Frozen Dollars and Hard Times: The Legal Developments and Implications of Rule B Attachments during the Financial Crisis

Transcription

1 BUCERIUS/WHU MASTER OF LAW AND BUSINESS Hamburg, Germany Frozen Dollars and Hard Times: The Legal Developments and Implications of Rule B Attachments during the Financial Crisis Sam Winston July 17 th, ,534 words (excluding footnotes) Supervisor 1: Professor Clifford Larsen Supervisor 2: Daniel Jones

2 Acknowledgements- I would like to thank my supervisors Clifford Larsen, Dean of the Bucerius/WHU Master of Law and Business Program at the Bucerius Law School, and Daniel Jones, partner of the international law firm Ince & Co in Hamburg, Germany. Their tutelage was instrumental in this work. I would also like to thank Christopher Dove of Locke Lord Bissell & Liddell for making his work available for review and Madeline Wright of Ince & Co. for her assistance in finding the latest news articles on the shipping industry.

3 TABLE OF CONTENTS Table of Contents i Introduction Legal Background and Basis of Rule B What Rule B is: Getting Jurisdiction and/or Security How to Obtain a Rule B Attachment: The Complaint, Affidavit, and Attachment Order What Happens Next: The Post-Attachment Hearing, Proceeding to Trial, and Default Judgment Why Rule B is Designed the Way It is: The Elusive Maritime Defendant Rule B Attachments of Electronic Funds Transfers How EFTs Work: A Critical Time Lapse EFT Property Issues: Is an EFT Really Property? If so, then whose? How Plaintiffs Attach EFTs: Good Timing, a Wide Net, and a Bullish Approach Rule B s Practical Effect in the Modern Era: The Aggressive Maritime Plaintiff Pre-Financial Crisis Defenses to Rule B The Constitutional Challenge: Despite Shaffer, Rule B Remains Good Law Forum Selection Clauses: Attachment doesn t fit neatly within dispute Vacatur only on limited grounds: Aqua Stoli v. Gardner Smith (2006) Rule B Developments During the Financial Crisis The Legal Ground Beneath Rule B: Shifting Back and Forth Long Live Rule B: Consub Delaware LLC, v. Schahin Engenharia Limitada (2008) Rule B is Dead: STX Panocean v. Glory Wealth Shipping (2009) Rule B s Implications Post-STX Panocean: Register at Your Own Risk and Reward Conclusion Bibliography 33 i

4 Introduction: In the midst of the financial crisis, world trade suffered its worst collapse since World War II. 1 Market rates for goods and services in the shipping industry in particular, which accounts for 90 percent of all world trade 2, nosedived by amounts as large as 80%. 3 Consequently, the painful adjustment to new market realities brought a wave of commercial legal disputes around the globe seeking to rectify various unfilled obligations and financial losses. 4 There were repeated instances of traders either unable or unwilling to pay for goods upon delivery, of charterers intentionally breaching their agreements, and of owners refusing to accept new ships they had bought. 5 While plaintiffs have brought their underlying claims in courts and arbitration tribunals around the world, there has been one legal tool from one legal forum widely used above all others to secure and bring those claims: Rule B property attachments in the Southern District Court of New York. 6 Formally known as Rule B of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture, which augment the Federal Rules of Civil Procedure, this obscure but potent federal procedural rule is available in all federal courts for attachments regarding all kinds of property. However, it is currently most often used on electronically transferred funds (EFTs), also known as U.S. dollar wire transfers, running through New York. 7 Commercial parties use Rule B to freeze EFTs that are directed to or from the allegedly offending party while intermediary banks are holding them in transit. The United States unique federal maritime case law and the cluster of banks in New York that hold large dollar reserves and act as intermediaries for foreign banks make EFT attachment possible. The primary legal purpose of a Rule B attachment is for a plaintiff to obtain jurisdiction over a highly mobile and often-foreign maritime defendant and/or to obtain security should a plaintiff prevail in its underlying claim. Since the majority of shipping transactions are conducted in dollars, 8 the legal and commercial circumstances of the past 1 Miller, Shipping lines take it slow in hard times, in: The Wall Street Journal of April 9 13, 2009; [Newspaper Article] Bockmann, Another 31 idle boxships join the lay-up list, in: Lloyd s List of March 19, [Newspaper Article] 2 The International Chamber of Shipping, Shipping and World Trade: Key Facts. [Other Anonymous Sources] 3 Garfield, Default by one party setting off other claims down hire chain, in: TradeWinds of January 9, [Newspaper Article] 4 Lloyd s List, The B all and end all of litgation?, January 9, 2009; [Newspaper Article] Lloyd s List, Security takes centre stage in pursuit of maritime claims; Rule B attachments gaining in popularity, February 18, 2009; [Newspaper Article] Lloyd s List, Arbitrators on call as contract disputes soar, January 22, [Newspaper Article] 5 Lloyd s List, The B all and end all of litgation?, January 9, 2009; [Newspaper Article] Lloyd s List, Security takes centre stage in pursuit of maritime claims; Rule B attachments gaining in popularity, February 18, 2009; [Newspaper Article] Lloyd s List, Arbitrators on call as contract disputes soar, January 22, [Newspaper Article] 6 Lloyd s List, The B all and end all of litigation?, January 9, [Newspaper Article] 7 Id. Because the overwhelming majority of Rule B attachments are attachments of EFTs in New York, this paper focuses on the federal case law of the Southern District of New York and its appellate court, The United States Court of Appeals for the Second Circuit. While these opinions are not binding on courts in other districts and other circuits, they are often consulted as persuasive authority on federal maritime attachment, given the Second Circuit s experience in handling such matters. 8 Joshi, Rule B dealt a crippling blow, in: Lloyd s List of February 16, [Newspaper Article] 1

