The United States Court of Appeals for the Second Circuit recently ruled that a midstream electronic fund transfer (“EFT”) temporarily in the possession of an intermediary bank in New York may not be garnished under the Federal Debt Collection Procedures Act (“FDCPA”), 28 U.S.C. § 3206, et seq., to satisfy judgment debts owed by either the originator or the intended beneficiary of the EFT. Exp.-Imp. Bank of the United States v. Asia Pulp & Paper Co. Ltd., No. 09-2254-cv (2d Cir. June 22, 2010). In so holding, the Second Circuit upheld the district court’s order quashing two writs of garnishment in connection with plaintiff-appellant’s efforts to collect a $144 million judgment against defendant-appellees.

Electronic Fund Transfers

An EFT is simply an instruction to electronically transfer funds from one account to another. The originator, the party transferring funds, will send to its financial institution an instruction to transfer funds to the beneficiary, the intended recipient of the funds. When the originator and beneficiary each have an account in the same bank, the bank will simply credit the beneficiary’s account and debit the originator’s account to effectuate the transfer. When the parties have accounts in different banks that are not members of the same wire transfer consortium, the bank uses an intermediary bank where both banks, the originator’s bank and the beneficiary’s bank, have accounts to effectuate the transfer. The originator will contact its bank when it wants to effect a transfer, and the originator’s bank will then contact the intermediary bank to perform the transfer from its account at the intermediary bank. The originators and beneficiary’s banks then adjust the accounts of their respective clients to reflect the transfer made by the intermediary bank. Significant to this analysis is the fact that, while the funds are held at the intermediary bank, they are in accounts of either the originator’s bank or the beneficiary’s bank, not in accounts of the originator or beneficiary.

The Parties

Plaintiff Export-Import Bank of the United States (“ExIm”) is a government corporation that serves as the official export credit agency of the United States. As a federal agency, ExIm’s mandate is to promote the export of domestic products, including by providing direct loans, loan guarantees, working capital guarantees and insurance promoting exportation. Defendants Asia Pulp & Paper Company, Ltd. (“APP”) and its former subsidiaries, the Principal Indonesian Operating Companies (“PIOCs”), collectively formed one of the largest paper manufacturers in the world. ExIm held over $100 million of debt owed by defendants APP and PIOCs.

The Dispute

Defendants PIOCs borrowed over $100 million through ExIm’s direct loan and loan guarantee programs. In March 2001, defendants announced a worldwide “standstill” on their repayment of their debt obligations, including the thirteen loans from ExIm. When PIOCs defaulted, ExIm sued for breach of contract, breach of promissory notes and breach of guarantee. The New York federal district court granted ExIm’s motion for summary judgment, finding no issue of fact as to defendants’ default, and awarded ExIm a judgment in excess of $144 million. Exp.-Imp. Bank of United States v. Pulp & Paper Co., Ltd., No. 03-8554, 2008 WL 465169, at *8 (S.D.N.Y. Feb. 6, 2008).

To collect on its judgment, ExIm applied for writs of garnishment pursuant to the FDCPA to attach property in which the defendants purportedly had an interest. The district court granted ExIm’s application, and ExIm served the writs on Deutsche Bank Trust Company Americas and Bank of New York Mellon Corporation directing them to withhold all of the defendants’ property in their possession. The banks responded by stating that the only property they possessed in which the defendants may have a property interest consisted of EFTs on which those banks were serving as intermediary banks. On some of the EFTs, the defendants were the originator, and on others they were the beneficiary. The defendants objected to the banks’ responses asserting that (1) New York law prohibits restraint of EFTs at intermediary banks and (2) while in the possession of the intermediary banks, neither of the defendants had any property interest in the EFTs. Accepting defendants’ arguments, the district court quashed the writs, and ExIm appealed.

