Lawhorne v. Employers Insurance

RODOWSKY, Judge. Presented here is an interpleader action brought by an automobile liability insurer faced with multiple claims against an insured that exceeded the limits of the insured’s coverage. The issue is whether the claimants are entitled to interest on $849,680.16 for the period of more than two years that elapsed from the filing of the interpleader action to the payment of that sum into court, a delay principally caused by the bankruptcy of the insured. The circuit court would not order prejudgment interest, and the Court of Special Appeals affirmed in an unreported opinion by a divided panel.

We granted the claimants’ petition for certiorari in order to consider this issue. The insurer and original plaintiff in interpleader is the respondent, Employers Insurance Company of Wausau (Em ¹¹⁴ ployers). The automobile accident underlying the interpleader action occurred on November 27, 1984. For a period encompassing that date Employers had issued a business automobile policy to Beltran Corporation (Beltran) of Acton, Massachusetts and to its subsidiaries, including Acton Food-services Corporation (Acton), as additional named insureds.

The accident occurred in Cecil County, Maryland when a tractor trailer truck, operated on behalf of Acton by its employee, Louis Wallace Powell (Powell), pulled into the roadway of U.S. Route 301 at its then foggy intersection with Route 299. A pickup truck, towing a horse trailer with two horses and proceeding on U.S. Route 301, crashed into the tractor trailer. Petitioner Karen M. Lawhorne, then wife of petitioner Darrell F. Lawhorne, was a passenger in the pickup truck. Mrs. Lawhorne suffered totally disabling injuries as a result of the accident. 1 Two other persons in the pickup truck suffered bodily injuries in the accident, the operator, Kelley Ann Corrigan, and her mother, Mary Anna Corrigan.

The Lawhornes sued Acton and Powell in December 1985 in the Circuit Court for Anne Arundel County. Employers undertook defense. Unknown to the Lawhornes and to Employers, Acton had filed a petition for bankruptcy in Massachusetts in June 1985. The record is unclear as to whether Acton was the subject of one, or more than one, bankruptcy proceeding and, if more than one, precisely when any earlier proceeding terminated and any later proceeding commenced.

It is clear, however, that on or about April 17, 1986, Beltran and various of its subsidiaries filed petitions under the Bankruptcy Code which were consolidated in the District of Massachusetts and that ¹¹⁵ the consolidated proceedings included Acton. There is also an evidentiary conflict over the earliest date as of which Employers was on notice that Acton was in bankruptcy. Imprecision and conflicts on these aspects of the matter before us are immaterial, in view of our ground of decision, explained below. Employers filed the subject interpleader in the Circuit Court for Anne Arundel County on April 27, 1987.

It named as defendants Employers’ insureds, the bodily injury claimants, and property damage claimants, including a subrogated insurer. The complaint alleged that Employers “will pay into the registry of this Court the sum of $1,000,000.00, less credit for payments heretofore made.... ” The relief requested by the complaint included a court order “directing and authorizing [Employers] to deposit with the Clerk of this Court the sum of $1,000,000, less credit for amounts previously paid ... and, upon such payment, [discharging Employers] from any and all further obligations under the terms of its policy of insurance.” 2 Employers requested that the defendants be ordered to “interplead and settle among themselves their rights and claims” to the amount payable under the liability policy, and that the defendants be enjoined from instituting or further prosecuting actions arising out of the accident. Answering the complaint for interpleader in June 1987, the Lawhornes raised no objection to the use of interpleader and requested that the “appropriate sum” be paid into court and invested in an interest-bearing account(s). Employers did not deposit the balance of the liability coverage with the court, and no party at that time sought a court order requiring the deposit. ¹¹⁶ Almost two years later, on May 30, 1989, the Lawhornes moved for an order directing Employers to deposit the balance of the policy limits in court.

By an order of June 29, 1989, the circuit court directed Employers to deposit that balance, namely, $849,680.16. During the pendency of the interpleader Employers had settled the property damage claims and had advanced $81,324.31 for the care of Mrs. Lawhorne. The order directing deposit of the balance further directed the court clerk to make a distribution of that balance to the bodily injury claimants in specified amounts upon which they obviously had agreed. Employers paid the balance into court on the day immediately following passage of the order to deposit.

The Lawhornes and their counsel received $712,-180.16. During the period between the filing of the interpleader and the deposit of the funds, the parties to the interpleader, and others, were occupied in efforts to settle the tort claims. These settlement negotiations involved the trustee in bankruptcy of Acton because, as explained below, the amount available under a policy of liability insurance issued to a debtor against whom tort claims are asserted is an asset of the debtor’s bankruptcy estate. Further, inasmuch as Employers was willing to pay policy limits, Employers advised the Lawhornes to negotiate with Acton’s excess liability carrier, Mission Insurance Company (Mission), a California-based insurer.

