Aaron v. Mahl

• Decision Date: 18 December 2008
• Docket Number: No. 08-2020.,No. 07-4004.,07-4004.,08-2020.
• Citation: 550 F.3d 659
• Parties: Jim AARON, Plaintiff, v. Susan J. MAHL, Defendant-Appellant, v. Merrill Lynch, Pierce, Fenner & Smith, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

550 F.3d 659

Jim AARON, Plaintiff, v. Susan J. MAHL, Defendant-Appellant, v. Merrill Lynch, Pierce, Fenner & Smith, Defendant-Appellee.

No. 07-4004.

No. 08-2020.

United States Court of Appeals, Seventh Circuit.

Argued October 23, 2008.

Decided December 18, 2008.

Ronald D. Foster, Attorney (argued), South Bend, IN, for Plaintiff Jim Aaron.

Patrick D. Murphy, Attorney (argued), Boveri Murphy Rice & Ladue, South Bend, IN, for Defendant-Appellee Merrill Lynch, Pierce, Fenner & Smith.

Michael P. Quinlivan, Attorney (argued), Kouns, Quinlivan & Severson, San Jose, CA, Robert V. Mathison, Jr., Attorney (argued), Mathison & Mathison, Hilton Head Island, SC, for Defendant-Appellant Susan J. Mahl.

Before BAUER, WOOD, and TINDER, Circuit Judges.

TINDER, Circuit Judge.

Susan Mahl and Jim Aaron were live-in lovers in southern California in the late 1990s. But the romance only lasted until 2001 when Aaron left Mahl for another woman. However, for the past seven years or so, Aaron has been arduously pursuing Mahl, from California to Indiana and then South Carolina; but sadly, not because he is having second thoughts about the demise of their relationship — as you will soon learn, he has quite a different motivation. In the meantime, Mahl has been drastically reinventing herself. And for good reason—in early 2000, a California law firm sued Mahl for what was essentially embezzlement from that firm during her tenure as its managing partner. That suit resulted in a judgment for a little more than a million dollars in favor of the firm against Mahl. Not surprisingly, Mahl left the practice of law, left California, changed her last name to Scott (which is how we will refer to her from this point on) and moved eventually to South Carolina where she apparently still resides. At some point in this transformation, Scott opened IRA accounts in LaPorte, Indiana, the proceeds of which are at the heart of the present dispute (and the reason for Merrill Lynch being in this case). And the inspiration for Aaron's continued interest in Scott? According to Aaron, the California law firm assigned its judgment against Scott to him (which may seem odd, but that is not important to this appeal) and he has been attempting—unsuccessfully so far—to collect on that judgment. Up to this point, these disputes have journeyed through state and federal courts in California, Indiana, and South Carolina. Today we determine whether an Indiana district court properly granted Merrill Lynch interpleader as the holder of some of the assets over which Aaron and Scott are engaged in tug of war.

I. Background

Aaron brought these matters to the Indiana court system by seeking to domesticate the California judgment in the circuit court of LaPorte County, Indiana, where some of Scott's assets were located. The LaPorte Circuit Court entered a temporary restraining order against Scott in December 2001, prohibiting her from transferring those assets. Scott promptly violated the court order and moved the assets into accounts with Merrill Lynch.

The LaPorte Circuit Court domesticated Aaron's assigned judgment and held Scott in contempt for moving the funds. It also entered three orders in proceedings supplemental that are pertinent to this appeal. The first order, entered in January 2003, ordered Merrill Lynch not to deliver the assets to Scott or any other person and not to dispose of or transfer the assets. Like the parties, we will refer to this as the "freeze order." Because the Merrill Lynch accounts contained retirement funds, Scott challenged Aaron's right to execute on the funds under Indiana law. The second order, entered in June 2003, determined that Indiana law did not exempt Scott's funds from execution by Aaron; however, it also determined that it could not order the assets moved by Scott in violation of the temporary restraining order "back to Indiana."¹ The parties understandably found the order confusing. The third order, which we will address momentarily, explained the reasoning behind the second order.

Despite the LaPorte Circuit Court's second order that the funds could not be ordered back to Indiana, Aaron sought and obtained an ex parte writ of execution from the clerk of the court, in attempt to have the Merrill Lynch funds turned over to him. Merrill Lynch, still bound by the freeze order, refused to comply. Scott filed a motion to quash the writ of execution, and the LaPorte Circuit Court set a hearing on the issue. Rather than wait for the hearing, Aaron filed a complaint against Scott and Merrill Lynch in the U.S. District Court for the Northern District of Indiana. Noting that Aaron's precise legal theory of recovery was unclear the district court construed Aaron's complaint as requesting that the court enforce the writ of execution and require Merrill Lynch to turn over the funds to which Aaron was entitled. Merrill Lynch filed a counterclaim and cross-claim against Aaron and Scott for interpleader.

