Legal Definitions - interpleader

Interpleader is a legal procedure that allows a party, often called a 'stakeholder,' who holds property or money that is claimed by two or more other parties, to ask a court to decide who the rightful owner is. The stakeholder does not claim ownership of the property themselves but is in a difficult position because they could be sued by multiple claimants. By initiating an interpleader action, the stakeholder can deposit the disputed property with the court and be released from further liability, letting the claimants resolve their dispute among themselves under the court's supervision.

Here are some examples of how interpleader might be used:

• Example 1: Life Insurance Payout

  Imagine a life insurance company holds a significant payout for a deceased policyholder. The policyholder had recently divorced but had not updated their beneficiary designation, which still named their ex-spouse. However, the policyholder's adult children also claim they are the rightful beneficiaries, citing a more recent will that names them. The insurance company, as the stakeholder, doesn't know who should receive the money. To avoid being sued by both the ex-spouse and the children, the company can file an interpleader action, depositing the insurance funds with the court. The court will then decide who the legitimate beneficiary is, protecting the insurance company from having to pay twice or making an incorrect decision.

• Example 2: Disputed Bank Account Funds

  Consider a bank that holds a substantial sum in a savings account. The account was opened jointly by two business partners. After one partner unexpectedly passes away, the surviving partner claims the entire balance, stating it was a "right of survivorship" account. However, the deceased partner's estate executor presents documents showing the funds were intended to be part of the estate and distributed to other heirs. The bank, as the stakeholder, is caught between these two conflicting claims. Through an interpleader action, the bank can ask the court to determine the rightful owner of the funds, ensuring they disburse the money correctly and are not held liable by either party.

• Example 3: Escrow Funds in a Real Estate Deal

  Suppose a real estate transaction falls through, and the buyer and seller cannot agree on who is entitled to the earnest money deposit held in escrow. The buyer claims the seller breached the contract, entitling them to a full refund. The seller, conversely, argues the buyer defaulted and the deposit should be forfeited to them. The escrow agent, a neutral third party holding the funds, is the stakeholder. Faced with conflicting demands and potential lawsuits from both sides, the escrow agent can initiate an interpleader action. They would deposit the earnest money with the court, allowing the buyer and seller to litigate their claims against each other, and relieving the escrow agent of responsibility for deciding who gets the money.