The Second Circuit’s Decision

The FDCPA is a federal statue that authorizes the garnishment of property in which the debtor has a “substantial interest.” In affirming the district court’s ruling, the Second Circuit held that whatever interest or right an originator or intended beneficiary had in a midstream EFT under New York law is insufficient to constitute a substantial interest under the FDCPA. The Court noted: “An EFT is nothing other than an instruction to transfer funds from one account to another,” citing Shipping Corp. of India Ltd. v. Jaldhi Overseas PTE Ltd., 585 F.3d 58 (2d Cir. 2009). In Jaldhi, the Court held that EFTs in the temporary possession of an intermediary bank were not subject to attachment pursuant to Rule B of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions of the Federal Rules of Civil Procedure (“Rule B”).

The Second Circuit first looked to New York state law to determine what rights the defendants had in the property ExIm was seeking to reach, and then the court determined whether according to federal law the defendant’s state delineated rights constituted a “substantial interest” in the EFTs sufficient to let ExIm garnish the EFT pursuant to the FDCPA.

Relying on Article 4-A of New York’s Uniform Commercial Code, the Second Circuit found:

[T]he issuance and acceptance of payment orders creates rights and obligations only as between the sender of the payment order and its receiving bank, between the originator’s bank and an intermediary bank as to the originator’s bank’s payment order, between the intermediary bank and the beneficiary bank as to the intermediary bank’s payment order, and finally, as between the beneficiary bank that has accepted a payment order and that beneficiary. (Emphasis added.)

Therefore, while they are in the possession of an intermediary bank, EFTs are neither the property of the originator nor the beneficiary. Further, because the intermediary bank is neither the legal agent of the originator nor the intended beneficiary, and because neither the originator nor intended beneficiary has any legal claim or contractual rights against the intermediary bank in the event a funds transfer is not completed, this further suggests that whatever rights or interests the defendants have in the EFTs are limited.

Based on these limitations, the Second Circuit concluded that whatever rights or interests the defendants had in the midstream EFTs under New York law were insufficient to constitute a “substantial interest.” Since neither the statutory language nor legislative history defines the phrase “substantial interest,” the Court based its interpretation of the phrase on common definitions of “substantial” and how “direct and tangible” an originator or intended beneficiary’s benefit from the property appears. The Court found that the defendants’ interests in the EFTs were not substantial, essential, or material, and the defendants did not benefit from the midstream EFTs in the same way as if they had received the money directly, and therefore they only had minimal interests in the EFTs.

Subsequent Case Law

Since issuing this decision of Exp.-Imp. Bank of the United States v. Asia Pulp & Paper Co. Ltd., No. 09-2254-cv (2d Cir. June 22, 2010), the Second Circuit Court of Appeals has decided yet another case concerning the ability to attach or garnish EFTs. In Scanscot Shipping Svcs. v. Metales Tracomex LTDA, No. 09-5280-cv (2d Cir. August 12, 2010), the Court held, in conformity with Jaldhi, that “EFTs for which the defendant is both the originator and the beneficiary are not the property of the defendant, and therefore may not be attached pursuant to Rule B,” and affirmed the district court’s order vacating its order of attachment.

In Scanscot, the plaintiff and defendant were in the midst of arbitration proceedings when plaintiff moved for the attachment of certain EFTs held in Wachovia Bank in New York. The district court granted the motion but then ordered the plaintiff to show why the order of attachment should not be vacated in light of Jaldhi. The Court stated that, to be attachable pursuant to Rule B, the EFTs must be tangible or intangible property belonging to the defendant. New York state law, however, makes it clear that EFTs in the temporary possession of an intermediary bank are not the property of either the originator or beneficiary of the EFT, and therefore the Court found that the EFTs could not be attached. The fact that the defendant was both the originator and the beneficiary of the EFT did not make any difference.

 Impact on Midstream EFT Property Interests

The law in the Second Circuit now seems quite clear that intended beneficiaries and originators of EFTs lack any substantial interests or substantial property rights in the EFTs while they are in the possession of intermediary banks. Consequently, under New York law, attempts to garnish EFTs to satisfy a debt owed by an originator or intended beneficiary while in the possession of an intermediary bank will likely be unsuccessful.