Interpleader and ERISA: More Complicated (and Interesting) Than You May Think

This article by Gentry Locke Partner Kevin Holt regarding Interpleader actions and ERISA was published in DRI — The Voice of the Defense Bar, August 2016, Volume 11, Issue 2.

Most lawyers, including ERISA practitioners, likely think interpleader actions are unappealing because they are easy and boring. They involve situations in which there are two or more competing claimants or beneficiaries to the same insurance policy proceeds. Rather than pay one claimant and risk being sued by the other, carriers typically prefer to bring an interpleader action, naming all claimants or beneficiaries as defendants and then paying the policy proceeds into court. Thereafter, the carrier requests, and typically receives, an injunction against future claims to the proceeds and some portion of its attorney’s fees and costs incurred from the proceeds. The carrier is then discharged from the case. In the second stage of the proceedings, the competing claimants litigate their entitlement to the funds.

In reality, at least based on my recent experience and a number of recent rulings, interpleader actions, especially those involving ERISA-governed policies, are anything but easy and boring. This article attempts to highlight some of the recent decisions and difficult issues ERISA practitioners may face when dealing with interpleader actions.

Interpleader Jurisdiction

The first issue to consider when filing an interpleader action is jurisdiction. You need it. Do you have it?

Section 1335 of Title 28 of the United States Code provides for Federal jurisdiction over interpleader actions. However, under the statute, all claimants to the funds must be diverse from one another. This requirement may be lacking in the frequent situation in which the competing claimants to life insurance proceeds, for example, are members of the same family who reside in the same state.

Fortunately, in addition to the Federal statute, there is also “rule interpleader.” Rule 22 of the Federal Rules of Civil Procedure permits an interpleader action to be brought in Federal Court, provided that subject matter jurisdiction is based on a general jurisdictional statute. Thus, if you have either Federal question jurisdiction or diversity jurisdiction in your case, an interpleader action under Rule 22 will be proper. Diversity among all claimants is not required for rule interpleader.

Of course, if the policy at issue is part of an employer-sponsored ERISA plan, Federal question jurisdiction will be conferred. If the policy is not subject to ERISA, you must have diversity jurisdiction, including the $75,000.00 amount in controversy requirement. The dollar requirement may bar the doors to the Federal courthouse in the case of a modest life or accidental death and dismemberment policy, for example, in which case you would have to bring your interpleader action in state court, likely the second choice forum of most carriers.

Standing under ERISA

An insurance company usually qualifies as a claims fiduciary under ERISA when it has some discretionary authority over the benefit plan or the determination of the entitlement to benefits under the policy. Standing as a “fiduciary” under ERISA is typically liberally construed, particularly for jurisdictional purposes.

Most policies governed by ERISA include express grants of authority to the insurance carrier designating it as the claims fiduciary with full discretion and authority to determine eligibility for benefits and to construe and interpret all terms and provisions of the policy. If the clause grants the carrier discretion over the administration and management of the benefit plan, particularly whether benefits will be paid under the policy, the carrier will have standing to bring an interpleader action as an ERISA fiduciary. See Metro. Life Ins. Co. v. Marsh, 119 F.3d 415 (6^th Cir. 1997); Aetna Life Ins. Co. v. Bayona, 223 F.3d 1030 (9^th Cir. 2000); Metro Life Ins. Co. v. Bigelow, 283 F.3d 436, 439-40 (2^nd Cir. 2002); Metro Life Ins. Co. v. Price, 501 F.3d 271, 276-77 (3^rd Cir. 2007).

Equitable Relief and Defenses

Federal courts have generally held that a Rule 22 interpleader action is one seeking “other equitable relief” under 29 U.S.C. §1132(a)(3). “[I]nterpleader is ‘fundamentally equitable in nature.’” Marsh, 119 F.3d at 418 (citing Commercial Union Ins. Co. v. United States, 999 F.2d 581, 588-89 (D.C. Cir. 1993)). “The remedy in an interpleader action by an insurance company with limited contractual liability draws upon equitable principals and common sense, namely that the court will distribute the limited fund of assets on some sort of ratable basis.” Guardian Life Ins. Co. of America v. Spencer, Civil Action No. 5:10CV004, 2010 U.S. Dist. LEXIS 93405 (W.D. Va. Sept. 8, 2010).

