What Is an Interpleader?

Interpleader Explained in Less Than 5 Minutes

DEFINITION:
An interpleader is a legal process that helps resolve disputes over ownership of money or property.

An interpleader is a legal process that helps resolve disputes over ownership of money or property. The individual or organization that has the money or property under dispute might seek for an interpleader to enable a court to determine which claimant is the legitimate owner.

Read more about the intricacies of how an interpleader works, and about the benefits and downsides of utilizing one.
Important Takeaways
  • The interpleader judicial process helps settle ownership issues involving money and property.
  • Interpleader acts involve fulfilling specific interest and value conditions.
  • Interpleader lawsuits may resolve conflicts, but diminish stakes.

Meaning and Examples of Interpleader

An interpleader is a legal process that identifies the true owner of money or property claimed by two or more parties.

Custodians of such money and property employ the technique when they face, or may face, several lawsuits from the claimants.

Let’s imagine a person dies and three remaining family members claim to be the legitimate recipient of the dead person’s life insurance death benefit. In such a circumstance, the insurer may face three distinct lawsuits from the different claimants. Instead of pursuing various cases, the insurance company might file a complaint for interpleader action.

Note
The interpleader method brings together the custodian of the property (in this case, the insurance company) and the claimants to fight the disagreement in a single court.

Understanding an Interpleader

A “stakeholder” is the custodian of disputed money and property. A stakeholder might be an association, company, business, or individual. Stakeholders seeking interpleader action can’t have an interest in the property they possess. For example, a trustee may take interpleader action in the disposal of an estate in which they are not entitled to receive any money or property. 

Stakeholders don’t pursue interpleader action to prevent transferring property, but to discover the property’s lawful owner. Basically, the interpleader method flips the script on a property dispute since the shareholder becomes the plaintiff, and the claimants become defendants.

Interpleader Requirements

A shareholder may pursue interpleader action after the claimants file lawsuits or, in anticipation of several lawsuits, before any claimant sues. To qualify for an interpleader action, the money or property under dispute must have a value of at least $500.

Note
To pursue interpleader, the shareholder must face responsibility from more than one party over the same money or property. In such situations, the shareholder may pursue interpleader action if they deny culpability to all claims. In other situations, a defendant may pursue interpleader action via a counterclaim or crossclaim if they face responsibility from more than one party over the same money or property claim.

Federal law offers national service for interpleader cases. Therefore even if defendants reside in various jurisdictions, a single court may decide on an interpleader.

Interpleader Procedure

By interpleader action, the shareholder demands that the court allocate ownership of money or property under dispute. By submitting an interpleader, the shareholder must give up the money or property under dispute to the court clerk.

Note
If the disagreement concerns money, it will stop to earn interest when the court clerk takes custody of it. After the clerk gets the money or property, the claimants can’t sue for damages caused by its detention. For example, if during the interpleader procedure, a claimant loses their house to foreclosure, they can’t sue the shareholder, arguing that the money under dispute might have avoided the loss.

The shareholder has the right to pursue repayment for court expenses and legal fees. When the court determines on the disposal of the property, it allocates a share of the property to reimburse the stakeholder’s fees. For instance, if the argument was over a $500,000 life insurance policy, and the insurance company expended $50,000 in legal expenditures, the court may give $450,000 to the winning defendant and $50,000 to the shareholder.

When an interpleader includes money, the court clerk will deposit the amounts into an interest-bearing account. After the court resolves on ownership, it will give the winner the money that were under dispute and accumulated interest. 

Benefits and Disadvantages of Interpleader Activities

Pros

  • Stakeholders avoid several lawsuits
  • Court decides on ownership

Cons

  • Depleted stakes

Pros Explained

  • Stakeholders prevent several lawsuits: Interpleader action may avoid a shareholder from facing several lawsuits over the same money or property.
  • Court decisions on ownership: The approach relieves the shareholder of the burden of determining which claimant should get the money or property. As the legislation permits the plaintiff to bring a claim for attorney and court expenses, the shareholder may also collect expenditures generated by the dispute.

Cons Explained

  • Depleted stakes: Frequently, a stakeholder can’t simply offload a money or property issue by seeking interpleader. A court may force the shareholder to stay in the case until it issues a final judgment, thus the plaintiff must continue to employ counsel. If the court allows the shareholder compensation for attorney’s fees and court expenses, the monies will come from the award made to the winning defendant.

The Bottom Line

Stakeholders may utilize an interpleader action to resolve a disagreement over money or property. Yet the method benefits the shareholder, at the cost of the claimants.

A defendant in an interpleader action may need to employ an attorney to make a case that will persuade the court that they are the legitimate owner. When the court finds for a defendant, they may have to pay the legal fees and court expenses of the plaintiff, plus their own attorney fees.