Prudential Ins Co v. Hovis ( 2009 )

Opinions of the United
2009 Decisions States Court of Appeals
for the Third Circuit
1-27-2009
Prudential Ins Co v. Hovis
Precedential or Non-Precedential: Precedential
Docket No. 07-4406
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 07-4406
THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA
v.
ROBERT L. HOVIS;
DAVID R. POTTER;
DENISE R. GERSKI
Robert Hovis,
Appellant
Appeal from the United States District Court
for the Middle District of Pennsylvania
(D.C. Civil Action No. 06-cv-02020)
District Judge: Honorable James F. McClure
Argued December 2, 2008
Before: AMBRO and GREENBERG, Circuit Judges,
and O’NEILL,* District Judge
(Opinion filed: January 27, 2009)
Thomas A. Berret, Esquire
Frederick J. Francis, Esquire
Beth A. Slagle, Esquire (Argued)
Meyer, Unkovic & Scott
535 Smithfield Street
1300 Oliver Building
Pittsburgh, PA 15222-0000
Counsel for Appellant
Jonathan Dryer, Esquire (Argued)
Helen C. Lee, Esquire
Wilson, Elser, Moskowitz, Edelman & Dicker
601 Walnut Street
The Curtis Center, Suite 1130
Philadelphia, PA 19106-0000
Counsel for Appellee
OPINION OF THE COURT
*
Honorable Thomas N. O’Neill, Jr., Senior United States
District Judge for the Eastern District of Pennsylvania, sitting by
designation.
2
AMBRO, Circuit Judge
Faced with competing claims to the proceeds of a
$100,000 life insurance policy, Prudential Insurance Company
of America filed an interpleader complaint against the claimants,
seeking to deposit the disputed sum with the District Court and
withdraw from the proceedings. One of the claimants, Robert
C. Hovis, then counterclaimed, alleging that Prudential had
acted negligently and in bad faith in its handling of the policy
changes that led to the dispute. The District Court ruled that the
interpleader action was properly brought, and that, because it
was properly brought, Prudential could not be held liable for its
prior handling of the requested policy changes.
This case requires us to decide how far the protection of
the interpleader device extends. Does bringing a valid
interpleader action shield a stakeholder from further liability to
the claimants not only with respect to the amount owed, but also
with respect to counterclaims brought by the claimants? We
hold that it can where the stakeholder bears no blame for the
existence of the ownership controversy and the counterclaims
are directly related to the stakeholder’s failure to resolve the
underlying dispute in favor of one of the claimants.
Accordingly, we affirm the order of the District Court.
I. Facts and Procedural History
In February 2003, Hovis, a Prudential representative, sold
a life insurance policy in the sum of $100,000 to Bonnie L.
3
Shall, a retired widow.1 The policy designated Shall’s son,
David R. Potter, as the primary beneficiary and her daughter,
Denise Gerski, as the contingent beneficiary. Shortly thereafter,
Shall and Hovis became romantically involved, and in mid-2004
began to live together. In 2005, Shall was diagnosed with a
reoccurrence of cancer and given a very grim prognosis. On
January 23, 2006, Shall submitted through Hovis a request to
Prudential to change ownership of the policy from herself to
Hovis and to change its primary beneficiary from Potter to
Hovis.2 The request described Hovis’s relationship to Shall as
that of “fiancé.” It was signed by both Shall and Hovis in the
presence of a former Prudential agent. On February 23, 2006,
Shall died.
1
This was one of two life insurance policies Hovis sold to
Shall. The other named her children as beneficiaries and was
distributed, following her death, without incident with the help
of Hovis.
2
According to Hovis, the beneficiary change was made to
compensate him for money he had spent on work on Shall’s
home (which was to go to Shall’s children after her death). The
plan, as he described it, was that he would keep $30,000 of the
insurance proceeds and devote the remaining $70,000 to paying
down the mortgage on Shall’s home. Hovis also explained that
the purpose of the change in ownership was to avoid having
Shall’s son learn about the beneficiary change, and to expedite
payment of the policy proceeds, thereby preventing a gap in
mortgage payments after Shall’s death.
