Winter Storm Passes: Second Circuit Court Of Appeals Overturns Recent Decision Permitting Attachment Of Electronic Fund Transfers By Maritime Plaintiffs

Tuesday, December 1, 2009 - 01:00

United States' federal courts are vested with exclusive jurisdiction over civil maritime or admiralty disputes, i.e. , disputes relating to matters occurring on vessels or as a result of the employment of a vessel. In analyzing whether maritime jurisdiction is present in any given contract-related matter, courts focus on "whether the principal objective of a contract is maritime commerce."1In furtherance of the federal courts' exclusive maritime jurisdiction, Rule B of the Federal Rules of Civil Procedure Supplemental Rules ("Rule B") authorizes courts to issue orders attaching the tangible or intangible personal property of a named defendant. Attachment orders permit the court to exercise jurisdiction over a defendant's personal property and provide the plaintiff with some indirect control over assets against which a later-obtained judgment or arbitration award may be satisfied.

Rule B attachments are obtained without notice and, significantly, the property attached does not have to relate to the parties' dispute. Rule B attachments have been utilized by litigants in disputes wholly unrelated to the United States - essentially as proceedings in aid of foreign litigation or arbitration. As one federal district court recently noted, Rule B attachment "frequently operates on parties with little or no connection to the United States . . ."2Indeed, the fact that a dispute did not arise in the United States and will not be fully adjudicated in the United States does not prohibit a litigant from obtaining a Rule B attachment from a United States district court.

To obtain a Rule B attachment a plaintiff is required to show that: 1) he has a valid admiralty claim against the defendant; 2) the defendant cannot be found within the geographic area encompassed by the federal district court where the Rule B attachment application has been filed; 3) the defendant's personal property is located within the geographic area encompassed by that same federal district court; and 4) there is no legal bar to the issuance of an order of attachment.3When a plaintiff makes the necessary showing by verified complaint and affidavit, a Rule B attachment order will issue ex parte giving the plaintiff the right to attach the defendant's tangible and intangible personal property located within the district and within the possession of garnishees identified in the Rule B attachment application.

Until very recently, the terms tangible and intangible personal property were construed by courts within the Second Circuit to include electronic fund transfers ("EFT"). EFTs are utilized to transmit funds electronically among banks by debiting the account of the initiating party and crediting the account of the beneficiary. When banks do not have the requisite relationship to initiate a direct EFT they utilize an intermediary bank:

If the originating bank and the destination bank belong to the same wire transfer system, then they are the only sending and receiving banks, and the transfer can be completed in one transaction. However, if the originating bank and the destination bank are not members of the same wire transfer system, which is often the case with international transfers, it is necessary to transfer the funds by a series of transactions through one or more intermediary banks.

U.S. v. Daccarett , 6 F.3d 37, 43-44 (2d Cir. 1993).

International EFTs in dollar-denominated transactions often utilize banks located in New York City as the intermediary bank. Because Rule B attachments are issued ex parte and, because a party initiating an EFT would likely be unaware or not focus on the fact that the EFT would be routed through an intermediary bank in New York, or anywhere else for that matter, there would be no reason for the initiating party to suspect that an EFT would be intercepted and attached in connection with a proceeding in a jurisdiction wholly unrelated to an existing dispute.

The United States Court of Appeals for the Second Circuit first ruled that EFT's were subject to Rule B attachment in 2002 in Winter Storm Shipping, LTD. v. TPI , 310 F.3d 263 (2d. Cir. 2002) (" Winter Storm "). As Senior District Judge Haight succinctly stated, Winter Storm involved "the interplay between a centuries-old admiralty law procedure and present-day banking technology." Id. , at 265.

The underlying dispute in Winter Storm involved a Maltese-based plaintiff which had chartered a vessel to the Thai- based defendant for the purpose of carrying oil from Saudi Arabia to Thailand. Plaintiff alleged that defendant failed to pay all amounts due and owing to plaintiff. The charter party included a provision providing for disputes to be resolved via arbitration in London. Thus, the parties underlying dispute had absolutely no relationship to the United States.

Despite the complete lack of a nexus between the United States and the underlying dispute, the plaintiff sought and obtained a Rule B attachment order. The plaintiff served the attachment order on, among others, Bank of New York ("BNY"). Upon service, BNY placed a stop order on any of the defendant's funds passing through the bank. Defendant initiated an EFT in a wholly unrelated matter from its bank in Thailand. The EFT was for the benefit of an entity that maintained an account at the Royal Bank of Scotland in London. Apparently because of the lack of relationship between RBS and the Thai-based bank, the EFT was routed through BNY as an intermediary bank. Because BNY had placed a stop order on the defendant's funds, the EFT was stopped upon its receipt by BNY in New York. A portion of the EFT equivalent to the value of plaintiff's claim was attached and placed in a suspense account.