5 year have demonstrated that Rule B has tremendous reach into world trade and the shipping industry, regardless of the nationality, place of business, or place of performance of the involved parties or their banks. Nevertheless, the rule remains controversial in the uncertain times of the financial crisis. Plaintiffs have sought to use the rule in new ways given the ever-increasing need to secure their claims; 9 In turn, defendants have responded by launching a fury of defenses against the rule. 10 The result has been both movement towards expansion and restriction of EFT attachment, which has made an already fragile commercial environment even more unpredictable. 11 What is clear is that Rule B attachments of EFTs have replaced ship arrest as the international plaintiff s go-to weapon for obtaining security for future maritime court judgments and arbitration awards. 12 The Second Circuit Court of Appeals has also recently made two key rulings in Consub Delaware v. Schahin Engenharia Limitada (2008) and STX Panocean v Glory Wealth Shipping (2009) that could be influential on EFT attachment in the future. 13 Regardless of how these two decisions will be followed in the district courts, the last year of Rule B proceedings has already had a significant impact on how international commercial parties will transact with one another going forward. This paper seeks to track and analyze these developments from a U.S. case law perspective and to discuss the practical realities that an international commercial party faces in this changing legal environment. 1. Legal Background and Basis of Rule B 1.1. What Rule B is: Getting Jurisdiction and/or Security As stated above, Rule B is part of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions, which augment the Federal Rules of Civil Rules of Procedure. Paragraph (1)(a) of Rule B reads as follows: Rule B. In Personam Actions: Attachment and Garnishment (1) When Available; Complaint, Affidavit, Judicial Authorization, and Process. In an in personam action: (a) 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 9 Kalafrana Shipping Ltd v Sea Gull Shipping Co Ltd., 591 F. Supp. 2d 505 (S.D.N.Y. 2008); Stolt/Nielsen Transportation Group, Bvv. LIO Yag Sanayi ve Ticaret A.S., , (2d. Cir. May 7, 2009); Mulrenan, Britannia battle, in: TradeWinds of December 31, 2008; [Newspaper Article] Rust, US judge gets tough on non-maritime fund freezing, in: TradeWinds of October 27, [Newspaper Article] 10 Summary of February 3, 2009 Meeting Between Rule B Subcommittee of the City Bar Admiralty Committee and SDNY Judges; [Other Sources] Lloyd s List, Arbitrators on call as contract disputes soar, January 22, [Newspaper Article] 11 Joshi, Following the Money, in: Lloyd s List of March 10, [Newspaper Article] 12 Rust, Another victory on fund freezing, in: TradeWinds of September 25, [Newspaper Article] 13 Consub Delaware v. Shahin Engenharia Limitada, 543 F.3d 104 (2d. Cir. 2008); STX Panocean (UK) Co., Ltd. v. Glory Wealth Shipping Pte Ltd., 560 F.3d 127 (2d Cir. 2009). 2

6 tangible or intangible personal property up to the amount sued for in the hands of garnishees named in the process. 14 Rule B provides the availability of a temporary pre-judgment remedy 15 to the plaintiff via the attachment and garnishment of the defendant s property in an in personam claim, as opposed to the arrest of a defendant s property in an in rem claim, which is governed by Rule C. 16 Rule B is applicable only when the defendant s property is present within the district but the defendant himself is not be found within the district. The type of jurisdiction a court asserts over a defendant under Rule B is quasi in rem, though in some cases, it can later become in personam. 17 In rem jurisdiction is based on the principle that courts have jurisdictional authority over property that is present within the geographical jurisdiction of the court. 18 In quasi in rem jurisdiction, a court has jurisdiction over an absent defendant via the presence of the defendant s property in the court s geographical jurisdiction irrespective of the relationship between the property and the claim. 19 Thus, under a Rule B attachment, the court derives its jurisdiction over the defendant solely from its authority over the attached property or its substitute security. 20 The writ of the attachment itself, however, does not provide the court with its jurisdictional authority over the defendant or his property. 21 It is the presence of the defendant s property within the district that provides the court with its jurisdictional authority. 22 It should also be noted that while quasi in rem jurisdiction is said to exercise jurisdiction over a thing, i.e property, it is more accurate to describe quasi in rem as using property as the predicate from which the court asserts jurisdiction over the defendant Federal Rules of Civil Procedure, Supplemental Rules For Admiralty or Maritime Claims and Assets, Rule B(1)(a). (hereinafter all Supplemental Rules listed as Fed. R. Civ. P., Supp. Rule ) [Other Source] 15Stolt/Nielsen Transportation Group, Bvv. LIO Yag Sanayi ve Ticaret A.S., , (2d. Cir. May 7, 2009); Williamson v. Recovoery Ltd. P ship, 542 F.3d 43 (2d Cir. 2008); Frevola, Maritime Arrests and Attachments in the United States, in: Lloyd s Maritime Academy s 13 th Annual Comprehensive Guide to Ship Arrest 2007, London, England, November 2007, p Federal Rules of Civil Procedure, Supplemental Rules For Admiralty or Maritime Claims and Assets, Rule C; Arrest, which is most often known as ship arrest, is an action in rem available under Rule C of the Supplemental Rules. Unlike in arrest, however, property attached under Rule B does not have to be maritimerelated and there doesn t have to be an existing lien on the property. Rule B attachment requires only an in personam maritime claim and any tangible property (which could include the ship itself) or intangible property in the district belonging to the defendant. Plaintiffs can use these two maritime security features in tandem with one another, which is a unique feature of U.S. law, if the total security demanded for the claim is large enough to warrant it. (Tetley, William, Q.C Tulane Law Review 1999, p ; Frevola, Maritime Arrests and Attachments in the United States, in: Lloyd s Maritime Academy s 13 th Annual Comprehensive Guide to Ship Arrest 2007, London, England, November 2007, p. 6 8). 17 Teyseer Cement Co. v. Halla Maritime Corp., 794 F.2d 472 (9 th Cir. 1986). 18 Emanuel, p ; Great Prize, S.A. v. Mariner Shipping Pty., Ltd., 967 F.2d 157 (5 th Cir. 1992). 19 The effect of the landmark Supreme Court case on quasi in rem jurisdiction, Shaffer v. Heitner, on maritime attachment is discussed in Section Teyseer Cement Company v. Halla Maritime Corporation, 794 F.2d 472, 477 (9th Cir. 1986); (Great Prize, S.A. v. Mariner Shipping Pty., Ltd., 967 F.2d 157 (5 th Cir. 1992). 21 Great Prize, S.A. v. Mariner Shipping Pty., Ltd., 967 F.2d 157 (5 th Cir. 1992). 22 Emanuel, p Freer, p

