Following is a brief discussion of some of the more notable recent developments in the New York attachment and garnishment arena. Some of the developments relate to Rule B maritime attachments, and others relate more broadly.
Controlling Law in Rule B Alter EGO Attachments
A recent decision from the Second Circuit Court of Appeals clarified two important points primarily relating to alter ego attachment actions. As many are aware, a plaintiff may obtain a Rule B attachment where it is asserting a “valid prima facie maritime claim” against a party who cannot be “found” within the district, but who has an attachable interest in property located within the district. This issue of whether a plaintiff has a valid prima facie maritime claim has caused confusion in some cases where the underlying claim is subject to foreign law and will be litigated or arbitrated in a foreign proceeding. In such case, whose law controls the inquiry of whether an attachment is warranted?
That question was answered by the Second Circuit in Blue Whale Corp. v. Grand China Shipping Development, 722 F.3d 488 (2d Cir. 2013), which held that the inquiry is actually a two-pronged one, breaking down into whether the claim is “maritime” and whether it is “prima facie valid.” The first prong is a procedural question—i.e., is the claim within the subject matter of the U.S. federal courts. Thus, federal law always controls that question—i.e., if the claim would be maritime within the meaning of federal maritime law, then it is a maritime claim irrespective of how it may be classified under the foreign law governing the merits of the dispute.
The second prong, however, raises a substantive issue because the ultimate question is whether the claim, as pled, states a valid cause of action under the law that controls the merits of that claim. In many cases, the governing law will be clear from, for instance, a choice of law clause in the governing contract. With an alter ego claim, however, the analysis is not so simple. In such a claim, the plaintiff is contending that a third party—i.e., not the party to the contract or the party actually committing the tort—should have its “corporate veil” pierced because it is no more than the alter ego of the primary defendant. What law should govern such a claim—particularly in the typical situation where the plaintiff and defendant are from different foreign countries and the dispute involves a foreignflagged vessel carrying cargo to and from foreign ports?
In Blue Whale, the Second Circuit concluded that a choice of law clause in the contract should not control, because an alter ego claim is not strictly a claim under the contract but involves the separate question of when one party should be liable for another’s obligations. The court also rejected the notion that federal maritime law should always govern the question. Instead, the Second Circuit ruled, a court must conduct a choice of law analysis “by ascertaining and valuing points of contact between the transaction and the states or governments whose competing laws are involved.” Id. (quoting Lauritzen v. Larsen,345 U.S. 571 (1953)).
In Blue Whale, the points of contact implicated no particular jurisdiction, and the court thus weighted most heavily the plaintiff’s choice of forum coupled with the situs of property in the forum, and found that federal maritime law should apply. In other situations, however, it is not difficult to see how the analysis could weigh more heavily in favor of another jurisdiction’s alter ego law.
Attachment of New york Correspondent Accounts
We have seen a number of recent cases where the plaintiff has sought to attach U.S. dollar funds maintained by a defendant at a foreign bank with a correspondent banking relationship with a New York bank. The premise of the attachment is that that foreign defendant has an attachable property interest in its “share” of its bank’s funds maintained with the correspondent in New York.
Thus far, however, we are aware of no decision accepting this argument, and several have rejected it. In Toisa Ltd. v. PT Transamudra Usaha Sejahtera, 13 cv 1407 (Sept. 20, 2013)(JMF), the court issued a ruling from the bench concluding that a defendant has no attachable interest in a correspondent’s New York account. That ruling relied on a similar conclusion reached by the district judge in Lauritzen Bulkers A/S v. JIT Int’l Corp. Ltd., 13 cv 3982 (Aug. 9, 2013)(WHP), which considered such an attempt essentially analogous to EFT attachments, which had been barred in Shipping Corp. of India Ltd. v. Jaldhi Overseas Pte Ltd., 585 F.3d 59 (2d Cir. 2009).
In Toisa the plaintiff sought to rely on Cargill Financial Services Int’l, Inc. v. Bank Fin. and Credit Ltd., 896 N.Y.S.2d 317 (1st Dep’t 2010), in support of its position that a defendant had an attachable interest in correspondent funds. Cargill involved a claim against a foreign bank itself, and the plaintiff attempted to attach its correspondent account in New York. The court found that the evidence supported such an attachment, but ruled that the district court had not abused its discretion in vacating the attachment since the evidence also established that the funds were held “for the benefit” of third-party customers who used the account to transact foreign business in U.S. currency. This ruling, the plaintiff in Toisa argued, supported the conclusion that those third-party clients must themselves have an attachable interest in the funds. The Toisa court rejected this argument, however, concluding that a correspondent bank’s holding funds “for the benefit” of customers was not the same as saying they had a property interest in them. Instead, the Toisa court relied on earlier rulings in Sigmoil Resources, N.V. v. Pan Ocean Oil Corp., 234 A.D.2d 103 (1st Dep’t 1996), and Sidwell & Co., Ltd. v. Kamchatimpex, 166 Misc. 2d 639 (Sup. Ct., N.Y. Cty 1995), which had rejected similar attempts to attach funds in a correspondent bank’s account. As the Sigmoil court noted:
Neither the originator who initiates payment nor the beneficiary who receives it holds title to the funds in the account at the correspondent bank. Id. at 104.
