The Two Stages

The Two Stages

Interpleader runs in two stages, and each stage asks a different question about a different party. Stage one asks whether the stakeholder may use the device at all. Stage two asks which claimant takes the fund. When the court finds that interpleader was properly invoked, the stakeholder ordinarily leaves the case and the claimants litigate the rest among themselves.¹

Rule 22(a)(1) supplies the starting point: persons whose claims may expose a plaintiff to double or multiple liability may be joined as defendants and required to interplead.² Once they are joined, courts divide the case. First the court decides whether the stakeholder has properly invoked interpleader. Then it decides the claimants' respective rights to the fund through the normal litigation processes of pleading, discovery, motions, and trial.³

The division follows who has a stake in each question. The first question is the stakeholder's: do the competing claims against it justify forcing the claimants into one proceeding? The second belongs to the claimants, because they alone want the fund. A stakeholder that takes no side has nothing more to add to that contest, and the device exists to protect it from double or multiple liability, not to keep it in a fight over ownership.⁴ Suppose a bank holds a $50,000 account that two people each say is theirs. At stage one the court asks whether the bank may bring both into a single action and step aside. At stage two the court asks which of the two owns the account.

The stakeholder's exit depends on its own position. Rule 22(a)(1)(B) allows interpleader even though the plaintiff denies liability in whole or in part to any or all of the claimants.⁵ A stakeholder that denies liability has a position of its own to litigate, and discharging it at the threshold would leave that position undecided. The subsections below place discharge in the sequence and show what keeps a stakeholder in the case.

Notice links the stages. Persons served with fair notice and given an opportunity to litigate are bound by the result both against the stakeholder and among themselves, and that binding effect is what the stakeholder gains by interpleading.⁶ A claimant who was never properly brought in has had no such opportunity. Stage one therefore confirms that the conditions for binding everyone are in place before the court spends effort on entitlement. Stage two follows, and a closing subsection on costs and fees covers the stakeholder's recovery of its expenses across both stages.

Stage One: Invoking Interpleader

The first stage asks whether the stakeholder has properly invoked interpleader, and the question has three parts: whether the court has jurisdiction over the suit, whether the stakeholder is actually threatened with double or multiple liability, and whether any equitable concerns prevent the use of the device.⁷ The claimants litigate their rights to the fund only after the stakeholder clears all three. Clearing them leaves a separate question open, which is whether the stakeholder may then leave the case.

The gate exists because interpleader gives the stakeholder power over other people. It summons the claimants into a forum the stakeholder chose and binds those who receive fair notice and a chance to litigate, both against the stakeholder and among themselves.⁸ A court should not exercise that power unless it can validly hear the case and the stakeholder has a real need for the remedy.

Jurisdiction is measured when the action is brought. In First Place Bank v. Olympia Logistics & Services, Inc., a dispute over $47,000 in wired funds, the court recited the two-stage framework and added that the existence of subject-matter jurisdiction is determined as of the date the action is brought and remains notwithstanding later changes in the status of the parties.⁹ A later shift among the parties therefore does not undo a jurisdictional showing that was sound at filing. The excerpt supports that timing rule. It does not decide how Rule 22's own jurisdictional requirements are met, which earlier sections cover.

The threat inquiry asks whether the stakeholder has a genuine and reasonable concern that multiple claims will be asserted against the fund. The risk need not be imminent or certain, and a threat of multiple claims suffices.¹⁰ In the Septembertide litigation, New Library held paperback funds that several parties claimed. Paying Septembertide directly, as it demanded, could have left New Library exposed to later liability from Stein & Day and Bookcrafters, which is the dilemma Rule 22 seeks to avoid.¹¹

The third inquiry preserves the court's equitable discretion. Other equitable restrictions may still prevent interpleader, and a stakeholder guilty of undue delay, or one that contributed to the development of the adverse claims, may be denied relief.¹² Both limits follow from the purpose of the device. Interpleader rescues a stakeholder from a rivalry it did not create and cannot safely resolve. A stakeholder that helped create the competing claims asks to be relieved of a dilemma of its own making, and one that sits on known claims lets the claimants run up the duplicate litigation the device exists to reduce. The court in Septembertide treated New Library as the clean case, describing it as not to blame for the litigation.¹³

Because the power is discretionary, an answer should say that the court may deny relief and tie that conclusion to the stakeholder's delay or its part in creating the claims. A stakeholder that promptly interpleaded rivals it had no hand in creating faces no equitable obstacle.

Clearing the gate settles only whether the claimants can be required to interplead. Whether the stakeholder may leave is a separate question, and the stakeholder's own position answers it. A stakeholder that concedes that one of the claimants is entitled to the fund may be discharged, and a disinterested stakeholder that deposits the stake in the court's registry or posts bond will be discharged.¹⁴ Nothing remains for such a stakeholder to contribute. The only open question is which claimant takes the fund, and a stakeholder with no side in that contest gains nothing by staying.

