Maritime attachments and vessel arrests are very useful tools for maritime claimants. The successful use of Rule B and Rule C of the Federal Rules of Civil Procedure can provide prejudgment security and potential satisfaction for maritime claims and judgments. The underlying rights and procedures are in many respects unique to maritime law, and they can vary from district to district. Plaintiffs should be familiar with the local rules and consider their exposure to counterclaims and corresponding countersecurity before commencing attachment or arrest proceedings. In turn, defendants or those claiming an interest in any attached or arrested property should consider making a restricted appearance, posting security, and requesting an emergency hearing. This article briefly discusses maritime attachments and arrests under US maritime law.
Rule B: Attachment
Maritime attachment is an ancient remedy that predates not only the Federal Rules of Civil Procedure, but also the formation of the United States. It provides a means to obtain prejudgment security and jurisdiction for claims against an otherwise absent defendant, and to assure satisfaction of judgment if the underlying claims are ultimately successful. These procedures are important to the fundamentally transient maritime industry because, without them, “defendants, their ships, and their funds could easily evade the enforcement of substantive rights of admiralty law.” Winter Storm Shipping. Ltd. v. TPI, 198 F. Supp. 2d 385, 387 (S.D.N.Y. 2002).
Rule B of the Supplemental Rules for Certain Admiralty and Maritime Claims provides in pertinent part:
(1) … 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 tangible or intangible personal property—up to the amount sued for—in the hands of garnishees named in the process.
(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.
In short, “an attachment should issue if the plaintiff shows that 1) it has a valid prima facie admiralty claim against the defendant; 2) the defendant cannot be found within the district; 3) the defendant’s property may be found within the district; and 4) there is no statutory or maritime law bar to the attachment.” Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., 460 F.3d 434, 445 (2d Cir. 2006). Usually, a court’s initial review of the complaint and entry of an order of attachment and garnishment is conducted ex parte, i.e., without prior notice to or participation of the defendant.
The verified complaint must allege both a maritime claim and a prima facie claim. These are related but separate concepts. Whether a plaintiff alleged a “maritime” claim is a procedural question governed by US maritime law, but whether a plaintiff alleged a “prima facie” claim is a substantive question governed by the law that applies to the claim (potentially, foreign law). The first prong of the analysis—maritime claim—is complicated by quirks of US maritime law. For example, a ship mortgage contract is a maritime contract, and breach of a ship mortgage contract would give rise to a maritime claim. In contrast, a shipbuilding contract is not a maritime contract, and a breach of a shipbuilding contract would not give rise to a maritime claim.
The verified complaint must be supported by an affidavit showing that the defendant cannot be found in the district. In simplest terms, this means that the defendant is not physically located where the attachment is being sought. But it also means, among other things, that the defendant does not have continuous or systematic contacts within the district that would make it subject to the court’s general personal jurisdiction. The supporting affidavit will frequently declare that the plaintiff searched the internet and phone books, and that it could not find any contact information for the defendant within the district. However, some courts will nonetheless deny or vacate a maritime attachment if the defendant can be found within a “convenient” adjacent jurisdiction. The applicability of this equitable rule varies from district to district.
Once a plaintiff establishes Rule B’s prerequisites, a court “must … enter an order … authorizing process of attachment and garnishment.” The clerk of the court then issues a writ of maritime attachment and garnishment. Issues concerning when service of process is effective are frequently resolved by court orders permitting alternative service like, for example, daily electronic service. All of the defendant’s tangible and intangible property is subject to attachment and garnishment, including its non-maritime property. This includes a defendant’s vessels, cargo, and bunkers as well as a defendant’s bank accounts and debts owed by third parties to the defendant (e.g., freight or hire).
Rule E: Defending a Maritime Attachment
A successful maritime attachment creates so-called quasi in rem jurisdiction and forces a defendant to make a difficult choice: appear to defend the attached property or risk the uncontested use of the attached property to satisfy a judgment or award. Rule E offers the defendant some protections. (This same rule applies in the context of Rule C vessel arrests, discussed below.) For example, a defendant not otherwise subject to the court’s personal jurisdiction does not have to make a general appearance, which would fully expose it to liability on, for example, additional related claims. Rather, a defendant may make a restricted appearance without submitting to the court’s personal jurisdiction, in which case its exposure is limited only to the value of the attached property. Furthermore, Rule E entitles the defendant to an emergency hearing at which the plaintiff has the burden to prove why the attachment should not be vacated.
