Significant Narrowing of Rule B Attachments
November 2009
Recently, the U.S. Second Circuit Court of
Appeals decided the most significant case in a number of years related to Rule
B attachments. Shipping Corp. of India, Ltd. v. Jaldhi
Overseas PTE Ltd., represents a significant narrowing of Rule B attachments
concerning electronic fund transfers (EFTs). Also of importance is the fact
that this decision is now precedent in one of the world's leading financial
centers, New York City.
by Michael
A. Orlando
Meyer Orlando LLC
In general, Rule B1 of the Admiralty Rules allows
a maritime claimant to attach a defendant's tangible or intangible personal
property as security for a maritime claim. Beginning in earnest with the
Winter Storm Shipping, Ltd. v. TPI, 310 F.3d
263, (2d Cir. 2002), decision, a cottage industry sprung up overnight in New
York relating to maritime attachments of EFTs.2
When parties to a maritime contract designate payment in U.S. dollars, there
is a strong chance that the wire transfer of such funds will pass through one
of the large banks in New York City. Since Rule B can only be used when the
defendant has no presence in the jurisdiction, these court battles are usually
between foreign parties. What allowed these battles between foreign entities
to proceed in a U.S. court was Winter Storm's
holding that the mere momentary passage of an ETF through a New York bank was
sufficient to vest jurisdiction in the U.S. District Court for the Southern
District of New York—without any other connection to the United States to the
dispute or the parties.
What has occurred over the last several years is a flood of Rule B cases
inundating the federal courts in New York. Under Rule B, a plaintiff maritime
claimant could file a verified complaint on a maritime claim against a foreign
entity, then seek writs of attachment directed to every major bank in New York
City in an effort to catch the momentary electronic transfer that might occur
at any point in time when a U.S. dollar denominated transfer might occur. These
attachments have been swamping the banks which then had to respond to such attachments.
The courts in New York, as well as other places around the country, began
to question the holding of Winter Storm because
of its unforeseen consequences. As the Jaldhi Overseas
case notes, merely from October 1, 2008, to January 31, 2009, maritime plaintiffs
filed 962 lawsuits seeking to attach a total of $1.35 billion and that such
lawsuits constituted 33 percent of all lawsuits filed in the Southern District
of New York. The resulting maritime writs of attachment were introducing significant
uncertainty into the international funds transfer process. It was also undermining
the efficiency of New York's international funds transfer business. The court
noted that if this were allowed to go on unchecked, parties around the world
might be discouraged from entering dollar-denominated transactions and thus
damage New York's standing as an international financial center.
The factual context of the Jaldhi case is
not much different than many other maritime claims. The dispute itself was over
a charter agreement, and both the claims and counterclaims were to be arbitrated
in London. The Rule B attachment proceeding filed in New York was to obtain
security for the claim that was to be arbitrated in London. The claimant was
allowed to attach EFTs in which Jaldhi was both the originator as well as those
on which Jaldhi was the beneficiary. The U.S. District Court later vacated the
attachment order insofar as it applied to EFTs of which Jaldhi was the beneficiary
on the basis that EFTs in route to a defendant were not attachable under Rule
B. The principal issue on appeal relevant to this article was whether EFTs are
attachable property in general.
The court of appeals began the analysis by noting that a plain reading of
the rule requires that, for an EFT to be attachable, it must meet two requirements:
- It must be tangible or intangible property; and
- It must be the defendant's property.
The earlier Winter Storm decision had so held,
but in this case, the Second Circuit Court of Appeals decided that
Winter Storm was erroneously decided and should
no longer be binding precedent in the Second Circuit. The court decided that
Winter Storm should be reversed for two reasons.
The first and most important reason was that Winter
Storm had erroneously relied on the U.S. v. Daccarett
case to conclude that EFTs were attachable property. The second reason for reversing
Winter Storm was that the effects of the decision
on the federal courts and the international banks in New York were too significant
to let the error go unchecked.
For its analysis, the Second Circuit Court of Appeals noted that the question
of the ownership of the asset was critical under a Rule B attachment. The determination
that the res at issue is the property of
the defendant at the moment the res is attached
will determine the validity of a Rule B attachment. It is in fact the existence
of the res in the particular jurisdiction
which provides the court its basis to obtain jurisdiction over the defendant.
If the res is not the property of the defendant,
then the court lacks jurisdiction.
This court decided that, because the prior Daccarett
decision on which Winter Storm was based was
a forfeiture matter, it provided no persuasive guidance on the validity of a
Rule B attachment. In short, it was easy to justify seizures of EFTs related
to criminal activities under the pertinent penal code section. However,
Daccarett did not decide the critical issue of
who had a property interest in an EFT; the EFT only needed to be traceable to
criminal activity in the Daccarett case. Without
that Daccarett decision as support, there remained
no compelling reason to conclude as a matter of federal law that an EFT is defendant's
personal property.
The court then looked to New York state law as to whether it would permit
an attachment of EFTs in the possession of an intermediary bank. The court concluded
from its analysis of New York state law that such law established EFTs are neither
the property of the originator nor the beneficiary while briefly in the possession
of an intermediary bank. That being so, Rule B does not allow attachment of
such EFTs.
Conclusion
This decision should bring to a screeching halt the cottage industry that
had sprung up after the Winter Storm decision.
Now, Rule B will go back to being used to attach actual bank accounts if the
same can be located, rather than, as the Jaldhi Overseas
court describes, "ephemeral EFTs." This case has finally brought back some much
needed common sense into Rule B attachments.
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