Metropolitan Life Insurance Co. v. Bigelow involved stakeholders in exactly that posture. MetLife and GE told the daughters and the father who were claiming plan benefits that they could not decide who should be paid, because they feared double liability if their conclusion proved wrong. They then brought an interpleader action naming the daughters and the father as defendants, alleging that they could not determine to whom the benefits should be paid and were “ready, willing and able” to pay whichever party the court found to be the appropriate beneficiary.¹⁵ Stakeholders that say this claim none of the money for themselves and stand ready to pay whoever wins, which is the posture the discharge rule contemplates.

The deposit did not carry the brokerage out of the case. Its contention that no claimant is entitled kept it there, because a stakeholder that claims no claimant is entitled must stay to litigate that contention.¹⁶ The same contention did not defeat interpleader at the outset, because joinder is proper even though the plaintiff denies liability in whole or in part to any or all of the claimants.¹⁷ The Rule thus answers the permission question in the stakeholder's favor and leaves the discharge question open. Deposit alone does not earn discharge; deposit by a disinterested stakeholder does.

When stage one runs smoothly, it ends in what the Septembertide court called the ordinary interpleader sequence: the stakeholder deposits the funds in court and is then dismissed from the suit.¹⁸ A claimant can obstruct that sequence. Only Septembertide refused to agree. It moved for summary judgment on its contract claims against all defendants and to dismiss New Library's interpleader action, taking the position that New Library was not a stakeholder entitled to that relief, and New Library had to cross-move before the court granted it leave to deposit the funds in an interest-bearing bank account.¹⁹ The court said that Septembertide's unreasonable litigation posture had prevented New Library from following the ordinary sequence.²⁰ A challenge to the stakeholder's status is a stage-one dispute, and the contest over who takes the fund belongs to stage two. Who bears the cost of that delay is taken up under Costs and Fees below.

The last two steps are where exam writers place the trap. A stem reporting that the court allowed the interpleader does not tell you whether the stakeholder is out of the case, and the answer turns on whether the stakeholder takes a position on who owns the fund.

Stage Two: Deciding Entitlement

Stage two is where the claimants litigate against one another. Once the court finds interpleader properly invoked, it determines their respective rights to the fund through normal litigation processes, including pleading, discovery, motions, and trial, and a court or jury then decides which claimant, if any, is entitled to it.²² Rule 22(a)(1) is what compels that contest, because it lets the stakeholder require the claimants to interplead.²³ The questions about the stakeholder's own exposure were answered at stage one, so what remains is an ordinary dispute over ownership, and ordinary tools resolve it.

Bigelow shows the stage at work. After discovery, the father and the daughters cross-moved for summary judgment. The district court concluded that the daughters were the proper beneficiaries of the plans, denied the father's motion, granted the daughters' cross-motion, and entered judgment, and the father appealed.²⁴ The stakeholders had said they would pay whichever claimant the court found entitled, so the contest was the claimants' alone, and it was decided on the same kind of motions that decide any civil dispute.

First Place shows the same machinery with a different stakeholder posture. The bank moved for summary judgment on the ground that no genuine issue of fact existed about its entitlement to the wired funds and that Olympia had no claim to them in law or equity. Olympia, claiming an interest in the same funds, moved for summary judgment on its cross-claim.²⁵ In Bigelow the stakeholders stood aside while the claimants contested, and in First Place the bank contended for the funds itself. Either way, stage two is motion practice about entitlement. The excerpt illustrates the stage and is not a holding about Rule 22.

Each claimant carries the burden of proof on its own claim to the stake.²⁶ The allocation follows who is asking the court for something. A disinterested stakeholder asserts no entitlement and so has nothing to prove, while every claimant asks the court to award it a fund that a rival also wants. Placing the burden on the stakeholder would make a party with no interest in the outcome prove the rights of people who are adverse to each other.

An exam stem that calls interpleader an equitable proceeding and then asks about a jury invites the answer that there is none. That answer is wrong, because a federal court looks through a device that was once available only in equity and gives a jury on the common-law issues in the underlying claim.²⁷ Interpleader gathers claimants into one action and creates no new rights, so whether a jury is available depends on what each claim would have been had the claimants sued one another or the stakeholder separately.

Stage two is not always confined to the single question of who takes the fund. It may also include the adjudication of additional claims asserted between the parties, within the bounds of the joinder, jurisdiction, and venue rules.²⁸ The limiting phrase carries the weight. A further claim that a party wants decided in the same case must satisfy those ordinary requirements on its own account. A claimant who says the stakeholder owes it money on a separate account can raise that claim inside the interpleader only if joinder, jurisdiction, and venue all allow it.

Because the claimants must assert their rights inside this single proceeding, a claimant might fear that interpleader strips away its right to be paid. It does not. In the Hapag-Lloyd dispute, USOT held a maritime lien and argued that a payment by Hapag-Lloyd to O.W. Germany under its contracts would not discharge that lien. The court allowed that this might be true and held that interpleader does not abrogate USOT's right to be paid, if it has one. It requires only that USOT litigate its claim in the same proceeding as the competing claimants, so that the district court can minimize or eliminate the risk of double payment to the extent the governing law permits.²⁹ The decision arose under 28 U.S.C. § 1335, so it is an analogy for the Rule. The reasoning carries over because interpleader changes where a claimant's right is tested and not whether the right exists. A claimant who proves its entitlement collects, and the judgment tells the stakeholder whom to pay.

