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Gard News 184 -

 


A Second Circuit Court of Appeals decision raises reservations regarding the application of the attachment rules by district courts.

The article “’B’ is for … Rule B maritime attachments in the US”, which appeared in Gard News issue No. 182, explained that in recent years, Supplemental Admiralty Rule B has ruthlessly wielded its double-edged sword, cutting the international maritime industry off at the knees. But now it seems the Second Circuit Court of Appeals has dulled its blade, leaving many to wonder if the reign of Rule B is about to come to an end.

Since 2002, when the Second Circuit decided the case of Winter Storm v. TPI,1 the time-honoured concept of maritime attachment has been used to attach electronic funds transfers (EFTs) to or from the (allegedly) indebted party as they are passing through banks located in the court’s jurisdiction. Though the process raised a few eyebrows at first, it is has since become regular fare for maritime attorneys in the Second Circuit (and elsewhere). The process of maritime attachment of EFTs is explained in Gard News issue No. 182.

The attachment of EFTs has been heavily criticised by the banking industry, which has argued that the decision in Winter Storm undermines the federal clearing system and disrupts the financial markets. Indeed many attorneys routinely filing Rule B attachments in the Second Circuit question the validity of the procedure and believe it is only a matter of time before the Second Circuit is given the opportunity to do away with it altogether.

Earlier this year, the Second Circuit heard an appeal of the district court’s decision in Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd.2 This case was well-known for vacating the attachment of Gardner Smith’s EFTs because Gardner Smith was an on-going business with sufficient assets to satisfy any judgment against it. Therefore, the district court found that the burden on Gardner Smith of not being able to conduct its business in US dollars outweighed Aqua Stoli’s need for security. The Second Circuit vacated and remanded the district court’s decision.3

The Second Circuit recognised that the district courts have not been consistent in their reasoning since Winter Storm. Recent cases have produced varying tests and criteria for determining whether a Rule B attachment should be vacated.

Although it recognised that there are certain limited circumstances in which a maritime attachment should be vacated, such as where suit could readily be brought in another jurisdiction within the state or security has already been attached elsewhere, the Second Circuit determined that the rules on maritime attachment should be strictly construed; and as there is no room in the rules for considering, inter alia, the need for the attachment, it was not within the discretion of the district courts to create such tests when considering a motion to vacate. The court held that “[i]t was sufficient to sustain the attachment that Aqua Stoli satisfied the requirements of Rule B,” and the fact that Gardner Smith “had substantial assets elsewhere in the world” was “legally irrelevant”.

The Second Circuit’s outright rejection of recent case law that fashioned various tests for determining whether a motion to vacate should be granted will no doubt impact the decision of whether to file such a motion. However, by far the most interesting aspect of the Second Circuit’s decision may be found in a footnote. Footnote 6 called into question the correctness of Winter Storm in holding that “EFTs are property of the beneficiary or sender of an EFT”.4Winter Storm had relied on a forfeiture case that held EFTs to be attachable assets, but did “not answer the more salient question of whose assets they are while in transit”5 (emphasis in original).

Noting that one looks to state law in the absence of a federal rule, the court indicated that “[u]nder state law, the EFT could not be attached because EFTs are property of neither the sender nor the beneficiary while present in an intermediary bank”.6

Footnote 6 is a clear invitation to bring this issue before the Second Circuit and it is only a matter of time before someone accepts. Although it remains to be seen how the Second Circuit will decide, popular opinion is building against allowing attachments of EFTs.

While it remains a viable course of action, even at the district court level certain judges are showing their displeasure with the current state of Rule B attachments. These judges may limit relief by not allowing service of an order of attachment to be valid for (the otherwise usual) twenty-four hours, and not requiring the acceptance of daily service by telefax (as usual after the first service by hand). When this occurs, the moving party may decide to drop its motion altogether. If service is not valid beyond the moment it is handed to the bank, the whole affair becomes hit or miss as EFTs do not spend a very long time in the custody of the clearing bank. With the twenty-four hour rule in place, banks will stop all funds arriving throughout the course of the day. However, without it, only those funds actually transiting the bank at the exact moment of service may be attached. Theoretically, hourly service would be required to have any hope of attaching funds. Moreover, if service by telefax is not voluntarily accepted, the expense of personal service quickly becomes prohibitive.

Until the Second Circuit has an opportunity to state otherwise, EFTs may still be attached, but would-be attaching creditors are dependent on the luck of the draw (of their judge) as to whether the action is worth pursuing.

  1 Winter Storm Shipping, Ltd. v. TPI, a/k/a Thai Petrochemical Industry Public Company Limited, Thai Petrochemical Limited, Thai Petrochemical Industry PCL, TPI Oil (1997) Co., Ltd. and TPI Oil Co. Ltd. 310 F.3d 263 (2d Cir. 2002).
  2 384 F. Supp. 2d 726 (SDNY 2005).
  3 Case No. 05-5385-cv (2d Cir.), decided 31st July 2006, not yet published.
  4 Id. Footnote 6.
  5 Id.
  6 Id.

 

Gard News 184, November 2006/January 2007

Any comments to this article can be e-mailed to the Gard News Editor.

Gard News is published quarterly by Gard AS, Arendal, Norway.