THE “ADVERSE CLAIMANT” AND DIVERSITY JURISDICTION UNDER THE FEDERAL INTERPLEADER STATUTE (28 U.S.C. § 1335)

If you are an insurer and intend to file an interpleader action1 related to an insurance claim or lawsuit between an insured and a third-party, you should know about the Fourth Circuit’s decision in AmGuard Insurance v. SG Patel and Sons II LLC et al., 20-1246, decided on June 7, 2021, and its implications for diversity of citizenship in statutory interpleader actions in federal court.

In 2019, AmGuard Insurance Co., a Pennsylvania corporation with its principal place of business in Pennsylvania, filed an interpleader and declaratory judgment action to deposit $500,000 with a U.S. District Court in South Carolina and post a bond for an additional $2.5 million that was in dispute due to a disagreement over the applicable policy limits for a single-car collision involving multiple seriously injured third parties who bought alcohol from the insured convenience store. The interpleader action was filed under 28 U.S.C. § 1335, which requires: (1) minimal diversity jurisdiction between “[t]wo or more adverse claimants,” (2) a value of $500 or more in controversy, and (3) a deposit in court by the plaintiff of the amount in dispute or a bond.2 The federal district court sua sponte dismissed the action due to a lack of diverse citizenship because the insured and the five plaintiffs were all citizens of South Carolina.

On appeal, the Fourth Court reversed the decision. Because AmGuard disputed the appropriate policy limits for the third-party claims, it was an “adverse” claimant and consequently created diverse citizenship between itself and the South Carolina citizens. In a standard interpleader action, the stakeholder deposits property that is being claimed by two or more other parties with the court and defers to the court for distribution of the property because it has no interest in the property and is indifferent as to how the property is distributed to the claimants. The court then discharges the stakeholder from the proceeding. However, AmGuard was pursuing an action in the nature of an interpleader rather than a standard interpleader action because “AmGuard did not simply seek, as a disinterested party, to distribute to claimants the proceeds of its insurance policy. Rather it sought to deny its liability for paying the majority of the funds claimed by the defendants.” Because AmGuard was claiming an interest in part of the property it deposited with the court, it was an “adverse claimant” and its citizenship could be considered. So the moral of the story is, while an interpleader plaintiff’s citizenship does not matter when it is a disinterested stakeholder, an interpleader plaintiff’s citizenship does become relevant when it expresses an interest in the property deposited with the court.

INSIGHTS FOR GF CLIENTS

Below are a couple of other takeaways from the Fourth Circuit’s decision:

  • The federal interpleader statute allows an interpleader action to be filed when multiple claimants “may claim” to be entitled to property in the possession of a disinterested third party. “Based on this language, the Supreme Court has consistently held that ‘to bring an interpleader suit, “a plaintiff need not await actual institution of independent suits,”’. . . California v. Texas, 457 U.S. 164, 166, n. 1 (1982) (per curiam) (emphasis added) (cleaned up) (quoting Texas, 306 U.S. at 406.).” In other words, the claimants do not need to file a lawsuit seeking recovery for the property in possession of the disinterested third party before an interpleader action can be commenced by the disinterested third party. Similarly, Fed. R. Civ. P. 22(a)(1) allows for an interpleader action when the claimant may make a claim in the future.
  • As noted by the Fourth Circuit in its opinion, there are some key differences between rule interpleader and statutory interpleader: “Rule interpleader functions much like a joinder rule and provides no additional attributes of the kind available under statutory interpleader. Section 1335 contains a jurisdictional provision that relaxes the traditional diversity requirements of § 1332, and it authorizes the court to receive a deposit of the subject property or a bond. Also, 28 U.S.C. § 1397 provides liberalized venue for § 1335 actions, and 28 U.S.C. § 2361 provides nationwide service of process. Section 2361 also explicitly authorizes the district court to discharge an interpleader plaintiff “from further liability” and to enforce its interpleader judgment with permanent injunctions and other orders.”

Please contact a Gjording Fouser lawyer at 208.336.9777 if you would like any additional information about this topic or any other issues facing your company.

1 “Interpleader” is a suit to determine a right to property held by a usually disinterested third party (called a stakeholder) who is in doubt about ownership and who therefore deposits the property with the court to permit interested parties to litigate ownership. INTERPLEADER, Black’s Law Dictionary (11th ed. 2019). It allows the stakeholder to join all claimants and efficiently resolve their claims in a single forum.

2 The federal interpleader procedure can also be pursued in federal court under Federal Rule of Civil Procedure 22, known as “rule interpleader.” Rule interpleader requires complete diversity of citizenship between all parties, as compared to “minimal diversity between two or more adverse claimants.” The Fourth Circuit’s opinion provides an in-depth discussion on the differences between the two types of interpleaders.