4
When Hovis submitted the policy changes to Prudential,
he specifically requested that they be processed on an expedited
basis, due to Shall’s terminal condition. Prudential, however,
did not process the changes immediately because of an internal
policy prohibiting its sales professionals from having an
ownership or beneficiary interest in their clients’ policies unless
they are members of the “immediate family” of the
policyholder. In order to receive an exception to that policy,
Hovis was required to obtain approval from his managing
director and Prudential’s compliance division, something that he
had not done at the time the changes were initially submitted.
In February 2006, Prudential began an investigation to
determine whether to grant an exception in Hovis’s case on the
ground that he had an insurable interest in the policy. Hovis
informed his managing director, Steve Marziotto, that Shall was
his fiancé and that they had lived together and shared expenses
for two years. At Marziotto’s request, Hovis provided two items
attempting to verify his relationship with Shall: a bank letter
indicating that Hovis had a joint account with Shall and a copy
of a marriage license. No effort was made by Marziotto to
communicate with Shall, and she died while he was in the midst
of his investigation. On March 2, 2006, Marziotto
recommended that the beneficiary change be allowed, but that
the ownership change be denied. Five days later, Hovis
submitted a claim for the life insurance proceeds.
In March 2006, Prudential’s Corporate Investigations
Division (“CID”) began a separate investigation into the policy
5
changes. The CID had a handwriting analysis done of the
“Request to Change Ownership/Beneficiary,” which analysis
concluded that, due to Shall’s physical condition when she
allegedly signed the request, there was no way to verify the
authenticity of her signature. The CID report also concluded
that Hovis had only been joined with Shall on the latter’s bank
account in early 2006, just shortly before she died, and that the
marriage license was dated January 6, 2006 and was valid for
only sixty days. The CID then forwarded the matter to
Prudential’s Law Division to make an ultimate determination on
the putative policy change. In April 2006, Prudential advised
Hovis that it had yet to make a decision.
In May 2006, while Prudential was wrapping up its
internal investigation, Potter, Shall’s son, spoke with Prudential
about the insurance policy. Only then did Potter learn that a
policy change had been submitted naming Hovis as owner and
beneficiary. According to Potter, Hovis had previously
deflected all his attempts to check on the status of the insurance
proceeds even though Hovis had helped him file a claim on his
mother’s other life insurance policy. On learning that the
beneficiary change was still being investigated, and that, in the
interim, he was listed as the beneficiary of his mother’s policy,
Potter informed Prudential that he intended to file a claim. In
early June 2006, Potter sent a letter to Prudential asking to have
the status of the policy resolved. He also expressed his belief
that his mother would not have approved the changes and that
Hovis must have submitted them fraudulently.
6
Prudential then decided to pursue an interpleader action,
rather than resolve who was entitled to the funds. It informed
both Hovis and Potter by letter of this decision, and, on July 17,
2006, Prudential brought an interpleader complaint in the
Eastern District of Pennsylvania pursuant to Federal Rule of
Civil Procedure 22, naming Hovis, Potter and Gerski as
defendants. In its complaint, Prudential requested permission
“to deposit its admitted liability with the Clerk of th[e] Court,”
and asked the Court to order that “the defendants . . . be
permanently enjoined from instituting or prosecuting against
Prudential in a proceeding . . . affecting the insurance proceeds
due under the policy and on account of the death of Bonnie
Shall.” Venue was transferred to the Middle District of
Pennsylvania at Hovis’s request.
Hovis filed an answer contending that Prudential was not
entitled to interpleader relief because “Prudential has no legally
cognizable reason for failing to pay the policy proceeds to
Hovis.” In addition, Hovis sought a declaratory judgment
against all parties, naming him as the proper beneficiary, and
brought counterclaims against Prudential for breach of contract,
negligence, breach of fiduciary duty, bad faith and unfair trade
practices, all relating to Prudential’s alleged failure to process
Shall’s request to change the ownership and beneficiary of her
policy in a timely manner. Potter and Gerski filed an answer
contesting Prudential’s right to pass its failure to resolve
ownership of the insurance proceeds onto the claimants
themselves, and seeking declaratory judgment against all parties
that they were the rightful owners of the proceeds.