7 Under quasi in rem jurisdiction in a Rule B action, the defendant s liability is limited to the value of the attached property. 24 A Rule B defendant s liability may be extended to the value of the entire claim if he appears before the court to contest the case on the merits, which would constitute a general appearance via the defendant s consent to the court s personal jurisdiction over him. 25 However, a defendant can make a restricted appearance under Rule E(8) to avoid the assertion of personal jurisdiction over him while defending the suit. 26 In addition to the assertion of jurisdiction over the defendant, plaintiffs can use Rule B for the sole purpose of obtaining security while commencing proceedings for the underlying maritime claim in other jurisdictions, including non-u.s. jurisdictions, which is often the case when EFTs are attached. 27 Thus, Rule B serves two purposes: 1) to secure jurisdiction over an absent party and/or 2) to assure satisfaction of any judgments in the plaintiff s favor How to Obtain a Rule B Attachment: The Complaint, Affidavit, and Attachment Order A party seeking a Rule B attachment starts by filing a verified complaint with the district court. 29 The complaint must be for an admiralty or maritime claim as stipulated by scope of the Supplemental Rules in Rule A Teyseer Cement Co. v. Halla Maritime Corp., 794 F.2d 472 (9 th Cir. 1986); Emanuel, p ; Great Prize, S.A. v. Mariner Shipping Pty., Ltd., 967 F.2d 157 (5 th Cir. 1992). 25 Teyseer Cement Co. v. Halla Maritime Corp., 794 F.2d 472 (9 th Cir. 1986); Emanuel, p ; Great Prize, S.A. v. Mariner Shipping Pty., Ltd., 967 F.2d 157 (5 th Cir. 1992). 26 Fed. R. Civ. P., Supp. Rule E; Teyseer Cement Company v. Halla Maritime Corporation, 794 F.2d 472, 477 (9th Cir. 1986). 27 Polar Shipping, Ltd. v. Oriental Shipping Corp., 680 F.2d 627 (9 th Cir. 1982); Winter Storm Shipping, Ltd. v. TPI, 310 F.3d 263 (2d Cir. 2002); Aqua Stoli Shipping Ltd. v. Gardner Smith Pty. Ltd., 460 F.3d 434 (2d Cir. 2006); Consub Delaware v. Shahin Engenharia Limitada, 543 F.3d 104 (2d. Cir. 2008); Frevola, Maritime Arrests and Attachments in the United States, in: Lloyd s Maritime Academy s 13 th Annual Comprehensive Guide to Ship Arrest 2007, London, England, November 2007, p Swift & Co. Packers v. Compania Colombiana Del Caribe, 339 U.S. 684, 693 (1950); In Seawind Compania, S.A. v. Crescent Line, Inc. (2d. Cir. 1963), the Court stated that the purpose of Rule B is for a plaintiff to obtain in personam jurisdiction over a defendant through his property. The Court had cited the Supreme Court decision Swift & Co. Packers v. Compania Colombiana del Caribe (1950) to make its assertion but the Seawind court overstates, if not incorrectly states, what the Supreme Court in Swift & Co. Packers actually said. The relevant passage from Swift & Co. Packers reads, The process of foreign attachment is known of old in admiralty. It has two purposes: to secure a respondent s appearance and to assure satisfaction in case the suit is successful (citing Manro v. Almeida, 10 Wheat. 473, 489, 6 L.Ed. 369). Though federal courts have agreed that, to secure a respondent s appearance meant the assertion of jurisdiction over a defendant, there has been some discrepancy over whether the type of jurisdiction to be asserted over the defendant is in personam or quasi in rem (Compare Great Prize S.A. v. Mariner Shipping Pty. Limited (5 th Cir. 1992) with East Asiatic Co. v. Indomar, Ltd. (S.D.N.Y 1976)). Consequently, it is not uncommon to read in some court decisions and law review articles that a Rule B attachment asserts in personam jurisdiction over a defendant, or at the very least, it compels the assertion of in personam jurisdiction over the defendant. However, the Ninth Circuit squarely addressed the nature of Rule B jurisdiction in Teyseer Cement Company v. Halla Maritime Corporation (1986) and ruled that, the nature of the jurisdiction the court acquires by a Rule B attachment is properly denominated quasi in rem because any judgment rendered is limited to the value of the attached property. More recent decisions from the Second Circuit such as Winter Storm v. Tpi (2002) and Aqua Stoli Shipping v. Gardner Smith Pty. Ltd. (2006) have not adopted the Seawind position that the purpose of Rule B is to necessarily gain in personam jurisdiction. 29 Fed. R. Civ. P., Supp. Rule B(1). 4

