An interpleader is a civil action filed by a “stakeholder,” often a life insurance company, that is facing competing claims over benefits that are due. To avoid the risk of having to pay twice, the stakeholder can initiate an interpleader lawsuit against the competing claimants in order for the rightful claimant to establish their entitlement to the funds. Following the filing of such a lawsuit, the stakeholder deposits the funds at issue with the court and then is dismissed from the lawsuit, leaving it up to the competing claimants to each establish their right to the funds.
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What Do You Do When You Receive Notification of an Interpleader?
Sometimes, a potential claimant does not even know that they may be entitled to payment. They may have been unknowingly named as the beneficiary of a life insurance policy, or they might not know that they are the proper heirs if the named beneficiary is no longer alive and no contingent beneficiary has been named.
Therefore, anyone served with a summons and complaint that says “interpleader” in the caption should not ignore the court process. Doing so may forfeit the right to receive a substantial sum of money.
What Is an Example of an Interpleader Case?
Several years ago, the United States Supreme Court accepted a case involving life insurance benefits due under a policy that named the insured’s spouse as the named beneficiary. But the insured had divorced his wife several years earlier and lived in a state that had enacted a uniform law that automatically negates spousal life insurance beneficiary designations upon the entry of a divorce judgment. As a result, the life insurer did not know whether to pay the ex-wife or the contingent beneficiaries, the children of the decedent. The wife ultimately won that case because of the federal ERISA (Employee Retirement Income Security Act) law’s preference for the beneficiary named in the records maintained by the plan administrator. However, that result was not foreordained.
Another case decided by the Supreme Court involved the ownership of retirement benefits and a claim by the ex-spouse of a deceased employee who had amassed a significant retirement benefit. Although the spouses had addressed the retirement benefits in their divorce proceeding, neither spouse obtained a Qualified Domestic Relations Order (QDRO) and served the order on the administrator of the retirement plan. Thus, the ex-spouse prevailed since ERISA rules required that the plan pay the spouse in the absence of a QDRO.
In another situation, the beneficiary of survivor benefits under a pension plan murdered the employee who had the pension; however, she was acquitted of murder by reason of insanity. Typically, under what is known as a “slayer rule” or “slayer statute,” anyone who takes the life of another person is barred from inheritance. But there are exceptions, such as self-defense, insanity, or certain other circumstances. The law varies significantly from state to state on this issue. In this instance, the pension plan was uncertain as to who to pay and required a court to determine whether the spouse, who had been acquitted, could collect the pension.
Life insurance beneficiary changes, especially toward the end of the policyholder’s life, also often trigger interpleader actions, especially if there are questions as to whether the insured had the mental capacity to make the change or there may have been undue influence exercised by the new beneficiary.
Trusts are also the subject of interpleader actions when it is unclear as to who the beneficiaries may be. For example, a trust may be established for the benefit of the children of the settlor, i.e., the person who created the trust. However, it may be unclear as to whether illegitimate children qualify as well. In that situation, the trustee may need to file an interpleader action, just as a life insurance company may file an interpleader when questions arise as to the rightful beneficiary.
What Happens in an Interpleader Proceeding?
After the disputed funds are deposited with the court, each of the potential claimants need to assert their claim and the court ultimately decides on the rightful beneficiary or the proper allocation of the proceeds. If one of the potential claimants fails to take any action, though, the other claimants are likely to receive the life insurance or trust proceeds by default.
Because the failure to act immediately upon receipt of a summons in an interpleader action may have devastating financial consequences for rightful heirs and beneficiaries, it is critical to retain an attorney experienced in handling interpleader cases as soon as possible to protect your rights. The lawyers at DeBofsky Law have that experience and can help you recover what is rightfully yours if you are named as a party to an interpleader lawsuit.