Robert Lee, et al v. West Coast Life Insurance Co.

Filing

FILED OPINION (KIM MCLANE WARDLAW, RICHARD A. PAEZ and JOHNNIE B. RAWLINSON) REVERSED AND REMANDED., Judge: RAP Authoring,. FILED AND ENTERED JUDGMENT. [8269182]

Case: 11-55026

07/31/2012

ID: 8269182

DktEntry: 27-1

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
ROBERT S. LEE; GINA STEVENS;
LAURA STEVENS,
Counter-claimants-cross-claimantsAppellants,
and
STEVE LEE; BOBBIE BILL LEE;
WILLIAM LEE,
Plaintiffs-counter-defendants-crossdefendants,
v.
WEST COAST LIFE INSURANCE
COMPANY,
Defendant-counter-defendantcounter-claimant-Appellee.





No. 11-55026
D.C. No.
2:09-cv-06789PA-VBK
OPINION



Appeal from the United States District Court
for the Central District of California
Percy Anderson, District Judge, Presiding
Argued and Submitted
May 9, 2012—Pasadena, California
Filed July 31, 2012
Before: Kim McLane Wardlaw, Richard A. Paez, and
Johnnie B. Rawlinson, Circuit Judges.
Opinion by Judge Paez

8629

Page: 1 of 17

Case: 11-55026

8632

07/31/2012

ID: 8269182

DktEntry: 27-1

Page: 2 of 17

LEE v. WEST COAST LIFE INSURANCE

COUNSEL
Benjamin Blakeman, Esq. and Burton Mark Senkfor, Esq.,
Law Office of Burton Mark Senkfor, Los Angeles, California,
for the counter-claimants-cross-claimants-appellants.
Brent Dorian Brehm and Glenn R. Kantor, Kantor & Kantor
LLP, Northridge, California, for the plaintiffs-counterdefendants-cross-defendants.
Linda B. Oliver, Reed Smith LLP, San Francisco, California, for the defendant-counter-defendant-counter-claimantappellee.

OPINION
PAEZ, Circuit Judge:
This case, which involves a dispute over the proceeds of a
life insurance policy, raises the following issue: Does the fed-

Case: 11-55026

07/31/2012

ID: 8269182

DktEntry: 27-1

LEE v. WEST COAST LIFE INSURANCE

Page: 3 of 17

8633

eral interpleader remedy shield a negligent stakeholder from
tort liability for its creation of a conflict over entitlement to
the interpleaded funds? We hold that it does not, and that a
claimant may seek to recover all damages directly and proximately caused by the negligent stakeholder’s conduct.
I.
A.
On March 13, 1998, West Coast Life Insurance Company
(“West Coast”) issued a life insurance policy with a death
benefit of $800,000 to the late Steve Lee, Sr. Steve Sr. was
the original owner of the policy. William Lee, Steve Sr.’s
brother, was the original beneficiary. In the subsequent years,
West Coast received numerous change of ownership and beneficiary forms from members of the Lee family. At issue is a
policy change form signed and executed in July 2005, purporting to change the ownership and beneficiaries of the policy to Robert Lee, Bobbie Bill Lee, and Steve Lee, Jr. Bobbie
and Steve Jr. are Steve Sr.’s nephews. Robert is Steve Sr.’s
grandson.
Robert, Bobbie, and Steve Jr. executed the aforementioned
change forms in West Coast’s San Francisco office with the
help of West Coast’s Director of Policy Administration,
James Davis. Davis erroneously instructed Bobbie and Robert
to sign as the existing owners of the policy, when in fact
Steve Jr. was an existing owner and Robert was not. Davis
also erroneously failed to ask Steve Jr. to sign a change of
beneficiary form which would have transferred a 62.5% interest to Robert as a beneficiary. Nonetheless, Davis witnessed
Bobbie and Robert’s signatures and West Coast approved and
recorded a change of beneficiary as follows: Robert, 62.5%,
Steve Jr., 19%, Bobbie, 18.5%. Relying on the validity of the
July 2005 changes, Robert paid premiums due on the policy
until Steve Sr.’s death approximately four years later.

