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Saturday, October 21, 2017

Possession May Be Nine-Tenths of the Law - but Watch out for the Other One-Tenth

Prudential Insurance Company of America issued a life insurance policy on the life of Russell. Russell’s wife, Sherry, was the beneficiary. The policy contained $332,000 of term life coverage and $332,000 of accidental death coverage.

Russell died on June 24, 2015. On June 26, 2015, Sherry made a claim. On January 21, 2016, Prudential settled the life portion by paying $343,240.50 into a Prudential Alliance Account in Sherry’s name. This account was an interest-bearing account, and Sherry could draw against it by check or withdrawal.

On January 26, 2016, a grand jury indicted Sherry for the murder of Russell. Between January 29 and February 3, 2016, Sherry wrote three checks withdrawing $83,855.50 from the account. On February 8, 2016, Prudential notified Sherry that it had frozen the account at a time when it held $259,616.51.

On May 25, 2016, Prudential filed an interpleader complaint in federal court to join four potential beneficiaries under the policy, presumably due to concerns under a slayer statute that disqualifies a murderer from receiving insurance benefits payable because of his or her crime. It also sought to deposit into the court registry total death benefits of $591,564.90, plus applicable interest. Importantly, Prudential made no mention to the court of the $343,240.50 already paid to Sherry’s account nor Sherry’s withdrawals from that account. It also appears that Prudential did not give notice of the court registry petition to Sherry and/or other parties. The court granted Prudential’s motion.

About three months later, Sherry filed an answer and counterclaim. She alleged that Prudential illegally took $259,616.51 from her account and placed it into the court's registry without her permission. She also alleges fraud and breach of contract related to her agreement with Prudential to place the distributed term life benefits into an account with Prudential and for her to have access and control over the account.

The court found that Prudential violated Federal Rule of Civil Procedure 67 in seeking to deposit funds into the court registry without giving notice to every party. The court vacated its earlier order and directed the distribution to Prudential of the funds previously deposited.

The court granted Prudential’s interpleader request to join the other potential beneficiaries but only as to the $332,000 of accidental death benefits that had not been previously deposited to Sherry’s account. It denied the request as to the funds that Prudential removed from Sherry’s account since there is a question of whether Prudential rightfully possessed those funds.

Prudential sought the court to discharge it from the case and to enjoin the defendants from a further suit against it. The court declined to do that because Prudential is not a disinterested stakeholder, largely because Sherry has made a plausible counterclaim for conversion and fraud.

Prudential also sought judgment on the pleadings for the conversion claim. It claimed it did not commit the tort of conversion because it did not convert the funds for its own use. The court denied that aspect, when it found a potential benefit to Prudential in the deposit of the account funds - namely, the protection against liability if Sherry instead dissipated those funds and the other beneficiaries, would found to be entitled to receive the insurance proceeds. The court also noted that if Prudential had been transparent about how it obtained the account funds it sought to deposit, the court would never have allowed them to be deposited in the registry without the approval of the other parties. Importantly it noted that “Prudential now has possession of Sherry Bailey’s allegedly converted funds and it is potentially liable for conversion.” Thus, the court is allowing Sherry’s conversion claim to proceed.

The court also allowed Sherry’s fraud claim to proceed, based on her allegations that Prudential willfully removed money from her account in violation of state law, or in the alternative committed fraud when it remove money from the account after assuring her that the money in the account would be secure and her money.

The court also denied Prudential’s request for attorneys’ fees in the interpleader under precedent that provides unlike innocent stakeholders who unwittingly come into possession of a disputed asset, an insurance company can plan for interpleader as a regular cost of business.

By freezing Sherry’s account balance and paying it into the court registry without proper notice, Prudential’s self-help to avoid the risk of double liability may have opened itself up to liability for conversion, fraud, and breach of contract. Perhaps Prudential may ultimately be successful in fending off Sherry’s claims, but the trial court at this point indicated there might be merit to those claims.

Perhaps Prudential need not have taken any action in this regard. The court notes that under the Georgia statutes, O.C.G.A. § 33-24-41 provides: “Whenever the proceeds of . . . a life . . . insurance policy . . . become payable . . . and the insurer makes payment of the proceeds . . . the payments shall fully discharge the insurer from all claims under the policy or contract unless, before payment is made, the insurer has received . . . written notice . . . [that another] person claims to be entitled to the payment or some interest in the policy or contract.” Perhaps Prudential received the requisite written notice, or there are other bars to the protection of the statute, but if not, Prudential need not have frozen and effectively seized the account to protect itself from liability to the other beneficiaries. Interestingly, Prudential tried to use this statute as a defense to Sherry’s claims. The court noted, however, that the statute protects Prudential only against claims by another claimant to the policy proceeds – not the claims being made here by Sherry.

There is a kernel of trust in the bromide “possession is nine-tenths of the law.” While it may have seized possession of Sherry’s remaining proceeds, the other one-tenth of the law may end up costing it dearly.

Prudential Ins. Co. of Am. v. Bailey, 2017 U.S. Dist. LEXIS 161097 (USDC for So. Ga., September 29, 2017)

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