Notably, Rule E also permits a defendant to post security to stay the execution of a writ of attachment and garnishment, or to act as a substitute to affect the release of seized property from attachment and garnishment. This option is useful to defendants when seizures are causing consequential damages. The form and amount of security may be negotiated by the parties or ordered by the court. Security may include costs and interest, at 6% annum, and attorneys’ fees if provided for by agreement. However, security cannot exceed twice the value of the claim or the value of the attached property. Moreover, when a defendant has posted security, Rule E requires a plaintiff to post countersecurity for the defendant’s counterclaims, subject to the court’s discretion. A court is unlikely to require countersecurity on the basis of a frivolous wrongful attachment counterclaim. Nevertheless, the risk of counterclaims and countersecurity is an important factor for any plaintiff to consider before commencing maritime attachment proceedings.
Rule B: In Practice
In 2002, the United States Court of Appeals for the Second Circuit decided Winter Storm Shipping, Ltd. v. TPI, and caused a flood of Rule B maritime attachments in New York’s federal courts. In Winter Storm, two foreign corporations were engaged in a foreign arbitration, and while that arbitration was pending the plaintiff commenced a maritime attachment proceeding in the United States District Court for the Southern District of New York to secure its claims. Having found the plaintiff satisfied Rule B’s prerequisites, the district court authorized the issuance of a process of maritime attachment and garnishment, which the plaintiff then served upon several New York banks. In a novel idea, the plaintiff did not intend to attach dormant funds in an existing bank account, but instead sought to attach electronic funds transfers (“EFTs”) that were simply passing through intermediary banks. In practice, many international EFTs, especially those relating to US dollar-denominated transactions, are settled by intermediary banks in New York.
The plaintiff’s effort initially succeeded when the Bank of New York, as garnishee, seized $361,621.58 as the EFT was being transferred from the defendant’s foreign bank to another foreign bank for an unrelated beneficiary. However, upon the defendant’s motion, the district court vacated the attachment because an EFT in transit does not belong to the sender or the receiver under New York state law, and therefore it is not attachable property under Rule B.
At issue on the Winter Storm appeal was whether an EFT belongs to the sender or the receiver under US maritime law, and whether it was therefore attachable property under Rule B. Senior District Judge Haight, sitting on the court of appeals by designation and long considered an éminence grise of US maritime law, vacated the district court’s judgment and remanded to the district court to reinstate the plaintiff’s maritime attachment. The court of appeals held, as a threshold issue, that despite the lack of notice to a defendant, Rule B proceedings satisfy due process standards (e.g., Rule E hearings). The court of appeals further held that US maritime law preempts state law, and that under US maritime law “EFT funds in the hands of an intermediary bank may be attached….” Winter Storm Shipping, Ltd. v. TPI, 310 F.3d 263, 278 (2d Cir. 2002). Then, the flood began.
In December 2005, HSBC Bank USA reportedly processed 797 writs of maritime attachment; in February 2006, Citibank reportedly processed writs of maritime attachment seeking to attach a total amount exceeding $195 million; in 2008, approximately 19% of more than 10,600 cases filed in the Southern District of New York were based on breach of maritime contract (presumably, mostly Rule B maritime attachments). The New York banks complained about the damage these EFT seizures were causing to the US banking system’s global reputation. The overburdened district court judges began to indirectly stem the rising tide by, for example, denying motions for continuous service, making it nearly impossible to attach EFTs momentarily passing through New York intermediary banks. Yet, for a few years, the court of appeals continued to uphold Winter Storm. See, e.g., Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., 460 F.3d 434 (2d Cir. 2006); See also Consub Delaware LLC v. Schahin Engenharia Limitada, 543 F.3d 104 (2d Cir. 2008). That was, until, the court of appeals decided Shipping Corp. of India v. Jaldhi Overseas Pte Ltd., 585 F.3d 58 (2d Cir. 2009).
In Jaldhi, the court of appeals found US maritime law did not answer the question of whether EFTs are attachable property. So, the court of appeals applied New York state law and held that EFTs being processed by intermediary banks are not property subject to maritime attachment. Jaldhi overruled Winter Storm. Today, EFTs passing through New York’s intermediary banks are not attachable property under Rule B.
Regardless, Rule B remains a useful tool for claimants seeking security for their maritime claims. While EFTs are not attachable property, a defendant’s vessels, cargo, and bunkers as well as its bank accounts and debts owed to it by third parties remain attachable property.
In fact, more recently, on October 30, 2020, in the United States District Court for the Eastern District of Louisiana, plaintiff Ping May Maritime filed a verified complaint against defendant Jiangsu Steamship (Singapore) praying for the issuance of a writ of maritime attachment and garnishment. The complaint alleged that the plaintiff was the owner of the vessel PING MAY, which had been time chartered to Jiangsu Steamship, but that Jiangsu Steamship breached that maritime contract and caused damages. The plaintiff had already commenced arbitration in London, as required by the charter party, and demanded security, but Jiangsu Steamship did not agree to provide it.