7
Prudential moved for summary judgment on both its
claim for interpleader relief and Hovis’s counterclaims, arguing
that “[a]s the federal rules provide for interpleader in a situation
like this, defendant Hovis is estopped from counterclaiming for
breach of contract, negligence, breach of fiduciary duty, bad
faith and violations of [Pennsylvania’s Unfair Trade Practices
and Consumer Protection Law, 73 Pa. Stat. Ann. § 201-1 et
seq.].” Shortly thereafter, Hovis reached a settlement with
Potter and Gerski for distribution of the insurance proceeds.
Nonetheless, in his brief in opposition to Prudential’s motion for
summary judgment, Hovis argued that while the issue of who
was entitled to the interpleaded funds had become moot, that did
not entitle Prudential to judgment in its favor on his
counterclaims.3
On October 23, 2007, the District Court dismissed
Prudential’s interpleader complaint, along with the various
declaratory judgment actions, as moot, and directed Prudential
to pay the proceeds of the life insurance, plus interest, to Hovis,
Potter and Gerski in accordance with their settlement agreement.
Prudential Ins. Co. of Am. v. Hovis, No. 4:06-CV-2020, 2007
WL 3125084, at *2 (M.D. Pa. Oct. 23, 2007). The Court also
3
Potter and Gerski—who are not parties to this appeal—only
opposed the grant of summary judgment to the extent that they
argued that Prudential should be “directed to pay the policy
proceeds directly to the respective Defendants in the manner
agreed by them,” rather than depositing those proceeds with the
Court.
8
granted summary judgment to Prudential on Hovis’s
counterclaims on the ground that the appropriateness of
Prudential’s interpleader action shielded it from any liability
relating to its failure to resolve the dispute over the interpleaded
funds. Id. at *3–4. Hovis timely appealed.
II. Jurisdiction and Standard of Review
The District Court had jurisdiction under 28 U.S.C.
§ 1332(a)(1), as the parties are diverse and the amount in
controversy exceeds $75,000. We have jurisdiction under 28
U.S.C. § 1291. “Our review of the [D]istrict [C]ourt’s grant of
summary judgment is plenary.” Jakimas v. Hoffmann La Roche,
Inc., 485 F.3d 770, 777 (3d Cir. 2007). As such, “[w]e apply the
same standard employed by the [D]istrict [C]ourt, and view the
facts in the light most favorable to the non-moving party.” Id.
We will affirm the District Court’s grant of summary judgment
only if no genuine issues of material fact exist and Prudential is
entitled to judgment as a matter of law. Celotex Corp. v.
Catrett, 477 U.S. 317, 322–23 (1986).
III. Discussion
Rule 22 of the Federal Rules of Civil Procedure provides
in pertinent part that “[p]ersons with claims that may expose a
plaintiff to double or multiple liability may be joined as
defendants and required to interplead.” Fed. R. Civ. P. 22(a)(1).
The purpose of the interpleader device is to allow “a party who
fears being exposed to the vexation of defending multiple claims
9
to a limited fund or property that is under his control a
procedure to settle the controversy and satisfy his obligation in
a single proceeding.” 7 Charles Allen Wright & Arthur R.
Miller, Federal Practice & Procedure § 1704 (3d ed. 2001), at
540–41 (“Wright & Miller”). Accordingly, interpleader allows
a stakeholder who “admits it is liable to one of the claimants, but
fears the prospect of multiple liability[,] . . . to file suit, deposit
the property with the court, and withdraw from the
proceedings.” Metro Life Ins. Co. v. Price, 501 F.3d 271, 275
(3d Cir. 2007). The result is that “[t]he competing claimants are
left to litigate between themselves,” while the stakeholder is
discharged from any further liability with respect to the subject
of the dispute. Id.
