What do you do if you are holding undisputed money owed to a subcontractor? Well, you make an effort to pay it or tender it! Right? I am never a fan of a client holding undisputed sums without a legitimate contractual basis.
There are circumstances, however, where the effort to pay an undisputed payable is not so easy. In fact, it is challenging, as in the below case example where the subcontractor filed for an Assignment for the Benefit of Creditors (referred to as an “ABC”). An ABC, in a nutshell, allows an insolvent entity to file an insolvency action in state court governed by state law and choose its assignee (versus a federal bankruptcy action governed by federal law where a trustee is appointed). One major difference is that there is no automatic stay in an ABC as there is in a federal bankruptcy action. Thus, the insolvent entity can still be sued, but, while that entity is in an ABC, there are many creditors that will not be able to enforce a judgment. (See Florida Statute Ch. 727).
In Balfour Beatty Construction, LLC v. New Era Lending, LLC, 2017 WL 3971438 (MD.Fla. 2017), a general contractor on a pool swimming pool rehabilitation project at a large Disney hotel was holding approximately $100,000 from a subcontractor that instituted an ABC. As a result of the ABC, the subcontractor’s subcontractors and suppliers and other creditors made a claim against this money. (It is uncertain whether any of these entities had lien or payment bond claims.) Due to the competing claims for the same money, the general contractor cleverly filed a federal interpleader action pursuant to 28 U.S.C. s. 1335 and Federal Rule of Civil Procedure 22. The general contractor acknowledged that the money was an open payable owed to the subcontractor that filed an ABC, but due to the competing claims, did not know which subcontractor or supplier or creditor was owed which amounts. Hence, the interpleader action, which has advantages when a party is holding undisputed sums subject to competing claims.
The federal interpleader statute [28 USC s. 1335] gives the district court jurisdiction of “any civil action of interpleader or in the nature of interpleader,” where the claimants are minimally diverse and the plaintiff has “any obligation written or unwritten to the amount of $500 or more …” 28 U.S.C. § 1335(a)(1). “Interpleader is the means by which an innocent stakeholder, who typically claims no interest in an asset and does not know the asset’s rightful owner, avoids multiple liability by asking the court to determine the asset’s rightful owner.” In re Mandalay Shores Co-op. Hous. Ass’n Inc., 21 F.3d 380, 383 (11th Cir. 1994). The well-pleaded allegations in the Second Amended Complaint establish that here, there is a single Fund [money or bond that was interpleaded with the court’s registry] that is the subject of adverse claims by Defendants. Balfour [innocent stakeholder] has also demonstrated that it is a disinterested stakeholder in that it makes no claim to the Fund, except for its attorney’s fees and the costs of this action. Accordingly, the Court finds that this interpleader action is properly brought.
Balfour Beatty, supra, at *5.
The general contractor knowing it owed the money cleverly filed the interpleader lawsuit depositing the undisputed sums or provided a bond conditioned on a future court order and sued all parties that have made a claim or could make a claim against the sums. The contractor claimed no interest in the money except for its attorney’s fees and costs incurred in the action. Notably, a plaintiff in an interpleader action, known as the innocent stakeholder, may, and oftentimes is as a matter if equity, awarded attorney’s fees and costs if the interpleader action is successful. See Murphy v. Travelers Ins. Co., 534 F.2d 1155, 1164 (5th Cir. 1976) (“In fact, as a general rule, when an interpleader action is successful, the court often awards costs, as well as attorney’s fees, to the stakeholder.”) See also Aetna Life Ins. Co. v. Outlaw, 411 F.Supp. 824, 826 (D.Md. 1976) (“The theory behind the award of attorneys’ fees in interpleader actions…is that plaintiff by seeking resolution of the multiple claims to the proceeds benefits the claimants and that plaintiff should not have to absorb attorneys’ fees in avoiding the possibility of multiple litigation.”).
Additionally, the general contractor knew that by filing an interpleader action, it could also move for a contemporaneous injunction preventing all of the potential claimants from prosecuting an action pertaining to the undisputed sums:
Title 28, United States Code, Section 2361 allows a district court to enter an order in an interpleader action “restraining [claimants] from instituting or prosecuting any proceeding in any State or United States court affecting the property, instrument or obligation involved in the interpleader action until further order of the court.” The district court has the authority to “discharge the plaintiff from further liability, make the injunction permanent, and make all appropriate orders to enforce its judgment.” .
Balfour Beatty, supra, at 5 (citations omitted).
By moving for an injunction, the general contractor—the innocent stakeholder—could move the court for a temporary restraining order/injunction and then a permanent injunction preventing any existing or future action asserted against it for the recovery of the undisputed sums.
In this circumstance, and without knowing all of the nuances of the case, this strategy was extremely clever. By filling the interpleader action, the contractor had a basis to recover the attorney’s fees it incurred in dealing with competing claims and move for an injunction to prevent numerous, competing claims over the same money.
Strategy is always important. Always. Here, the strategy not only worked, but it was clearly the most effective strategy based on the factual issues in the case in light of the subcontractor filing an ABC. Good strategy is rewarded!
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