Therefore, to secure its claims in London arbitration, plaintiff Ping May sought to arrest the vessel SPRING SUNSHINE. Notably, defendant Jiangsu Steamship was not the owner of the SPRING SUNSHINE, but plaintiff nonetheless alleged that Jiangsu Steamship was the alter ego of the vessel’s owner, and therefore the vessel was subject to maritime attachment as if it was Jiangsu Steamship’s property. The verified complaint, supported by an attorney’s declaration, specifically alleged that Jiangsu Steamship could not be found within the Eastern District of Louisiana, and that the SPRING SUNSHINE was expected to arrive within the district the next day, on October 31, 2020, and depart at any time following cargo operations.
Given the exigent circumstances, the district court issued a writ of attachment on Sunday, November 1, 2020. The district court simultaneously issued an order allowing a substitute process server because, due to COVID restrictions, the US Marshal was not immediately available to serve the writ of maritime attachment and garnishment. Three days later, the proceeding was voluntarily dismissed without prejudice. Presumably, the parties negotiated security, and the plaintiff is now assured satisfaction if its claims in arbitration are ultimately successful.
Attachment v. Arrest
It is important to distinguish the Rule B attachment, as in Ping May, from Rule C arrest. Unlike Rule B attachment, which depends on the existence of an underlying in personam maritime claim against the defendant, Rule C arrest depends on the existence of an underlying in rem maritime lien against the property.
Rule C: Arrest
Maritime arrest is also an ancient remedy. It provides a means to enforce a maritime lien or a statutory right against property, in rem. In other words, the property is personified as the defendant. The US is not a party to any international arrest conventions, and its arrest rules and procedures are unique. Although US maritime law does not allow so-called sister ship arrest, it is generally believed that US maritime law strongly favors the suppliers of goods and services to vessels, and therefore many vessel supply contracts incorporate US maritime law.
Rule C of the Supplemental Rules for Certain Admiralty and Maritime Claims provides in pertinent part:
(1) When Available. An action in rem may be brought:
(a) To enforce any maritime lien;
(b) Whenever a statute of the United States provides for a maritime action in rem or a proceeding analogous thereto.
(2) Complaint. In an action in rem the complaint must:
(a) be verified;
(b) describe with reasonable particularity the property that is the subject of the action; and
(c) state that the property is within the district or will be within the district while the action is pending.
(3) Judicial Authorization and Process.
(a) Arrest Warrant.
(i) The court must review the complaint and any supporting papers. If the conditions for an in rem action appear to exist, the court must issue an order directing the clerk to issue a warrant for the arrest of the vessel or other property that is the subject of the action.
The verified complaint must describe the property to be arrested with reasonable particularity (e.g., by vessel name and IMO number). The kinds of maritime property that can be arrested include vessels, freight, sub-freights, and cargo. The complaint must allege that the property is within the district when the proceeding is commenced, or that the property will come into the district while the proceeding is pending. For example, plaintiffs frequently rely upon published sailing schedules and automatic identification systems (AIS) to track the locations of targeted vessels. A court’s initial review of an arrest application is usually conducted ex parte, and frequently under exigent circumstances, such as the imminent departure of a vessel from the port after cargo operations are completed.
The verified complaint must allege a prima facie maritime lien. Yet, when making an in rem lien claim against property, a plaintiff does not waive any of its related in personam claims against tortfeasors or counterparties. A maritime lien can arise under many circumstances. For example, a maritime lien against a vessel might arise in connection with seamen’s wages, salvage, general average, maritime torts (e.g., injury and death), ship mortgages, and supplies of necessaries. Additionally, a carrier may have a maritime lien against cargo for unpaid freight, but this lien possessory, and therefore it must be enforced before the cargo is released. Most US maritime liens arise automatically and do not need to be recorded anywhere.
When a plaintiff establishes Rule C’s prerequisites, a “court must issue an order directing the clerk to issue a warrant for the arrest …” In order to minimize potential adverse impacts on innocent third parties, an order for the arrest of a vessel customarily permits the vessel to continue cargo operations and to shift within the terminal or port so long as it remains within the district. The clerk of the court then issues a warrant for arrest. The warrant is usually served by the US Marshals, who will require the plaintiff to advance costs, and might also require the plaintiff to insure and indemnify the marshals. The amounts of advance deposits and conditions for the US Marshal’s services vary from district to district. A plaintiff should be familiar with local rules and procedures, and close coordination with local authorities is essential.
Upon court order, the seized property can be turned over to a substitute custodian retained directly by the plaintiff. The plaintiff’s costs of holding the property in custody are recoverable. Nonetheless, plaintiffs should consider the risks of potentially excessive custodia legis costs before commencing arrest proceedings, especially when arresting relatively low-value and high-maintenance property.