Case: 11-55026

8634

07/31/2012

ID: 8269182

DktEntry: 27-1

Page: 4 of 17

LEE v. WEST COAST LIFE INSURANCE

The Lee family members made several additional, subsequent changes to the policy’s ownership and beneficiaries.
The final change occurred in December of 2008 when Robert
Lee and Gina Stevens became the sole beneficiaries. Steve Sr.
died in January 2009. Robert and Gina then submitted claim
forms to West Coast. In response, West Coast informed Robert and Gina that the July 2005 changes were improperly executed, and therefore that they had no interest in the policy. In
March 2009, upon learning that he retained the interest in the
policy that he held in 2005, Bobbie submitted a claim form to
West Coast. In April of 2009, West Coast responded by contacting all parties involved regarding the disputed claims, urging them to reach a mutual agreement regarding payment of
the insurance policy benefits, and informing them that it
would file an interpleader action if no agreement could be
reached. The parties were unable to reach an agreement.
B.
In August of 2009, Steve Jr., Bobbie, and William Lee (collectively, “plaintiffs”) filed suit against West Coast in the Los
Angeles Superior Court alleging claims for breach of contract
and breach of the covenant of good faith and fair dealing
under California law. West Coast removed the case to federal
court invoking diversity jurisdiction, filed an answer and
counterclaim in interpleader1, deposited $800,000 plus
1
West Coast’s counterclaim does not specify whether it is premised on
rule or statutory interpleader. “For statutory interpleader, 28 U.S.C.
§ 1335, there must be diversity between the adverse claimants. For interpleader under [R]ule 22(1) predicated on diversity jurisdiction, there must
be diversity between the stakeholder on one hand and the claimants on the
other.” Gelfgren v. Republic Nat’l. Life Ins. Co., 680 F.2d 79, 81 n.1 (9th
Cir. 1982). Otherwise stated, statutory interpleader “allows so-called ‘minimal’ diversity, as distinguished from complete diversity, and also requires
only that $500 be in controversy in lieu of the usual . . . requirement.”
Libby, McNeill, and Libby v. City Nat’l. Bank, 592 F.2d 504, 507 n.3 (9th
Cir. 1978) (internal citation omitted). Rule 22 further provides that rule
interpleader “does not supercede or limit” the statutory interpleader rem-

Case: 11-55026

07/31/2012

ID: 8269182

DktEntry: 27-1

LEE v. WEST COAST LIFE INSURANCE

Page: 5 of 17

8635

accrued interest with the district court, and added Gina and
Laura Stevens2 as counterdefendants. Robert, Gina, and Laura
(collectively, “counterclaimants”) filed counterclaims for negligence and declaratory relief against West Coast, and crossclaims against the plaintiffs.
West Coast moved for partial summary judgment, which
the district court granted in West Coast’s favor as to its interpleader claim and on the claims sounding in contract. The
plaintiffs and counterclaimants then reached a settlement to
distribute the interpleaded funds amongst themselves, and the
district court entered an order approving the distribution. The
district court, without prompting by the parties, then amended
its summary judgment order to grant summary judgment in
West Coast’s favor as to counterclaimants’ claim for attorney’s fees, ruling that West Coast’s liability for attorney’s
fees incurred in litigating over ownership of the stake was
“cut off” by the interpleader action. The district court concluded that counterclaimants’ negligence claim against West
Coast was the only claim remaining to be tried.3
At the pretrial conference, the district court asked the parties to brief what damages counterclaimants could recover
should they succeed on the merits of their negligence claim.
Counterclaimants argued that their damages included the
amount of the insurance proceeds allocated to the plaintiffs
pursuant to their settlement ($290,000) and the attorney’s fees
edy, and that statutory interpleader actions must be conducted in accordance with the Federal Rules of Civil Procedure. Fed. R. Civ. P. 22(b); see
also Wright, Miller & Kane, Federal Practice & Procedure: Civil 3d
§ 1708 (2001). Here, the jurisdictional requirements of statutory interpleader were satisfied, as there was complete diversity between the parties
and the amount in controversy far exceeded the jurisdictional minimum.
2
Laura Stevens held an interest in the policy from 2006-2008 and purported to transfer her interest to Gina in 2008.
3
Counterclaimants argue that they preserved additional claims for trial,
namely, their estoppel claims. We discuss these claims infra.

