Rule B: Good Riddance to Maritime Pre-judgment Attachments of EFTs

A cottage industry developed in the Southern District of New York after the Second Circuit's 2002 decision in Winter Storm Shipping, Ltd. v. TPI, 310 F. 3d 263 (“Winter Storm“) devoted to securing and maintaining pre-judgment attachments of funds-transfer payment orders (more commonly referred to as electronic funds transfers) (“EFTs”) passing through New York banks. The Second Circuit in Winter Storm held such payment orders to be “property” of the “originator” (the transferor of an EFT) notwithstanding that the originator had no account with the intermediary bank. Rule B attachments have also been routinely issued against beneficiaries (transferees) of an EFT, notwithstanding that the beneficiaries, likewise, have no account with the intermediary bank.

Rule B Attachments

Rule B attachments, as they are called, can get a party's attention. (The reference is to Rule B of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions (formerly the Rules of Practice in Admiralty and Maritime Cases)). To illustrate: A ship owner commences arbitration under a charter contract against its charter party in London. Neither party does business or is located in New York. Neither party has nor is likely to have property in New York. Claimant brings an action for a maritime attachment and garnishment, ex parte, against the defendant in the Southern District of New York, requesting attachment of all EFTs of which defendant is originator or beneficiary. Plaintiff secures the attachment ex parte, and serves it on numerous New York intermediary banks, not knowing whether in fact such banks handle EFTs for the bank with which defendant has an account and does business as originator or beneficiary. If, say, a party that does business with defendant (assume it has no involvement whatsoever in the London arbitration) instructs its bank to wire money for the account of defendant that passes through a New York intermediary bank (as virtually all dollar-denominated payment orders do), and plaintiff has served the attachment on the intermediary bank, then bingo! The monies are frozen (up to the amount of the attachment).

Needless to say, this procedure can be disruptive to international trade, and outrage parties (such as our counterparty to defendant) whose monies are intercepted.

Criticism of Winter Storm

The Winter Storm decision was much criticized, most prominently by leading commercial banks and the members of The Clearing House Association L.L.C. (comprised of ABN AMRO Bank, Bank of America, Bank of New York Mellon, Citibank, Deutsche Bank Trust Company Americas, HSBC Bank, JPMorgan Chase, UBS, US Bank, and Wells Fargo Bank), which filed an influential amicus brief with the Second Circuit. Southern District judges were also no fans of Winter Storm, as they repeatedly attempted to “cabin” it by restricting its scope. Winter Storm Rule B attachments took up much of the business of the Southern District. From Oct. 1, 2008 to Jan. 31, 2009, lawsuits filed by maritime plaintiffs seeking Rule B attachments constituted an astounding 33% of all lawsuits filed in the Southern District. Some 800 to 900 Rule B writs were being served daily on banks in New York!

Shipping Corporation of India v. Jaldhi

All of this was mercifully put to rest by the Second Circuit's Oct. 16, 2009 decision in The Shipping Corporation of India, Ltd., v. Jaldhi Oversees Pte. Ltd., 585 F. 3d 58 (“Jaldhi“). The court, in an opinion by Judge Jose Cabranes, overruled Winter Storm and concluded that neither an originator nor a beneficiary of an EFT has a property interest in an EFT in process by an intermediary bank in which neither has an account. While those who made a living prosecuting (and defending) Rule B attachments have to be disappointed by Jaldhi, the commercial bar generally and participants in international trade, including generally equipment lessors (e.g., marine cargo container lessors), are grateful for the decision.

Jaldhi itself illustrates the disruption caused by Rule B attachments in the context of EFTs. In March of 2008, The Shipping Corporation of India, Ltd. (“SCI”) charted its vessel to Jaldhi for transfer of iron from India to China. Promptly after delivering the vessel to Jaldhi, and while it was in port in Kolkata, India, a crane on board the vessel collapsed, killing the crane operator and halting cargo operations. A contract dispute ensued between SCI and Jaldhi. The contract called for the application of English law and for the resolution of disputes by arbitration in London. Notwithstanding this dispute resolution mechanism, SCI sought and initially obtained an attachment under Rule B for some $4.8 million. SCI proceeded to attach EFTs in that amount. The EFTs were intended for Jaldhi as beneficiary by in substantial part three different parties that had no involvement in the dispute between SCI and Jaldhi. As described by the court, the EFTs “were seized while they briefly passed through the computer systems of banks located in the Southern District of New York.” 585 F. 3d at 65, note 6.

