NDNY: No Interpleader Jurisdiction Where Investment Manager Previously Distributed Disputed Funds

I recently represented USAA Investment Management Company in the matter of USAA Investment Management Company v. John Connell et al., 2014 WL 2176283 (N.D.N.Y. 2014), an interesting case concerning interpleader jurisdiction.  In general, interpleader jurisdiction permits a party in possession of property to which multiple other parties have laid claim to initiate a suit in federal court whereby the Court and the claimants will adjudicate the ownership claims.  Interpleader offers protection for the party in possession (referred to as the “stakeholder”), who otherwise might be exposed to multiple lawsuits or other claims by the various persons or entities asserting a right to take possession of the property.  In some ways, USAA v. Connell was a very typical interpleader case:  USAA held certain funds in an investment account, and after the death of the account holder, various relatives asserted that they were each entitled to possession of the funds.  Seeking to obtain direction from the court as to how and to whom it should distribute the funds, USAA initiated the lawsuit in the United States District Court for the Northern District of New York by invoking the federal court’s jurisdiction pursuant to the federal interpleader statutes, 28 U.S.C. §§ 1335 and 2361.

And then the case took a strange turn:  Subsequent to filing the suit, USAA discovered that it was no longer in possession of the disputed funds.  Rather, USAA had already distributed the funds to one of the claimants. The discovery of this fact essentially ended any reason for bringing the suit in the first place.  Having distributed the funds to one party, USAA was already exposed to a potential suit – and recovery – by the other party, and there was no need to tee that suit up, which is essentially what the interpleader proceeding would have done.  Even though USAA had initiated the suit in the first place, therefore, we decided to move to dismiss it.

The crux of our motion to dismiss was that the Court lacked jurisdiction over the suit because USAA had failed to satisfy one of the jurisdictional prerequisites for interpleader jurisdiction, namely, that the stakeholder must deposit the disputed funds (or an equivalent bond) with the Court.  The requirement makes a lot sense – the stakeholder in an interpleader action lays no claim to the disputed funds and concedes at the outset that it will turnover the funds to whomever it is directed to by the Court.  Depositing the funds upfront takes the stakeholder out of the matter altogether and allows the Court to supervise post-adjudication distribution.  Here, having already released the funds, USAA had no disputed funds to deposit.  We argued, therefore, that in the absence of the required deposit, the Court lacked jurisdiction over the suit and so was required to dismiss it.  The Court agreed, holding that “it is undisputed that USAA did not possess the funds at issue at the time that it commenced the action, and has neither made a deposit nor issued a bond in the full amount of the sum in dispute with the court.  USAA, therefore, has not satisfied the jurisdictional prerequisites for interpleader jurisdiction.”