Wisconsin Lawyer: As I See It: Improving Interpleader: Discharge Stakeholders from Litigation:

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    June
    03
    2020

    As I See It: Improving Interpleader: Discharge Stakeholders from Litigation

    The Interpleader statute loses its usefulness when an innocent stakeholder is forced to endure costly litigation in which it has no interest.

    John D. Finerty, Jr.

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    Interpleader is a useful provision in the Wisconsin rules of civil procedure to resolve disputes over the right to money, financial instruments, or other assets, typically life insurance policy proceeds or cash in a bank account, when two or more adversaries claim an interest. Interpleader allows innocent third parties, such as banks, trusts, and insurance companies that hold funds, property or other things of value (the “stake”), to file an action and seek to deposit the stake with the court and leave the adversaries to litigate over ownership or possession themselves. Interpleader may also be used defensively as a counterclaim or cross claim; such is the situation when one adversary sues a bank for possession of disputed funds frozen in a joint account. But the statute loses its usefulness if the innocent stakeholder is not quickly dismissed from the case and is forced to endure costly litigation in which it has no interest.

    The Interpleader Problem

    Section 803.07 of the Wisconsin Statutes provides the general mechanism for the stakeholder to bring an action against parties that may claim an interest in the stake. The statute stops there, however; it does not dictate the disposition of claims against the innocent holder of the stake. It should. The practical effect in many cases is that disinterested third parties often are forced to incur unnecessary litigation costs or pass those costs through to interested parties and deplete the stake. Wisconsin should add a provision requiring automatic dismissal of the innocent stakeholder from the case with a discharge of liability upon tender to the circuit court of funds, property, or other things of value in its possession or control.

    John D. Finerty JrJohn D. Finerty Jr., Marquette 1992, is a trial attorney at Michael Best & Friedrich LLP in Milwaukee, representing lenders, insurers and investors in all aspects of litigation.

    Section 803.07 reads:

    Interpleader. Persons having claims against the plaintiff may be joined as defendants and required to interplead when their claims are such that the plaintiff is or may be exposed to double or multiple liability. It is not ground for objection to the joinder that the claims of the several claimants or the titles on which their claims depend do not have a common origin or are not identical but are adverse to and independent of one another, or that the plaintiff avers that the plaintiff is not liable in whole or in part to any or all of the claimants. A defendant exposed to similar liability may obtain such interpleader by way of cross claim or counterclaim. The provisions of this section supplement and do not in any way limit the joinder of parties permitted in s. 803.04.”1

    The statute seems self-explanatory. Perhaps that is why few cases have applied it. One case is Blunt Ellis & Loewi Inc. v. Tadych2 which held a brokerage firm was entitled to dismissal after facing competing claims for funds in a brokerage account. In that case, an investment club bought the stock of Novus Property Co. on margin at Blunt Ellis. After the margin account went negative, the investors replenished it with the proceeds of a promissory note secured by the Novus stock. However the investors defaulted on the note. Blunt Ellis then foreclosed, sold enough Novus stock to cover the note, and filed an interpleader action to tender the remaining shares of stock to the court for distribution among the investment club members. So far, so good.

    The investment club members who signed the note avoided personal service of the interpleader action so Blunt Ellis served by publication. The circuit court ruled that Blunt Ellis’ service by publication was proper and the court of appeals affirmed. The investment club then argued the interpleader action was improper because Blunt Ellis had an interest in the outcome of the case to avoid liability for the sale of Novus stock that was sold to pay off the note. The court rejected that argument because the discharge at the trial level only applied to the balance of the Novus stock tendered to the court and did not preclude a separate action for an accounting. Undeterred, the investment club then argued Blunt Ellis was not a neutral stakeholder; the court rejected that argument as “simply wrong,” and affirmed dismissal.

    Wisconsin’s interpleader statute mirrors Rule 22 of the Federal Rules of Civil Procedure. Federal cases applying federal rules that are the same or similar in text or purpose to the Wisconsin Rules are generally persuasive authority.3 There are significantly more federal decisions applying Rule 22 than there are decisons applying Wis. Stat. section 803.07. Under Rule 22, a federal court may dismiss a stakeholder if the stakeholder is disinterested. A court under Rule 65(e) may also issue an injunction prohibiting litigation over the stake against the disinterested stakeholder.4 Federal decisions generally recognize the importance of both timely filing an interpleader action by the stakeholder and a swift award of one or both types of relief.5

    Why Innocent Stakeholders Remain in These Cases

    Not all innocent stakeholders in interpleader actions successfully obtain timely dismissal and a discharge of liability. This risks depleting the stake. Courts tend to keep in a case interpleader parties, banks and insurance companies in particular, for various reasons that contradict the intent of the statute. Adversaries typically want stakeholders to remain in the case for discovery purposes. After all, it is easier to serve an attorney of record with a notice of deposition and document request than to serve a subpoena on a bank or other third party. But absent a claim against the innocent stakeholder, the adversaries do not have discovery rights against such stakeholder as a party.