The typical interpleader action proceeds in two distinct
stages. See NYLife Distribs., Inc. v. The Adherence Group, Inc.,
72 F.3d 371, 375 (3d Cir. 1995). During the first stage, the
court determines whether the interpleader complaint was
properly brought and whether to discharge the stakeholder from
further liability to the claimants. Id.; United States v. High
Tech. Prods., Inc., 497 F.3d 637, 641–42 (6th Cir. 2007); 7
Wright & Miller, § 1714, at 624–28. During the second stage,
the court determines the respective rights of the claimants to the
interpleaded funds. NYLife, 72 F.3d at 375; High Technology,
497 F.3d at 641. Because Hovis came to a private settlement
with Potter and Gerski about how to distribute the life insurance
proceeds, the second stage was never reached in this case. The
subject of this appeal is what happened at the first stage—the
District Court’s determination that the interpleader action was
10
properly brought, and that Prudential is therefore discharged
from any liability relating to Hovis’s counterclaims.
Hovis challenges the District Court’s dismissal of his
counterclaims on two grounds. First, he argues that Prudential
lacked the clean hands required of a party bringing an
interpleader action and thus was not entitled to the protections
such an action offers. He also argues that, even if Prudential
were entitled to bring an interpleader complaint, that action did
not encompass his counterclaims, which, as they are not
themselves claims to the disputed funds, fall outside the scope
of Prudential’s interpleader action.
A. Was the Interpleader Action Properly
Brought?
The District Court concluded that this “case presents the
perfect utilization of an interpleader” because Prudential “was
presented with competing claims for the life insurance proceeds
of Shall.” Hovis, 2007 WL 312504, at *3. Hovis does not
dispute that, at the time Prudential filed for interpleader, it was
facing competing claims to the insurance proceeds. Rather, his
argument is that Prudential is at fault for allowing things to get
to that point. Therefore, he contends, Prudential was ineligible
for interpleader relief of any kind, as it was not an “innocent
stakeholder.” See Farmers Irrigating Ditch & Reservoir Co. v.
Kane, 845 F.2d 229, 232 (10th Cir. 1988) (explaining that “[t]he
typical plaintiff in interpleader is an innocent stakeholder who
is subject to competing claims”).
11
It is true that, “[b]ecause interpleader is an equitable
proceeding, it is subject to dismissal based on equitable
doctrines.” U.S. Fire Ins. Co. v. Abestospray, Inc., 182 F.3d
201, 208 (3d Cir. 1999); see also High Technology, 497 F.3d at
641 (noting that among the issues relevant to whether
interpleader has been properly invoked is “whether any
equitable concerns prevent the use of interpleader”). Indeed,
“[i]t is a 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 . . . ,
he cannot have relief by interpleader.” Farmers Irrigating
Ditch, 845 F.2d at 232.
Here, however, it is difficult to see how Prudential is in
any way to “blame [for] causing the controversy.” Id. What
Hovis is essentially arguing is that, by failing to process Shall’s
request to change the owner and beneficiary of her policy
quickly, Prudential created circumstances in which there were
competing claims to the proceeds. But this argument is
premised on the strange idea that the controversy over
entitlement to the funds was caused by Prudential’s failure to
pay out the proceeds to Hovis before Potter found out about
Shall’s request to have the owner and beneficiary of her policy
changed, rather than the unmistakable appearance of
impropriety surrounding that request.
There is every indication that, had Prudential expedited
its investigation and paid out the proceeds to Hovis, it would
have faced a suit from Potter and his sister relating to the same
12
funds. Potter said as much in his deposition testimony. Thus,
insofar as there was a genuine dispute over entitlement to the
insurance proceeds, and Prudential was not to blame for its
existence, the interpleader action was properly brought.4
Whether bringing that action immunized Prudential against
Hovis’s counterclaims is a separate issue, to be addressed in the
next section. But Prudential was certainly entitled to some
measure of interpleader protection.
