The following article was prepared by George M. Chalos and published in the February 2010 issue of Maritime Risk International. Maritime Risk International is a world-renowned magazine which covers topics including loss prevention, carriage of goods, salvage, ship security, pollution and maritime law. Mr. Chalos's article, entitled "Life after Rule B", discusses the various issues arising from the Second Circuit Court of Appeals' surprising decision in The Shipping Corporation of India v. Jaldhi Overseas Pte. Ltd. and how the various judges in the Southern District of New York have addressed these issues.
On October 16, 2009, the Second Circuit Court of Appeals issued its decision in The Shipping Corporation of India v. Jaldhi Overseas Pte. Ltd., holding that electronic fund transfers (EFTs) are no longer attachable property. As time has passed following this surprising decision, there have been numerous developments both at the District Court level and in the Second Circuit Court of Appeals, as many claimants have fought to maintain their attachments; whilst many defendants have sought the return of their funds.
In the weeks immediately following Jaldhi, several judges in the Southern District of New York issued orders dismissing each of their pending Rule B attachment cases, vacating their orders of attachment, and releasing any attached EFTs, without permitting plaintiffs the opportunity to present argument to sustain the attachments. In addition, approximately twenty (20) judges issued orders, sua sponte, directing Rule B plaintiffs to show cause why their previously issued orders of attachment (and funds restrained pursuant to same) should not be vacated.
In response to these orders to show cause, numerous arguments were developed by Rule B plaintiffs that Jaldhi need not apply to their cases, including:
- that the rule announced in Jaldhi should be applied prospectively only to prohibit new attachments of EFTs and that it should not be applied retroactively to vacate pending attachments;
- that although the Rule B defendants' property was initially restrained in the form of EFTs, the funds were thereafter placed by the garnishee banks into a separate suspense account and validly re-attached by subsequent service of the attachment order;
- that Jaldhi was wrongly decided according to New York State law; and
- that the District Courts retained equitable authority to sustain pending attachments notwithstanding the holding in Jaldhi. Additional arguments were raised by Rule B plaintiffs concerning the unique factual circumstances of their cases that were not addressed by Jaldhi, such as whether Jaldhi could be applied to vacate funds being held in the Registry of the Court; funds being held pursuant to an escrow agreement between the parties; or a bond that had been posted by the Rule B defendant as substitute security.
On November 13, 2009, exactly four (4) weeks after its decision in Jaldhi, the Second Circuit issued its first reported ruling in a case entitled Hawknet, Ltd. v. Overseas Shipping Agencies, addressing a significant question left open by the Jaldhi Court - whether Jaldhi's holding should be applied retroactively. The Court expressly confirmed Jaldhi's retroactive application. In reaching this decision, the Court relied upon a prior decision of the United States Supreme Court, which stated that "by definition, a jurisdictional ruling may never be made prospective only." The Second Circuit concluded that because Jaldhi's holding directly affects how a district court may obtain personal jurisdiction over defendants, it is properly considered a "jurisdictional ruling" and, accordingly, should apply retroactively.
On November 30, 2009, the Plaintiff-Appellant in Hawknet filed a Petition for Rehearing, arguing, inter alia, the Hawknet Court failed to apply a three (3) part analysis set forth by the U.S. Supreme Court to determine if this new rule of law should apply retroactively. The Petition further argued that applying Jaldhi retroactively would be inequitable in light of the serious disruption to the reliance interests of Rule B plaintiffs.
On December 22, 2009, the Second Circuit issued an amended decision in Hawknet to address some of the arguments raised in the Petition for Rehearing. The Court's revised opinion relies on the U.S. Supreme Court's decision in Harper v. Virginia Development of Taxation, 509 U.S. 86, 97 (1993), which held that: "[w]hen this Court applies a rule of federal law to the parties before it, that rule is the controlling interpretation of federal law and must be given full retroactive effect in all cases still open on direct review." The Court stated that because the rule announced in Jaldhi applied to the parties in that case, therefore it has retroactive effect to all cases open on direct review. In addition, the Court added a footnote, noting that a reliance interest is insufficient to overcome the presumption of retroactivity.
Following Hawknet's confirmation that Jaldhi should apply retroactively, numerous District Court Judges issued Opinions and Orders addressing the arguments raised by Rule B plaintiffs attempting to show cause to sustain their pending attachments and found that:
- The Second Circuit's decision in Hawknet made clear that Jaldhi must be applied retroactively.
- Jaldhi and Hawknet are the binding law of the Second Circuit and the District Court judges do not have the authority or discretion to ignore these decisions.
- Electronic fund transfers which were subsequently transferred from the garnishee banks into the Registry of the Court without the consent of the Defendant must be vacated.
- The equitable argument that a plaintiff has commenced arbitration or other proceedings in reliance on attached security does not remove the case from Jaldhi's holding. This point was further clarified by the amended Hawknet decision, which confirmed that a Rule B claimant's reliance interest is insufficient to overcome the presumption of retroactivity. Several judges have vacated attachments even where the plaintiffs had already obtained a favorable arbitral award or foreign judgment. Other judges have gone so far as to vacate the entry of a default judgment against a defendant when it was later argued by that defendant that the only jurisdictional basis for obtaining the default judgment was the attachment of EFTs.
- The fact that the funds in question may have been (or even were) deposited by the garnishee into a segregated account, absent consent of the defendant, does not remove the case from Jaldhi's holding (because the legal character of the funds did not change when they were deposited and the transfer did not cure the improper initial attachment).
- The fact that funds are no longer "in transit" does not remove the case from the scope of Jaldhi.
- Although EFTs are not attachable property of a Rule B defendant, the defendant nonetheless has standing to seek vacatur of the attachment under Rule E(4)(f).
- A bond which was posted by a Rule B defendant as alternate security may be vacated when the defendant expressly reserved its rights and defenses to challenge the validity of the Order of Attachment.
Although most arguments raised by Rule B plaintiffs seeking to sustain their attached security have been unsuccessful, there has been one (1) factual distinction that at least three (3) judges have ruled removes a case from Jaldhi's death knell. These judges have each found that when the parties have reached an agreement concerning the attachment of the funds, the parties' agreement controls and the attachment should be sustained. Judges have sustained attachments where:
- The parties agreed to transfer the attached EFTs to a London escrow account pursuant to an escrow agreement.
- Funds were transferred to the Registry of the Court pursuant to an agreement between the parties.
- Funds remained at the garnishee bank pursuant to an agreement between the parties.
- Funds were initially restrained as EFTs, but the parties subsequently entered into a Bond Agreement whereby full security was posted; the Attachment Order was vacated; and the EFTs released to the Defendant. This particular issue has recently been certified by Judge Marrero for immediate interlocutory appeal to the Second Circuit.
As of the time of this writing, only three (3) judges in the Southern District have yet to issue any opinions or Orders applying the holdings of Jaldhi and Hawknet (or declining to do so) in their respective Rule B cases. However, the weight of authority in the Second Circuit and in the Southern District of New York is clear: attachment of electronic fund transfers at an intermediary bank is over.
Notwithstanding, it is noteworthy to reconfirm that Jaldhi did not eliminate or modify the rights and remedies available under traditional maritime attachment principals. Rule B remains alive and well with regard to "old fashioned attachment" of a Defendant's tangible or intangible property in the district (i.e. - attachment of bunkers, vessels, freight, bank accounts, etc.) provided that the other requirements of Rule B have been met and that the defendant cannot be "found" in the district.