Seventh Circuit Requires "Cash on the Barrelhead" From Interpleaders

19 February 2015 Wisconsin Appellate Law Blog

Judge Easterbrook and his colleagues on the U.S. Court of Appeals for the Seventh Circuit aren’t about to exercise jurisdiction over a civil action of interpleader merely on credit or promises to pay. The plaintiff has to pony up the goods.

This was the holding of the Seventh Circuit’s recent decision in State Farm Life Ins. Co. v. Jonas, No. 14-1464 (7th Cir. Dec. 31, 2014), an opinion authored by Judge Easterbrook, in which Judges Flaum and Kanne joined. Specifically, 28 U.S.C. § 1335 provides federal courts with jurisdiction over certain interpleader actions, but it requires (1) minimal diversity and (2) that “the plaintiff has deposited such money or property . . . into the registry of the court.” Without that “cash on the barrelhead,” the Seventh Circuit held that it lacked jurisdiction.

Jonas began with a dispute over reciprocal policies of life insurance. Troy Jonas and his wife took out reciprocal policies, where each owned their own policy, with the spouse designated as the primary beneficiary. Their children were the secondary beneficiaries. This state of conditions lasted until the Jonases’ divorce, when Troy became the owner of both policies. The beneficiary designations remained the same.

Troy’s wife died a year later, but State Farm refused to pay the claim ($1 million). It worried that the divorce might have had the effect, under Texas law, where Troy’s wife was domiciled, of negating Troy’s designation as primary beneficiary. If so, State Farm owed the proceeds to Troy’s children or to her estate, but not to Troy.

Texas law doesn’t give State Farm all day to figure that out, however. Texas Ins. Code § 542.060 entitled Troy to 18% a year plus reasonable attorneys’ fees if payment was delayed more than 60 days from when State Farm received his claim. But it also provides that, if State Farm receives “notice of an adverse, bona fide claim” within the 60-day window, the insurer can avoid the interest and attorneys’ fees by filing a proper interpleader action within 90 days of Troy’s claim.

And so it did, despite never having received notice of another claim. That prompted Troy to respond by asking for interest and attorneys’ fees, alleging that the interpleader action was unnecessary because he was the only claimant. The district court ruled for State Farm, treating the possibility that Texas law might have negated the primary-beneficary designation as notice of an adverse claim. It then ordered the insurer to pay the proceeds into the registry of the court.

But all that was for naught. State Farm’s payment should have come up front under § 1335, since the statute makes it a jurisdictional prerequisite. The Seventh Circuit tried to rescue the case under diversity jurisdiction, but found no “controversy” under Article III, since no one disputed Troy’s claim and since Texas law protects an insurer from multiple liability under these circumstances. Without jurisdiction, the Seventh Circuit held, it lacked even the power to remand “with instructions to calculate and award attorneys’ fees and . . . [the 18%] interest.” (Recall that Texas law required a properly filed interpleader action from State Farm to excuse it from the punitive interest, so Troy should be entitled to a juicy reward.)

The Seventh Circuit directed Troy to state court and “hope[d] that what we have said in this opinion will enable the parties to settle.”

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