What Is an Interpleader Action?

The short answer

An interpleader action is a lawsuit that a person or company holding money or property files when two or more other people claim it, and the holder cannot safely pay any one of them without risking a lawsuit from the others. The holder (the stakeholder) asks the court to take the money, or to supervise its payment, and to decide who is entitled to it. The people claiming the money (the claimants) become defendants and argue their claims against each other.

The classic example is a life insurance policy. The insured person dies. The beneficiary form names an ex-spouse, but the deceased person’s current spouse, children, or estate say the ex-spouse should not be paid. If the insurer picks one side and guesses wrong, it could be ordered to pay the death benefit a second time. Interpleader exists to avoid that problem.

Who files, and why

The party that files is usually a neutral holder of funds: a life insurance company, a bank or credit union, a brokerage firm, a retirement plan, an escrow or title company, or an employer holding final wages or benefits. Sometimes the holder does claim part of the money (for example, a fee it says it is owed), and federal rules allow that too.¹

The federal courts of appeals describe the stakeholder’s goal in practical terms. The Third Circuit has said that interpleader allows a stakeholder who “admits it is liable to one of the claimants, but fears the prospect of multiple liability,” to “file suit, deposit the property with the court, and withdraw from the proceedings,” leaving “[t]he competing claimants … to litigate between themselves.”²

The stakeholder does not have to decide who has the better claim before it files. The Ninth Circuit has explained that a stakeholder needs a good-faith belief that there are, or may be, colorable competing claims, and that this is “not an onerous requirement.”³ Avoiding the cost and hassle of competing demands is itself a legitimate reason to interplead, even if the stakeholder suspects only one claim is valid.

The two federal routes

In federal court, a stakeholder can bring interpleader in two ways. They have different requirements, and the choice can matter for where the case is filed and how the claimants are brought in.

Each requirement is explained, with the statutory text, in the guide to statutory versus Rule 22 interpleader. State courts also have interpleader procedures, which vary by state.

Before filing, the stakeholder often writes to the claimants asking them to resolve the dispute themselves. See before an interpleader.

How a typical case moves

Federal courts describe a typical interpleader case as proceeding in two stages.⁴

1. Stage one: is interpleader proper? The court decides whether the case was properly brought and whether the stakeholder should be discharged from further liability to the claimants. If the court agrees, the stakeholder deposits the money (if it has not already), is often released from the case, and may ask to be paid reasonable fees out of the fund.
2. Stage two: who gets the money? The claimants litigate their competing claims to the fund, just as they would in an ordinary lawsuit, with pleadings, evidence, and if needed a trial. In practice, many cases settle at this stage, and the court then orders the clerk to pay out the fund according to the settlement.

In federal statutory interpleader, the court can also order the claimants not to start or continue other lawsuits over the same money in other courts, so that everything is decided in one place.⁵

For realistic time frames, see how long does an interpleader case take?

What interpleader does not do

Interpleader is a tool for dividing a specific fund. It is not a way to gather every dispute connected to an event into one court. The Supreme Court made that point in State Farm Fire & Casualty Co. v. Tashire, where an insurer deposited a $20,000 liability policy into court after a bus crash that killed two people and injured dozens more, and then tried to use the interpleader to force all of the injury lawsuits against the bus company and its driver into a single federal court. The Court held that interpleader could protect the fund, but it could not be used to stop the injured passengers from suing the other defendants wherever they otherwise could.⁶

Interpleader also does not decide claims that are separate from the fund itself. If a claimant says the stakeholder did something wrong (for example, mishandled a request to change a beneficiary), courts may keep the stakeholder in the case to answer that claim, depending on whether the claim is really about the stakeholder’s failure to pick a winner or about some independent wrongdoing.⁷

If you are one of the claimants

Being named as a defendant in an interpleader does not necessarily mean you did anything wrong. It usually means a company holding money is asking a court to decide whether some of it belongs to you. But it is still a lawsuit, with real deadlines:

• In federal court, a defendant generally must answer within 21 days after being served (longer if the defendant agreed to waive formal service).⁸
• A claimant who does not respond can lose by default. Courts have held that a default judgment against an interpleader claimant “terminates that party’s interest in the fund.”⁹¹⁰
• The court cannot pay anyone until it has jurisdiction over all the claimants and resolves the competing claims, so cases can take months.

The guide for people who have been named in an interpleader walks through the steps, and the frequently asked questions give short answers on deadlines, fees, interest and settlement. For what happens to the money while the case is pending, including interest and the stakeholder’s attorney’s fees, see discharge, fees, and interest.

Where interpleader cases come from

Almost any fund can be interpleaded. The most common sources are death benefits and accounts that pass outside a will, because they pay out according to a form signed years earlier, often before a divorce, remarriage, or falling out. Our overview of what can be interpleaded covers life insurance, bank accounts, and other assets.

Footnotes

1. Fed. R. Civ. P. 22(a)(1) (a plaintiff may bring interpleader even if “the plaintiff denies liability in whole or in part to any or all of the claimants”); see also Rule 22(a)(2) (a defendant facing similar exposure may seek interpleader through a crossclaim or counterclaim). Text: Cornell LII, Rule 22. ↩

2. Metropolitan Life Ins. Co. v. Price, 501 F.3d 271, 275 (3d Cir. 2007); also quoted in Prudential Ins. Co. of America v. Hovis, 553 F.3d 258, 262 (3d Cir. 2009). Opinion (PDF), Third Circuit. ↩

3. Michelman v. Lincoln National Life Ins. Co., 685 F.3d 887, 894 (9th Cir. 2012) (stakeholder must have “a good faith belief that there are or may be colorable competing claims to the stake”). Opinion (PDF), Justia. ↩

4. Prudential Ins. Co. of America v. Hovis, 553 F.3d 258, 262 (3d Cir. 2009) (“The typical interpleader action proceeds in two distinct stages.”), citing NYLife Distributors, Inc. v. Adherence Group, Inc., 72 F.3d 371, 375 (3d Cir. 1995). Opinion (PDF). ↩

5. 28 U.S.C. § 2361 (in a § 1335 action, the court may restrain claimants “from instituting or prosecuting any proceeding in any State or United States court affecting the property, instrument or obligation involved”). Cornell LII. ↩

6. State Farm Fire & Casualty Co. v. Tashire, 386 U.S. 523 (1967). Cornell LII. See the summary of the decision. ↩

7. Hovis, 553 F.3d at 264–65 (holding that where the stakeholder “is blameless with respect to the existence of the ownership controversy,” a proper interpleader protects it from claims “directly relating to its failure to resolve that controversy,” and noting the modern approach of keeping a stakeholder in the case to defend independent counterclaims). ↩

8. Fed. R. Civ. P. 12(a)(1)(A) (21 days after service; 60 days after a waiver request was sent under Rule 4(d), or 90 days if sent outside the United States). Cornell LII. ↩

9. Fed. R. Civ. P. 55(a) (clerk must enter a party’s default when it “has failed to plead or otherwise defend”). Cornell LII. ↩

10. State Farm Mut. Auto. Ins. Co. v. Wagnon, 959 F.2d 245 (10th Cir. 1992). ↩