After a plaintiff succeeds in arresting property, a US court will consider the merits of the underlying maritime lien claim. After motions or trial, a court may enter in rem judgment and order the sale of the property to satisfy that judgment. In some very limited circumstances, a court can even order an interlocutory pre-judgment sale like, for example, when the arrested property is a perishable cargo. Before any judicial auction, a plaintiff must publish notice because the sale will extinguish all lien claims against the property. The priority among lienholders during the sale of a vessel in an in rem proceeding is roughly:
- Costs of keeping the vessel in custody (i.e., custodia legis);
- Seamen’s wage liens;
- Salvage and general average liens;
- Tort liens (e.g., injury and death);
- Preferred ship mortgage liens;
- Liens for necessary supplies;
- Maritime liens created by state law; and
- Non-maritime liens.
Another quirk of maritime law is that the order of priority among lienholders of the same class is “first in time, last in right”, which is a major departure from most non-maritime laws.
Rule E: Defending a Maritime Attachment
A successful maritime arrest perfects in rem jurisdiction and forces any person claiming an interest in the property to make a difficult choice: appear to defend the property or risk losing the property. But, again, Rule E offers some protections. For example, a person asserting a right of possession or ownership in the arrested property may make a restricted appearance without submitting to the court’s personal jurisdiction, so as to limit any exposure to the arrested property. Furthermore, Rule E entitles any person claiming an interest in the arrested property to an emergency hearing at which the plaintiff has the burden to prove why the arrest should not be vacated.
Rule C does not require a person claiming an interest in the property to post security, but it allows them to do so. In fact, the owner of a vessel may post a general bond with the district court to answer for the vessel’s future in rem liabilities, thereby reducing the risk of disruptive vessel arrests. Letters of undertaking provided by domestic or foreign underwriters, including International P&I Clubs, are customarily accepted as security. A person claiming an interest in arrested property should consider posting security, especially when the seizure is causing consequential damages.
Rule C: In Practice
Most arrest proceedings in the US are commenced by the suppliers of goods and services to vessels. As mentioned above, it long been believed that US maritime law strongly favors the suppliers of goods and services to vessels by giving them automatic statutory maritime liens that do not need to be recorded anywhere and can easily be enforced through in rem proceedings. That’s why vessel suppliers routinely incorporate US maritime law into their standard terms and conditions. However, the US maritime lien statute is strictly interpreted and applied.
The Commercial Instrument and Maritime Liens Act, 46 U.S.C. § 31301, et seq. (“CIMLA”) says that a person providing (1) necessaries, (2) to a vessel, and (3) on the order of the owner or a person authorized by the owner has a maritime lien on a vessel. “Necessaries” are basically anything that helps a vessel sail like repairs, supplies, towage, and even the use of a dry dock. “Vessels” are generally defined as anything capable of moving people or cargo over navigable waters. “[T]he order of the owner or a person authorized by the owner” is not always so easy to define and apply, and this statutory requirement was intensely litigated following the bankruptcy of OW Bunker, one of the world’s largest marine fuel traders.
In the ordinary course, OW Bunker would purchase marine fuel (also known as “bunkers”) from a physical supplier and resell those bunkers to its own customers. Frequently, OW Bunker would instruct a physical supplier to deliver the bunkers directly to OW Bunker’s customer’s vessel. OW Bunker’s bankruptcy left many physical suppliers unpaid; they were merely unsecured creditors in OW Bunker’s bankruptcy proceeding. Or were they? Rather than accept impaired recoveries from OW Bunker, many physical suppliers invoked CIMLA and claimed maritime liens directly against OW Bunker’s customer’s vessels. Meanwhile, OW Bunker and its purported assignees asserted competing maritime lien claims.
US courts had never before applied CIMLA to competing claims for the same supply of necessaries to the same vessel. The physical suppliers argued that, despite the absence of any direct contract between them and the vessels’ owners, they were entitled to maritime liens under CIMLA because the fuel orders originated from the vessels and also because the vessels ratified their maritime liens by accepting the bunkers and signing the bunker delivery notes. In contrast, OW Bunker argued that it alone was entitled to maritime liens under CIMLA because it alone received fuel orders directly from the vessels’ owners and their agents.
The disputes were intensely litigated in test cases in trial and appellate courts throughout the country. The United States Courts of Appeals for the Second, Fifth, Ninth, and Eleventh Circuits all held that, generally, the physical suppliers did not have enforceable maritime liens because they acted upon the order of OW Bunker, an independent trader who was not a vessel owner and was not an agent for vessel owners. Instead, the courts of appeals held that OW Bunker had an enforceable maritime lien because it supplied bunkers on the order of the vessel owners and agents. Perhaps US maritime law does not favor all suppliers of goods and services to vessels as strongly as commonly thought.