The stage-two judgment protects the stakeholder only if it binds the claimants. Persons who are served with fair notice and given an opportunity to litigate are bound by the result both against the stakeholder and among themselves.³⁰ A claimant who lost had its chance to prove its right, so it cannot turn around and sue the stakeholder for the same money. The condition is why service and personal jurisdiction matter at this point. In state court, the Supreme Court has held that an interpleader action is in personam, so the court must obtain personal jurisdiction over each claimant to bind that claimant to the decree, and most states have not adopted long-arm interpleader statutes to meet the requirement.³¹ The federal statute answered the problem. Before it, there was no effective procedure by which rival claimants of diverse citizenship and residence could be sued in any federal district, and territorial limits on service of process barred state courts from giving relief. The statute cured that situation, and Rule 22 supplements it.³²

An exam stem that ends with a stage-two judgment should therefore prompt a check on whether every claimant was properly served and heard. A judgment that follows full litigation among served claimants closes the matter for the stakeholder, and a judgment entered without one of the claimants leaves that claimant's demand open.

Costs and Fees

A court of equity may assess costs and attorney's fees in the stakeholder's favor only after it finds four things.³⁴ The findings describe a stakeholder that has done what interpleader contemplates, since Rule 22 lets a party acknowledging its indebtedness join those who have claims against it so that it can avoid exposure to double or multiple liability.³⁵ The four findings are these:

1. The stakeholder is disinterested, meaning it takes no side among the claimants and is not to blame for the dispute.
2. The stakeholder has conceded liability, meaning it acknowledges that it owes the fund to someone.
3. The stakeholder has deposited the disputed funds into court.
4. The stakeholder has sought discharge from liability.

Each finding marks a step along the path interpleader is built to follow. A stakeholder that stands apart from the contest, admits that the money belongs to one of the claimants, places it in the court's hands, and asks to leave has taken only the steps the device invites. If it still had to pay its own lawyers for bringing the claimants together, the protection Rule 22 offers would carry a price, and a stakeholder weighing that price against the danger of paying twice might decline to use the device.

New Library fit that profile. The court called it plainly disinterested because it was not to blame for the litigation and because paying Septembertide directly could have exposed it to liability from Stein & Day and Bookcrafters.³⁶ New Library obtained leave to deposit the paperback funds in an interest-bearing account, and Septembertide's resistance was what kept it from the ordinary sequence of deposit and dismissal.³⁷

Septembertide also argued that New Library could not qualify because it had not started the action. The court rejected that argument. That New Library asserted interpleader as a counterclaim and not as the original complaint is not relevant when considering a stakeholder's disinterestedness, and the Rule itself provides that a defendant exposed to similar liability may obtain interpleader by crossclaim or counterclaim.³⁸ Whether a stakeholder is disinterested turns on its blamelessness and its exposure to the competing claims, and the order in which the parties file changes neither.

A disinterested stakeholder that asserts interpleader is entitled to costs and attorney's fees, which are generally awarded against the interpleader fund. The court may, in its discretion, tax them against a party whose conduct justifies it.³⁹ Each half of that rule has its own logic. Charging the fund makes sense because the claimants' rival demands created the need for the proceeding, and the fund is the property already before the court. Shifting the cost answers a different problem. When a single claimant's behavior adds expense, charging the whole fund would make the cooperating claimants help pay for a delay they did not cause, and taxing the party at fault puts the cost where it originated.

Septembertide shows the shift. The district court awarded New Library $1,125.08 in costs and $14,092.00 in attorney's fees, to be satisfied out of Septembertide's portion of New Library's payments. On appeal, Septembertide argued that New Library was not disinterested and that any award should come from the fund as a whole.⁴⁰ The appellate court held that Septembertide's conduct justified taxing the costs and fees against it instead of against the fund, and it added that bad faith, fraud, and the like are not requisite to such an award.⁴¹ The inquiry is who caused the extra expense, so a claimant's unreasonable litigation posture can justify moving the cost onto that claimant.

The appellate court also approved interest on the deposited funds at five percent under N.Y. CPLR 5001(a). The relief New Library sought was equitable, and New Library was not responsible for the delay in paying the money into court, so the district court acted within its discretion in applying the equitable standard.⁴²

The contrast appears when a stakeholder asks for interpleader's protection while keeping both its position and the money.

The insurer's denial of liability did not stop the action itself, because joinder for interpleader is proper even though the plaintiff denies liability in whole or in part to any or all of the claimants.⁴³ Whether a stakeholder may interplead and whether it may recover its fees are separate questions, and the first answer is more generous than the second. New Library deposited and sought discharge, while the insurer did neither, so the two stakeholders stand on opposite sides of the fee line even though both had every right to bring the claimants together.

A stem that says a stakeholder properly interpleaded does not make its fees automatic. The answer should ask whether the stakeholder is disinterested, has conceded liability, has deposited the funds, and has sought discharge, and then ask whose conduct, if anyone's, justifies moving the cost off the fund. That the stakeholder entered the case by counterclaim does not change the analysis.