NYLife Distributors, Inc. v. Adherence Group, Inc., 94-5725

CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)
Citation72 F.3d 371
Docket NumberNo. 94-5725,94-5725
PartiesNYLife DISTRIBUTORS, INC. v. The ADHERENCE GROUP, INC.; Joseph Gerasolo; Patrick Bleach; Dennis Schnell; Donald Thomas; Richard Hessen; James Lyons; Elizabeth Gerasolo; Joseph Gerasolo, Elizabeth Gerasolo, and Patrick Bleach, Appellants.
Decision Date02 February 1996

William J. Salmond, Alan J. Karcher (argued), Karcher, Salmond, Ronan & Rainone, Edison, NJ, for Appellee.

Christopher J. Carey, Tompkins, McGuire & Wachenfeld, Newark, NJ, Raymond A. Connell (argued), Connell, Losquadro & Zerbo, New York City, for Appellants.

Before: MANSMANN, SCIRICA and ROTH, Circuit Judges.


MANSMANN, Circuit Judge.

In this case of first impression, we consider whether the broad discretionary standard set forth in Brillhart v. Excess Ins. Co. of America, 316 U.S. 491, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942), or the more narrow "exceptional circumstances" test enunciated in Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976), applies to a district court's decision to dismiss an interpleader action commenced under 28 U.S.C. Sec. 1335 (1993), in favor of parallel state court proceedings. Guided by the Supreme Court's recent decision in Wilton v. Seven Falls Co., --- U.S. ----, 115 S.Ct. 2137, 132 L.Ed.2d 214 (1995), where the Court determined that the Brillhart standard applies in declaratory judgment actions, we hold that a motion to dismiss a federal statutory interpleader action during the pendency of a parallel state court proceeding is addressed to the sound discretion of the district court.

Following the commencement of this section 1335 interpleader action, one of the defendant-claimants commenced a state court action. After the district court determined that the requirements of the statute had been met, but before the dispute to the stake had been adjudicated, this defendant filed a motion, essentially requesting that the district court defer to the state court action. Conflating the two-step nature of an interpleader action, the district court was of the belief that all federal claims had been eliminated and terminated the case. Instead, the court should have exercised its discretion to decide in which forum, federal or state, the unresolved dispute to the stake could be better determined. We will, therefore, vacate the district court's termination order and remand the case for the court to make this decision.


Since its commencement, this case has taken a number of procedural twists and turns. We begin by reviewing those aspects of its history that are relevant to the issues before us.

On February 15, 1994, NYLife Distributors, Inc., the averred administrator of the "Mainstay Mutual Fund", filed a complaint in interpleader in the United States District Court for the District of New Jersey under 28 U.S.C. Sec. 1335 (1993), 1 against The Adherence Group, Inc. ("TAG") 2 and several TAG employees, including Joseph Gerasolo, the company's former President 3 and Patrick Bleach, its former Executive Vice President. NYLife is a New York corporation; TAG is organized under the laws of Delaware and has its principal place of business in New Jersey; Gerasolo is a citizen of New York; and Bleach is a citizen of New Jersey.

In its complaint, NYLife asserted that it was subject to conflicting demands from the defendants for monies it was holding in Mainstay Mutual Fund accounts opened for TAG employees in connection with TAG's executive compensation plan. 4 Claiming no interest in the money, NYLife further alleged that it intended to deposit the money with the court and requested that the defendants be required to interplead and settle among themselves their respective rights to the fund. On February 16, 1994, the individual defendants' total balance in the Mainstay Mutual Fund, which amounted to $215,489.50, was deposited in the court's Registry.

On March 7, 1994, Gerasolo and Bleach filed an answer to the interpleader complaint averring, inter alia, that TAG's claims were barred by certain settlement agreements, and brought a counterclaim against NYLife, alleging that NYLife's liquidation of their respective Mainstay Mutual Fund accounts was a breach of contractual and fiduciary duties. Additionally, Gerasolo and Bleach filed a cross-motion requesting, inter alia, that NYLife's interpleader action be dismissed, except for the purpose of determining the damages they had allegedly sustained as a result of NYLife's actions.

On March 17, 1994, TAG filed an answer to NYLife's complaint, admitting that it and the individual defendants had subjected NYLife to conflicting claims for Mainstay Mutual Fund monies.