Case: 11-55026

8636

07/31/2012

ID: 8269182

DktEntry: 27-1

Page: 6 of 17

LEE v. WEST COAST LIFE INSURANCE

incurred in litigating their claims against the plaintiffs.4 At a
subsequent pretrial conference, the parties stipulated to a trial
on a record consisting of written declarations and stipulated
facts, and to West Coast’s filing of a motion for a judgment
as a matter of law under Federal Rule of Civil Procedure 52(c).5
The district court subsequently granted West Coast’s
motion. The court did not address the merits of counterclaimants’ negligence claim, reasoning that they had failed to
allege any cognizable damages flowing from West Coast’s
alleged negligent conduct.6
4

Counterclaimants claimed entitlement to recover attorney’s fees
incurred in litigation against the plaintiffs under California’s tort-ofanother doctrine. “Under California law, it is a well-established principle
that attorney[’s] fees incurred through instituting or defending an action as
a direct result of the tort of another are recoverable damages. Attorney[’s]
fees in this context are to be distinguished from attorney’s fees qua attorney’s fees, such as those the plaintiff incurs in suing the tortfeasor defendant. Rather, when a defendant’s tortious conduct requires the plaintiff to
sue a third party, or defend a suit brought by a third party, attorney[’s] fees
the plaintiff incurs in this third party action are recoverable as damages
resulting from a tort in the same way that medical fees would be part of
the damages in a personal injury action.” Third Eye Blind, Inc. v. Near
North Entm’t Ins. Serv., LLC, 26 Cal. Rptr. 3d 452, 463 (Cal. Ct. App.
2005) (internal quotation marks and citations omitted); see also Brandt v.
Super. Ct., 37 Cal. 3d 813, 817 (Cal. 1985) (“When an insurer’s tortious
conduct reasonably compels the insured to retain an attorney to obtain the
benefits due under a policy, it follows that the insurer should be liable in
a tort action for that expense. The attorney’s fees are an economic loss—
damages—proximately caused by the tort. These fees must be distinguished from recovery of attorney’s fees qua attorney’s fees, such as those
attributable to the bringing of the bad faith action itself.”) (internal citation
omitted).
5
The parties’ stipulation and the district court’s subsequent orders refer
to the Rule 52(c) motion as a motion for a directed verdict. Because the
motion is properly considered under Rule 52(c), we will refer to it as a
motion for judgment throughout this opinion.
6
The district court also found that counterclaimants had not properly
pled estoppel as an independent theory of liability.