8 What exactly constitutes a maritime claim is the subject of a long case law review of admiralty and maritime jurisdiction 31 but it generally includes claims for breach of contract as it relates to charter party and bill of lading disputes, collision damages, maritime torts, commodities sales, and anything else with a genuinely salty flavor directly related to maritime commerce. 32 For the purposes of the complaint, the Rule B Advisory Committee Notes state that a prima-facie maritime claim is all that is necessary. 33 In addition to a complaint praying for attachment, Paragraph (1)(b) states that a plaintiff also has to provide an accompanying affidavit attesting that the defendant cannot be found in the district : (b) The plaintiff or the plaintiff s attorney must sign and file with the complaint an affidavit stating that, to the affiant s knowledge, or on information and belief, the defendant cannot be found within the district. The court must review the complaint and affidavit and, if the conditions of this Rule B appear to exist, enter an order so stating and authorizing process of attachment and garnishment. The clerk may issue supplemental process enforcing the court s order upon application without further court order 34 Neither the rule nor its advisory committee notes gives an explicit definition of the phrase not found within the district, 35 but a two-pronged test developed by the Second Circuit in Seawind Compania v. Crescent Line (1963) has become the general standard evaluation technique. 36 The Seawind test considers whether the defendant has minimum contacts with the jurisdiction (as defined by International Shoe Co. v. Washington (1945) and its progeny 37 ) and if the defendant can be found within the district for service of process. 38 If the defendant has minimum contacts with the district and is available for service of process within the district, then Rule B is not applicable because the defendant can be found within the district. If the defendant is either lacking minimum contacts with the district or unavailable for service of process within in the district, then Rule B is applicable because the defendant cannot be found within the district Fed. R. Civ. P., Supp. Rule A; Dove, Admiralty and Maritime Law Conference 2007, p Dove, Admiralty and Maritime Law Conference 2007, p Kossick v. United Fruit Co., 365 U.S. 731 (1961); Kalafrana Shipping Ltd v Sea Gull Shipping Co Ltd., 591 F. Supp. 2d 505 (S.D.N.Y. 2008); Hohenstein, Pratt s Journal of Bankruptcy Law September 2008, p ; Lloyd s List, Security takes centre stage in pursuit of maritime claims; Rule B attachments gaining in popularity, February 18, [Newspaper Article] 33 Fed. R. Civ. P. Supp. B; Federal Rules of Civil Procedure, Supplemental Rules For Admiralty or Maritime Claims and Assets, Notes of Advisory Committee 1966, 1985, and 2000 (hereinafter Advisory Committee Notes ; [Rules, Laws, Statutes, and Committee Notes] Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., 460 F.3d 434, (2d. Cir. 2006). 34 Fed. R. Civ. P., Supp. Rule B(1). 35 Advisory Committee Notes. [Rules, Laws, Statutes, and Committee Notes] 36 Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., 460 F.3d 434, (2d. Cir. 2006) (citing Seawind Compania, S.A. v. Crescent Line, Inc. 320 F.2d 580, 582 (2d. Cir. 1963)). 37 International Shoe Co. v. Washington, 326 U.S. 310 (1945). 38 Seawind Compania, S.A. v. Crescent Line, Inc. 320 F.2d 580, 582 (2d. Cir. 1963). 39 Seawind Compania, S.A. v. Crescent Line, Inc. 320 F.2d 580, 582 (2d. Cir. 1963). 5

9 The counter-intuitive manner of the test is a way of ensuring that maritime attachment, an exceptional measure, is used only in quasi in rem situations and is not abused by maritime plaintiffs that have normal civil proceedings readily available to them. 40 For the purposes of filing with the court, the plaintiff s affidavit must simply attest that the defendant is not found within the district and that the plaintiff executed due diligence in attempting to find the defendant, though an exhaustive search is not required. 41 Under Rule E(3)(a), process may only be served within the district, which prohibits the use of other established means of process to be made outside the district such as Rule 4(e), (f), and (k). 42 The court must then review the complaint and the affidavit. If the conditions set out in Rule B appear to exist, it enters an ex-parte order stating and authorizing the process of attachment and garnishment, which commands the United States Marshal Service or other designated process server to attach any and all of the defendant s property within the district up to the amount sued for. 43 Process to attach tangible property on board a vessel must be delivered by the Marshal Service. 44 Process to attach other tangible or intangible property, such as EFTs, can be delivered by someone specially appointed by the court. 45 Plaintiffs can submit requests on the appointment of agents to serve process to the court in the complaint, affidavit, or even after process to attach has been issued. 46 In summary, all that is generally required for the initial attachment of a defendant s property is a prima-facie maritime claim, an affidavit from the plaintiff attesting that the defendant cannot be found within the district, and the presence of the defendant s property within the district What Happens Next: The Post Attachment Hearing, Proceeding to Trial, and Default Judgment 40 Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., 460 F.3d 434, (2d. Cir. 2006); Seawind Compania, S.A. v. Crescent Line, Inc. 320 F.2d 580, 582 (2d. Cir. 1963); In Integrated Container Serv. Inc. v. Starlines Container Shipping, Ltd., 476 F. Supp. 119 (S.D.N.Y. 1979), the Court criticized the Seawind test as arbitrary and stated that: No matter how convincingly demonstrated the plaintiff s need for security, it will not authorize attachment against a defendant who is present in the district in both senses. On the other hand, the fact that a defendant can be subjected to the court s in personam jurisdiction by virtue of the presence of a resident agent for service of process will not suffice to defeat the attachment if the defendant is not otherwise present in the district in the jurisdictional sense; nor will the fact that the defendant is present in the jurisdictional sense suffice, if he cannot be found for service of process within the district. This test amounts to a somewhat arbitrary compromise which assumes that the plaintiff will not require the protection of an attachment of security, nor should the defendant be subjected to it, if the defendant is present in both senses, and assumes on the other hand that the plaintiff s interests are not adequately protected despite the ability to perfect in personam jurisdiction if the defendant is not present in both senses. (Integrated Container Serv. Inc. v. Starlines Container Shipping, Ltd., 476 F. Supp. 119 (S.D.N.Y. 1979)). 41 Seawind Compania, S.A. v. Crescent Line, Inc. 320 F.2d 580, 582 (2d. Cir. 1963); Dove, Admiralty and Maritime Law Conference 2007, p Fed. R. Civ. P., Supp. Rule E(3)(a); Dove, Admiralty and Maritime Law Conference 2007, p Fed. R. Civ. P., Supp. Rule B(1). 44 Fed. R. Civ. P. Supp. B(1)(d)(i). 45 Fed. R. Civ. P. Supp. B(1)(d)(ii). 46 Dove, Admiralty and Maritime Law Conference 2007, p Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., 460 F.3d 434 (2d. Cir. 2006). 6