In reconsidering Winter Storm, the Jaldhi court noted that Winter Storm's holding and the subsequent explosion of Rule B attachments in the Southern District “undermined the efficiency of New York's international funds transfer business.” Id. at 62. If left uncorrected, the use of Rule B attachments would “discourage dollar-denominated transactions and damage New York's standing as an international financial center.” Id.

Rule B permits attachment of “the defendant's tangible or intangible personal property.” Rule B(1)(a). It is available with respect to a defendant who is “not found within the district” and upon the filing of a verified complaint requesting attachment and accompanied by an affidavit. In concluding that an EFT passing through an intermediary bank is not the “property” of the originator or the beneficiary, the court relied upon Section 4A-503 (“Funds Transfers”) of the Uniform Commercial Code as adopted in New York. This provision permits a court to restrain a beneficiary's bank from releasing funds to the beneficiary or the beneficiary from withdrawing the funds, and to restrain an originator's bank from executing a payment order of the originator, but:

No other injunction is permitted. In particular, intermediary banks are protected, and injunctions against the originator and the originator's bank are limited to issuance of a payment order. Except for the beneficiary's bank, nobody can be enjoined from paying a payment order, and no receiving bank can be enjoined from receiving payment from the sender of the order that it accepted.

UCC ' 4A-503, Official Comment. See also UCC ' 4A-502, Official Comment No. 4.

New York courts have held that attachments served on intermediary banks cannot be enforced, European American Bank v. Bank of Nova Scotia., 12 A.D. 3d 189, 784 N.Y.S. 2d 99 (1st Dept. 2009).

As the Second Circuit concluded in Jaldhi:

Because ETFs 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.

585 F.3d at 71.

With the Second Circuit's decision in Jaldhi, the “gotcha” aspect introduced into maritime litigation by the Circuit's decision in Winter Storm has been removed. Now plaintiffs will have to earn their Rule B attachments the old-fashioned way, by finding actual property within the district to attach.

James F. Fotenos, a member of this newsletter's Board of Editors, is a partner with Greene Radovsky Maloney Share & Hennigh LLP, in San Francisco, where he specializes in container leasing, corporate finance, and pass-through entities.

A cottage industry developed in the Southern District of New York after the Second Circuit's 2002 decision in Winter Storm Shipping, Ltd. v. TPI , 310 F. 3d 263 (“ Winter Storm “) devoted to securing and maintaining pre-judgment attachments of funds-transfer payment orders (more commonly referred to as electronic funds transfers) (“EFTs”) passing through New York banks. The Second Circuit in Winter Storm held such payment orders to be “property” of the “originator” (the transferor of an EFT) notwithstanding that the originator had no account with the intermediary bank. Rule B attachments have also been routinely issued against beneficiaries (transferees) of an EFT, notwithstanding that the beneficiaries, likewise, have no account with the intermediary bank.

Rule B Attachments

Rule B attachments, as they are called, can get a party's attention. (The reference is to Rule B of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions (formerly the Rules of Practice in Admiralty and Maritime Cases)). To illustrate: A ship owner commences arbitration under a charter contract against its charter party in London. Neither party does business or is located in New York. Neither party has nor is likely to have property in New York. Claimant brings an action for a maritime attachment and garnishment, ex parte, against the defendant in the Southern District of New York, requesting attachment of all EFTs of which defendant is originator or beneficiary. Plaintiff secures the attachment ex parte, and serves it on numerous New York intermediary banks, not knowing whether in fact such banks handle EFTs for the bank with which defendant has an account and does business as originator or beneficiary. If, say, a party that does business with defendant (assume it has no involvement whatsoever in the London arbitration) instructs its bank to wire money for the account of defendant that passes through a New York intermediary bank (as virtually all dollar-denominated payment orders do), and plaintiff has served the attachment on the intermediary bank, then bingo! The monies are frozen (up to the amount of the attachment).

Needless to say, this procedure can be disruptive to international trade, and outrage parties (such as our counterparty to defendant) whose monies are intercepted.

