What Is an Interpleader?

Interpleader Explained in Less Than 5 Minutes

A judge listens to a case.
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DEFINITION
An interpleader is a legal procedure that helps settle disputes over ownership of money or property.

An interpleader is a legal procedure that helps settle disputes over ownership of money or property. The person or entity that holds the money or property under dispute can file for an interpleader to allow a court to decide which claimant is the rightful owner.

Learn more about the details of how an interpleader works, and about the pros and cons of using one.

Key Takeaways

  • The interpleader legal procedure helps resolve ownership disputes involving money and property.
  • Interpleader actions require meeting certain interest and value requirements.
  • Interpleader cases can settle disputes, but deplete stakes.

Definition and Examples of Interpleader

An interpleader is a legal procedure that determines the rightful owner of money or property claimed by two or more parties.

Custodians of such money and property use the procedure when they face, or may face, multiple lawsuits from the claimants.

Let’s say a person dies and three surviving family members claim to be the rightful beneficiary of the deceased person’s life insurance death benefit. In such a case, the insurer could face three separate lawsuits from the individual claimants. Instead of battling multiple lawsuits, the insurance company could file a complaint for interpleader action.

The interpleader process brings together the custodian of the property (in this example, the insurance company) and the claimants to litigate the dispute in a single proceeding.

Understanding an Interpleader

A “stakeholder” is the custodian of disputed money and property. A stakeholder can be an association, corporation, firm, or person. Stakeholders seeking interpleader action can’t have an interest in the property they hold. For example, a trustee may seek interpleader action in the disposition of an estate in which they are not entitled to inherit any money or property.

Stakeholders don’t seek interpleader action to avoid transferring property, but to determine the property’s rightful owner. Essentially, the interpleader procedure flips the script on a property dispute because the stakeholder becomes the plaintiff, and the claimants become defendants.

Interpleader Requirements

A stakeholder may seek interpleader action after the claimants file lawsuits or, in anticipation of multiple 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.

To seek interpleader, the stakeholder must face liability from more than one party over the same money or property. In some cases, the stakeholder may seek interpleader action if they deny liability to all claimants. In other cases, a defendant may seek interpleader action through a counterclaim or crossclaim if they face liability from more than one party over the same money or property claim.

Federal law grants nationwide service for interpleader cases. So even if defendants live in different jurisdictions, a single court can rule on an interpleader.

Interpleader Process

Through interpleader action, the stakeholder requests that the court assign ownership of money or property under dispute. When filing an interpleader, the stakeholder must hand over the money or property under dispute to the court clerk.

If the dispute involves money, it will cease to accrue interest when the court clerk takes possession of it. Once the clerk receives the money or property, the claimants can’t sue for damages caused by its detention. For example, if during the interpleader process, a claimant loses their home to foreclosure, they can’t sue the stakeholder, claiming that the money under dispute could have prevented the loss.

The stakeholder has the right to request reimbursement for court costs and attorney fees. When the court rules on the disposition of the property, it awards a portion of the property to cover the stakeholder’s expenses. For instance, if the dispute was over a $500,000 life insurance policy, and the insurance company incurred $50,000 in legal expenses, the court may award $450,000 to the winning defendant and $50,000 to the stakeholder.

When an interpleader involves money, the court clerk will deposit the funds into an interest-bearing account. Once the court rules on ownership, it will award the winner the funds that were under dispute and accrued interest.

Pros and Cons of Interpleader Actions

Pros
  • Stakeholders avoid multiple lawsuits

  • Court rules on ownership

Cons
  • Depleted stakes

Pros Explained

  • Stakeholders avoid multiple lawsuits: Interpleader action can prevent a stakeholder from facing multiple lawsuits over the same money or property.
  • Court rules on ownership: The process relieves the stakeholder of the burden of deciding which claimant should receive the money or property. Since the law allows the plaintiff to file a claim for attorney and court fees, the stakeholder can also recoup costs caused by the dispute.

Cons Explained

  • Depleted stakes: Often, a stakeholder can’t simply unload a money or property dispute by seeking interpleader. A court may require the stakeholder to remain in the case until it makes a final ruling, so the plaintiff must continue to retain attorneys. If the court grants the stakeholder reimbursement for attorney’s fees and court costs, the funds will come from the award granted to the winning defendant.

The Bottom Line

Stakeholders can use an interpleader action to settle a dispute over money or property. But the procedure favors the stakeholder, at the expense of the claimants.

A defendant in an interpleader case may need to hire an attorney to present a case that will convince the court that they are the rightful owner. When the court rules for a defendant, they may have to pay the attorney fees and court costs of the plaintiff, plus their own attorney fees.

Article Sources

  1. Cornell University. “Interpleader.” Accessed Dec. 23, 2021.

  2. California Legislative Information. “Code of Civil Procedure - CCP.” Accessed Dec. 23, 2021.

  3. Northwestern Law Review. “The Value of Uncertainty.” Page 5. Accessed Dec. 23, 2021.

  4. Ohio Supreme Court. “Ohio Rules of Civil Procedure.” Accessed Dec. 23, 2021.

  5. Cornell University Legal Information Institute. “28 US Code § 1335 - Interpleader.” Accessed Dec. 23, 2021.

  6. State Bar of Wisconsin. "As I See It: Improving Interpleader: Discharge Stakeholders From Litigation.” Accessed Dec. 23, 2021.