Because an interpleader action is an equitable proceeding, equitable defenses apply. U.S. Fire Ins. Co. v. Abestospray, Inc., 182 F.3d 201, 208 (3^rd Cir. 1999); United States v. Hightech Prods., Inc., 487 F.3d 637, 641-42 (6^th Cir. 2007); Farmers Irrigating Ditch & Reservoir Co. v. Kane, 845 F.2d 229, 232 (10^th Cir. 1988) (explaining that “[t]he typical plaintiff in an interpleader is an innocent stakeholder who is subject to competing claims”). As we will see below, because equitable defenses apply, the carrier-plaintiff, in some cases, can be denied discharge from the case and forced to defend a counterclaim, including one alleging breach of fiduciary duty, or some other violation of ERISA.

“Competing Claims”

Sometimes a threshold issue will arise about whether, in fact, there are competing claims. If two claimants have each filed a written claim for benefits with the carrier, the answer is easy. There may be situations, however, in which, for instance, a husband has filed a written claim to the proceeds of a policy insuring the life of his deceased wife, and he is charged with having killed her. Her contingent beneficiary may be another family member or her estate under either a beneficiary designation form or the terms of the policy. But if the husband is merely suspected of involvement in his wife’s death and has not been charged or convicted and if the relative has not filed a formal claim with the carrier, a more difficult question is presented.

These were the facts in a recent interpleader case of mine. The wife died in a homicide committed in the family home. All evidence pointed to the woman’s husband as the killer. The husband was the named beneficiary of an ERISA-governed life policy insuring the wife. For whatever reason, years after the wife’s death, the husband remained the sole suspect, but had never been charged with any crime. The husband had filed a written claim under the policy, but the carrier had not paid it.

The carrier decided it could wait no longer and elected to file an interpleader action in Federal court invoking Rule 22 and ERISA jurisdiction. Application of Virginia’s slayer statute, now codified at Va. Code § 64.2-2500, et seq., barred the husband from taking under the policy, assuming he were determined to be his wife’s slayer. At the first court appearance, I was challenged by the judge about whether there truly were competing claims to the proceeds. The judge admonished that he lacked jurisdiction to render “advisory opinions” and wanted to be satisfied that we were not improperly asking the court to substitute itself for the carrier in administering the husband’s claim and the policy.

The court’s initial reaction was not unlike that of other judges who can be critical of interpleader actions when they believe they are being asked to essentially do the carrier’s job administering claims. See Metro. Life Ins. Co. v. McNatt, Case No. CIV-13-474, 2015 U.S. Dist. LEXIS 70950 (E.D. Ok. June 2, 2015). We had sued both the husband and the deceased wife’s elderly mother, who would take as a contingent beneficiary if the husband were found to be the slayer.

The mother never answered the Complaint and was in default. She was, however, also in the courtroom that day observing the proceedings. When the judge asked me what the mother’s position in the case was, I mentioned that the mother was sitting in the back of the courtroom (she had introduced herself to me before the hearing began). I indicated that she had not filed a formal claim to the proceeds or an Answer, but, because she was here, she could tell the court herself what her position was. The judge then asked her and, after being sworn, she shouted, “I don’t think he should get anything because he killed Ann!” At that point, turning to me, the judge declared, “I’ll take that as a claim.”

The court ultimately found that our case was brought properly. The court held that under Rule 22, an interpleader plaintiff has standing to bring an interpleader case if it faces claims that “may” expose it to “double or multiple liability….” Fed. R. Civ. P. 22(a)(1). The rule does not require there to actually be competing claims at the time the interpleader Complaint is filed, only that competing claims “may” arise, exposing the carrier to multiple liability. The judge was ultimately satisfied that we were not asking him for an advisory opinion or to administer the policy – but who knows if the result would have been the same had the mother not come to court that day.

ERISA and Slayer Statutes

As with my case several years ago, ERISA interpleader cases frequently occur in the context of murder. All but a handful of states have enacted statues that bar “slayers” from receiving benefits under a policy. In addition, Federal common law has long precluded beneficiaries from profiting from their own wrongdoing. See New York Mut. Life Ins. Co. v. Armstrong, 117 U.S. 591 (1886). But does ERISA preempt state slayer acts?