Case: 11-55026

07/31/2012

ID: 8269182

DktEntry: 27-1

LEE v. WEST COAST LIFE INSURANCE

Page: 7 of 17

8637

Counterclaimants timely appealed. We have jurisdiction
under 28 U.S.C. § 1291, and we reverse.
II.
“In reviewing a judgment following a bench trial, this court
reviews the district court’s findings of fact for clear error and
its legal conclusions de novo.” Price v. U.S. Navy, 39 F.3d
1011, 1021 (9th Cir. 1994) (citing Tonry v. Sec. Experts, Inc.,
20 F.3d 967, 970 (9th Cir. 1994)). “The same standard applies
to the district court’s involuntary dismissal of a claim under
Rule 52(c).” Id. (citations omitted). When deciding a motion
under Rule 52(c), the district court is “not required to draw
any inferences in favor of the non-moving party; rather, the
district court may make findings in accordance with its own
view of the evidence.” Ritchie v. United States, 451 F.3d
1019, 1023 (9th Cir. 2006).
III.
[1] Both Rule 22 and the interpleader statute allow a party
to file a claim for interpleader if there is a possibility of exposure to double or multiple liability. 28 U.S.C. § 1335; Fed. R.
Civ. P. 22(a)(2). “The purpose of interpleader is for the stakeholder to ‘protect itself against the problems posed by multiple claimants to a single fund.’ ” Mack v. Kuckenmeister, 619
F.3d 1010, 1024 (9th Cir. 2010) (quoting Minn. Mut. Life Ins.
Co. v. Ensley, 174 F.3d 977, 980 (9th Cir. 1999)); see also
Michelman v. Lincoln Nat’l Life Ins. Co., ___ F.3d ___, 2012
WL 2855815, at *5 (9th Cir. 2012). “This includes protecting
against the possibility of court-imposed liability to a second
claimant where the stakeholder has already voluntarily paid a
first claimant. But it also includes limiting litigation expenses,
which is not dependent on the merits of adverse claims, only
their existence.” Mack, 619 F.3d at 1024 (citation omitted).
“An interpleader action typically involves two stages. In
the first stage, the district court decides whether the require-

Case: 11-55026

8638

07/31/2012

ID: 8269182

DktEntry: 27-1

Page: 8 of 17

LEE v. WEST COAST LIFE INSURANCE

ments for [a] rule or statutory interpleader action have been
met by determining if there is a single fund at issue and
whether there are adverse claimants to that fund.” Id. at 1023
(quoting Rhoades v. Casey, 196 F.3d 592, 600 (5th Cir.
1999)). “If the district court finds that the interpleader action
has been properly brought the district court will then make a
determination of the respective rights of the claimants.” Id. at
1023-24 (citation omitted).
[2] “The protection afforded by interpleader takes several
forms. Most significantly, it prevents the stakeholder from
being obliged to determine at his peril which claimant has the
better claim . . . .” Wright, supra, 3d § 1702; see also id. at
§ 1704 (“[I]t is thought that the stakeholder should not be
compelled to run the risk of guessing which claimants may
recover from the fund.”). By contrast, interpleader protection
generally does not extend to counterclaims that are not claims
to the interpleaded funds. “Certainly when the stakeholder is
an interested party and when one of the claimants asserts that
the stakeholder is independently liable to him, the interposition of a counterclaim is appropriate. Indeed, in most
instances of this type, the counterclaim will be compulsory
and the court will exercise supplemental jurisdiction over it
. . .” Wright, Miller & Kane, Federal Practice & Procedure:
Civil 2d § 1715 (1986) (footnote omitted); see also 44B Am.
Jur. 2d Interpleader § 4 (“Interpleader is a procedural device
not intended to alter substantive rights. It is not [the] function
of an interpleader rule to bestow upon the stakeholder immunity from liability for damages that are unrelated to the act of
interpleading, such as negligence in preserving the fund.”)
(footnotes omitted).
The Supreme Court’s decision in State Farm Fire & Cas.
Co. v. Tashire, 386 U.S. 523 (1967), aptly illustrates this
point. There, the insurer of a truck driver whose vehicle had
collided with a bus brought an interpleader action in federal
court in Oregon. Many of the bus passengers had been injured
and several suits had been filed against the drivers and owners

