The Rise and Fall of Rule B Attachments

The Rise and Fall Of Rule B Attachments

For about the past seven years, the Second Circuit’s decision in Winter Storm1 — permitting maritime attachments of electronic fund transfers (EFTs) at intermediary banks in New York — has been a scourge to the conduct of international business and to banks in New York. On Oct. 16, 2009, the U.S. Court of Appeals for the Second Circuit reversed Winter Storm in its decision in Shipping Corp. of India v. Jaldhi Overseas PTE Ltd., holding that “EFTs being processed by intermediary banks are not subject to attachment under Rule B.”2 With this one decision, the Second Circuit has probably reduced by about 30 percent the number of civil cases that will be filed in the Southern District of New York and removed a burden on international commerce and New York banks.

Our 2001 Case

In 2001, we3 represented an Egyptian company, ANSDK, which, as reflected in court-filed documents, had a case with the following facts. On June 6, 2001, ANSDK, issued a payment order to National Societe Generale Bank (NSGB) in Alexandria, Egypt. The payment order instructed NSGB to transfer payment of USD709,230 to the account of Intermar Holding Company Trust Inc. at HSBC Bank in Greece. NSGB sought to effectuate the payment through the correspondent account that it maintained at the Bank of New York (BONY) in New York. At 1:15 P.M. on June 7, 2001, BONY received NSGB’s order to debit NSGB’s account in the amount of USD709,230 and to transfer the funds from its account to the account of Intermar at HSBC in Greece.

Unbeknownst to ANSDK, on May 29, 2001, Vrinera Marine Co., Ltd. (“Vrinera”), a Cypriot company, had commenced a lawsuit in the Southern District of New York, alleging that it had a maritime dispute with ANSDK that was subject to arbitration in London. In connection with that not-yet-commenced arbitration, Vrinera obtained an attachment order under Rule B of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions of the Federal Rules of Civil Procedure (“Rule B”). At 3:35 p.m. on June 7, about two hours after NSGB’s EFT instruction, BONY was served with the attachment order. The transaction between ANSDK and Intermar had nothing to do with the maritime dispute between ANSDK and Vrinera. Nevertheless, BONY debited NSGB’s account in the amount of  USD709,230 and, as a result of the attachment order, rather than transferring the funds to HSBC, BONY placed NSGB’s funds into a suspense account.

We moved forthwith to vacate the attachment. Article 4-A of the New York Uniform Commercial Code provided specifically the very limited circumstances in which EFTs may be attached. Furthermore, the comments stated that “[t]he creditor of the originator cannot reach any funds [after the fund transfer has been initiated] because no property of the originator is being transferred.” Official Comment to §4-A-502(4) (emphasis supplied). As one court had already held, “funds transfers that are in motion are not attachable at the intermediary bank stage under §4-A-503.”4

In our view, this was a simple issue. Rule B attachments are limited to the “property of the defendant” and, because the law made clear that the originator had no property interest in the account at the intermediary bank in New York, we were confident that we would prevail in having the attachment vacated. The district judge disagreed, holding that federal maritime law trumped New York state law under the Supremacy Clause and that, therefore, New York UCC law would not be applied.

‘Winter Storm’ and Aftermath

At about the same time, a similar issue came before Judge Shira A. Scheindlin in the Winter Storm case.5 She saw the matter in the same way that we had, concluding that there was no federal law on point and that state law—New York’s version of the UCC—forbade courts from attaching funds in an intermediary bank.6 Judge Scheindlin vacated the attachment. It was clear to us that Judge Scheindlin got it right and our judge had been wrong. Thus, we were dismayed when, on the appeal of Judge Scheindlin’s decision, the Second Circuit reversed. In Winter Storm, the court followed reasoning similar to that of our judge, ultimately holding that “EFT funds in the hands of an intermediary bank may be attached pursuant to Admiralty Rule B(1)(a).”7

Winter Storm then spawned a multitude of progeny. Although Winter Storm involved a situation in which the defendant was the originator of the EFT, courts quickly held that an EFT was likewise subject to attachment at an intermediary bank in a situation in which the defendant was the beneficiary of the EFT.8 A cottage industry developed of lawyers who devoted much of their practice to obtaining Rule B attachments of EFTs. The growth of these cases was so great that, between Oct. 1, 2008, and Jan. 31, 2009, maritime plaintiffs filed 962 lawsuits—constituting one-third of all lawsuits filed in the Southern District—seeking to attach a total of  USD1.35 billion.9

These Rule B attachments of EFTs also disrupted international commerce. Parties around the globe conduct business in U.S. dollars. Many learned for the first time about the long reach of Winter Storm when, in scenarios like that described above for our Egyptian client, payments were frozen in intermediary banks in New York. This was done in connection with transactions that had nothing to do with the United States or with the maritime dispute that led to a Rule B attachment. These orders were issued without apparent concern they might be causing a party to breach an agreement or financial covenant when a payment the party thought was being made wound up instead frozen in New York.