Shortly thereafter, on March 23, 1994, TAG and its sole shareholder, TAG/SCIB Services A.G., commenced an action in the Superior Court of New Jersey, Middlesex County, against Gerasolo and Bleach, alleging that they had wrongfully appropriated TAG assets, including the monies deposited in the Mainstay Mutual Fund, through fraud, embezzlement and conversion, and against the Moore Stephens Accounting Firm, TAG's auditor, for failure to uncover the fraud. The complaint was later amended on July 20, 1994, to join the law firm of Connell, Losquadro & Zerbo and unknown "John Doe" fictional defendants for allegedly conspiring with Gerasolo and Bleach to defraud TAG.

On May 19, 1994, the district court issued an order granting NYLife's motion for a judgment in interpleader in the amount of $215,489.50; dismissing NYLife from the case and from any future liability for the payment of the money into the court Registry; ordering that the defendants be enjoined from instituting any other action against NYLife or its affiliates based on NYLife's commencement of the interpleader action; awarding NYLife its attorneys' fees and costs; and dismissing the cross-motion for dismissal and counterclaim against NYLife that Gerasolo and Bleach had filed.

On June 1, 1994, Gerasolo and Bleach filed an amended answer to the interpleader complaint, adding cross-claims against TAG under New Jersey law for breach of contract, violations of the New Jersey Conscientious Employee Protection Act, 34 N.J.Stat.Ann Sec. 19-1 et seq. (1988), and malicious abuse of process.

Thereafter, the parties engaged in discovery.

On July 7, 1995, TAG filed a motion asking the district court to dismiss the cross-claims Gerasolo and Bleach had asserted against it and to transfer the interpleaded fund to the Superior Court of New Jersey; in the alternative, TAG asked the court to retain the fund while the parties litigated their entitlement to the money in the action TAG had commenced in the New Jersey state court.

By order dated October 26, 1994, the district court granted TAG's motion. Of the view that its May 19, 1994 order, which granted NYLife's motion for judgment in interpleader, denied Gerasolo's and Bleach's cross-motion for dismissal of the interpleader action and dismissed the counterclaim against NYLife, had "eliminat[ed]" all federal claims in this case[ ]", the court concluded that TAG was requesting that the court invoke its discretion under 28 U.S.C. Sec. 1367(c) (1993) and decline to exercise supplemental jurisdiction over Gerasolo's and Bleach's state law cross-claims. Citing 28 U.S.C. Sec. 1367(c)(3), which provides that a district court "may decline to exercise supplemental jurisdiction over a claim ... if the district court has dismissed all claims over which it has original jurisdiction[ ]", the court decided not to exercise its supplemental jurisdiction over the cross-claims based on its belief that no federal claims remained in the case. Accordingly, in its October 26, 1994 order, the court dismissed the cross-claims, retained jurisdiction over the interpleaded fund pending the outcome of the state court litigation (at which time the party who prevails in the state court may apply to the district court for a distribution of the fund) and administratively terminated the case.

Gerasolo and Bleach bring this appeal from the district court's October 26, 1994 order, contending that due to the court's misinterpretation of 28 U.S.C. Sec. 1335, it in effect improperly "abstained" from this statutory interpleader action. 5


The federal interpleader statute, 28 U.S.C. Sec. 1335 (1993), is a remedial device which enables a person holding property or money to compel two or more persons asserting mutually exclusive rights to the fund to join and litigate their respective claims in one action. 3A J. Moore & J. Lucas, Moore's Federal Practice Sec. 22.02 (2d ed. 1994). The benefits of the device to both the stakeholder and the claimants are substantial. It relieves the stakeholder from determining at his peril the merits of competing claims and shields him from the prospect of multiple liability; it gives the claimant who ultimately prevails ready access to the disputed fund. Id.

Section 1335 grants original jurisdiction to the district courts over interpleader actions and sets forth certain requirements that must be met before the action may be maintained. For example, although the citizenship of the stakeholder is irrelevant for jurisdictional purposes, the statute calls for diversity of citizenship between two or more of the adverse claimants, requires that the amount in controversy, which is measured by the value of the stake, be $500, and compels the stakeholder to deposit the money or property at issue in the court's Registry or, in the alternative, to give a bond payable to the clerk of courts in the appropriate amount. 6 28 U.S.C. Sec. 1335(a). Additionally, 28 U.S.C. Sec. 2361 (1994) provides for nationwide service on all claimants in statutory interpleader actions and allows a district court in a section 1335 interpleader case to enjoin any state or federal proceedings affecting the stake; 28 U.S.C. Sec. 1397 (1993)...

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