What is Interpleader? (Stuck in the Middle Again…

Interpleader is a legal remedy designed to protect a stakeholder caught between two competing claimants who have sued or threatened to sue the stakeholder to recover money or other property.  Easy to say but not always easy to comprehend.

Perhaps the best way to understand interpleader is by way of example.  Suppose you are a broker or title company holding an escrow deposit under an agreement of sale for a real estate transaction.  The buyer (who made the deposit) claims there is a title defect and refuses to go to settlement.  The seller claims that title meets contractual requirements and accuses the buyer of default.  The buyer wants his deposit money back, and the seller demands the deposit money as damages for buyer’s alleged default.  Buyer and seller each threaten to sue you if you do not turn over the money.

The most efficient resolution for you, the stakeholder, is to “interplead” the buyer and seller in a lawsuit; you would concurrently pay the deposit over to the Court (held by the Clerk of the Court) and let the buyer and seller “fight it out” without you.  Once the competing claimants have been joined in the case and the money has been paid to the Court, the stakeholder is discharged.  Once the Court determines who is rightfully entitled to the money it would be paid over to that party.

Since there are costs associated with an interpleader action, including filing fees and attorneys’ fees, any party agreeing to act as an escrow agent should include provisions in a written escrow agreement which require the competing claimants to reimburse the escrow agent for any costs and attorneys’ fees associated with any dispute over the deposit which might arise in the future.

–  Kevin Palmer

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