Case: 11-55026

07/31/2012

ID: 8269182

DktEntry: 27-1

LEE v. WEST COAST LIFE INSURANCE

Page: 9 of 17

8639

of the two vehicles in California state courts. Id. at 525-26. In
its complaint in the Oregon district court, the insurer asserted
that, at the time of the collision, it had in force an insurance
policy with respect to the driver of the truck providing for
bodily injury liability up to $10,000 per person and $20,000
per occurrence, and for legal representation of the driver in
actions covered by the policy. It asserted that the actions
already filed in California and others which it anticipated
would be filed far exceeded, in aggregate damages sought, the
amount of its maximum liability under the policy. Id. at 526.
Accordingly, the insurer paid into the court the sum of
$20,000 and asked the court (1) to require all claimants to
establish their claims against the driver and his insurer in that
single proceeding and in no other, and (2) to discharge it from
all further obligations under its policy—including its duty to
defend the driver in lawsuits arising from the accident. Id.
The district court issued an order requiring the defendantvictims to show cause why they should not be restrained from
filing or prosecuting “any proceeding in any state or United
States Court affecting the property or obligation involved in
this interpleader action, and specifically against the plaintiff[insurance company] and the defendant[-driver].” Id. at 527.
The district court then issued a temporary injunction along the
lines that the insurance company sought. Id. On appeal, we
reversed, reasoning that the insurance company could not
invoke federal interpleader until the claims against the
insured, the alleged tortfeasor, had been reduced to judgment.
Id. at 528.
The Supreme Court reversed our judgment. It reasoned
that,
Were an insurance company required to await reduction of claims to judgment, the first claimant to
obtain such a judgment or to negotiate a settlement
might appropriate all or a disproportionate slice of
the fund before his fellow claimants were able to

Case: 11-55026

8640

07/31/2012

ID: 8269182

DktEntry: 27-1

Page: 10 of 17

LEE v. WEST COAST LIFE INSURANCE

establish their claims. The difficulties such a race to
judgment pose for the insurer, and the unfairness
which may result to some claimants, were among the
principal evils the interpleader device was intended
to remedy.
Id. at 533 (footnote omitted).
Nonetheless, the fact that the insurer had properly stated an
interpleader claim did not “entitle it to an order both enjoining
prosecution of suits against it outside the confines of the interpleader proceeding and also extending such protection to its
insured, the alleged tortfeasor.” Id. This was so, the Court reasoned, because “the scope of the litigation, in terms of parties
and claims, was vastly more extensive than the confines of the
‘fund,’ the deposited proceeds of the insurance policy. In
these circumstances, the mere existence of such a fund cannot, by use of interpleader, be employed to accomplish purposes that exceed the needs of orderly contest with respect to
the fund.” Id. at 533-34.
The Court contrasted the case before it with the typical
interpleader action, explaining:
There are situations, of a type not present here,
where the effect of interpleader is to confine the total
litigation to a single forum and proceeding. One such
case is where a stakeholder, faced with rival claims
to the fund itself, acknowledges—or denies—his liability to one or the other of the claimants. In this situation, the fund itself is the target of the claimants.
It marks the outer limits of the controversy. It is,
therefore, reasonable and sensible that interpleader,
in discharge of its office to protect the fund, should
also protect the stakeholder from vexatious and multiple litigation.
Id. at 534 (footnote omitted). The case before it, the Court
explained, was “another matter.” Id.

Case: 11-55026

07/31/2012

ID: 8269182

DktEntry: 27-1

LEE v. WEST COAST LIFE INSURANCE

Page: 11 of 17

8641

Here, an accident has happened. Thirty-five passengers or their representatives have claims which they
wish to press against a variety of defendants: the bus
company, its driver, the owner of the truck, and the
truck driver. The circumstance that one of the prospective defendants happens to have an insurance
policy is a fortuitous event which should not of itself
shape the nature of the ensuing litigation. . . . And
an insurance company whose maximum interest in
the case cannot exceed $20,000 and who in fact
asserts that it has no interest at all, should not be
allowed to determine that dozens of tort plaintiffs
must be compelled to press their claims—even those
claims which are not against the insured and which
in no event could be satisfied out of the meager
insurance fund—in a single forum of the insurance
company’s choosing.
Id. at 534-35. The Court recognized that its “view of interpleader means that it cannot be used to solve all the vexing
problems of multiparty litigation arising out of a mass tort.
But interpleader was never intended to perform such a function, to be an all-purpose ‘bill of peace.’ ” Id. at 535.
[3] From this discussion, we distill certain fundamental
principles: The stake marks the outer limits of the stakeholder’s potential liability where the respective claimants’ entitlement to the stake is the sole contested issue; however, where
the stakeholder may be independently liable to one or more
claimants, interpleader does not shield the stakeholder from
tort liability, nor from liability in excess of the stake. Id.; see
also New York Life Ins. Co. v. Lee, 232 F.2d 811, 814 (9th
Cir. 1956) (stating, in the context of statutory interpleader,
“[w]e think that Congress in the enactment of the interpleader
statute did not intend thus to wipe out the substantial claims
of persons asserting rights against [insurance] companies.
. . . ‘The purpose of the interpleader statute was to give the
stakeholder protection, but in nowise to change the rights of