In late 1986 or early 1987 Mission was placed in liquidation in California. Consequently, the settlement negotiations expanded beyond the parties to the interpleader action and Acton’s trustee in bankruptcy to include the liquidator of Mission and the Massachusetts Insurance Insolvency Fund (MIIF). The lengthy negotiations led to a structured settlement under which Employers’ contribution was to be an annuity for Mrs. Lawhorne purchased from an affiliate of Employers. When the settlement agreement was circulated for signature, however, the Acton trustee concluded, after analyzing claims and assets of the bankruptcy estate, that Acton could not fund its portion of the settlement.

In addition, MIIF advised that ¹¹⁷ it did not provide the level of coverage that had been anticipated. The long awaited settlement fell through. The Lawhornes then concentrated their efforts on lifting the bankruptcy stay. It was lifted by the Bankruptcy Court on May 15, 1989.

There followed in this interpleader action the Lawhornes’ motion for an order directing the deposit of funds, described above, and a counterclaim by the Lawhornes seeking interest on the net of the liability policy limits. That counterclaim was decided favorably to Employers on its motion for summary judgment. That interest issue, however, was not resolved until May 1994, for reasons that are not relevant to the instant matter. Petitioners contend that prejudgment interest is awardable in this case under: (1) the law governing interpleader actions; (2) Maryland Code (1974, 1995 Repl.Vol.), § 11-301 of the Courts and Judicial Proceedings Article (CJ); and (3) the law governing constructive trusts.

I Petitioners give the following explanation of their first theory for prejudgment interest: “The requested award does not derive from the mere act of filing the interpleader action. Nor do the Lawhornes seek an award of interest based on an obligation to pay interest, such as that created by a note or a loan. Rather it is simply bedrock logic that leads to the conclusion that the stakeholder should pay interest, where it would be inequitable not to make it do so.” Appellants’ Brief at 14. In support of this position petitioners cite decisions from federal courts.

Analysis of petitioners’ argument begins with some background on interpleader in Maryland and in federal practice. Chief Judge Murphy, writing for this Court in Farmers & Mechanics Nat’l Bank v. Walser, 316 Md. 366 , 558 A.2d 1208 (1989), reviewed the evolution of modern interpleader. It “is derived from the chancery practices of the eighteenth and nineteenth centuries....” Id. at 372 , 558 A.2d at 1211 . Dur ¹¹⁸ ing the nineteenth century, due to the work by Professor Pomeroy, courts rather rigidly considered that there were four requirements for a strict bill of interpleader.

Id. at 373 , 558 A.2d at 1211 . In addition to a res claimed by two or more parties that was held by a stakeholder who had no interest in the res nor any independent liability to the claimants, “ ‘[a]ll [the claimants’] adverse titles or claims must be dependent, or be derived from [a common] source.” Id. (quoting 4 J. Pomeroy, Equity Jurisprudence § 1322, at 906 (5th ed.1941)). In Farmers & Mechanics Nat’l Bank, we further explained how “[t]he viability of the classic interpleader requirements was further eroded” by Fed.R.Civ.P. 22 governing interpleaders. 316 Md. at 375 , 558 A.2d at 1212 .

That federal rule in part provides that “[i]t is not ground for objection to the joinder that the claims of the several claimants or the titles on which their claims depend do not have a common origin or are not identical but are adverse to and independent of one another.....” Fed.R.Civ.P. 22. We then pointed out that, in 1961 when this Court adopted former Subtitle BU, “Inter-pleader,” of the Maryland Rules of Procedure dealing with Special Proceedings, the “rules established a procedure for. interpleader which was closely analogous to the federal practice, drawing upon both the federal rule’s language and the case law which arose from it.” 316 Md. at 379-80 , 558 A.2d at 1214 . Interpleader in Maryland courts is now governed by Maryland Rule 2-221. Rule 2-221(a) in part provides that “[a]n action for inter-pleader or in the nature of interpleader may be brought against two or more adverse claimants who claim or may claim to be entitled to property.” An interpleader complaint “shall specify the nature and value of the property and may be accompanied by payment or tender into court of the property.” Id. “After the defendants have had an opportunity to answer the complaint and oppose the request for interpleader,” the court is to schedule a hearing.

Rule 2-221(b). . Following the hearing the court is authorized to enter an order with a variety of provisions, among which is one directing ¹¹⁹ “the original plaintiff (the party bringing the interpleader action) to deposit the property or the value of the property into court to abide the judgment of the court or to file a bond with such surety as the court deems proper, conditioned upon compliance by the plaintiff with the future order or judgment of the court with respect to the property[.]” Rule 2-221(b)(3). There is authority from nineteenth century chancery practice under which the plaintiff in interpleader “must bring the money or thing claimed into Court, so that he cannot be benefitted by the delay of payment, which may result from the filing of his bill.” Atkinson v. Manks & Holroyd, 1 Cow. 691, 704 (N.Y.1823), an appeal from the Court of Chancery. Maryland Rule 2-221 changes that practice.

