Admiralty Rule B Update - EFTs No Longer Subject to Attachment


Philip C. Brickman, partner at Fowler Rodriguez Valdes-Fauli law firm, weighs in on U.S. Second Circuit Court of Appeals’ significant ruling concerning the attachment of electronic fund transfers (“EFTs”) pursuant to Rule B of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions (“Supplemental Rule B” or “Rule B”).



On October 16, the U.S. Second Circuit Court of Appeals issued a significant ruling concerning the attachment of electronic fund transfers (“EFTs”) pursuant to Rule B of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions (“Supplemental Rule B” or “Rule B”). As previously written by the author in the September-October 2009 issue of The Maritime Executive Magazine, EFTs had been subject to attachment under Rule B pursuant to Winter Storm Shipping, Ltd. v. TPI, 310 F.3d 263 (2nd Cir. 2002) and subsequent decisions emanating from the Southern District of New York. In The Shipping Corporation of India v. Jaldhi Overseas, Pte., Ltd., 2009 U.S. App. LEXIS 22747 (2d Cir. 2009), the Second Circuit overruled its prior decision and held that an EFT being processed by an intermediary bank is not property subject to attachment under Supplemental Rule B. As a consequence, some Southern District of New York judges have reacted by automatically vacating or setting aside pre-existing Rule B attachments of EFTs.



In its decision, the Court of Appeals cited recent cases where various restrictions have been placed on the attachment of EFTs under Rule B. See STX Pan Ocean (UK) Co. v. Glory Wealth Shipping Pte. Ltd., 560 F.3d 127 (2d Cir. 2009) and Cala Rosa Marine, Co., Ltd. v. Sucres, 613 F. Supp. 2d 426 (S.D.N.Y. 2009). STX Pan Ocean held that an international firm can avoid having its property attached by simply registering as a domestic corporation in New York State. Cala Rosa rejected a request for continuous service in the plaintiff’s proposed writ of attachment and, therefore, attachment is only possible if the garnishee bank actually possesses the defendant’s property when the attachment is served. These cases are addressed in more detail in the September-October issue of The Maritime Executive Magazine.



The Second Circuit then carefully examined the history EFT attachments. The Court first looked to its prior ruling in U.S. v. Daccarett, 6 F.3d 37 (2d Cir. 1993) and noted that it did not find that either the originator or beneficiary of an EFT had a property interest in the EFT. Rather, Daccarett held that EFT funds were attachable assets because they were traceable to an illegal activity and subject to seizure U.S. forfeiture statutes. Daccarett did not address the issue of ownership of EFTs while in transit, which is critical for Rule B maritime attachments because only the defendant’s property can be attached. Without the underlying foundation of Daccarett, there is no other persuasive guidance under federal law to support the attachment of EFTs.



The Second Circuit also supported its opinion by recognizing that New York state law does not permit the attachment of EFTs. Because there is no federal governing law on the attachment of EFTs and New York law prohibits it, the Court concluded that EFTs possessed by an intermediary bank in New York are not subject to Rule B attachments. This only applies in cases where the defendant is a beneficiary/transferee of an EFT (i.e. defendant is expecting to receive the EFT). The Appellate Court remanded the case to the District Court to consider whether there are grounds for not vacating the remaining portions of the plaintiff’s proposed attachment order affecting EFTs of which the defendant was the originator.



The Court also recognized that attachment of EFTs has placed a significant burden on New York’s banking industry, and in particular, the members of the Clearing House Association that facilitate EFTs. The Court cited staggering statistics related to the EFT attachments. From October 1, 2008 to January 31, 2009, plaintiffs filed 962 lawsuits seeking to attach a total of $1.35 billion in EFTs. These lawsuits constituted 33% of all lawsuits filed in the Southern District of New York and added to the burden to 800-900 writs already served daily on banks within the Southern District of New York. Based on these numbers, the Court expressed its concern that undermining “the efficiency and certainty of fund transfers in New York, could, if left uncorrected, discourage dollar-denominated transactions and damage New York’s standing as an international financial center”. This policy rationale heavily contributed to the Second Circuit’s decision to overrule Winter Storm.



Notwithstanding the Second Circuit’s decision in The Shipping Corporation of India regarding EFTs, Rule B remains a very viable mechanism to obtain security for various maritime claims. It is still available where businesses cannot be found within a particular federal judicial district, but have property within that jurisdiction such as bank accounts, real property or other assets. The decision has no bearing on traditional assets that are typically the subject of Rule B attachments such as vessels, bunkers onboard time chartered vessels and cargo.

 


For further information on Rule B attachments and the affects of the Second Circuit decision, please contact the author at pbrickman@frvf-law.com. Philip C. Brickman is a partner at Fowler Rodriguez Valdes-Fauli law firm in New Orleans, Louisiana.