorney fees. The court in the South Dakota Action ultimately found that Plaintiffs were entitled to the Policy proceeds.

Plaintiffs commenced the action in New York Supreme Court in March 2017. Among other things, Plaintiffs alleged that Defendants tortiously interfered with the Policy by interpleading the Policy proceeds in the South Dakota Action. Defendants moved to dismiss.

The Motion Court’s Decision

The Court easily disposed of the tortious interference with contract claim, finding that “Transamerica did not breach its contract with SPV by interpleading the Policy proceeds.” (Citations omitted.) The reason said the Court: “a stakeholder is allowed to bring an interpleader action, rather than choosing between adverse claimants.…” Thus, even though Transamerica declined “to choose between the adverse claimants (rather than bringing [the] interpleader action),” that decision could not “itself be a breach of a legal duty.” Citations omitted.

The Court went on to note that Plaintiffs failed to allege any breach of contract based on an independent claim of liability. Instead, Plaintiffs merely alleged “a claim to the stake itself.” Citing Clearlake Shipping PTE Ltd. v. O.W. Bunker (Switzerland) SA, 2017 A.M.C. 656, 666 (S.D.N.Y. 2017) (internal citations omitted). Alleging that Transamerica “should have paid SPV the Policy proceeds ‘rather than instituting the interpleader’” held the Court, “is not an ‘independent’ claim’” upon which relief can be granted. Id.

Takeaway

An interpleader action protects the holder of assets (such as a bank account, brokerage account or life insurance policy proceeds) and property when there is a dispute between two or more parties claiming ownership. The stakeholder can file an interpleader action to deposit the assets into court to allow the competing claimants to litigate the ownership of the stake, thereby allowing the stakeholder to be discharged from further liabilities. Where, as in SPV-LS, the stakeholder declines to choose between the competing claimants, and files an interpleader action, the stakeholder cannot be held liable for an independent cause of action. SPV-LS illustrates that more is needed to hold the stakeholder liable – a wrong independent of the interpleader action.

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