Rule B - the end of attachment of EFTs in New York


Published: 19 October 2009

On October 16, 2009, the United States Court of Appeals for the Second Circuit, which covers the United States District Court for the Southern District of New York where most Rule B attachment cases are filed, issued a decision in The Shipping Corporation of India Ltd. v. Jaldhi Overseas Pte. Ltd. overruling Winter Storm Shipping, Ltd. v. TPI, 310 F.3d 263 (2d Cir. 2002) and finding that Electronic Fund Transfers (EFTs) at intermediary banks are not the property of defendants and therefore cannot be attached.  This in effect means that the much used Rule B attachment of funds in New York is over.

Supplemental Rule B for Certain Admiralty and Maritime Claims (“Rule B”) provides “If a defendant is not found within the district…, a verified complaint may contain a prayer for process to attach the defendant’s tangible or intangible personal property – up to the amount sued for – in the hands of garnishees named in the process”.  The remedy had traditionally been used to attach any property of the defendant such as bunkers, real property, and funds held in bank accounts.  However, the Winter Storm decision found that EFTs to or from a defendant are attachable as they pass through banks.  All wire transfer transactions in U.S. Dollars must pass through a U.S. bank and the vast majority pass through a bank in New York.  This has led to the common practice of filing Rule B attachment lawsuits in federal court in New York.

In The Shipping Corporation of India Ltd. v. Jaldhi Overseas Pte. Ltd. the court specifically overruled Winter Storm.  The court found that the Winter Storm court’s reliance on the Daccarett case which allowed attachment of drug money was ‘misplaced’ as under forfeiture laws, funds that are not the property of defendants can be attached.  Since the court found that there was no federal law on the issue, it looked to New York state law which does not allow attachment of EFTs at an intermediary bank.  Accordingly, the court found that EFTs possessed by intermediary banks were not the property of the defendants and cannot be attached.

The decision spends some time discussing the alleged burden on the district courts and the banks in dealing with Rule B attachments and mentions the potential threat to the use of Dollars in international transactions as a result of Rule B attachments.  Also noteworthy is the fact that the only issue before the court was whether beneficiary funds (funds paid to the defendant) were attachable, but the court chose to look at the overall issue of whether EFTs are the property of the defendant.  No one in the maritime legal community in New York expected the Second Circuit to look at that broader issue in this particular case or at this particular time.  The court also used a very unusual procedure of polling all the judges on the court, all of whom agreed with the decision.

It is unknown at this point in time whether the decision will be appealed.  However, the Supreme Court has discretion whether or not to hear the case.  As the issue concerns the Second Circuit only, since funds are rarely passed through banks outside of New York, we do not expect the Supreme Court to hear the appeal.  The Supreme Court will likely find that the Second Circuit is the proper court to make the final decision on the issue.

It is unknown what will happen with current Rule B attachments.  We expect that Rule B attachment cases where no funds have been attached will be dismissed.  We do not yet know what will happen with cases where funds have been attached and either remain attached at the banks or are in escrow accounts with the court.  Also unknown is what will happen to Rule B attachments where the defendants have put up alternate security in the form of bonds or club LOU’s.  Unless the Southern District of New York puts out a directive then we expect there to be extensive motion practice in those cases and there is a possibility that each judge will handle attached funds differently.

While this decision in effect ends the common practice of filing Rule B attachments against EFTs in New York, the traditional use of Rule B attachment to attach property still exists.  Accordingly, if information is available that a company has a bank account in a New York bank, owns bunkers on a vessel in New York, or owns any other property in New York, that property can still be attached provided the company does not have a presence in New York (by having an office or being registered to do business in New York).  This is also true for any other jurisdiction in the U.S.

We are happy to assist the members with specific questions on any Rule B proceedings to which they are currently a party.

Find the full Decision by the US Court of Appeals here.