B. Are Hovis’s Counterclaims Outside the Scope
of the Interpleader Action?
Hovis’s second, and more substantial, argument is that,
even if the District Court were correct in concluding that
4
It is worth noting, in addition, that the rule that bars a party
from obtaining interpleader relief when it caused the underlying
controversy is not geared toward the kind of situation that Hovis
alleges occurred here (i.e., one in which the stakeholder’s own
errors are responsible for the ownership dispute). Rather, that
rule is meant to prevent a tortfeasor, facing claims from multiple
parties, from using the interpleader device to cap its liability.
See Farmers Irrigating Ditch, 845 F.2d at 232 (“Our attention
has not been directed to any case where a tortfeasor in a multi-
claim tort can admit liability, tender into court a minimal
amount of money with the representation that such is all he has,
force the claimants to prorate the amount deposited, and then
obtain an order discharging him from any further liability for his
tort.”). This case is not like that.
13
Prudential’s interpleader action was properly brought, it
nonetheless erred by dismissing his counterclaims. That is
because, according to Hovis, those counterclaims are not claims
to the interpleaded funds and thus fall outside the scope of
Prudential’s interpleader action.
Under the old interpleader practice, if a claimant alleged
that the stakeholder was independently liable to him or her, the
stakeholder would lose its right to bring the interpleader action.
See Libby, McNeill & Libby v. City Nat’l Bank, 592 F.2d 504,
507 (9th Cir. 1978); Note, The Independent Liability Rule as a
Bar to Interpleader in the Federal Courts, 65 Yale L.J. 715, 716
(1956). The modern approach, however, is that, where a
claimant brings an independent counterclaim against the
stakeholder, the stakeholder is kept in the litigation to defend
against the counterclaim, rather than being dismissed after
depositing the disputed funds with the court. See High
Technology, 497 F.3d at 643; Wayazta Bank & Trust Co. v. A &
B Farms, 855 F.2d 590, 593 (8th Cir. 1988); Libby, 592 F.2d at
507. That is what Hovis argues should have occurred
here—Prudential should have been required to face Hovis’s
counterclaims even after entitlement to the disputed funds was
resolved.
To assess this argument, it is necessary to determine how
far interpleader protection extends. Hovis argues that it extends
only to the claimants’ competing claims to the funds. If so, his
counterclaims are plainly independent of Prudential’s
interpleader action. While each relates to Prudential’s handling
14
of Shall’s life insurance policy, each nonetheless attempts to
subject Prudential to liability apart from its duty to account for
the insurance proceeds.
Hovis’s proposed understanding of the scope of
interpleader protection is not without support. Because what
entitles a stakeholder to bring an interpleader action in the first
place is the prospect of multiple liability, in the typical case the
protection provided by that device is limited to the interpleaded
defendants’ competing claims to the stake. Thus, the normal
rule is that interpleader protection does not extend to
counterclaims that are not claims to the interpleaded funds. Cf.
State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 535
(1967) (cautioning that “interpleader was never intended . . . to
be an all-purpose ‘bill of peace’”).
This is not the typical case, however. Here, each of
Hovis’s counterclaims concern Prudential’s failure to resolve its
investigation in his favor and pay out the life insurance proceeds
to him. See Hovis, 2007 WL 3125084, at *4 (“We are quite
certain that if [Prudential] had immediately paid . . . Hovis the
proceeds of Shall’s life insurance policy, . . . Hovis would not
have brought an action against [Prudential] based on any of the
causes of action that were counterclaimed in the instant case.”).
As such, none of the counterclaims is truly independent of who
was entitled to the life insurance proceeds, which is the issue the
interpleader action was brought to settle.
To allow Prudential to be exposed to liability under these
15
circumstances would run counter to the very idea behind the
interpleader remedy—namely, that a “stakeholder [should] not
[be] obliged at his peril to determine which claimant has the
better claim.” Bierman v. Marcus, 246 F.2d 200, 202 (3d Cir.
