The Second Circuit on August 5 clarified the standard for attachment in aid of arbitration – in this case an international arbitration and assets of a Lebanese bank held in New York. In Iraq Telecom Limited v. IBL Bank S.A.L,[ the Second Circuit addressed the issues left open in two of its prior decisions and that have not yet addressed by the New York Court of Appeals. The Second Circuit held that courts addressing such attachments under New York law may consider both statutory and non-statutory factors in deciding whether to attach a party’s assets, or vacate or modify an existing attachment – but the non-statutory factors can only be considered if they are “extraordinary”.
In the case before the Second Circuit, the plaintiff seeking attachment had initiated arbitration proceedings in Lebanon against the defendant, a Lebanese bank. The plaintiff had previously obtained a declaratory judgment that the Lebanese bank and several other defendants had defrauded the plaintiff. Based on that judgment, the plaintiff initiated another arbitration just against the bank, seeking $97 million in damages.
While the arbitration was pending, the plaintiff filed a petition in the U.S. District Court for the Southern District of New York seeking to attach the bank’s New York assets during the pendency of the arbitration. The district court initially issued an ex parte order attaching $100 million in assets, but then reduced the amount of the attachment to $3 million after the bank appeared in the action and moved to vacate the attachment. The district court found that the plaintiff satisfied all of the statutory factors for attachment under New York law, but reduced the amount based on its finding that the plaintiff was not likely to succeed on the full amount of its claimed damages in the second arbitration. The district court then further reduced the amount of the attachment based on “extraordinary circumstances”: (1) the potential impact of the attachment on the Lebanese economy if the bank became insolvent; (2) the fact that a large attachment could cause the bank to fall out of compliance with certain reserve requirements imposed by Lebanon’s central bank; (3) the attachment could interfere with innocent bank customers’ ability to access their money; (4) the attachment could undermine confidence in New York’s financial institutions; and (5) the bank was not the principal wrongdoer in the fraudulent scheme.
On appeal, the plaintiff argued that the district court was not permitted to consider the non-statutory “extraordinary circumstances”; even if it was permitted to do so, it applied those factors incorrectly; and also erred in finding that the plaintiff was unlikely to succeed on the full amount of its damages claim in the arbitration. The Second Circuit rejected the plaintiff’s first argument, finding that courts applying New York state attachment laws can consider “extraordinary circumstances.” Although New York’s highest state court, the Court of Appeals, has not addressed this issue, the Second Circuit predicted that it would find consideration of non-statutory factors appropriate based on a decision from a lower New York appellate court and the broad discretion afforded to courts under the attachment statute.
The Second Circuit agreed with the plaintiff, however, that the district court erred in using the “extraordinary circumstances” to reduce the attachment all the way to $3 million. The Second Circuit explained that the district court failed to consider whether an amount higher than $3 million, but less than $100 million, could have been used while still keeping the bank solvent, in compliance with applicable regulations, and permitting customers to get to their funds. The Second Circuit remanded to the district court to reconsider the amount of the attachment.
The Second Circuit also held that the fact that the bank was not the primary wrongdoer did not qualify as an “extraordinary circumstance” under the facts presented here. The Court stated that the fact that multiple defendants may be jointly and severally liable is not “extraordinary,” although it left open the possibility that the existence of a “principal wrongdoer” might be an “extraordinary circumstance” based on different facts than those presented in this case.
Finally, the Second Circuit held that the district court erred in finding that the plaintiff was unlikely to succeed on the full amount of its claimed damages. The Court stated that the district court erred in finding that it was “conceivable” that the arbitral panel might reduce the award because the standard is whether such an outcome is “probable.” The Court further found that the district court erred in basing its likelihood of success determination on what it thought the bank could afford to pay, rather than the amount of the bank’s liability.
Given the importance of the New York courts in hearing international disputes, this the Second Circuit’s decision provides important guidance for when seeking to attach funds or to vacate previously-issued attachments in connection with an arbitration. The Second Circuit’s decision makes clear that courts can look beyond the statute, but that the non-statutory circumstances must be “extraordinary” in order to warrant a reduction in the attachment amount.