Learn more about the details of how an interpleader works, and about the pros and cons of using one.
Definition and Examples of Interpleader
An interpleader is a legal procedure that determines the rightful owner of money or property claimed by two or more parties. Custodians of such money and property use the procedure when they face, or may face, multiple lawsuits from the claimants. Let’s say a person dies and three surviving family members claim to be the rightful beneficiary of the deceased person’s life insurance death benefit. In such a case, the insurer could face three separate lawsuits from the individual claimants. Instead of battling multiple lawsuits, the insurance company could file a complaint for interpleader action.
Understanding an Interpleader
A “stakeholder” is the custodian of disputed money and property. A stakeholder can be an association, corporation, firm, or person. Stakeholders seeking interpleader action can’t have an interest in the property they hold. For example, a trustee may seek interpleader action in the disposition of an estate in which they are not entitled to inherit any money or property. Stakeholders don’t seek interpleader action to avoid transferring property, but to determine the property’s rightful owner. Essentially, the interpleader procedure flips the script on a property dispute because the stakeholder becomes the plaintiff, and the claimants become defendants.
Interpleader Requirements
A stakeholder may seek interpleader action after the claimants file lawsuits or, in anticipation of multiple lawsuits, before any claimant sues. To qualify for an interpleader action, the money or property under dispute must have a value of at least $500. Federal law grants nationwide service for interpleader cases. So even if defendants live in different jurisdictions, a single court can rule on an interpleader.
Interpleader Process
Through interpleader action, the stakeholder requests that the court assign ownership of money or property under dispute. When filing an interpleader, the stakeholder must hand over the money or property under dispute to the court clerk. The stakeholder has the right to request reimbursement for court costs and attorney fees. When the court rules on the disposition of the property, it awards a portion of the property to cover the stakeholder’s expenses. For instance, if the dispute was over a $500,000 life insurance policy, and the insurance company incurred $50,000 in legal expenses, the court may award $450,000 to the winning defendant and $50,000 to the stakeholder. When an interpleader involves money, the court clerk will deposit the funds into an interest-bearing account. Once the court rules on ownership, it will award the winner the funds that were under dispute and accrued interest.
Pros and Cons of Interpleader Actions
Pros Explained
Stakeholders avoid multiple lawsuits: Interpleader action can prevent a stakeholder from facing multiple lawsuits over the same money or property.Court rules on ownership: The process relieves the stakeholder of the burden of deciding which claimant should receive the money or property. Since the law allows the plaintiff to file a claim for attorney and court fees, the stakeholder can also recoup costs caused by the dispute.
Cons Explained
Depleted stakes: Often, a stakeholder can’t simply unload a money or property dispute by seeking interpleader. A court may require the stakeholder to remain in the case until it makes a final ruling, so the plaintiff must continue to retain attorneys. If the court grants the stakeholder reimbursement for attorney’s fees and court costs, the funds will come from the award granted to the winning defendant.
The Bottom Line
Stakeholders can use an interpleader action to settle a dispute over money or property. But the procedure favors the stakeholder, at the expense of the claimants. A defendant in an interpleader case may need to hire an attorney to present a case that will convince the court that they are the rightful owner. When the court rules for a defendant, they may have to pay the attorney fees and court costs of the plaintiff, plus their own attorney fees.
