CATCH RULE 22: WHEN INTERPLEADER ACTIONS VIOLATE STATUTORY AND CONSTITUTIONAL DIVERSITY JURISDICTION REQUIREMENTS.

Author:DeWilde, Kristen
 
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Since the time of the Founding, actions in strict interpleader have allowed parties in possession of a fund or other asset to sue claimants who have competing claims to that asset. The party in possession of the asset or stake, also referred to as the "stakeholder," has no ownership interest itself Instead, it seeks only to hand off the stake to the rightful party and avoid any future liability.

Today, interpleader actions can be brought in federal courts in one of two ways. They can be brought under Congress's Federal Interpleader Act, which confers jurisdiction on the federal courts to hear interpleader actions in which at least one claimant is diverse from another adverse claimant and $300 is at stake. Alternatively, interpleader actions can be brought pursuant to Rule 22 of the Federal Rules of Civil Procedure. Because the Rules do not on their own confer jurisdiction on the federal courts, any action brought under Rule 22 must be brought under one of Congress's general jurisdictional statutes, such as 28 U.S.C. [section]1331, which requires a federal question in the lawsuit, or 28 U.S.C. [section] 1332, which requires in one instance a controversy between citizens from different states. Although the Federal Interpleader Act requires diversity between adverse claimants, many federal courts exercise jurisdiction over strict interpleader actions pursuant to Rule 22 and [section] 1332 merely when the stakeholder is completely diverse from the claimants.

This Comment argues that anytime an interpleader action is brought in a federal court pursuant to Rule 22 and [section] 1332, there must be diversity between adverse claimants--not just diversity between the stakeholder and the claimants--in order to satisfy Congress's and the Constitution's controversy and diversity requirements. When the stakeholder hands off an asset or fund, it admits that the stake belongs to someone else--it just is not quite sure which claimant should have the stake. The only controversy, then, is the dispute between the claimants over who is the rightful receiver. The Supreme Court appeared to confirm in the mid-twentieth century that the existing controversy in strict interpleader actions is the one between claimants, not the one between the stakeholder and the claimants. Further, Congress's diversity jurisdiction statute and, arguably, the Constitution's Diversity Clause require courts to realign parties to a lawsuit and determine their jurisdiction based on which parties the "actual" controversy is between. Finally, in addition to Supreme Court precedent and the realignment doctrine, this Comment argues that, based on the text and history of Article III's Diversity Clause, the Constitution requires that claimants be diverse before federal courts may exercise jurisdiction over strict interpleader actions. The solution to this problem is simple: these actions can be brought and heard in state courts.

INTRODUCTION I. HISTORY OF THE ARTICLE III DIVERSITY CLAUSE, STATUTORY INTERPLEADER, AND RULE 22 INTERPLEADER ACTIONS A. History of Diversity Jurisdiction Under Article III of the Constitution B. History of Statutory Diversity Jurisdiction C. History of Interpleader Actions Before Statutory and Rule Interpleader D. History of Statutory Interpleader Under Federal Law E. History of Rule Interpleader II. NONDIVERSE CLAIMANTS IN STRICT BILLS OF INTERPLEADER VIOLATE STATUTORY AND CONSTITUTIONAL DIVERSITY REQUIREMENTS A. The Controversy Required by Congress's Diversity Jurisdiction Statute B. The Controversy Requirement of Article III C. Supreme Court Precedent Requiring Diverse Claimants in Strict Interpleader Actions D. The Persistent Impermissible Use of Rule 22 to Hear Strict Interpleader Actions Between Nondiverse Claimants in Federal Courts III. IMPLICATIONS CONCLUSION INTRODUCTION

Richard and Mary Smith's divorce suit was pending for only three months when Mr. Smith unexpectedly died. (1) In the three months between Mr. Smith's Montgomery County divorce filing and his death, he changed the designated beneficiary of his State Farm life insurance policy from Ms. Smith to a man named Alejandro Plascencia. (2) This new life insurance designation, which occurred unbeknownst to Ms. Smith, violated a Montgomery County, Texas Standing Order which prohibits parties in a divorce proceeding from changing the beneficiary on a life insurance policy. (3) After Mr. Smith's death, both Ms. Smith and Mr. Plascencia submitted claims to the life insurance proceeds totaling $120,000. (4)