The growth of Rule B attachments wreaked havoc on New York banks as well. As Judge Scheindlin described in a recent decision, leading New York banks were receiving numerous new attachment orders and over 700 supplemental services of existing orders each day. This required them to hire staff just for Rule B attachments and “the sheer volume…leads to many false ‘hits’ of funds subject to attachment, which has allegedly introduced significant uncertainty into the international funds transfer process.”10
As we noted in our May 28, 2009, column, there developed over the past year some backlash to these Rule B attachments. Judge Richard J. Holwell criticized the Winter Storm decision and said that it “has become conventional wisdom in this district that Winter Storm…may merit reconsideration by the U.S. Supreme Court or the en banc Second Circuit.”11 Judge John G. Koeltl required a “plausible” showing that defendant’s funds were actually passing through the Southern District of New York, as opposed to hypothetically passing through. See 2009 U.S. Dist. LEXIS 19057, at *4. Judge Scheindlin denied a maritime plaintiff’s request for “continuous service” of an attachment on banks and refused to appoint a plaintiff-designated process server to act instead of the U.S. Marshal, actions that she recognized would significantly reduce the efficacy of Rule B attachments of EFTs.12

The ‘Shipping Corp.’ Decision

It was against this backdrop that the Second Circuit decided Shipping Corp. The first noteworthy element of the decision is procedural. As the court stated, a panel of the court is “bound by the decisions of prior panels until such time as they are overruled either by an en banc panel of our Court or by the Supreme Court.”13 But the court explained that the reversal was justified here because the panel had circulated its opinion to all active members of the Second Circuit prior to filing and received no objection.

The court also expounded on why it was reversing a decision that was only seven years old. One reason was that the effects of Winter Storm on the federal courts and international banks in New York were too significant to let the error go uncorrected simply to avoid overturning a recent precedent. The “effects” referred to by the court included the following quotation from our May 28 column:

[W]hen lawyers are advising their clients that the best way to avoid Rule B attachments is to conduct maritime and perhaps other transactions in a currency other than U.S. dollars, there are emerging risks of a significant reduction in the use of the dollar as the dominant currency of international commerce.14

The other reason for the reversal was the frank admission that the Winter Storm reasoning was simply unpersuasive. Rule B permits attachment of a “defendant’s property.” As we argued unsuccessfully in our case in 2001, New York’s UCC makes clear that an EFT at an intermediary bank is not the property of the originator. Winter Storm cleverly avoided looking at the issue of ownership under New York law, but Shipping Corp. recognized that this was wrong. After discussing relevant New York law, the court held as follows:

[The] provisions of New York law establish that EFTs are neither the property of the originator nor the beneficiary while briefly in the possession of an intermediary bank. 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.15

One other comment by the court is worthy of note. There are those who tried to argue that EFTs are transitory and thus attaching them is analogous to the historical practice of attaching transitory ships. The Second Circuit pointed out a significant distinction: “EFTs, like ships in a port, are transitory. Streamlined Rule B practices, however, developed out of the concern that ships might set sail quickly, not because the courts intended to arm maritime plaintiffs with writs of attachment prior to the arrival of the ship in port.”16 Thus, the practice of Rule B plaintiffs of obtaining attachment orders based solely on the speculative hope that the defendant will engage in a dollar-denominated transaction that involves an EFT was not the same as historical practice.

Conclusion

The Second Circuit was clear in stating that “overturning Winter Storm will dramatically affect the law of maritime attachments in our Circuit.” At the very least, based on the statistics mentioned above, the inability to use Rule B any longer to attach EFTs at intermediary banks will probably result in about 30 percent fewer civil cases being filed in the Southern District of New York.

Finally, we note that, notwithstanding the title of this article, traditional Rule B attachments remain alive and well. But, with respect to the attachments of EFTs, Winter Storm never should have been. It was wrong as a matter of substantive law. It caused untold disruption of international commercial transactions. It acted as a yoke on many banks in New York. And, Rule B litigation has unnecessarily burdened the courts for seven years. We are among many happy to see the demise of Winter Storm. Better late, than never.

 

1. Winter Storm Shipping, Ltd. v. TPI, 310 F.3d 263 (2d Cir. 2002).
2. 2009 U.S. App. LEXIS 22747 at *38 (2d Cir. Oct. 16, 2009).
3. The “we” used in this article actually refers to a case on which Mr. Zaslowsky worked.
4. Weston Compagnie de Finance et D’Investissement, S.A., 1993 U.S. Dist. LEXIS 9531, at *10.
5. Winter Storm Shipping, Ltd. v. TPI, 198 F.Supp.2d 392 (S.D.N.Y. 2002).
6. Winter Storm, 310 F. 3d at 267.
7. Id at 268.
8. Noble Shipping Inc. v. Euro-Maritime Chartering Limited, 2003 WL 23021974 (S.D.N.Y. Dec. 24, 2003).
9. Shipping Corp., 2009 U.S. App. LEXIS 22747 at *9.
10. Cala Rosa Marine Co. Ltd. v. Sucres et Deneres Group, 613 F.Supp.2d 426, 431-32 n.7 (S.D.N.Y. 2009) (citation omitted).
11. Hannah Brothers v. OSK Marketing & Communications Inc., 2009 U.S. Dist. LEXIS 34927 (S.D.N.Y April 24, 2009), n. 3.
12. Cala Rosa, 613 F.Supp.2d at 432.
13. Shipping Corp., 2009 U.S. App. LEXIS 22747 at *23 (citation omitted).
14. Lawrence W. Newman and David Zaslowsky, “Is There Finally a Backlash Against Rule B Attachments?” 241 NYLJ, 3 (2009).
15. Shipping Corp., 2009 U.S. App. LEXIS 22747, at **35-36.
16. Id. at *32 (emphasis added).
friday, october 30, 2009
Reprinted