10 Under Supplemental Rule E(4)(f), the defendant is entitled to a prompt hearing following attachment where the plaintiff shall be required to show why the arrest or attachment should not be vacated or other relief granted consistent with these rules. 48 Rule E does not provide, however, any further indication of the scope and nature of a post-attachment hearing, nor does it explicitly provide for what would constitute a vacatur of attachment. 49 Consequently, the limited wording in Rule E(4)(f) has caused some discrepancy among district courts over how the post-attachment hearing should be conducted. 50 Some district courts have conducted a careful weighing of evidence while others have conducted an informal cursory review of the prima facie claims previously asserted in the complaint. 51 Aside from examining literal compliance with Rule B, judges have generally looked to case law and the traditional needs of maritime plaintiffs to guide them in the post attachment hearing. 52 In the Second Circuit, which is the relevant jurisdiction for this paper s analysis of EFT attachment, the general rule is that attachments can be vacated only on narrow grounds. 53 A posting of counter-security is available under Rule E (7) when the defendant advances a counter claim arising from the same transaction or occurrence as the plaintiff s claim. 54 The issuance of counter-security rests largely with the judge s discretion 55 and is generally not as easily obtained as the original security Why Rule B is Designed the Way It is: The Elusive Maritime Defendant Though English courts abandoned the practice of maritime attachment in the early 1800s, U.S. courts retained and developed the practice to create a unique set of case law that remains firmly entrenched in current U.S. law. 57 Consequently, in analyzing Rule B and U.S. maritime attachment case law, it is important to note the commonly accepted policy justifications underlying an ex-parte attachment that asserts quasi in rem jurisdiction over a defendant. 48 Fed. R. Civ. P. Supp. E(4)(f). 49 Fed. R. Civ. P. Supp. E; Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., 460 F.3d 434 (2d. Cir. 2006). 50 Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., 460 F.3d 434 (2d. Cir. 2006). 51 Fed. R. Civ. P. Supp. E; Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., 460 F.3d 434 (2d. Cir. 2006). 52 Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., 460 F.3d 434 (2d. Cir. 2006). 53 Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., 460 F.3d 434 (2d. Cir. 2006). (See Sections 3 & 4 for a more detailed discussion of Rule B defenses and vacatur assertions). 54 Fed. R. Civ. P. Supp. E(7); Frevola, Rule E(7) Counter-Security in the U.S. A New Trend in Rule B Maritime Attachments, in: The Journal of International Maritime Law 2008, Rule E(7) Counter-Security in the U.S. A New Trend in Rule B Maritime Attachments, in: The Journal of International Maritime Law 2008, ; Dove, Admiralty and Maritime Law Conference 2007, p Dove, Admiralty and Maritime Law Conference 2007, p Tetley, Tulane Law Review 1999, p. 1898; The Supreme Court in Manro v. Almeida (1825) called maritime attachment an ancient practice that predated the Constitution in both the civil and common-law traditions. (Manro v. Almeida, 23 U.S. (10 Wheat.) 473 (1825)) Similarly, the Second Circuit in Aqui Stoli noted that, The power to grant attachments in admiralty is an inherent component of the admiralty jurisdiction given to the federal courts under Article III of the Constitution. (Aqua Stoli Shipping Ltd. v. Gardner Smith Pty. Ltd., 460 F.3d 434 (2d Cir. 2006)). After being codified in 1844 as Admiralty Rule 2, maritime attachment became available under Rule B in 1966 as part of the Supplemental Rules. The rule was further amended in 1985 to address constitutional inconsistencies raised by some recent Supreme Court decisions on jurisdiction. (Advisory Committee Notes). 7

11 Specifically, courts have recognized a plaintiff s particular needs in dealing with maritime defendants that are highly mobile and likely to have mobile assets. 58 Courts have also recognized that maritime defendants can be elusive when it comes to the nature of their assets. 59 In many companies, the ship is the only asset and/or the ownership structure itself is very difficult to determine, which makes it easier for potential defendants and their property to avoid litigation. 60 Additionally, courts have traditionally recognized the international level that maritime commerce operates on and the foreign parties that a maritime plaintiff is constantly in contact with. 61 As the Supreme Court noted in In re The Louisville Underwriters (1890), always making maritime plaintiffs go to the home of the defendant would not only often put them in great delay, inconvenience, and expense, but would in many cases amount to a denial of justice. 62 It is worth noting that the maritime plaintiff s needs in the modern era have changed slightly from their original justification. Forum selection clauses have provided plaintiffs with a viable alternative forum option for pursuing potential claims against maritime defendants. 63 Additionally, some commentators have questioned whether the needs of the maritime plaintiff are truly unique to maritime commerce in the modern era, given the technological and global environment that many of today s industries operate in. 64 Nevertheless, federal courts have continued to explicitly support the policy justifications behind Rule B. 65 As several courts have noted, the federal courts exclusive jurisdiction over admiralty matters as designated by the Article III of the Constitution and a significant case law precedent have established attachment to be a characteristic feature of maritime law, which requires uniform adherence by U.S. courts, and a general recognition that maritime law is sometimes unique. 66 In addition to a well-established precedent, courts have also recognized that a maritime plaintiff s need to secure jurisdiction over an absent party and to assure satisfaction 58 Tetley, Tulane Law Review 1999, p Benda, Tulane Maritime Law Journal 2006, Id. 61 Winter Storm Shipping, Ltd. v. TPI, 310 F.3d 263 (2d Cir. 2002); Schiffahrtsgesellschaft Leonhardt & Co. v. A. Bottachi S.A. de Navegacion, 773 F.2d 1528 (11 th Cir. 1985). 62 In re Louisville Underwriters, 134 U.S. 488, 493 (1890). 63 Polar Shipping, Ltd. v. Oriental Shipping Corp., 680 F.2d 627 (9 th Cir. 1982). (See Section 3.2 for a full discussion of the effect of forum selection clauses on Rule B attachments). 64 Benda, Tulane Maritime Law Journal 2006, which states that, Modern maritime practice may not be any more transient, and maritime companies may not be any more financially insolvent or judgment-prone than other modern maritime industries subject to general civil procedure s more stringent strictures. In an increasingly technological world, even maritime companies must adapt ; It would perhaps be fair to say that the needs of the maritime plaintiff in the modern era are very much the same as they were before, but the modern maritime plaintiff s needs in comparison to other plaintiff s needs may not be as unique as they once were. 65 Consub Delaware v. Shahin Engenharia Limitada, 543 F.3d 104 (2d. Cir. 2008); Winter Storm Shipping, Ltd. v. TPI, 310 F.3d 263 (2d Cir. 2002). 66Americcan Dredging Co. v. Miller, 510 U.S. 443 (1994); Swift & Co. Packers v. Compania Colombiana Del Caribe, 339 U.S. 684, 693 (1950); Winter Storm Shipping, Ltd. v. TPI, 310 F.3d 263 (2d Cir. 2002); Aqua Stoli Shipping Ltd. v. Gardner Smith Pty. Ltd., 460 F.3d 434 (2d Cir. 2006); The Maritime Law Association of the United States, Brief of Amicus Curiae in Support of Application of Federal Maritime Law, in Consub Delaware LLC, v. Schahin Engenharia Limitada (2008). 8