The United States Supreme Court has suggested, in dicta, that ERISA does not preempt state slayer statutes. Egelhoff v. Egelhoff, 532 U.S. 141, 152 (2001)(“[b]ecause the [slayer] statutes are more or less uniform nationwide, their interference with the aims of ERISA is at least debatable.”). Some district courts have echoed this belief that preemption is doubtful. See, e.g., Admin. Comm. for the H.E.B. Inv. & Ret. Plan v. Harris, 217 F.Supp.2d 759, 761 (E.D. Tex. 2002) New Orleans Elec. Pension Fund v. Newman, 784 F.Supp. 1233, 1236 (E.D. La. 1992); Mendez-Bellido v. Bd. of Tr. of Div. 1181, 709 F.Supp. 329, 333 (E.D. N.Y. 1989). Other courts have held that slayer statutes are preempted either by ERISA or Federal common law. Mitchell v. Robinson, Case No. 1-11cv130, 2011 U.S. Dist. LEXIS 147226, at *12 (E.D. Mo. 2011); Addison v. Metro. Life Ins. Co., 5 F. Supp. 2d 392 (W.D. Va. 1998). Most courts, however, have declined to decide the issue, concluding that Federal common law, which includes the equitable principal that a person should not benefit from his wrongs, would invariably yield the same result that slayer statutes would. Nale v. Ford Motor Co. UAW Plan, 703 F. Supp. 2d 714, 722 (E. D. Mich. 2010) (citing New York Mutual Life Ins. Co., 117 U.S. at 600).

Frequently, the issue in slayer cases is how and when a claimant or beneficiary is determined to be a slayer and, considering this, when an interpleader case should be brought.

Some statutes, like my native Virginia’s, provide that a person can be adjudicated a slayer in a civil proceeding, including an interpleader action, by a preponderance of the evidence. See Va. Code § 64.2-2500. Just across the state line in West Virginia, however, the statute explicitly requires the person to be “convicted of feloniously killing another” to be established as a slayer. W. Va. Code § 42-4-2 (emphasis added). At the time your client asks you about filing an interpleader case in the Mountain State, there may not yet be a conviction.

This statute did not abrogate West Virginia common law, however. West Virginia common law (like that of many other states) similarly bars a killer from obtaining property as a result of the killing. Metropolitan Life Ins. Co. v. Hill, 115 W. Va. 515, 177 S.E. 188 (1934). Under the common law, when there is no conviction for a felonious killing, the burden is on the insurance company to demonstrate that the beneficiary has committed an unlawful and intentional killing. McClure v. McClure, 184 W.Va. 649, 403 S.E.2d 197 (1991). An unlawful and intentional killing may be proven in a civil action by a preponderance of the evidence. Id.

Thus, in a jurisdiction like West Virginia, a conviction will conclusively preclude the claimant or beneficiary from taking under the policy. Nevertheless, if your client wants to file an interpleader action prior to a conviction, it could do so if it is willing to accept the burden of proving that the beneficiary is the slayer under the greater weight of the evidence standard. My usual advice to clients in this situation is to wait for the conviction after the criminal trial or, more likely, the guilty plea. Better to let the criminal justice system take on the heavy lifting at taxpayer expense.

Interpleader and Divorce

Another frequent source of interpleader litigation is divorce. Typically, the insured dies without having changed the original beneficiary from his or her spouse and there was an intervening divorce. A majority of states provide that divorce does not alter a spouse’s status as a beneficiary to proceeds of a policy. See O’Toole v. Cent. Laborers Pension & Welfare Funds, 299 N.E.2d 392, 394 (Ill. App. Ct. 1973).

Other states, including Virginia, void any existing beneficiary designation upon divorce. Va. Code § 20.111.1. An interesting case decided earlier this year in the Eastern District of Virginia illustrates the interplay between ERISA, the Virginia statute and interpleader.

In Metropolitan Life Ins. Co. v. Gorman-Hubka, Case No. 1:15-CV-1200, 2016 U.S. Dist. LEXIS 13900 (E.D. Va. Feb. 3, 2016), the court found against the decedent’s ex-wife and in favor of his sisters, even though the decedent had intended to make his ex-wife his beneficiary again after their divorce.

The Virginia statute provides that “upon the entry of a decree of annulment or divorce from the bond of matrimony…, any revocable beneficiary designation contained in a then existing written contract owned by one party that provides for the payment of any death benefit to the other party is revoked.”

