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.
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.
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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1 Rule B (1)(a) of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions of the Federal Rules of Civil Procedure states, in relevant part: "If a defendant is not found within the district, when a verified complaint praying for attachment and the affidavit required by Rule B (1)(b) are filed, a verified complaint may contain a prayer for process to attach the defendant's tangible or intangible personal property—up to the amount sued for—in the hands of garnishees named in the process."
2 An EFT is nothing more than a banking instruction to transfer money from one account to another account.