Wednesday, August 01, 2012

Lee v. West Coast Life Ins. Co. (9th Cir. - July 31, 2012)

Fortunately, the Ninth Circuit gets the result correct in this case.  But it unfortunately gets there in a way that makes civil procedure scholars (including yours truly) cringe.

It's an interpleader case.  A classic one:  Proceeds of a life insurance policy.  The insurance company faces conflicting claims and wants to deposit the fund and leave (as well as get its attorney's fees).  No particular problem there.  Done every day.

The complexity here is that some of the claimants -- the competing (alleged) beneficiaries -- claim that the life insurance company was negligent when it directed and/or participated in various acts relating to establishing the beneficiaries.  The trial court held, however, that the stakeholder's liability was limited to the fund, so dismissed the claimant's claims.

The Ninth Circuit holds that this was error, and that's exactly right.  The easiest way to get to this result is to note that, at common law, the right to interplead was denied when the stakeholder had independent liability to one of the claimants.  However, that's no longer true under the Federal Interpleader Act or federal common law pursuant to Rule 22, both of which (unlike the traditional common law doctrine) allow actions "in the nature of" interpleader and don't retain the traditional common law limitations.  But while interpleader itself is allowed, that doesn't shield the stakeholder from its substantive liability, which may indeed exceed the stake.

The Ninth Circuit gets that last point right.  But it doesn't mention the traditional common law doctrine, and doesn't mention the revisions adopted by the federal system, both of which are critical components of the correct answer.  But, again, it gets the policy right, so that's at least good.

The Ninth Circuit also thinks that its result is compelled by the Supreme Court's decision in Tashire, which in fact has nothing whatsoever to do with a stakeholder's independent liability.  Tashire deals instead with the permissible scope of injunctive relief under federal interpleader, and holds that in cases  in which "the tail wags the dog" -- i.e., when the interpled funds are a tiny portion of the underlying controversy (e.g., a huge auto accident with a tiny insurance policy issued to one of the participants) -- the court should exercise its discretion and not enter injunctive relief that encompasses the whole controversy, and should instead tailor the injunction so that it constrains only litigation against the tiny portion (the "tail") covered by the policy.  That holding about injunctive relief in tail-wagging cases really says nothing at all -- much less anything dispositive -- about a case (like this one) that nowhere requests for an injunction and in which there's only one "dog" (one insurance policy) and no tail.

So to say, as the Ninth Circuit does, that this case is controlled by Tashire -- and to devote pages and pages to that decision -- seems wrong.  Much more relevant are the legions of common law decisions about independent liability of stakeholders, which are directly on point and which aren't mentioned at all in the opinion.

One other thing.  A minor point, but indicative of why scholars in the area might cringe when they read the Ninth Circuit's opinion.  Plaintiffs brought the case in state court, and the defendant (the insurance company) removed it to federal court.  This was totally fine, since it was a diversity case, in which the plaintiffs were each from a different state than the insurance company.  Once in federal court, the insurer answered and interpled the funds.  This too was jurisdictionally and procedurally proper.

Judge Paez nonetheless understandably wants to make sure that the court has jurisdiction, and also wants to make sure that he's discussing the correct law of interpleader -- which varies depending on whether it's Rule 22 interpleader or statutory interpleader.  He mentions that the insurer's complaint (and, presumably, briefs) don't mention which interpleader is pled, but Judge Paez concludes that "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."

That's (again) the correct result, but for the wrong reason.  Even putting entirely aside supplemental jurisdiction (which is really the proper -- omitted -- basis for jurisdiction over the ancillary interpleader claims here), statutory interpleader (1) requires only minimal, not complete, diversity, and (2) does not look to diversity of the parties -- which is what Judge Paez is talking about (Ps vs. Ds), but rather cares only about diversity of the claimants (here, amongst the Ps).  I can't tell whether the Ps -- who were all from an extended family -- were themselves diverse.  But that's the relevant inquiry, not diversity across party lines.

The jurisdiction that does exist -- again, Judge Paez reaches the correct outcome -- is not jurisdiction under statutory interpleader, but under Rule 22 interpleader, which employs only the usual rules about jurisdiction (i.e., complete diversity and $75,000 rather than minimal diversity and $500).  That not only  the right jurisdictional statute -- since there's then independent jurisdiction over the interpleader claim -- but may also affect the substantive analysis, since we're now talking about purported immunity under common law Rule 22 interpleader rather than a statutory analysis of purported immunity under statutory interpleader.  (Truth be told, the answer is the same under either version of federal interpleader, but you at least want to be talking about the right one.)

I concede this isn't easy stuff.  It's not like you run across interpleader cases every day.  But when you do, you want to get it right.  Here:  Result right.  Reasoning wrong.

The former's much more important than the latter, but given that it's a published opinion, the latter's far from insignificant as well.

P.S. - Blogger tells me that that's officially my 3,000th post.  Three thousand different cases.  Clearly I talk way too much (and, as here, too long).  Sorry 'bout that.