Property Subject to Attachment Under State Law
Maritime plaintiffs tend to think only of Rule B when they think of attachment in the U.S., but most states provide their own attachment remedies that may apply in a given case as well. New York is no exception and allows for attachment of a defendant’s property in a number of different circumstances. Grounds include where the defendant is a foreign corporation not qualified to do business in the state; where the defendant, with intent to defraud creditors, has hidden or disposed of property or removed it from the state; or where the action is to enforce a foreign judgment.
Another ground that commonly arises in the maritime context is the attachment in aid of arbitration pursuant to C.P.L.R. § 7502(c). That provision allows a party to seek an attachment where it can show that “the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief.” Such an attachment may be sought irrespective of whether the arbitration arises under state law, the Federal Arbitration Act, or the New York Convention.
An attachment order issued under New York law can in some instances cast a wider net than one issued under Rule B—particularly where the defendant is subject to the jurisdiction of the New York courts. In Hotel 71 Mezz Lender LLC v. Falor, 14 N.Y.3d 303 (2010), the New York Court of Appeals, the state’s highest court, noted the distinction between cases where attachment is sought solely to obtain security for a claim and cases where attachment is sought to obtain quasi in rem jurisdiction—i.e., to litigate the merits of the dispute against attached property. In the latter category of case, due process concerns dictate that “the following black letter principle must be adhered to: ‘where personal jurisdiction is lacking, a New York court cannot attach property not within its jurisdiction.’” Id. at 311.
But, “where the court acquires jurisdiction over the person of one who owns or controls property, it is equally well settled that the court can compel observance of its decrees by proceedings in personam against the owner within the jurisdiction.” Id. at 312. Where the court has jurisdiction over the defendant, in other words, it “has jurisdiction over that party’s tangible or intangible property, even if the situs of the property is outside New York.” Id.
Where that property consists of a debt, courts have held that “the obligation of the debtor…clings to and accompanies him wherever he goes.” Id. at 315 (citing Harris v. Balk, 198 U.S. 215 (1905) (overruled on other grounds). Thus, if a garnishee owing money to the defendant can be served in New York, that debt can be attached even if the garnishee resides outside the state. The Hotel 71 court determined that this same rule applies to “uncertificated ownership interests” and thus authorized the attachment of a defendants’ interest in several limited liability companies located outside New York where the defendant had submitted to New York jurisdiction as a term of the guaranty under which he was being sued.
The decision in Mishcon de Reya NY LLP v. Grail Semiconductor, Inc., 2011 WL 6957595 (S.D.N.Y. 2011), helps illustrate how a New York court’s attachment power may be effectively used. There, the parties entered an agreement by which the plaintiff was to provide certain legal services to the defendant. The agreement provided for arbitration of disputes in New York. Disputes arose, and the plaintiff commenced arbitration and also sought an attachment in aid of arbitration. The property to be attached was a patent owned by the defendant. The defendant opposed the attachment on the grounds that the court lacked jurisdiction over the property since, under New York law, a patent is located where its owner is domiciled—in this case, California.
The court rejected this argument, relying on Hotel 71, and concluded that the attachment was valid because the court had jurisdiction over the defendant on the basis of its having agreed to arbitrate disputes under the agreement in New York. Importantly, the Grail court rejected the defendant’s narrow interpretation of Hotel 71 to suggest that the defendant had to be physically located in New York in order to be subject to attachment of its property outside the state. To the contrary, the court held, the defendant merely needs to be subject to jurisdiction here. Id. at n.7.
Koehler and the Separate entity Rule
Courts have uniformly held that New York attachment rules do not permit a party to obtain a pre-judgment attachment of a defendant’s foreign bank account merely because the bank happens to have a branch in New York. Under the so-called “separate entity rule,” courts treats each branch of a bank as a separate entity for attachment purposes even if they are all part of the same corporate entity. See Allied Maritime, Inc. v. Descatrade SA, 620 F.3d 70, 74 (2d Cir. 2010) (citing cases). Many thought that the separate entity rule was done away with in post-judgment execution cases after the New York Court of Appeals’ decision in Koehler v. Bank of Bermuda, 12 N.Y. 3d 533 (2009), which held that a judgment creditor could obtain an order directing a garnishee to turn over property located outside New York so long as the garnishee is subject to jurisdiction here. The cases considering this issue since Koehler, however, have been split. Compare JW Oilfield Equipment, L.L.C. v. Commerzbank AG, 764 F. Supp. 2d 587 (S.D.N.Y. 2011) (holding separate entity rule did not apply in post-judgment turnover action) with Shaheen Sports, Inc. v. Asia Inc. co., Ltd., 2012 WL 919664 (S.D.N.Y. 2012) (holding separate entity rule does apply).
On January 14, 2014, the Second Circuit Court of Appeals certified this issue for appeal to the New York Court of Appeals in Tire Engineering and Sistribution L.L.C. v. Bank of China Ltd., 740 F.3d 108 (2d Cir. 2014), so perhaps we will have a definitive answer on this question in time for the next issue of Mainbrace!
Provisional remedies are a powerful tool and can mark the difference between success and failure in a case. Parties are accustomed to thinking about whether there is property subject to attachment in a given jurisdiction, but in New York, at least, some powerful attachment remedies become available merely because the defendant is subject to jurisdiction here. A party may be subject to New York jurisdiction for many reasons: because it does business here; because it has registered with the Secretary of State; or because it has agreed to litigate or arbitrate disputes in New York. In such cases, it may be well to consider whether there are other attachment remedies available, even if the defendant has no known property in the state.