Case: 11-55026

8642

07/31/2012

ID: 8269182

DktEntry: 27-1

Page: 12 of 17

LEE v. WEST COAST LIFE INSURANCE

the claimants by its operation. . . . We think Congress had no
intention to permit . . . destruction of acquired rights [under
state law], if indeed it had power so to do.’ ”) (quoting Sanders v. Armour Fertilizer Works, 292 U.S. 190, 200 (1934)).
The district court recognized these principles, and applied
them in its initial summary judgment ruling when it found
that counterclaimants’ negligence claim survived the interpleader action. The district court nonetheless granted West
Coast’s Rule 52(c) motion because it concluded that attorney’s fees are not recoverable in interpleader actions absent
a showing of bad faith, and that counterclaimants’ attempt to
recover the amount disbursed to the plaintiffs in settlement as
damages would require relitigation of entitlement to the insurance benefits. This reasoning was in error.
[4] “It is generally recognized that interpleader ‘developed
in equity and is governed by equitable principles.’ ” Aetna
Life Ins. Co. v. Bayona, 223 F.3d 1030, 1033-34 (9th Cir.
2000) (quoting Lummis v. White, 629 F.2d 397, 399 (5th Cir.
1980), rev’d on other grounds by Cory v. White, 457 U.S. 85
(1982); Metro. Life Ins. Co. v. Marsh, 119 F.3d 415, 418 (6th
Cir. 1997) (“[I]nterpleader is fundamentally equitable in
nature.”)). Accordingly, many courts have held that those who
have acted in bad faith to create a controversy over the stake
may not claim the protection of interpleader. See, e.g., Kent
v. N. Cal. Reg’l Office of Am. Friends Serv. Comm., 497 F.2d
1325, 1328 (9th Cir. 1974) (“Interpleader, which is an equitable remedy, is not available to one who has voluntarily
accepted funds knowing they are subject to competing
claims.”) (citations omitted); Farmers Irrigating Ditch & Reservoir Co. v. Kane, 845 F.2d 229, 232 (10th Cir. 1988) (“It
is the general rule that a party seeking interpleader must be
free from blame in causing the controversy, and where he
stands as a wrongdoer with respect to the subject matter of the
suit or any of the claimants, he cannot have relief by interpleader.”) (collecting cases); see also 44B Am. Jur. 2d Interpleader § 7 (“The equitable doctrine of ‘clean hands’ applies

Case: 11-55026

07/31/2012

ID: 8269182

DktEntry: 27-1

LEE v. WEST COAST LIFE INSURANCE

Page: 13 of 17

8643

to interpleader actions. The party seeking interpleader must
do equity, not have caused the conflicting claims, and be free
from blame in causing the controversy.”) (footnotes omitted).7
[5] Here, however, counterclaimants have not alleged that
West Coast acted in bad faith, nor do they contend that the
interpleader remedy was, or should have been, unavailable.
Rather, they allege that West Coast’s negligent actions in
2005 caused the instant controversy, and claim damages flowing from that negligence. As the Supreme Court’s discussion
in Tashire makes clear, interpleader was not intended to extinguish independent tort claims, nor intended to relieve the
stakeholder from liability in excess of the stake. The district
court’s conclusion that counterclaimants were required to
show that West Coast acted in bad faith in order to claim
attorney’s fees as damages that flow from West Coast’s negligence is without support.
[6] Nor does counterclaimants’ negligence claim arise
from West Coast’s failure to resolve the controversy over
entitlement to the insurance proceeds in their favor. But for
Davis’ erroneous recording of the July 2005 change forms,
counterclaimants allege that they would not have been forced
to litigate their adverse claims against the plaintiffs. In other
words, West Coast’s alleged negligence directly and proximately caused counterclaimants to forgo $290,000 to which
they claim they were rightfully entitled, and caused them to
incur attorney’s fees in litigating this action. Their damages
flowed not from West Coast’s filing of an interpleader claim
7

