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Interpleader in Construction Cases

Updated: Jan 25

A bank holds $15,000.00 in an account owned by John Smith. But two different people claim to be the "John Smith" whose name is on the account. If the bank gives the $15,000.00 to one of them, the other will sue the bank. So what does the bank do?


One option may be to file an interpleader lawsuit. In an interpleader, the bank would file a lawsuit against all of those who claim to own the account. The bank would then file a motion to deposit all of the money with the court, and to be dismissed. If granted, John Smith 1 and John Smith 2 would then be left to litigate among themselves who owns the $15,000.00.


From a conceptual standpoint, interpleader is fairly simple. A party says "I have money, it's not mine, and I don't know who to give it to." In response, the court says "give it to us and we'll make them figure it out." These types of cases are common in the banking, insurance, and construction industries.


What is an interpleader?


"Interpleader" acts like a cause of action (like breach of contract, trespass, or battery), but it is really a type of case. An interpleader action is one where a plaintiff (called a "stakeholder") files a lawsuit against multiple people (called "claimants") who claim ownership of some property (usually money).


What is the procedure for an interpleader?


Generally, an interpleader is a two-part case. In the first part, the court determines whether or not interpleader is appropriate. After that, the second part involves the litigation among the claimants, potentially going to trial. Effectively (or, in some jurisdictions, actually) the stakeholder is no longer a part of the case.


To kick things off, the stakeholder will need to determine whether the funds are owed, to identify as many potential claimants as possible, and then to file the lawsuit naming the claimants as defendants. As with any other lawsuit, the complaint/petition will need to conform to the jurisdiction's pleading standards, and the claimants will need to be served.


Next, the stakeholder will set a motion that does the following: allow for the deposit of the property, discharge the stakeholder from the lawsuit, and restrain anyone from suing the stakeholder for the money. If granted, the stakeholder deposits the money with the court, and then takes a backseat in the litigation.


At that point, the court might set case management hearings, but in general, the next step is litigation among the claimants. The claimants might engage in written discovery, depositions, motion practice, etc. As with other litigation, these cases can settle before trial, or they might go to trial.


How does this come up in construction cases?


In California, the Contractor State License Board ("CSLB") requires contractors to be licensed and to maintain a surety bond for $25,000.00 (as of January 1, 2023). Bus. & Prof. Code section 7071.6. Depending on the work involved and the bond period, it could be $15,000.00 or $7,500.00.


Texas construction interpleaders often arise out of bonds as well, usually performance bonds or payment bonds. It may also arise in cases involving insurance, or under the Construction Trust Fund Act. See, for example, In re T.S.C. Seiber Servs., L.C. (5th Circ. 2014) 771 F.3d. 246 (a federal case arising in bankruptcy). In any event, as in California, there is a limited amount of money for the taking.


What happens if the claimants are all owed money, but there isn't enough to go around?


This is fairly typical. If a contractor made a mistake on your property, it's more likely that they've made similar mistakes.


Because there is relatively little money available in construction cases, oftentimes, there isn't enough money to go around. If a contractor's bond has 10 potential claimants, each of whom claims $2,500.00 on a $25,000.00, then no problem. They will all get their $2,500.00. But if each claimant claims $3,500.00, then there isn't enough money.


So what do the parties get? Their pro rata share of the funds. In that last example, each of the 10 claimants receives an equal amount. So the $25,000.00 will be divided evenly, and each will get $2,500.00, even though they are each owed $3,500.00. They can each then decide whether or not to sue for the remainder.


It usually isn't this clean-cut. Perhaps there is one claimant owed $1,000,000.00, and two others owed $2,500.00 each. The $1,000,000.00 claimant is owed about 99.5% of the total, so that claimant will get about $24,875.00, and the other two will split the remaining $125.00.

Is that it? The other parties don't get anything else?


If a contractor works on your home and causes $75,000.00 of damage, you know that the bond cannot reimburse you in full, even if you are the only claimant in an interpleader. So what do you do?


You still have options. You can assert your own claim in the interpleader (called a cross-claim or cross-complaint), or you can file a separate lawsuit. That determination is outside the scope of this post. But your damages would be reduced by the amount of the recovery in the interpleader. For example, if you suffered $75,000.00 in damages and received the full $25,000.00 bond amount, you would only be able to recover $50,000.00 on a separate breach of contract claim.


What if none of the other claimants show up?


As long as you file an answer, the case proceeds with you. The other parties will be defaulted, and they won't be able to appear. This happens with some frequency, as it usually makes little sense to litigate over relatively small amounts of money. If your claim is relatively straightforward, that's great. But often, construction claims will require substantial discovery, including expert analysis. This becomes costly quickly, so sometimes it makes sense for a claimant to focus on a separate complaint rather than litigating within the interpleader action.


Conclusion


Interpleaders are a particular kind of action where the plaintiff (the "stakeholder") forces the defendants to litigate over the property claimed. The defendants ("claimants") then get a final judgment. If the amount doe snot satisfy all the claims, then the claimants receive their pro rata share of damages, and then go on to litigate on their own. Because these kinds of actions are so particular, consult with an experienced attorney before entering or ignoring an interpleader action.

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