1957). Put another way, where a stakeholder is allowed to bring
an interpleader action, rather than choosing between adverse
claimants, its failure to choose between the adverse claimants
(rather than bringing an interpleader action) cannot itself be a
breach of a legal duty. See Lutheran Bhd. v. Comyne, 216 F.
Supp. 2d 859, 862 (E.D. Wis. 2002) (holding that the bringing
of a valid interpleader action shields a plaintiff from liability for
counterclaims where those “counterclaims are essentially based
on the plaintiff’s having opted to proceed via an interpleader
complaint rather than having chosen from among competing
adverse claimants”); Metropolitan Life Ins. Co. v. Barretto, 178
F. Supp. 2d 745, 748 (S.D. Tex. 2001) (holding that interpleader
protection extends to counterclaims that arise from “utilizing the
protections afforded by the interpleader”).
Accordingly, the District Court was correct to conclude
that, given the nature of these particular counterclaims,
Prudential’s having brought an appropriate interpleader action
shields it from any liability relating to those claims. It therefore
properly discharged Prudential from liability for Hovis’s
counterclaims.
Hovis contends that if the District Court’s dismissal of
his counterclaims is upheld, the interpleader remedy will be
transformed from one “designed merely to protect an innocent
16
stakeholder from being subject to having to pay out multiple
claims” to one that “cloak[s] th[e] stakeholder in unfettered
immunity from suit from all liability it may have incurred in
dealing with claimants.” Hovis’s Br. 34. Our decision in no
way turns the interpleader device into an all-purpose get-out-of-
jail-free card. What we hold here is 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.5 That does not mean, for instance, that a
stakeholder is free from liability for diminishing the value of the
interpleaded stake simply because of the presence of an
unrelated dispute as to who is its rightful owner. Cf. High
Technology, 497 F.3d at 643 (holding that the existence of
5
We note as well that, where a stakeholder unreasonably
delays in filing the interpleader action, that can itself constitute
ground for denying it the right to bring that action. See Mendez
v. Teachers Ins. & Annuity Assoc. and Coll. Ret. Equities Fund,
982 F.2d 783, 788 (2d Cir. 1992). And, even where no such
unreasonable delay occurred, the stakeholder may (depending
on the relevant state law requirements) be liable for prejudgment
interest covering the period between when the funds became due
to someone and when they were deposited with the court. See
Atlin v. Security-Connecticut Life Ins. Co., 788 F.2d 139, 142
(3d Cir. 1986) (holding that bringing a valid interpleader action
does not bar a state law claim for prejudgment interest where
such interest accrues as a matter of right).
17
conflicting claims of entitlement to isotopes in the stakeholder’s
possession did not immunize the stakeholder against potential
liability for damage sustained by those isotopes while in its
custody). Our decision here is even potentially consistent with
holding a stakeholder liable for its investigation of ownership of
the stake, at least where defects in its investigation can plausibly
be blamed for the existence of the underlying ownership
controversy.
But that is not our case. The closest Hovis gets to
alleging something of that nature is his contention that
Prudential was negligent for failing to interview Shall while she
was still alive. However, given both that Shall died a mere 31
days after the policy changes were made, and that it is not at all
clear that speaking to her in her diminished state would have
resolved the underlying controversy, we cannot say that
Prudential’s failure to speak with her is to blame for the dispute
over entitlement to the proceeds of her life insurance policy.
We therefore hold that Prudential cannot be liable for failing to
resolve the ownership controversy prior to bringing the
interpleader complaint.
IV. Conclusion
Because there was a legitimate dispute over entitlement
to Shall’s life insurance proceeds, and because Prudential was
not to blame for the existence of that dispute, Prudential was
eligible to bring an interpleader action to resolve that
controversy. Bringing that action, in turn, protected it not only
18
from further liability to the claimants for the amount owed under
the life insurance policy, but also from liability arising out of its
decision to settle the ownership controversy by way of
interpleader. We therefore affirm the District Court’s grant of
summary judgment to Prudential.
19