City Government Misuses Interpleader Procedure in Dispute with Union

Posted by Michael P. Stone, esq. & Marc J. Berger, esq.

A city government’s recent attempt to misuse the court system to financially cripple the local police union was successfully overcome in a Los Angeles Superior Court case known as City of South Gate v. South Gate Police Officers Association. The police union survived this effort thanks in large part to the financial support of PORAC, which enabled the union to defend itself in court when its usual source of funding was temporarily cut off by vindictive political tactics of city officials.

Last year, a campaign was initiated to recall the majority faction of the South Gate City Council. The campaign, which was ultimately successful in January 2003, received support from the membership of the city’s police union, the South Gate Police Officers’ Association (“the POA”). During the recall campaign, the incumbent City Council majority was seeking ways to discourage the POA from supporting the recall, and was conducting a broad-based investigation of POA activities toward that end.

The manner in which the POA’s operations were funded at that time gave the targeted city officials a tactical opportunity in their struggle against the recall. Under the collective bargaining agreement between the city and the POA, the city had been deducting union dues from the payroll checks of the POA members and delivering the deducted funds to the POA on a monthly basis. Exercising their raw power of possession over the deducted funds that the city seized on an improper pretext developed during its investigation of the POA, the city wrongfully impounds the deducted funds.

Instead of delivering the union dues to the POA, the city deposited the funds with the clerk of the Superior Court and filed a civil complaint against the POA under the doctrine of “Interpleader.” The allegations made in the Interpleader Complaint challenged the POA’s basic right to continue functioning as the recognized bargaining representative for the city’s police officers.

Before the city’s Interpleader Complaint could be brought before the court, the recall election succeeded. Under the governance of the new officials elected in the recall, the city voluntarily dismissed the Interpleader action and paid back the impounded funds with interest. In retrospect, the efforts of the recalled city officials illustrate a misguided attempt to use the legal doctrine of “Interpleader” for an improper purpose.

The former city officials, in their effort to seek political leverage to discourage the POA from supporting the recall, conducted a broad-based investigation of union activities. In the process, they discovered some records in the office of the California Secretary of State that, in their minds, called into question the union’s right to continue in its capacity as the officers’ recognized bargaining representative. Records dating back to the early 1980′s showed a “suspension” of the corporate status of an entity incorporated under the same name as the South Gate POA.

The city then seized on what they perceived to be a “suspension” of the union’s “corporate” status as a pretext to impound the POA’s union dues. They did this without explanation or notice to the POA, in complete disregard of the collective bargaining agreement, and without any hearing, finding or legal proceeding of any kind. For more than a month, the POA leaders were given a runaround and were unable to even find out what had been done with the funds. The POA soon began to run short of operating funds.

It only became clear what had happened to the union dues when the POA was served with a Complaint in Interpleader. The POA, short of cash, was forced to file a Demurrer to the Interpleader Complaint, to establish its right to exist and receive the dues the members paid through their payroll deductions. The financial support of PORAC helped the POA bridge this cash flow gap to fund the defense of the Interpleader action and ultimately to vindicate its legal position.

The city’s action demonstrates an abuse of the legal proceeding known as Interpleader. In its proper use, a Complaint in Interpleader is brought by a party in possession of property that is subject to competing claims of ownership and needs judicial supervision to be able to deliver the property to the rightful owner without facing liability to the competing claimant. The party in possession of the disputed property is known as the “stakeholder.” Probably the most typical stakeholder for an Interpleader action would be a life insurance company that has issued an insurance policy covering an accidental death, where the heirs or beneficiaries are in dispute over their proper shares of the insurance proceeds.

The Interpleader doctrine enables the insurance company to “deposit” the policy proceeds with the clerk of the court, and file a complaint in which the competing claimants to the policy proceeds are named as defendants. In filing a Complaint in Interpleader, the stakeholder must renounce any ownership interest in the property. The complaint asks the court to require the competing claimants to litigate and resolve their claims against each other.

A proper Interpleader Complaint seeks a final adjudication that determines the respective claimants’ rights to receive the property and directs the stakeholder to deliver the property in accordance with the court’s determination of the entitlement of the respective claimants. Delivering the property in accordance with the court’s directions then has the effect of releasing the stakeholder from liability to any of the claimants arising from its delivery of the property to the particular claimants found entitled to it.