As a threshold matter, the court determined that ERISA did not preempt the Virginia statute. The life insurance policy fell under the “safe harbor” regulation, 29 C.F.R. § 2510.3-1(j). Had ERISA applied, the Virginia statute would have been preempted under the U.S. Supreme Court’s decision in Egelhoff v. Egelhoff, 532 U.S. 141, 146 (2001) (holding that a similar Washington state statute was preempted because it had “a prohibited connection with ERISA plans because it interfere[d] with nationally uniform plan administration….”). Since ERISA did not apply, the decedent’s pre-divorce designation of his ex-wife as the beneficiary was automatically revoked by Va. Code § 20.111.1.

Prior to his death, however, in telephone conversations with “Operator Ben,” a representative of the carrier, the decedent attempted to confirm verbally that his ex-wife remained the beneficiary. The decedent asked Operator Ben what steps he needed to take to keep his ex-wife as the beneficiary. Operator Ben advised decedent that he could keep his ex-wife as the beneficiary. The decedent then asked, “So I don’t need to do any paperwork or anything like that to keep her the same?” Operator Ben replied, “Right. If she is already the beneficiary, then there is nothing you need to do.”

There were over $281,000.00 in life benefits under the policy.

The policy required the submission of a written beneficiary designation form to change the beneficiary. Decedent, of course, did not complete one; he merely spoke by telephone with Operator Ben. Although the equitable principal of “substantial compliance” applies to give effect to the demonstrated intent of an insured in designating a beneficiary, it requires the policy owner to do “everything within his power to effectuate the change.” Dennis v. Aetna Life Ins. and Annuity Co., 873 F. Supp. 1000, 1006 (E.D. Va. 1995).

The court in Gorman-Hubka found that the decedent had not substantially complied with the terms of the policy because he had not done everything in his power to re-designate his ex-wife as the policy beneficiary. The court acknowledged that the decedent had clearly demonstrated his intent to re-designate his ex-wife as the beneficiary during the telephone call. The Court found that while Operator Ben’s advice was “misleading, to be sure,” he did not instruct decedent “in absolute terms that no additional steps were required.” Rather, Operator Ben stated that “[i]f she is already the beneficiary, then there is nothing you need to do.” Because the ex-wife was not the designated beneficiary at the time due to the Virginia statute, the decedent could have done more, like sending a letter following the call to confirm his wishes.

This case, including the “misleading, to be sure” advice from Operator Ben, highlights one final minefield in ERISA interpleader actions—determining the scope of the discharge of the carrier, particularly in situations when the carrier’s alleged errors caused the competing claims.

Scope of Discharge and Injunctive Relief

In any interpleader action, the plaintiff will request injunctive relief and a discharge. Pursuant to 28 U.S.C. § 2361, “In any civil action of interpleader… a district court may … enter its order restraining [all claimants] from instituting or prosecuting any proceeding in any state or United States court affecting the property, instrument or obligation involved in the interpleader action….” The statute entitles an interpleader plaintiff to a discharge from further liability after paying the policy proceeds into court and a permanent injunction restraining all claimants from instituting or prosecuting any proceeding affecting the policy proceeds which have been interplead.

As discussed above, an interpleader action is an equitable proceeding. Equitable defenses, including unclean hands, can be asserted by a claimant/defendant. A defendant may also bring a counterclaim, arguing that the dispute over the ownership or entitlement to the policy proceeds was the carrier’s fault. In such a case, the claimant/defendant may assert a counterclaim for failure to follow the written plan document, breach of fiduciary duty, or to recover benefits or to enforce his rights under the terms of the plan under 29 U.S.C. § 1132(a)(1)(B) or 29 U.S.C. § 1132(a)(3). How far do the interpleader injunction and discharge extend in such circumstances?

Generally, courts have held that where the carrier/stakeholder bears no blame for the existence of the ownership controversy and the counterclaim is directly related to the stakeholder’s failure to resolve the underlying dispute in favor of one of the claimants, discharge will be granted. See, e.g., Prudential Ins. Co. of Am. v. Hovis, 553 F.3d 258 (3^rd Cir. 2009) (“it is a general rule that a party seeking interpleader must be free from blame in causing the controversy, and where he stands as a wrongdoer with respect to the subject matter of the suit…, he cannot have relief by interpleader.”); ReliaStar Life Ins. Co. v. Lormand, Action No. 3:10-cv-540, 2011 U.S. Dist. LEXIS 25397 (E.D. Va. 2011).

