Securities Litigation

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. V. J. Graffeo is an attorney with Burr and Forman in Birmingham, Alabama.