In September 2004, the district court stayed the case pursuant to the Colorado River doctrine² while the LaPorte Circuit Court considered Scott's motion to quash the writ of execution. In March 2005, the LaPorte Circuit Court entered its third order granting Scott's motion. The court explained its second order from June 2003 in greater detail because "in retrospect, the Order was not artfully drafted ... and has created continuing confusion." The court clarified that the second order ruled that Indiana law did not provide Scott with an exemption from execution on her retirement accounts. The order was not intended, however, to allow Aaron to execute on the funds because the court lacked the power to order the funds back to Indiana—"the attachment of Defendant Scott's personal property should be accomplished through a court in her state of residence or an appropriate federal court." After this third order had been affirmed by the Indiana Court of Appeals, see Aaron v. Scott, 851 N.E.2d 309 (Ind.Ct.App. 2006), trans. denied, 869 N.E.2d 446 (Ind. 2007), the federal district court lifted its stay in February 2007 to address the parties' cross-motions for summary judgment.

The district court concluded that Merrill Lynch properly refused to comply with the now-void writ of execution and, therefore, Merrill Lynch was not personally liable to Aaron. The court also determined that interpleader was appropriate because Merrill Lynch was a disinterested stakeholder facing conflicting claims between Aaron and Scott. The court granted Merrill Lynch's motion for summary judgment on the interpleader claims, with a note that the order would become effective after Merrill Lynch deposited the funds with the federal court's registry (as required by statutory interpleader). The LaPorte Circuit Court then lifted the freeze order to allow Merrill Lynch to deposit the funds. The district court subsequently granted Merrill Lynch's motion to enter final judgment on its interpleader claim under Fed. R.Civ.P. 54(b). Finally, the district court awarded Merrill Lynch attorneys' fees from the interpleader stake. Scott appealed from the grant of interpleader and the award of attorneys' fees.

II. Interpleader

We begin, as we must, with the district court's subject-matter jurisdiction, which Scott contends was lacking. Autotech Tech. LP v. Integral Research & Dev. Corp., 499 F.3d 737, 742 (7th Cir.2007). Aaron's complaint alleged diversity jurisdiction under 28 U.S.C. § 1332. Aaron is a citizen of Indiana, Scott is a citizen of South Carolina, and Merrill Lynch is a Delaware corporation with its principal place of business in New York. The amount in controversy was alleged to exceed $213,000. Aaron's allegations satisfied § 1332, so the district court clearly had subject-matter jurisdiction. Scott's concerns stem, apparently, from the district court's initial consideration of Merrill Lynch's interpleader claim under Fed. R.Civ.P. 22 and its subsequent use of statutory interpleader, set out in 28 U.S.C. § 1335.

Section 1335 provides the federal court with an independent basis for asserting subject-matter jurisdiction, but Rule 22 does not. Commercial Nat'l Bank of Chi. v. Demos, 18 F.3d 485, 488 (7th Cir.1994). The district court permitted Merrill Lynch to proceed only under Rule 22 interpleader initially, because it, unlike statutory interpleader, does not require the stake to be deposited in the federal court's registry. (As previously mentioned, Merrill Lynch could not deposit the stake due to the LaPorte Circuit Court's freeze order.) Jurisdiction was proper, though, because the district court had diversity jurisdiction over Aaron's claim and supplemental jurisdiction over Merrill Lynch's inter-pleader claims. See id. That the district court later permitted Merrill Lynch to proceed under statutory interpleader—on the condition that the freeze order be removed and the stake deposited—did not deprive the court of subject-matter jurisdiction.³ On appeal, we have jurisdiction because the district court entered final judgment in favor of Merrill Lynch under Fed.R.Civ.P. 54(b). 28 U.S.C. § 1291.

The district court's grant of summary judgment in favor of Merrill Lynch was based purely upon a decision of law, which we review de novo. Officer v. Chase Ins. Life & Annuity Co., 541 F.3d 713, 714 (7th Cir.2008). Interpleader is an equitable procedure used when the stakeholder is in danger of exposure to double liability or the vexation of litigating conflicting claims. Indianapolis Colts v. Mayor and City Council of Baltimore, 741 F.2d 954, 957 (7th Cir.1984). Interpleader is justified only when the stakeholder has a real and reasonable fear of double liability or conflicting claims. Id.; Union Cent. Life Ins. Co. v. Hamilton Steel Prods., Inc., 448 F.2d 501, 504 (7th Cir.1971). A "real and reasonable fear" does not require the party requesting inter-pleader to show that the claimants might eventually prevail. "Of course, the claims of some interpleaded parties will...