Wright & Miller suggest that modern interpleader analysis should
focus not on the stakeholder’s interest in the controversy or lack thereof,
but solely on the “threat of multiple vexation.” Wright, supra, 3d § 1706.
They suggest that “[c]ontemporary procedure, with its flexible and liberal
provisions for joinder of parties and claims, for separate trial of separate
issues, for assuring that the right to a jury trial on a particular issue or
claim is not impaired, and for shaping the relief to the necessities of the
particular case is well adapted to disposing of interpleader cases even
when independent liability [of the stakeholder] is asserted.” Id.

Case: 11-55026

8644

07/31/2012

ID: 8269182

DktEntry: 27-1

Page: 14 of 17

LEE v. WEST COAST LIFE INSURANCE

but from its alleged negligent conduct. For this reason, counterclaimants are not required to show that West Coast acted
in bad faith in creating the controversy in order to recover
damages directly and proximately flowing from its alleged
negligent conduct. The district court’s holding to the contrary
threatens to convert the interpleader action into a species of
get-out-of-jail-free card, a device that would shield tortfeasors
from liability for their negligent mistakes and limit their total
financial exposure to the value of the stake. As the Supreme
Court explained in Tashire, this was never the intention of the
interpleader remedy. See 386 U.S. at 535.8
Prudential Ins. Co. of America v. Hovis, upon which the
district court heavily relied, is not to the contrary. 553 F.3d
258 (3d Cir. 2009). Hovis involved a dispute over life insurance proceeds between the decedent’s son and the decedent’s
fiancee. Id. at 259-60. Robert Hovis, the decedent’s fiancee,
was a Prudential employee, and became romantically
involved with the decedent after selling her life insurance policies. Id. at 259. Shortly before her death, Hovis submitted a
change of beneficiary form to Prudential, changing the primary beneficiary of a particular policy from his fiancee’s son
to himself. Hovis requested that the change be made on an
expedited basis because of his fiancee’s declining health. Id.
at 260. Prudential had an internal policy generally prohibiting
8
Indeed, several courts outside our Circuit have recognized that interpleader does not protect the stakeholder from total liability in excess of the
value of the stake. See William Penn Life Ins. Co. v. Viscuso, 569 F. Supp.
2d 355, 361 (S.D.N.Y. 2008) (stating that, upon filing an interpleader
claim, an insurer is liable to a single beneficiary as to the value of the
stake, but may nonetheless face “potential counterclaim liability to the
non-beneficiary defendant” such that it “will be liable to all claimants in
a total amount greater than the value of the Policy”) (citing Ashton v. Josephine Bay Paul and C. Michael Paul Found., Inc., 918 F.2d 1065, 1069
(2d Cir. 1990) (“[W]e reject the argument that interpleader jurisdiction is
improper where claims against the stakeholder potentially exceed the
value of the interpleaded fund.”)); see also Bradley v. Kochenash, 44 F.3d
166, 169 (2d Cir. 1995) (noting that interpleader was intended to protect
the stakeholder only from unjustified multiple liability).

