Anyone who has obtained security through a Rule B attachment of EFTs in New York, or has had funds attached by a Rule B attachment order, should conduct further legal assessment of their position towards Rule B attached EFTs.
In a landmark judgment dated 16 October 2009, the United States Court of Appeals for the Second Circuit held in The Shipping Corporation of India v. Jaldhi Overseas Pte Ltd. that claimants attaching electronic funds transfers (EFTs) passing through the New York banking system are no longer subject to attachment under Rule B of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions of the Federal Rules of Civil Procedure. The Second Circuit departed from its previous decision in Winter Storm Shipping v. TPI – the initial decision that sanctioned the restraint of an EFT.
In Jaldhi, the Shipping Corporation of India (the “Plaintiff”) chartered a bulk carrier to Jaldhi Overseas Pte Ltd. (the “Defendant”) in March 2008 to transport iron ore from India to China. While loading cargo in India, a ship’s crane collapsed and killed the crane operator. The ship went off-hire because of the accident and subsequently a dispute involving $4.5 million in charter hire, legal fees and costs arose between the parties. The Plaintiff initiated a Rule B action in New York, and initially obtained an order of attachment and garnishment from the District Court for the Southern District of New York. The order included EFTs held by any banks under the court's jurisdiction that were originated by or payable to the Defendant.
The Southern District later vacated the order as it applied to EFTs for which the Defendant was the beneficiary (as opposed to the originator). The Southern District then certified to the Second Circuit the question of whether or not funds held by an intermediary bank during the course of an EFT could be considered property of the beneficiary subject to attachment.
Rather than addressing the specific issue of whether or not funds held at an intermediary during the course of an EFT are the property of the intended beneficiary and are subject to attachment by a creditor of the beneficiary, the Second Circuit held that Winter Storm had been decided erroneously. In its opinion, the Second Circuit stated that Winter Storm’s reliance on an earlier precedent had been misplaced because in the absence of controlling federal law, the court must adhere to New York State law. New York's version of the Uniform Commerical Code (UCC) bars the restraint of funds at intermediary banks during a funds transfer process (NY UCC section 4-A-503).
The Second Circuit also emphasised that the negative effects of Winter Storm had influenced its decision in Jaldhi. In particular, the Second Circuit expressed concern over the overwhelming growth in the number of Rule B applications that were putting a strain on both the judicial and banking systems of New York as well as the potential threat to the US dollar’s position as the leading currency in international trade.
As a result, the Second Circuit held that EFTs in the temporary possession of an intermediary bank are neither the property of the originator nor the beneficiary of the transfer and may not be the subject of an attachment under Rule B.
Difficulties with Jaldhi
The broad scope of the decision came as a surprise to many, as the holding in Winter Storm had been affirmed twice by the Circuit Court. One of the issues the Jaldhi decision raises is to what extent US courts will now have to make the Rule B ban retroactive. The decision does not provide any guidance on this. Retroactive application of a decision is generally presumed, although there are exceptions to this rule. This issue is complicated further, however, by the myriad of forms in which funds may be held in an active Rule B case. In many current cases, funds have been attached as EFTs but subsequently replaced by bank guarantees or other substitute security. It is unclear at this stage whether judges will order the release of these types of non-EFT funds.
Another difficulty that has arisen from the Jaldhi decision concerns the issue of conflicts of interest for law firms that represent both plaintiffs and defendants in Rule B cases. Legal ethics experts believe that representing both Rule B plantiffs and Rule B defendants is an “unwaivable conflict”. It is thought that firms in which even one lawyer represents a client trying to get EFTs released could be disqualified from representing any clients who are seeking to keep attached EFTs frozen.
The decision in Jaldhi significantly erodes the effectiveness of the Rule B remedy. It does not do away with Rule B completely, however, as the possibility of attachment of ships, cargo, bunkers, etc., as security for maritime claims still remains. Nevertheless, the outcome of Jaldihi is good news for defendants where their only connection with New York is the passing of funds through the New York banking system. On the other hand, claimants now have to deal with the potential loss of a cost-effective and wide-ranging tool that had made it much easier to obtain security from unwilling defendants.
Further to the Jaldhi decision, McDermott would recommend that anyone who has obtained security through a Rule B attachment of EFTs in New York, or has had funds attached by a Rule B attachment order, should conduct further legal assessment of their position towards Rule B attached EFTs.