12 of a judgment remain in modern times. 67 A maritime defendant s property, such as an EFT, is more easily transferable today than it ever was. 68 Consequently, courts in the modern era have reinforced the principle that a maritime defendant can reasonably expect to face suit wherever his property may be found. 69 The validity of the modern policy justifications in the face of other conflicting legal issues is discussed throughout this paper. 2. Rule B Attachments of Electronic Fund Transfers 2.1 How EFTs Work: A Critical Time Lapse Attachment of EFTs involves the interplay between a centuries-old admiralty law procedure and present day banking technology. 70 The normal EFT process can be described as follows: A customer ( the originator ) commences an EFT by instructing its bank ( the originating bank ) to transfer funds to a beneficiary. Because the beneficiary is not located in the United States, it only maintains an account with a foreign bank ( the beneficiary s bank ). The beneficiary s bank, because it does not operate in the United States, maintains a U.S. dollar account with an American bank ( the intermediary bank ). The originating bank sends the originator s payment instructions to the intermediary bank, including the name and account number of the intended beneficiary. The intermediary bank executes those instructions by crediting funds into the beneficiary bank s U.S. dollar account at the intermediary bank. Subsequently, the beneficiary s bank pays the beneficiary by crediting the appropriate sum in the beneficiary s account at the beneficiary s bank. 71 Attachment of an EFT comes into play during the critical time lapse between when the intermediary bank receives payment from the originator s bank and when the intermediary banks credits the corresponding payment to the beneficiary bank. 72 Though the payment is electronic, this time lapse can occur almost instantaneously or it can take as long as a couple of days. 73 In the landmark case from the Second Circuit on EFT attachment, Winter Storm v. TPI (2002), the Court said for the first time that EFTs were attachable property for the purposes of maritime attachment under Rule B. 74 Plaintiff Winter Storm, a foreign corporation with its place of business in Malta, had chartered its vessel to the defendant TPI, a Thai corporation, to carry an oil cargo from Saudi Arabia to Thailand. The charter party provided for arbitration of disputes in London Winter Storm Shipping, Ltd. v. TPI, 310 F.3d 263 (2d Cir. 2002); Consub Delaware v. Shahin Engenharia Limitada, 543 F.3d 104 (2d. Cir. 2008). 68 Id. 69Winter Storm Shipping, Ltd. v. TPI, 310 F.3d 263 (2d Cir. 2002); Aqua Stoli Shipping Ltd. v. Gardner Smith Pty. Ltd., 460 F.3d 434 (2d Cir. 2006). 70 Winter Storm Shipping, Ltd., v. TPI, 310 F.3d 263 (2d Cir. 2002). 71 Noble Shipping, Inc. v. Euro-Maritime Chartering, Ltd., 2003 WL (S.D.N.Y. Dec. 24, 2003); Dove, Admiralty and Maritime Law Conference 2007, p Navalmar(U.K.) Ltd. v. Welspun Gujarat Stahl Rohren, Ltd., 485 F. Supp. 2d 399, 406 (S.D.N.Y Apr. 24, 2007) 73 Winter Storm Shipping, Ltd., v. TPI, 310 F.3d 263 (2d Cir. 2002). 74 Id. 75 Id. 9

13 Winter Storm alleged that it was due $361, in freight, interest, and anticipated attorney and arbitration fees. Shortly thereafter, Winter Storm sought the attachment of TPI s assets held by potential garnishees in the Southern District of New York for the amount of its arbitration claim and had process served on two New York banks. At or around the same time, TPI entered into an unrelated commercial transaction, which was to be made in U.S. dollars, with a party whose bank was based in London. TPI s Thai bank attempted to send the payment to London through one of the two New York banks as an intermediary, at which point a portion of the payment was held by the New York bank according to the attachment order. 76 Overruling the district court s holding in the post-attachment hearing, the Second Circuit found that controlling federal precedent and the language of Rule B itself deemed an EFT to be property for the purposes of Rule B. In doing so, it described an EFT as a credit temporarily in the possession of the intermediary bank, and as such, parties filing a complaint praying for attachment can seek the attachment of them. 77 Though it was perhaps not evident at the time, Winter Storm paved the way for Rule B s widespread use as a powerful litigation tool for international maritime claims. 78 The ruling also became the basis for the continued legal battle over EFT attachment. Courts and litigants following the ruling analyzed and critiqued the ruling s assertions on maritime attachment s history and characteristics, property interests, and due process concerns. 79 The remainder of this chapter as well Section 3.1 discusses these issues in detail. 2.2 EFT Property Issues: Is an EFT Really Property? If so, then whose? While Winter Storm said EFT funds were seizable property under Rule B, district courts thereafter were still unsure whose property they were, mainly the originator s or the beneficiary s. 80 In Winter Storm, the defendant was the originator of an EFT that was attached. Nevertheless, the courts following Winter Storm s precedent allowed attachment of EFT funds going from defendants or coming to defendants, i.e. in both directions. 81 A careful reading of Winter Storm lends support to the notion that the Court intended for EFT funds to be defined as the property of the originator. On at least two occasions the court refers to TPI s funds in the hands of BNY, with TPI being the defendant and originator and BNY being the intermediary bank. 82 Though the Court never said the exact words, EFT funds at the critical time lapse belong to the originator, the Court s language used to describe TPI s funds said just as much. 83 With this definition in place, allowing attachment of EFT funds on their way to a defendant as the beneficiary would appear on its face to be problematic. Property under Rule 76 Id. 77 Winter Storm Shipping, Ltd., v. TPI, 310 F.3d 263 (2d Cir. 2002). 78 Dove, Admiralty and Maritime Law Conference 2007, p Aqua Stoli Shipping Ltd. v. Gardner Smith Pty. Ltd., 460 F.3d 434 (2d Cir. 2006); Consub Delaware v. Shahin Engenharia Limitada, 543 F.3d 104 (2d. Cir. 2008). 80Aqua Stoli Shipping Ltd. v. Gardner Smith Pty. Ltd., 460 F.3d 434 (2d Cir. 2006); Seamar Shipping Corp. v. Kremikovitzi Trade Ltd., 461 F. Supp. 2d 222 (S.D.N.Y. 2006). 81 General Tankers Pte Ltd., v. Kundan Rice Mills Ltd., 475 F.Supp.2d 396 (S.D.N.Y. 2007); Navalmar(U.K.) Ltd. v. Welspun Gujarat Stahl Rohren, Ltd., 485 F. Supp. 2d 399, 406 (S.D.N.Y Apr. 24, 2007). 82 Winter Storm Shipping, Ltd., v. TPI, 310 F.3d 263 (2d Cir. 2002). 83 Id. 10