Criticism of Winter Storm

The Winter Storm decision was much criticized, most prominently by leading commercial banks and the members of The Clearing House Association L.L.C. (comprised of ABN AMRO Bank, Bank of America, Bank of New York Mellon, Citibank, Deutsche Bank Trust Company Americas, HSBC Bank, JPMorgan Chase, UBS, US Bank, and Wells Fargo Bank), which filed an influential amicus brief with the Second Circuit. Southern District judges were also no fans of Winter Storm, as they repeatedly attempted to “cabin” it by restricting its scope. Winter Storm Rule B attachments took up much of the business of the Southern District. From Oct. 1, 2008 to Jan. 31, 2009, lawsuits filed by maritime plaintiffs seeking Rule B attachments constituted an astounding 33% of all lawsuits filed in the Southern District. Some 800 to 900 Rule B writs were being served daily on banks in New York!

Shipping Corporation of India v. Jaldhi

All of this was mercifully put to rest by the Second Circuit's Oct. 16, 2009 decision in The Shipping Corporation of India, Ltd., v. Jaldhi Oversees Pte. Ltd. , 585 F. 3d 58 (“ Jaldhi “). The court, in an opinion by Judge Jose Cabranes, overruled Winter Storm and concluded that neither an originator nor a beneficiary of an EFT has a property interest in an EFT in process by an intermediary bank in which neither has an account. While those who made a living prosecuting (and defending) Rule B attachments have to be disappointed by Jaldhi, the commercial bar generally and participants in international trade, including generally equipment lessors (e.g., marine cargo container lessors), are grateful for the decision.

Jaldhi itself illustrates the disruption caused by Rule B attachments in the context of EFTs. In March of 2008, The Shipping Corporation of India, Ltd. (“SCI”) charted its vessel to Jaldhi for transfer of iron from India to China. Promptly after delivering the vessel to Jaldhi, and while it was in port in Kolkata, India, a crane on board the vessel collapsed, killing the crane operator and halting cargo operations. A contract dispute ensued between SCI and Jaldhi. The contract called for the application of English law and for the resolution of disputes by arbitration in London. Notwithstanding this dispute resolution mechanism, SCI sought and initially obtained an attachment under Rule B for some $4.8 million. SCI proceeded to attach EFTs in that amount. The EFTs were intended for Jaldhi as beneficiary by in substantial part three different parties that had no involvement in the dispute between SCI and Jaldhi. As described by the court, the EFTs “were seized while they briefly passed through the computer systems of banks located in the Southern District of New York.” 585 F. 3d at 65, note 6.

In reconsidering Winter Storm, the Jaldhi court noted that Winter Storm's holding and the subsequent explosion of Rule B attachments in the Southern District “undermined the efficiency of New York's international funds transfer business.” Id. at 62. If left uncorrected, the use of Rule B attachments would “discourage dollar-denominated transactions and damage New York's standing as an international financial center.” Id.

Rule B permits attachment of “the defendant's tangible or intangible personal property.” Rule B(1)(a). It is available with respect to a defendant who is “not found within the district” and upon the filing of a verified complaint requesting attachment and accompanied by an affidavit. In concluding that an EFT passing through an intermediary bank is not the “property” of the originator or the beneficiary, the court relied upon Section 4A-503 (“Funds Transfers”) of the Uniform Commercial Code as adopted in New York. This provision permits a court to restrain a beneficiary's bank from releasing funds to the beneficiary or the beneficiary from withdrawing the funds, and to restrain an originator's bank from executing a payment order of the originator, but:

No other injunction is permitted. In particular, intermediary banks are protected, and injunctions against the originator and the originator's bank are limited to issuance of a payment order. Except for the beneficiary's bank, nobody can be enjoined from paying a payment order, and no receiving bank can be enjoined from receiving payment from the sender of the order that it accepted.

UCC ' 4A-503, Official Comment. See also UCC ' 4A-502, Official Comment No. 4.

New York courts have held that attachments served on intermediary banks cannot be enforced, European American Bank v. Bank of Nova Scotia. , 12 A.D. 3d 189, 784 N.Y.S. 2d 99 (1st Dept. 2009).

As the Second Circuit concluded in Jaldhi:

Because ETFs 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.

585 F.3d at 71.

With the Second Circuit's decision in Jaldhi, the “gotcha” aspect introduced into maritime litigation by the Circuit's decision in Winter Storm has been removed. Now plaintiffs will have to earn their Rule B attachments the old-fashioned way, by finding actual property within the district to attach.

James F. Fotenos, a member of this newsletter's Board of Editors, is a partner with Greene Radovsky Maloney Share & Hennigh LLP, in San Francisco, where he specializes in container leasing, corporate finance, and pass-through entities.