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August 2012

Lee v. West Coast Life Ins. Co. ? Federal Interpleader Does Not Shield Negligent Stakeholder

Federal Interpleader Does Not Shield Negligent Stakeholder From Liability For Its Creation of Conflict Over Entitlement to Funds

(July 31, 2012) ____ F.3d ____; 12 C.D.O.S. 8604

The Ninth Circuit reversed and remanded the district court’s order granting summary judgment in favor of the defendant stakeholder and held that federal interpleader does not shield a negligent stakeholder from tort liability arising out of its creation of a conflict over entitlement to the interpleaded funds.

On March 13, 1998, Defendant West Coast Life Insurance Company (“West Coast”) issued a life insurance policy with a death benefit of $800,000 to Steve Lee, Sr.  The original owner of the policy was Steve Sr., and the original beneficiary of the policy was Steve Sr.’s brother, William Lee.  Over the years, Steve Sr.’s family made several changes to the ownership and beneficiaries of the policy.

In July 2005, Robert Lee, Bobbie Bill Lee, and Steve Jr., the grandson and nephews of Steve Sr., executed a policy change form.  The form was executed at West Coast’s office with the help of West Coast’s Director of Policy Administration, who erroneously instructed Bobbie and Robert Lee to sign as existing owners, when only Steve Jr. was an existing owner.  The Director also failed to ask Steve Jr. to sign a change of beneficiary form which would have transferred a 62.5% interest to Robert Lee as a beneficiary.  West Coast nevertheless approved and recorded the change of beneficiary providing Robert a 62.5% interest. There were several subsequent changes to the policy’s ownership, including a final change in December of 2008, when Robert and Gina Lee became sole beneficiaries.   

In January 2009, Steve Sr. passed away.  Robert and Gina Lee submitted claim forms to West Coast.  West Coast denied the claims after concluding Robert and Gina Lee had no interest in the policy because the 2005 changes had been improperly executed. In March 2009, Bobbie Lee submitted a claim form to West Coast, and the parties were unable to reach a mutual agreement regarding entitlement to the benefits.

Steve Jr., Bobbie and William Lee (“Plaintiffs”) filed a lawsuit against West Coast in Los Angeles Superior Court alleging breach of contract and bad faith.  West Coast removed to federal court and filed a counterclaim in interpleader.  West Coast deposited $800,000 plus interest with the district court, and added Robert and Gina Lee, among others, as counter-defendants.  Robert and Gina Lee (“Counterclaimants”) filed counterclaims for negligence and declaratory relief against West Coast.

West Coast filed a motion for partial summary judgment which the district court granted as to the interpleader claim and the claims sounding in contract.  The Plaintiffs and Counterclaimants then settled as to distribution of the interpleaded funds and the district court approved the requested distribution.  The court also unilaterally amended its previous summary judgment order to dismiss the Counterclaimants’ request for attorneys fees. It concluded only the Counterclaimants’ negligence claim remained to be tried.

As to that negligence claim, Counterclaimants argued they could recover the amount of the insurance proceeds allocated to Plaintiffs pursuant to the settlement ($290,000) as well as the attorney’s fees they had incurred litigating their claims against Plaintiffs, under California’s “tort of another” doctrine.  West Coast filed a Rule 52 motion for judgment which the district court granted, holding Counterclaimants had not alleged any cognizable damages flowing from West Coast’s negligence.  Counterclaimants timely appealed and the Ninth Circuit reversed.

The Ninth Circuit noted interpleader actions are intended to protect a stakeholder from the possibility of exposure to double or multiple liability.  Stakeholders are thus protected from having to determine, at their peril, which claimant has a better claim to the funds at issue.  Interpleader does not however preclude counterclaims that are not directed at the interpleaded funds.  Thus, when the sole issue is the competing claimants’ entitlement to the stake, the stake marks the outer limits of the stakeholder’s potential liability. When however the stakeholder faces potential independent liability to a claimant, interpleader does not shield the stakeholder from this liability or cap it to the amount of the stake.  

The Ninth Circuit concluded the district court correctly determined the Counterclaimants’ negligence claim survived the interpleader action, but erred when it determined their attorney’s fees were not recoverable absent a showing of bad faith.  The district court also erred when it concluded Counterclaimants’ attempts to recover amounts disbursed to the Plaintiffs in settlement as damages would require re-litigating the issue of entitlement to the benefits. 

As to the claim for attorney’s fees, the Ninth Circuit concluded attorney’s fees awarded under the tort of another doctrine are an economic loss proximately caused by the tort. There is no requirement of “bad faith” to recover such damages. The Ninth Circuit also held that Counterclaimants negligence claim did not arise from West Coast’s failure to resolve the controversy over entitlement to the insurance proceeds.  Instead, this claim arose from West Coast’s negligent execution and recording of the July 2005 change forms, which resulted in Counterclaimants’ being forced to litigate their adverse claims against Plaintiffs. 

Since the Counterclaimants’ alleged damages flowed from West Coast’s alleged negligent conduct, these claims were not precluded by the interpleader. The Ninth Circuit noted the interpleader did not operate as a “get-out-of-jail-free” card, or improperly shield tortfeasors from liability for their negligent acts or limit their exposure to the value of the stake.  The Ninth Circuit therefore reversed and remanded the matter to the district court.     
Please click here for the opinion. 

This opinion is not final.  The Ninth Circuit may modify it on rehearing or the United States Supreme Court may order it depublished or grant review.  The latter two events would render the opinion unavailable as legal authority in California courts.

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Aaron P. Rudin