14 B, whether tangible or intangible, must belong to the defendant in order to be attached. 84 If an EFT at the critical time lapse belongs to the originator, then it is not yet the beneficiary s property, and thus cannot be attached as the beneficiary s property. Likewise, the originator and the beneficiary cannot both own the EFT funds simultaneously. 85 However, courts have examined EFT property in the hands of intermediary banks in terms of property interests and not exclusive ownership. Instead of determining who owns the EFT, the property interest approach in the Southern District raises the question of whether EFTs are seizable property when the defendant is the beneficiary, given that Winter Storm already decided that they were seizable when the defendant was the originator. 86 The prevailing view among judges in the Southern District has been that an EFT fund represents the concurrent property interests of both originator and beneficiary in that an EFT fund can also be viewed as a debt owed to the beneficiary. 87 As Winter Storm noted, Rule B also permits a plaintiff to attach intangible items, such as debts owed to the defendant. Such items may be attached even if they have not yet matured or have only partially matured. Of course, the defendant s entitlement to the credit or interest in the debt must be clear. 88 Consequently, Rule B s broad language does not require exclusive property interest for attachment and EFTs can be seized going in either direction. 89 Defendants in Winter Storm and subsequent Second Circuit cases, as well as the banking industry in supporting briefs of Amicus Curiae, have defiantly taken an alternative view of the property issue. 90 Their position is that a funds transfer at an intermediary bank is the property of neither the originator nor the beneficiary. 91 As the banking industry stated: The funds transfer is in fact not subject to the possession, use or enjoyment of either the originator or the beneficiary. If either walked into an intermediary bank to claim those funds, those claims would be rejected Fed. R. Civ. P., Supp. Rule B 85The Clearing House Association L.L.C., Brief of Amicus Curiae in The Shipping Corporation of India Ltd. v. Jaldhi Overseas Pte Ltd. (2009). 86 General Tankers Pte Ltd., v. Kundan Rice Mills Ltd., 475 F.Supp.2d 396 (S.D.N.Y. 2007). 87 General Tankers Pte Ltd., v. Kundan Rice Mills Ltd., 475 F.Supp.2d 396 (S.D.N.Y. 2007); One judge in the Southern District has continued to view EFTs in terms of exclusive property interests and does not allow the attachment of EFTs en route to the defendant as the beneficiary. The judge argues that such an interpretation comes from the precedent set in Winter Storm, which was a narrow holding that only condoned EFT attachment when the defendant was originator. (Seamar Shipping Corp. v. Kremikovitzi Trade Ltd., 461 F. Supp. 2d 222 (S.D.N.Y. 2006)) This analysis has been widely rejected by the rest of the judges in the district as they have interpreted the language in Winter Storm regarding debts that haven t matured yet as attachable property to allow the attachment of EFTs. (Navalmar(U.K.) Ltd. v. Welspun Gujarat Stahl Rohren, Ltd., 485 F. Supp. 2d 399, 406 (S.D.N.Y Apr. 24, 2007); General Tankers Pte Ltd., v. Kundan Rice Mills Ltd., 475 F.Supp.2d 396 (S.D.N.Y. 2007)). 88 Winter Storm Shipping, Ltd., v. TPI, 310 F.3d 263 (2d Cir. 2002) 89 General Tankers Pte Ltd., v. Kundan Rice Mills Ltd., 475 F.Supp.2d 396 (S.D.N.Y. 2007) 90The Clearing House Association L.L.C., Brief of Amicus Curiae in The Shipping Corporation of India Ltd. v. Jaldhi Overseas Pte Ltd. (2009); The Clearing House Association L.L.C., Brief of Amicus Curiae in Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd. (2006); The New York Clearing House Association L.L.C., Brief of Amicus Curiae in Winter Storm Shipping, Ltd., v. TPI, 310 F.3d 263 (2d Cir. 2002). 91 Consub Delaware v. Shahin Engenharia Limitada, 543 F.3d 104 (2d. Cir. 2008). 92 The Clearing House Association L.L.C., Brief of Amicus Curiae in The Shipping Corporation of India Ltd. v. Jaldhi Overseas Pte Ltd. (2009). 11