When a claimant brings an “independent counterclaim” against the stakeholder, the stakeholder will be kept in the litigation to defend against the counterclaim, rather than being dismissed after depositing the disputed funds with the court. See, e.g., United States v. Hightech. Prods., Inc., 497 F.3d 637, 641-42 (6^th Cir. 2007); Wayzata Bank & Trust Co. v. A&B Farms, 855 F.2d 590, 593 (8^th Cir. 1988); Libby, McNeil & Libby v. City National Bank, 592 F.2d 504, 507 (9^th Cir. 1978); J.G. Wentworth Originations, LLC v. Mobley, Civil Action No. 11-CV-1406, 2012 U.S. Dist. LEXIS 150157 (D. Md. 2012) (“interpleader was never intended… to be an all-purpose ‘bill of peace.’”). The counterclaim, however, must be separate from the interpleader action itself. Where a stakeholder is allowed to bring an interpleader action instead of choosing among adverse claimants, its failure to choose among the adverse claimants “cannot itself be a breach of a legal duty.” Hovis, 553 F.3d at 265 (citing Lutheran Bhd. v. Comyne, 216 F. Supp. 2d 859, 862 (E.D. Wisc. 2002); Metro. Life Ins. Co. v. Barretto, 178 F. Supp. 2d 745, 748 (S. D. Tex. 2001)).

One can imagine a case in which a claims administrator honors a beneficiary designation change request that does not strictly comply with the requirements of the policy. The designation change eliminates or reduces a previous beneficiary’s entitlement to proceeds under the policy. The stakeholder carrier, later faced with competing claims, decides to bring an interpleader action naming both beneficiaries. The original beneficiary takes the position that the claims administrator changed the designation improperly thereby causing the underlying dispute between the competing claimants. In such a situation, the original beneficiary may have a counterclaim against the stakeholder for breach of fiduciary duty or failure to follow the written plan or policy documents. Such a counterclaim would likely be an “independent counterclaim” which would survive an interpleader discharge and injunction, forcing the carrier to remain in the case to defend the counterclaim.

Attorney’s Fees

Although there is not express statutory authority to do so, courts often award reasonable attorney’s fees and costs to a stakeholder when an interpleader action is successful. The decision to do so is discretionary. Banner Life Ins. Co. v. U.S. Bank, NA, 931 F. Supp. 2d 629 (D. Del. 2013). The theory behind such an award is that by seeking resolution of multiple claims to policy proceeds, the plaintiff stakeholder benefits the claimants and it should not have to absorb its attorney’s fees in avoiding the possibility of multiple litigation.

Courts may take into account a number of factors in deciding the amount of attorney’s fees to award, including:

1. Whether the case is simple;
2. Whether the stakeholder performed any unique services for the claimants or the court;
3. Whether the stakeholder acted in good faith or with diligence;
4. Whether the services rendered benefited the stakeholder; and
5. Whether the claimant improperly protracted the proceeding.

Charles A. Wright, Arthur R. Miller & Mary K. Kane, FEDERAL PRACTICE AND PROCEDURE, § 17-19 (3d ed. 2001). Wright and Miller continue:

Any attorneys’ fees awarded to the stakeholder in an interpleader action should be modest. Recoverable expenses in an interpleader action are limited to the attorneys’ fees billed to prepare the complaint, obtain service of process on the claimants to the fund, and secure the plaintiff’s discharge from liability and dismissal from the lawsuit; an interpleader plaintiff is, thus, not entitled to an attorneys’ fee reimbursement for any additional professional services rendered by the plaintiff’s attorney.

Id. (citing Fresh Am. Corp. v. Wal-Mart Stores, Inc., 393 F.Supp.2d 411 (N.D. Tex. 2005; Dusseldorp v. Ho, 4 F.Supp.3d 169 (S.D. Iowa 2014)).

This view of recoverable attorneys’ fees, while perhaps historically justified, does not reflect the current challenges in interpleader actions, particularly those involving ERISA. As seen above, these cases are often difficult and complicated. The case law concerning the recovery of attorneys’ fees would appear to need to “get with the times”—such as they are.

Conclusion

The next time you are faced with an interpleader case involving an ERISA-governed policy, I encourage you to consider these thorny issues. You are likely to find that the case is more complicated and interesting than you originally thought. Good luck!