Protecting the Financial Services Firm as a Stakeholder: the Interpleader Action Defined (Part 1)

by Burr & Forman
Contact

Financial services firms oftentimes can find themselves in the unenviable position of being in the middle of a dispute over money or property held by their clients. If two or more parties assert competing claims to the ownership of assets held at a financial institution, the institution with custody of the account—the “stakeholder”—can initiate a complaint in interpleader to allow a court to determine the rightful owner of the assets and obtain a discharge from further liability. Here is how an interpleader action operates and how it can protect the stakeholder:

When a stakeholder—be it a bank, a brokerage firm, custodial trustee, an insurance company or other financial institution—is unable to determine the rightful owner of assets, or the “res,” without facing liability from multiple parties, it can initiate an interpleader lawsuit. Under interpleader procedures, the stakeholder files a lawsuit naming the competing claimants as defendants. In the action, the stakeholder acknowledges that one of the parties claiming ownership is the legal owner of the res, but due to the competing nature of the claims, the stakeholder requests the court to declare rights to the res in order for the stakeholder to avoid dual liability. Typically, upon the court’s acceptance of the interpleaded funds, the stakeholder is dismissed from the suit and discharged from further liability, leaving the claimants to litigate their dispute over ownership of the assets.

Interpleader actions often arise in the insurance industry. Here is an instance of a classic situation. Let’s say that a life insurance company has a client with a life policy who dies, and a dispute arises among the presumptive beneficiaries as to who is entitled to the policy proceeds. Although the insurance company knows it is liable to someone, it could face the risk of a claim if the wrong beneficiary is paid. In order for the insurance company to not be liable to multiple parties, the life insurance company can decide to file an interpleader action and request the court to declare the rightful beneficiary of the policy. Through an interpleader action, the insurance company deposits the policy proceeds with the court, and litigation is carried out to determine the owner of the funds. By doing this, the life insurance company can be relieved of any future liability once the court accepts the payment and proceeds to determine competing claims among the presumptive beneficiaries.

In a recent case of mine, the owner of a life insurance policy left his ex-wife as the primary beneficiary of his policy after their divorce was finalized.   He passed away shortly after their divorce and his mother, who was the named secondary beneficiary, claimed to be the rightful owner of the policy proceeds because the ex-wife had disclaimed any interest she in her husband’s property in the divorce decree. A legal issue arose between the ex-wife and her former mother-in-law as to whether such a disclaimer of property in a divorce decree operated as a disclaimer to her interests in the life insurance policy proceeds.  Because the life insurance company faced the risk of competing claims between the primary and secondary beneficiaries, it filed an interpleader action requesting the court to accept the policy proceeds, to adjudicate the competing claims and to discharge the life insurance company of liability.  The court accepted the policy benefits, dismissed the insurance company from the case and allowed the beneficiaries to litigate their claim to the proceeds.  Through the interpleader action, the insurance company was able to pay its liability under the policy into court and walk away from a family dispute without facing risk of paying the improper party.

An interpleader action is an extremely useful litigation strategy to protect the stakeholder when the rightful ownership over custodial assets is in dispute. In my next blog post, I will explore the mechanics of two different types of interpleader actions, the laws that govern them, and provide examples. As always, consult with an attorney familiar with interpleader cases before taking any action.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Burr & Forman | Attorney Advertising

Written by:

Burr & Forman
Contact
more
less

Burr & Forman on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!