Second Circuit Court of Appeals Overules Winter Storm Shipping Ltd. v. TPI and Holds That Electronic Fund Transfers (EFTs) Processed By Intermediary Banks Are Not Property Subject to Rule B Attachment
On October 16, 2009, the Second Circuit Court of Appeals issued a decision severely limiting the scope of the type of property that may be attached pursuant to Rule B. In The Shipping Corporation of India Ltd. v. Jaldhi Overseas Pte Ltd., the Court, in sum and substance, held that "electronic fund transfers ("EFTs") being processed by an intermediary bank are not property subject to attachment under Rule B." The Court relied on New York State law, which prohibits the attachment of EFTs in possession of an intermediary bank. Citing the New York Uniform Commercial Code, the Court stated that neither the originator nor the beneficiary of an EFT hold title to the funds in the account at an intermediary bank. Accordingly, the Court found that since EFTs are no longer considered property of either the originator of the beneficiary, they cannot be "defendant's property" subject to Rule B attachment. In so holding, the Court expressly overruled its 2002 decision in Winter Storm Shipping Ltd. v. TPI.
The Second Circuit's decision emphasizes the burden that Rule B has placed on the federal courts and international banks operating within the Southern District and suggests that the attachment of EFTs has "threatened the usefulness of the dollar in international transactions." The decision stresses the threat posed by the "explosion" of maritime attachments to, inter alia, New York's position as the center of international banking and finance. The Court stated that, in attempting to avoid Rule B attachments, many potential Rule B defendants conduct their cross-border transactions in a currency other than U.S. Dollars, causing a reduction in the use of the dollar as the preferred currency of international commerce. In addition, the Court cited to The Clearing House Association's (whose members consist of all major NY garnishee banks) amicus curiae brief, which detailed the large volume of maritime cases filed between October 1, 2008 and January 31, 2009 and the resulting burden that has been placed on the banks and the District Court Judges. The Court's focus on the aforementioned reasoning and its weak legal rationale for reaching its conclusion suggests that this was a result-driven decision and that the Court has succumbed to intense pressure from the garnishee banks to put an end to Rule B attachments of EFT transfers transiting through New York.
At present, it is unclear what the implications of the Second Circuit's decision will be. It is likely that defendants in Rule B actions whose EFTs have been attached will bring motions to vacate, which the Judges sitting in the Southern District Court may well be amendable to grant. In Rule B actions that are not challenged but where plaintiffs have restrained funds, it is unclear whether the Court will require these funds to be released (or not).
This decision does not prevent Rule B actions from being commenced, where the defendant has property in the Southern District (other than EFTs, such as bunkers, freight or bank accounts) and cannot be "found."
Finally, it should be noted that while pre-judgment attachment of EFTs appears to no longer be permissible following the Jaldhi decision, the New York Court of Appeals decision in Koehler v. Bank of Bermuda Ltd., 2009 NY Slip Op. 04297 (June 4, 2009) provides an important post-judgment option for parties wishing to enforce foreign judgments and/or arbitration awards. In that matter, the Court of Appeals held that a New York court with personal jurisdiction over a defendant and/or a garnishee holding a defendant's property may be ordered to turn over out-of-state property including property located abroad), regardless of whether the defendant is a judgment debtor or a garnishee. The full effect of this decision in the maritime context still remains to be seen, but according to Koehler, any party with an unsatisfied judgment or arbitration award for any claim may seek to enforce its award against a judgment debtor that has property in the possession of a garnishee subject to personal jurisdiction in New York or against the debtor, itself, that is registered to do business in New York. Read more on the Koehler decision.