When State Farm, an Illinois corporation, could not decide to whom the $120,000 belonged, it filed a Rule 22 interpleader action in the Southern District of Texas against Ms. Smith and Mr. Plascencia, both Texas citizens. (5) Rule 22 interpleader actions allow parties, like State Farm, who are holders of some stake of money or property to go to court, admit that the stake belongs to someone, and "interplead" all competing claimants. The stakeholder can then deposit the stake with the court, be dismissed from the lawsuit, and allow competing claimants like Ms. Smith and Mr. Plascencia to battle it out in court who the proper claimant to the stake at issue is. (6)

As is typical in any interpleader action, the Southern District of Texas issued an order that so long as State Farm deposited the insurance proceeds with the registry of the court, it would be discharged from the lawsuit. (7) With State Farm gone, the federal district court was left to decide whether Texas law gave effect to a Texas county standing order that was violated during Texas divorce proceedings and, if so, whether insurance proceeds should be given to one Texas resident over the other. But if all roads lead to Texas, how did this case end up in federal court?

Although many civil procedure topics leave learned scholars grasping for clarity, this is not one of them. There is unanimous consensus that if a federal court hears a case between citizens of the same state presenting only questions arising out of state law, something has gone astray. As Part I of this Comment discusses, Article III of the Constitution extends federal judicial power to hear cases arising out of federal law. Alternatively, if no federal question exists, Article III also grants power to federal courts to hear controversies between diverse parties, in particular, "[c]ontroversies ... between Citizens of different States," as expressed in a provision known as the Diversity Clause. (8) Historical analyses posit that the Diversity Clause was intended to avoid potential state bias that may arise from a lawsuit being litigated in one citizen's state courts over the other's. Further, the Diversity Clause may have been intended to provide federal court jurisdiction when states themselves could not resolve disputes implicating issues of "national harmony." Part I also discusses Congress's similar concerns when it passed its first diversity statute granting federal courts jurisdiction to hear suits between citizens from different states.

Taking this to its logical conclusion, if Texas-based Ms. Smith is left to argue with Texas-based Mr. Plascencia about who is entitled to insurance policy proceeds under Texas state law, the federal judicial power has not been triggered by federal law. Nor can there be any fear that a Texas state judge would be biased against one Texas citizen over another Texas citizen--the only adverse parties in the lawsuit. Further, a state-law claim to insurance proceeds arising from a dispute between citizens of the same state appears to present an issue sitting squarely within the competence of state courts. It seems, then, that someone took a wrong turn into federal court.

This is not to say that parties like State Farm should not get to bring their interpleader actions somewhere. As Part I continues, interpleader has always been a needed, equitable solution to ensure justice and prevent competing claimants from dragging a stakeholder into multiple trials. However, interpleader was never intended to overstep the bounds of the federal judicial power under the U.S. Constitution. Congress had these concerns in mind when it passed the 1917 Federal Interpleader Act to provide a statutory vehicle for bringing interpleader actions in federal court. It required that all interpleader actions have at least one claimant be diverse from another claimant. But when the Federal Rules of Civil Procedure went into effect in 1938, lawyers began bringing actions under Rule 22 interpleader, not the Federal Interpleader Act. As is typical of the federal rules, Rule 22 did not speak to jurisdictional requirements such as the requirement that there be a federal question or that the "controversy" in the lawsuit be between diverse citizens. Because of this, lower federal courts held that Rule 22 interpleader actions had to meet the requirements of Congress's general statutes granting federal courts jurisdiction over cases arising under federal law or in which complete diversity existed between the parties to a controversy--codified as 28 U.S.C [section][section] 1331 and 1332 today. And gradually, a phenomenon occurred among the lower federal courts in which most judges began to accept, without discussion, that as long as the stakeholder initiating the lawsuit was diverse from all the state claimants on the other side, Congress's statutory and the Constitution's "controversy" requirements between citizens from different states were met--regardless of whether the claimants themselves were diverse from each other.

As Part II of this Comment argues, when no federal question is at issue, the statutory and constitutional requirement that a "controversy" exist between diverse parties should be interpreted to require that some issue exists in which diverse parties stand in opposition. And when an insurance company or any other stakeholder admits its liability to someone, it has no controversy with competing claimants--it simply seeks a...

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