15 They derive their position from New York s Uniform Commercial Code, which is state law. Section 4-A-503 provides: For proper cause and in compliance with applicable law, a court may restrain (i) a person from issuing a payment order to initiate a funds transfer, (ii) an originator s bank from executing the payment order of the originator, or (iii) the beneficiary s bank from releasing funds to the beneficiary or the beneficiary from withdrawing the funds. A court may not otherwise restrain a person from issuing a payment order, paying or receiving payment of a payment order, or otherwise acting with respect to a funds transfer. 93 Under this wording, the interdiction of funds when they are with the intermediary bank is prohibited. Defendants and the banking industry reasoned that EFTs were the property of the intermediary banks, with the originator maintaining control over the fund, by saying: [an EFT] is a debt owed by the intermediary bank to the next bank (if the intermediary bank accepts the payment order), or to its sender if the funds transfer is not completed. 94 However, the Second Circuit in Winter Storm and its progeny have ruled that this determination is irrelevant because federal law pre-empts state law on the matter. 95 Article III Section 2 of the Constitution grants federal courts exclusive jurisdiction over maritime cases. Only when federal law is silent on an issue may a federal court turn to state law for guidance. 96 While the banking industry had argued that there was no statutory federal law on EFTs as attachable property, the Court in Winter Storm ruled that the inclusive language of Rule B and existing case law on EFTs produced relevant federal law on the matter. The Court cited United States v. Daccarett (2d Cir. 1993), a civil forfeiture case brought under federal drug laws in which the Court permitted plaintiffs to seize EFTs. The Court in Daccarett had determined EFT to be property by saying, an EFT while it takes the form of a bank credit at an intermediary bank is clearly a seizable res under the forfeiture statutes. The Court in Winter Storm found Daccarett particularly relevant because the attachment of funds in Daccarett was accomplished pursuant to the Admiralty Rules, incorporated by reference into the forfeiture statute. 97 Thus, Winter Storm concluded that: the broad inclusive language of Admiralty Rule B(1)(a) 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)(a). Because that rule is derived from federal law, there is no occasion to look for guidance in state law N.Y. U.C.C. Law 4-A-503; Winter Storm said that this rule was made in favor of banks and worked an unacceptable prejudice to maritime attachment. (Winter Storm Shipping, Ltd., v. TPI, 310 F.3d 263 (2d Cir. 2002). 94The Clearing House Association L.L.C., Brief of Amicus Curiae in The Shipping Corporation of India Ltd. v. Jaldhi Overseas Pte Ltd. (2009); Consub Delaware v. Shahin Engenharia Limitada, 543 F.3d 104 (2d. Cir. 2008). 95Winter Storm Shipping, Ltd., v. TPI, 310 F.3d 263 (2d Cir. 2002); Emanuel, Winter Storm Shipping, Ltd., v. TPI, 310 F.3d 263 (2d Cir. 2002) 97 Winter Storm Shipping, Ltd., v. TPI, 310 F.3d 263 (2d Cir. 2002) citing United States v. Daccarett, 6 F.3d 37 (2d Cir 1993). 98 Winter Storm Shipping, Ltd., v. TPI, 310 F.3d 263 (2d Cir. 2002) 12

16 Additionally, Winter Storm rejected the state law view on policy grounds. The Court quoted the Supreme Court in American Dredging Co. v. Miller (1994), which had said that a statute cannot work material prejudice to the characteristic features of the general maritime law since maritime law is the exclusive jurisdiction of the federal courts and the uniformity of maritime law must be preserved. 99 Given that attachment is a characteristic feature of maritime law, and the state statute would have the effect of eliminating it for Winter Storm, the Court ruled that the state statute cannot be used to eliminate maritime attachment under Rule B How Plaintiffs Attach EFTs: Good Timing, a Wide Net, and a Bullish Approach Given that EFTs are only in the district for short periods of time that are not readily transparent to the plaintiff, unlike say cargo or a ship itself, the question arises as to how a plaintiff knows when and where to have process of attachment served. Plaintiffs don t really know for sure when and where to have process served, nor do they need to know. 101 From a legal standpoint, Rule B requires the plaintiff only to attest in its affidavit that the defendant cannot be found within the district. Nothing in the wording of Rule B requires plaintiffs to demonstrate specific knowledge of the defendant s property s presence in the district. 102 A few judges have required maritime plaintiffs to provide factual support that the defendant has, or will have, assets in the jurisdiction, but it is not common practice. 103 From a practical standpoint, plaintiffs have generally responded with a big net approach and simply served process on all of the banks they think the defendant s bank would use. 104 Plaintiffs can come up with educated guesses where to serve process by knowing which banks specialize in this type of funds transfer payment and by having previously conducted dollar transactions with the defendant. 105 Plaintiffs have taken a similar approach concerning when service of process for attachment should be executed. 106 The main challenge for plaintiffs is that only property that the garnishee has in its possession at the time of service can be attached. 107 That means service of process on an intermediary bank as a garnishee must occur when the originator bank has deposited funds with the intermediary bank but before the intermediary bank has deposited the corresponding funds with the beneficiary bank. 99 Winter Storm Shipping, Ltd., v. TPI, 310 F.3d 263 (2d Cir. 2002) citing Americcan Dredging Co. v. Miller, 510 U.S. 443 (1994). 100 Id. 101 Winter Storm Shipping, Ltd., v. TPI, 310 F.3d 263 (2d Cir. 2002); The Clearing House Association L.L.C., Brief of Amicus Curiae in The Shipping Corporation of India Ltd. v. Jaldhi Overseas Pte Ltd. (2009). 102 Fed. R. Civ. P. Supp. B; The Clearing House Association L.L.C., Brief of Amicus Curiae in The Shipping Corporation of India Ltd. v. Jaldhi Overseas Pte Ltd. (2009). 103 The Clearing House Association L.L.C., Brief of Amicus Curiae in The Shipping Corporation of India Ltd. v. Jaldhi Overseas Pte Ltd. (2009). 104 Dove, Admiralty and Maritime Law Conference 2007, p The Clearing House Association L.L.C., Brief of Amicus Curiae in The Shipping Corporation of India Ltd. v. Jaldhi Overseas Pte Ltd. (2009); The Clearing House Association L.L.C., Brief of Amicus Curiae in Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd. (2006); The New York Clearing House Association L.L.C., Brief of Amicus Curiae in Winter Storm Shipping, Ltd., v. TPI, 310 F.3d 263 (2d Cir. 2002). 106 Dove, Admiralty and Maritime Law Conference 2007, p Reibor Int l Ltd. v. Cargo Carriers (Kacz-Co.) Ltd., 759 F.2d 262 (2d Cir. 1985). 13