Defendant sought to vacate the attachment order. The district court granted defendant's vacatur request, holding that EFTs do not constitute attachable property under New York law. In reversing the district court's vacatur order, the court of appeals first put to rest any due process concerns:

We hold that when an individual or company transfers funds by means of an EFT, those funds may be subjected to maritime attachment in the hands of an intermediary bank without violating constitutional due process, whether or not the initiator of the transfer knew which intermediary bank would be used to effect it.

Winter Storm , at 273. The Court then rejected the district court's holding that EFTs do not constitute attachable property under New York law. Relying on Daccarett , a case involving civil forfeiture under the federal drug laws, the court held that EFTs do constitute attachable property under Rule B:

[T]he broad inclusive language of admiralty Rule B(1) and the EFT analysis in Daccarett combine to fashion a rule in this Circuit that EFT funds in the hands of an intermediary bank may be attached pursuant to Admiralty Rule B(1).

Winter Storm , at 278.

Winter Storm led to a tremendous increase in Rule B attachment actions as plaintiffs whose claims frequently had no direct nexus at all to the United States commenced actions, often in aid of overseas proceedings, seeking Rule B attachments with the hope of capturing and attaching EFTs. These actions were primarily filed in the Southern District of New York since large intermediary banks processing EFTs are often located in New York City.

Primarily because of the large increase in Rule B attachment filings after Winter Storm, on October 16, 2009, the Second Circuit Court of Appeals specifically overruled Winter Storm , holding that EFTs "being processed by an intermediary bank in New York are not subject to Rule B attachment." The Shipping Corp. of India LTD v. Jaldhi Overseas PTE LTD , - F.3d -, -, 2009 WL 3319675, *11 (2d. Cir., 2009) (" Shipping Corp. "). In Shipping Corp., which like Winter Storm centered around a dispute having no nexus to the United States, the court rejected the Winter Storm Court's use of Daccarett to establish a rule permitting attachment of EFTs under Rule B. Instead, the Shipping Corp. Court analyzed the question of attachment of EFTs in the hands of intermediary banks under New York State law and concluded that an EFT being processed by an intermediary bank does not constitute "personal property" of the defendant:

Because EFTs in the temporary possession of an intermediary bank are not property of either the originator or the beneficiary under New York law, they cannot be subject to attachment under Rule B.

Shipping Corp. , 2009 WL 3319675, at *11.

Although the Second Circuit articulated a legal basis under New York's Uniform Commercial Code for overturning Winter Storm , the Second Circuit's decision appears to be motivated in substantial part by growing judicial concern about the perceived negative effects of EFT attachments on docket congestion in the federal courts in New York City, and the heavy burden on the New York area banking system. Indeed, in its Shipping Corp. decision, the Second Circuit noted that between October 1, 2008 and January 31, 2009, "maritime plaintiffs filed 962 lawsuits seeking to attach a total of $1.35 billion." Id. , at -, 2009 WL 3319675, at 2.Rule B applications during that time period constituted one-third of all cases filed in the Southern District of New York. Id. The Second Circuit also noted the effect of Rule B attachments of EFTs on the banking system, including the need to hire additional personnel to process Rule B attachments, as well as the effect of those same attachments on "dollar-denominated transactions and . . . New York's standing as an international financial center." Id.

The effects of Shipping Corp. and its prohibition on the attachment of EFTs may not be readily apparent to those who do not regularly engage in maritime activities. That said, Shipping Corp. is significant to all entities that regularly engage in international commerce and receive EFTs from entities outside the United States. Shipping Corp. ensures that EFTs routed through intermediary banks in New York will move to the intended beneficiary without the substantial interruption that would be caused by attachment of the EFT. Shipping Corp. also ensures that an unsuspecting party will not have its funds attached in a jurisdiction with which it has no contacts and no property, solely as a result of its financial institution's need to utilize an intermediary bank in New York to complete an EFT.

That said, while Shipping Corp. does limit the "property" subject to Rule B attachment, it does not preclude a plaintiff from pursuing a Rule B attachment and attaching personal property of the defendant other than EFTs. In addition, Rule B attachments can still be sought in any federal district court making a defendant's personal property in any United States jurisdiction susceptible to attachment. Thus, despite the fact that attachment orders may no longer be used to attach EFTs, at least where New York state law is applicable, Rule B attachments continue to provide plaintiffs in maritime-related disputes a viable attachment tool in aid of foreign-based actions and arbitrations to guard against unenforceable judgments and hollow victories. 1Tradhol Internacional, S.A. v. Colony Sugar Mills LTD., 2009 WL 2381296, *4 (S.D.N.Y., Aug. 4, 2009).

2Id.

3Marimed Shipping Inc. v. Persian Gulf Shipping Co. Inc., 567 F.Supp.2d 524, 526 (S.D.N.Y. 2008).

James E. Nealon is a Partner in Kelley Drye & Warren LLP's Stamford, CT office. His practice focuses on civil litigation and arbitration . James M. Moriarty is an Associate in the firm's Stamford, CT office. His practice focuses on commercial litigation and securities arbitration.

Please email the authors at jnealon@kelleydrye.com or jmoriarty@kelleydrye.com with questions about this article.