Case: 11-55026

07/31/2012

ID: 8269182

DktEntry: 27-1

LEE v. WEST COAST LIFE INSURANCE

Page: 15 of 17

8645

its sales persons from having an ownership or beneficiary
interest in its clients’ policies. Hovis required approval from
his managing director and Prudential’s compliance division in
order to obtain an exemption from that policy, but had not
secured approval when he submitted the changes. Id. Prudential therefore began an investigation into whether to grant an
exception in Hovis’s case, but did not complete its investigation before the policyholder’s death approximately one month
later. Id.
Hovis and the policyholder’s son both submitted claims to
the policy proceeds. In lieu of determining who was entitled
to the funds, Prudential filed an interpleader action. Id. at 26061. Hovis counterclaimed alleging, inter alia, negligence, bad
faith, and breach of fiduciary duty arising from Prudential’s
failure to make the requested policy change in a timely manner. Id. at 261. Prudential moved for summary judgment as to
Hovis’ counterclaims, arguing that its action in interpleader
extinguished those claims. The district court granted summary
judgment in Prudential’s favor, and Hovis appealed. Id. at
261-62.
In affirming the district court’s judgment, the Third Circuit
explained that, while in the typical case “interpleader protection does not extend to counterclaims that are not claims to
the interpleaded funds,” id. at 264, Hovis did not present the
typical case in that “each of [his] counterclaims concern[ed]
Prudential’s failure to resolve its investigation in his favor and
pay out the life insurance proceeds to him.” Id. Therefore,
“none of the counterclaims [wa]s truly independent of who
was entitled to the life insurance proceeds, which is the issue
the interpleader action was brought to settle.” Id. at 264-65.
The court concluded that exposing Prudential to tort liability where Hovis’ tort claims arose from Prudential’s failure to
resolve the controversy in his favor was contrary to “the very
idea behind the interpleader remedy—namely, that a stakeholder [should] not [be] obliged at his peril to determine

Case: 11-55026

8646

07/31/2012

ID: 8269182

DktEntry: 27-1

Page: 16 of 17

LEE v. WEST COAST LIFE INSURANCE

which claimant has the better claim.” Id. at 265 (citation and
internal quotation marks omitted) (alteration in original). The
court therefore held that Prudential’s interpleader action
shielded it from further liability to Hovis because a stakeholder’s “failure to choose between the adverse claimants (rather
than bringing an interpleader action) cannot itself be a breach
of a legal duty.” Id. (citation omitted). The court cautioned,
however, that its
“decision in no way turn[ed] the interpleader device
into an all-purpose get-out-of-jail-free card[,]” but
merely stood for the proposition that “where a stakeholder is blameless with respect to the existence of
the ownership controversy, the bringing of an interpleader action protects it from liability to the claimants both for further claims to the stake and for any
claims directly relating to its failure to resolve that
controversy.” Id. at 265 (citation omitted).
[7] As the foregoing discussion reveals, Hovis is consistent
with the general principles of interpleader, namely, that a disinterested stakeholder may not be subjected to liability for its
failure to resolve the controversy over entitlement to the stake
in one claimant’s favor, but that a stakeholder whose alleged
tort caused the controversy is not absolved of liability by filing an interpleader action. Here, counterclaimants seek damages wholly separate and apart from West Coast’s failure to
award them the policy proceeds: They seek damages flowing
from Davis’ allegedly negligent failure to correctly execute
the July 2005 change forms. As alleged in the counterclaim,
West Coast, unlike Prudential, is in no way blameless for the
instant controversy.
[8] For these reasons, we follow the Supreme Court’s
direction in Tashire and join our sister circuits in holding that
the federal interpleader remedy does not shield a negligent
stakeholder from tort liability for its creation of a conflict over
entitlement to the interpleaded funds. It follows logically from

Case: 11-55026

07/31/2012

ID: 8269182

DktEntry: 27-1

LEE v. WEST COAST LIFE INSURANCE

Page: 17 of 17

8647

this principle that a claimant may seek to recover all damages
directly and proximately caused by the negligent stakeholder’s conduct.
IV.
The district court’s grant of West Coast’s Rule 52(c)
motion is reversed and the case is remanded for further proceedings consistent with this opinion. We note that the pretrial conference order, which the district court orally deemed
filed, included additional claims that were to be tried, namely,
counterclaimants’ estoppel claims. Consistent with the pretrial conference order, those claims were properly preserved
for trial. See Fed. R. Civ. P. 16(e). We express no views on
the merits of these additional claims.
REVERSED and REMANDED.