    In addition, adversaries adopt the failed arguments made in Blunt Ellis, namely that Blunt Ellis was not neutral or that the discharge was overbroad and extended beyond the tendered shares. Other objections to dismissal range from claims of investment losses if the clerk of courts does not have access to a high-yield interest bearing account, to the dubious objection that money paid into the court would not be readily accessible and should stay with the stakeholder. That argument in particular may be easily debunked: a party needing immediate access to funds would not want multiple layers of process (that is, court rules, clerk procedures, and bank verification requirements) impeding its access.

    Lawyers representing stakeholders in interpleader actions need to act quickly to identify with particularity the stake, frame the dispute for the court, and move to dismiss all disinterested parties.

    All this procedural posturing, or arguments between adversaries that do not involve the innocent stakeholder, only prolong dismissal and discharge and threaten to increase attorney fees and other litigation costs. Those added fees and costs in most cases are ultimately paid out of the stake. Therefore, if circuit courts therefore do not dismiss innocent stakeholders early in an interpleader action, all parties, interested and disinterested, bear the cost.

    The Need for This Provision

    The Blunt Ellis case lasted nearly two years from filing to conclusion of the appeal. Although not clear in the decision, Blunt Ellis likely had the right to recover its litigation costs from the proceeds of the investment club’s account. In most cases, bank deposit account agreements and life insurance policies allow financial institutions to offset litigation costs from the balance in the account; at a minimum, these agreements require interested parties to indemnify and hold financial institutions harmless from litigation costs, including attorney fees. That means extended litigation that includes the innocent stakeholder may eventually have to be paid out of the stake.6 Thus, the interested parties have less to divide at the conclusion of the case. In some cases, litigation costs threaten to deplete the entire stake, leaving adversarial parties with nothing.

    Jarndyce v. Jarndyce, a fictional but infamous lawsuit over an inheritance that spanned generations in Victorian England, was the premise of Charles Dickens’ novel Bleak House. The story is told by Esther Summerson who comes to live under the guardianship of Mr. Jarndyce, who owns Bleak House. Character after character in the novel becomes obsessed with the proceedings even though nobody can remember exactly how the case started.  In the meantime, life goes on but even lost fortunes, tragedy, and murder cannot bring the parties to their senses. In the end, no one gets the inheritance because all the money has been spent on legal fees. Dickens was making a point about a corrupt legal system of the times and the dark elements of society that sought to exploit it. The broader lesson of Bleak House is, however, the old adage: justice delayed is justice denied.

    How to Implement

    If Wisconsin were to amend section 803.07 to require dismissal and discharge of innocent stakeholders in interpleader actions it could do so in one of three ways. First, the Wisconsin Rules Enabling Statute authorizes the Wisconsin Supreme Court to promulgate rules regulating "pleading, practice and procedure in judicial proceedings in all courts, for the purposes of simplifying the same and of promoting the speedy determination of litigation upon its merits."7 This statute was the source of section 803.07 that was created by supreme court order.

    The legislature may also pass rules of civil procedure under section 751.12,8 but it is more common for the supreme court to do so, with the input of the Wisconsin Judicial Council, when the rule relates to court process and procedures.9 However, this case may be appropriate for either rule-making by the court or legislative action because adding a dismissal and discharge provision to the statute would effectively codify efficient state court procedure and federal common law. The third option is by a decision on appeal or interlocutory appeal.

    An analogous line of cases in which the Wisconsin Supreme Court established a process to resolve insurance coverage disputes early in litigation demonstrates how this could work. Allstate Ins. Co. v. Charneski10 and Mowry v. Badger State Mutual Casualty Co.11 stand for the proposition that a coverage trial should be held first, before trying the underlying claim, to avoid conflicts of interest between the insurer and insured. Insurers may thus move pursuant to Wis. Stat. section 803.04(2)(b) to intervene, bifurcate insurance coverage issues and stay the case on the merits.12 Cases such as Newhouse v. Citizens Security Mut. Ins. Co. called this “intervene, bifurcate and stay” process a “judicially preferred” method to make coverage determinations before getting to the merits.13 This process strikes a “fair balance between the respective interests of insurers and insureds” by avoiding costs incurred by both sides to simultaneously litigate coverage and the merits of the underlying case.

    A change to section 803.07 that places resolution of stakeholder interests before the merits of the case makes interpleader more efficient.