Employers was not required to deposit the net available insurance until ordered to do so by the court. Neither Md. Rule 2-221 nor Fed.R.Civ.P. 22 requires that the res be deposited upon institution of a complaint for interpleader. On the other hand, one of the conditions for the conferral of jurisdiction on United States District Courts under the Federal Interpleader Act is that the plaintiff have deposited the money or property in the registry of the court, or have given bond. 28 U.S.C. § 1335 (a)(2). 3 Commentators on federal practice have pointed out that, as a result of this difference “it may be to the advantage of the stakeholder to bring suit under Rule 22(1).... ” 7 C. Wright, A. Miller & M. Kane, Federal Practice and Procedure § 1703, at 499 (2d ¹²⁰ ed.1986). Because of this difference, “it is possible that the stakeholder could have the use of all or part of the disputed fund or property for a longer period of time if he proceeds under Rule 22(1) rather than the statute.” Id. 4 By way of further background, we note that the type of interpleader presented here differs from strict nineteenth century interpleader in that the adverse claims do not rest on a common title.

The classical model may be illustrated by the life insurer which initiates an interpleader over the death benefits payable on the death of the insured, naming as defendants the originally designated beneficiary and one designated in a change of beneficiary that the original beneficiary challenges. In the illustration, the claims are mutually exclusive, so that if the insurer pays the wrong claimant, it may be required to pay the same obligation twice. Justification for the type of interpleader utilized by Employers in the instant matter is explained by Hazard & Moskovitz, An Historical and Critical Analysis of Interpleader, 52 Cal. L.Rev. 706 (1964).

The authors state: “A more complicated but modernly more important type of case is where a liability insurance carrier is confronted with claims against its insured that exceed the limits of the policy. In this type of case, the middleman does not face the risk of paying twice, for he is acquitted upon payment. There is a risk, however, that the members of the group may be treated disproportionately, for if the first to come forward is fully served, there may be nothing left for the tail-enders. It is unfair that a group similarly situated be treated dissimilarly, and especially that preference among them be shown to the hoggish.

There is still more at stake in the typical case of the liability policy, for the claims in such a situation, being personal injury claims, are indeterminate in amount in advance of settlement or adjudication. Because settling one share cuts down the pie available for ¹²¹ another, the settlement process easily breaks down into a circular interdependency. Interpleader invites supervision of settlement, and enhances the possibility that trials may be avoided to fix the shares.” Id. at 759 (footnotes omitted). This type of interpleader has been described as involving “pie-slicing” adversity.

Note, Can Statutory Interpleader Be Used As A Remedy By the Tortfeasor In Mass Tort Litigation?, 90 Dick. L.Rev. 439, 445 (1985). 5 The Court of Special Appeals has recognized the use of pie-slicing interpleader by an officers and directors liability insurer that was faced with a number of suits against its insureds following the collapse of a savings and loan association. See Faulkner v. American Casualty Co., 85 Md.App. 595, 619-25 , 584 A.2d 734, 746-48 , cert. denied, 323 Md. 1 , 590 A.2d 158 (1991). Inasmuch as pie-slicing interpleader is recognized, not to protect the insurer from double liability on the same claim, but to attempt to avoid a multiplicity of suits, the question arises whether pie-slicing interpleader may be invoked by a liability insurer in a state that does not recognize direct actions by tort claimants against the tortfeasor’s liability insurer.

That question was answered for the federal courts by State Farm Fire & Casualty Co. v. Tashire, 386 U.S. 523 , 87 S.Ct. 1199 , 18 L.Ed.2d 270 (1967). State Farm had coverage of $20,000 per occurrence on a pickup truck that had collided in California with a Greyhound bus, resulting in the deaths of two persons and bodily injuries to thirty-five persons in addition to the operator of the truck. The insurer filed in ¹²² Oregon under the federal interpleader statute. The United States Court of Appeals vacated an injunction issued by the trial court because Oregon did not permit direct actions against insurance companies until judgments were obtained against the insureds.

Id. at 528 , 87 S.Ct. at 1202 . The Supreme Court reversed, holding that, under the language of the statute in effect since 1948, interpleader would lie “where adverse claimants ‘may claim’ benefits as well as where they ‘are claiming’ them.” Id. at 532 , 87 S.Ct. at 1204 . Maryland, like Oregon, is not a direct action state. Washington Metropolitan Area Transit Auth. v. Queen, 324 Md. 326, 331 , 597 A.2d 423, 425 (1991).

Indeed, since Chapter 204 of the Acts of 1924, the Maryland Insurance Code has provided that “if an execution upon any final judgment against the assured is returned unsatisfied ... in an action brought by the injured ... then an action may be maintained by the injured ... against the insurer under the terms of the policy for the amount of any judgment recovered in such action, not exceeding the amount of the policy....” Md.Code (1957, 1994 Repl.Vol.), Art. 48A, § 481. The statute has been interpreted to permit a direct action “[o]nce there is a verdict or judgment in the tort action.” Queen, 324 Md. at 332 , 597 A.2d at 426 ; see Allstate Ins. Co. v. Atwood, 319 Md. 247, 257 , 572 A.2d 154, 159 (1990). See also Bass v. Standard Accident Ins.

Co., 70 F.2d 86, 87-88 (4th Cir.1934). Further, Md. Rule 2-221, like 28 U.S.C. § 1335 (but unlike the text of Fed.R.Civ.P. 22(1)), permits interpleader against “adverse claimants who claim or may claim to be entitled to property.” This inclusion of the