In this case, to state a claim in Interpleader, the city had to allege first that it had come into possession of money that it had deducted from the members’ payroll checks. To fit the Interpleader doctrine, the complaint alleged that the city had learned that the POA’s “corporate status” was “suspended,” and therefore the city was now in doubt as to whether the POA still had a right to receive members’ union dues.

As mentioned above, a stakeholder in an Interpleader action must renounce its own right of ownership of the disputed property, and allege a dispute between rival claimants to the property, other than the stakeholder itself. This means that the city had to allege that there was a dispute to the funds between the POA and some third party, other than the city itself.

To meet that requirement, the city alleged that the members themselves, from whose payroll checks the funds had been deducted, were in dispute with the POA over the POA’s right to receive the funds. In other words, the city alleged that if the POA had lost the right to receive union dues because of the “suspension” of its “corporate status,” then the individual members were entitled to have the funds returned to them.

No POA member actually joined in the city’s argument that the POA had lost its status as a bargaining representative. But a few members asserted a right to have the funds returned to them if the city would not deliver them to the POA. On that basis, the Complaint in Interpleader named as defendants the POA on one hand, and each individual member of the POA on the other. Of course, there was no real dispute: the members-only wanted the money back if the city was correct about the POA having lost its union status, and thus could refuse to deliver the funds to the POA.

It is not only improper but impossible, to use the doctrine of Interpleader under the facts of this case. In proper use of the doctrine, the “stakeholder,” by filing the action, forces the competing claimants to litigate their claims against one another. Having renounced any ownership of the property, the stakeholder itself take a position on the merits of the competing claims.

The action rests on the assumption that the stakeholder is genuinely uncertain as to which of the claimants is entitled to the property, and thus faces a risk of liability to at least one rival claimant if it delivers the property to others. If the claimants are not truly adverse and refuse to disagree about the right to the property, there is nothing to litigate. For example, if this action had been permitted to proceed beyond the pleading stage, and the court had ordered the members to litigate their claims against the POA, the members could have stipulated with the POA that the union dues are to be delivered to the POA, and the city could not have done anything about it. In other words, if the city officials wanted the POA’s right to receive the funds to be examined in a court of law, they could not force the POA members to carry this torch for them. And if the city wanted to argue on its own behalf that the POA’s right to the dues was questionable, it could not use the Interpleader doctrine for that purpose.

In truth, what the city officials had discovered had absolutely no tendency whatsoever to call the POA’s legitimacy as a union into question. The city’s investigation had discovered records in the Secretary of State’s office showing that a corporate license was suspended in the early 1980s for a corporate entity, which the POA had started to create, but which had never been activated. The POA had at that time taken some initial steps toward setting up a tax-exempt corporation for the purpose of engaging in some charitable activities outside its official function as a labor organization. The idea of setting up that corporation had been abandoned, and because the corporate paperwork had never been completed, the secretary of state eventually carried that entity in its records as being “suspended.” But the corporate entity was not the POA. As a labor union, the POA did not have corporate status and did not need corporate status. After the recall, the newly elected city officials understood this basic reality. The new officials properly dismissed the Interpleader Complaint and delivered the impounded dues to the POA. But as of this writing, the POA has not been able to reinstate the payroll deduction procedure for collecting union dues and has been forced to rely on direct payment by individual members, a far less efficient method for funding its operations.

The City’s actions in impounding the POA’s dues had no justification. The POA’s entire existence was temporarily threatened, and it is fortunate that PORAC was there to fill the financial gap. This experience demonstrates reckless conduct of city officials in misusing the legal process to attain narrow political goals. The recalled South Gate city officials apparently face problems arising from their terms in office more serious than the heavy-handed political vindictiveness demonstrated by this case. We also understand they left the city treasury in a mess, and that their replacements face an uphill financial battle in restoring the city to a satisfactory level of public service and creditworthiness. There is probably no more profound social lesson to be derived from this experience than the principle that errant and irresponsible public servants should be exposed before they can inflict this type of damage on the public.

About the authors

Michael P. Stone, Esq. and Marc J. Berger, Esq. are members of Michael P. Stone, PC, LDF panel attorneys of Pasadena. For further information about this case, call 626-683-5600 or fax at 626-683-5656.