    The Wisconsin Supreme Court or court of appeals could in a single decision adopt a rule analogous to Wisconsin insurance law holding that disinterested stakeholders should be dismissed out of interpleader cases early in a case and discharged from liability upon tendering the stake to the circuit court. Such a judicially created rule could also advise circuit courts to stay discovery pending discharge. However, it does not appear likely that such a holding is imminent unless the court takes up an interlocutory appeal. The final order rule simply makes it impractical to bring interpleader issues to the court of appeals.

    An adversary in an interpleader action may appeal dismissal of a disinterested stakeholder as a matter of right, as the defendants did in Blunt Ellis. However, there is a strong disincentive to do so because the appeal simply delays the resolution and ultimate distribution of the stake.14 On the other hand, a circuit court’s decision to deny a motion to dismiss the stakeholder based on the interpleader statute may not be appealed as a matter of right. Disinterested stakeholders are thus forced to litigate until there is a decision or resolution of the case. Once the underlying dispute is resolved the disinterested stakeholder would be ordered only to disburse funds or turn over assets as directed by the court; there would be, in theory, no adverse ruling from which the stakeholder could appeal. Or perhaps the stake has been depleted by the cost of litigation, thereby forcing the disinterested stakeholder to fund the appeal with no possibility of recovering costs. The issue of dismissal and discharge therefore will rarely be brought before an appellate court in Wisconsin for decision. The Wisconsin Supreme Court or the legislature should therefore address the issue by amending the statute if the interpleader statute in Wisconsin is going to truly serve its purpose.

    Conclusion

    Lawyers representing stakeholders in interpleader actions need to act quickly to identify with particularity the stake, frame the dispute for the court, and move to dismiss all disinterested parties. Courts should recognize the role the statute plays in efficient case management. Deciding interpleader interests early in the case and certainly before discovery fulfills the purpose of the statute and preserves the stake. A change to Wis. Stat. section 803.07 that moves resolution of stakeholder interests before resolution of the merits of the case would make interpleader more efficient.

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    John D. Finerty JrA senior trial attorney, nicknamed the OG, once told me, “In the legal business, you are only as good as your last month.” Whether that is right or wrong, it keeps me motivated to win my cases, serve clients as best I can, and continuously develop business.

    John D. Finerty Jr., Michael Best & Friedrich LLP, Milwaukee

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    Endnotes

    1 See also 2015 Wis. Act.55, codified as Wis. Stat. § 706.22 (the “TOS Prohibition”).

    2 Blunt Ellis & Loewi Inc. v. Tadych, No. 84-171, 1984 Wisc. App. LEXIS 4483 (Wis. Ct. App. Nov. 5, 1984) (unpublished).

    3 See, e.g., Data Key Partners v. Permira Advisers LLC, 2014 WI 86, 356 Wis. 2d 665, 849 N.W.2d 693.

    4 See also 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…”).

    5 Mendez v. Teachers Ins. & Annuity Ass’n, 982 F.2d 783, 787-88 (2d Cir. 1992) (filing 11 months after insurer received notice of claims was untimely).

    6 Courts have wide discretion to award attorney fees under Rule 22 and, by analogy, section 803.07. See Lutheran Bhd. V. Comyne, 216 F. Supp. 2d 859, 863 (E.D. Wis. 2002). Also, most bank-loan documents and insurance policies have fee-shifting provisions that allow an interpleader plaintiff to withhold attorney fees and costs from the stake.

    7 See Wis. Stat. § 751.12.

    8 See, e.g., 2017 Wis. Act 235.

    9 See Ryan M. Billings, Robert L. Gegios & Melinda A Bialzik, Sweeping Changes to Rules of Civil Procedure, 91 Wis. Lawyer __ (June 2018) (“In a significant departure from standard practice, the legislature exercised its powers under Wis. Stat. section 751.12 to implement the changes directly, without consulting or involving the Wisconsin Supreme Court or the Judicial Council); see also Court Rules Research Guide: Wisconsin Court Rules, Marq. Univ. Law School.

    10 16 Wis. 2d 325, 331, 114 N.W.2d 489 (1962).

    11 129 Wis. 2d 496, 523, 385 N.W.2d 171 (1986).

    12 See Elliott v. Donahue,169 Wis. 2d 310, 317-22, 485 N.W.2d 403 (1992).

    13 176 Wis. 2d 824, 832-39, 501 N.W.2d 1 (1993) (describing the “judicially preferred” methods available to the insurer to avoid the risk of breaching its duty to defend); see also Choinsky v. Emp’rs Ins. Co. of Wausau, 2020 WI 13, ¶ 15, 390 Wis. 2d 209, 938 N.W.2d 548.

    14 See Wis. Stat. § 805.07 (circuit court proceedings are stayed pending appeal).




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