Ince&Co International Law Firm

Rule B - the banks have had enough!

Tuesday 20 October, 2009

On 16 October 2009, the United States Court of Appeals for the Second Circuit handed down a decision [i] that is set drastically to cut down the usefulness to maritime claimants of obtaining Rule B attachment orders [ii] in the future.

The precise implications of this ruling remain to be established. We are not US lawyers, but what does seem to be clear is that the previous practice that permitted the attachment of so-called electronic fund transfers (“EFTs”), routed through New York intermediary banks, has been brought to an abrupt halt.

Where there is a maritime claim, Rule B essentially allows for the attachment of the defendant’s property within the district of New York, but only if the defendant is not itself to be ‘found’ within the jurisdiction. Since 2002, New York has been a jurisdiction of choice in which to seek security for maritime claims against overseas defendants; especially perhaps for claims against charterers. This was triggered by a decision of the Second Circuit in Winter Storm [iii], which held that EFTs passing electronically through New York intermediary banks were susceptible to attachment under the Rule B regime.

However, in SCI v Jaldhi Overseas, three Circuit Judges of the US Second District now seem to have dealt the practice a fatal blow. They have overruled Winter Storm and, in so doing, have recorded that every other active Circuit Judge agrees with this course.

Policy reasons and judicial second thoughts appear to underlie this about-turn. As to policy, the practice of attaching EFTs was said to be putting strain on the New York Courts and banking systems. It was said to be creating an emerging risk of damage to New York’s standing as an international financial centre, of threatening the efficiency of the process of transferring funds and of discouraging the number of dollar-denominated transactions.

In comparison, the legal justification for reversing Winter Storm seems straightforward enough. First, in Winter Storm the Court had noted that, since the 1993 judgment in United States v. Daccarett [iv], an EFT could properly be the target of criminal forfeiture under a Federal statute against drug dealing. The Winter Storm Court had equated that with an injunction over a maritime defendant’s assets. The Court in SCI v Jaldhi Overseas has held that that analogy is false; an EFT could properly be forfeited if it represents criminal proceeds without proof that the EFT is the property of the criminal themselves. Rule B, on the other hand, requires proof of the defendant’s ownership of the property located within New York. Second, the breadth of Rule B (which bites on the "defendant's tangible and intangible property") is not, the Court considers, enough in itself to justify treating an EFT as the defendant's property. Third, although US law treats a bank account (or the balance in a bank account) as the defendant's property, that does not mean that an EFT en route to that account is necessarily the defendant’s property.

We understand that that removed all the Federal law arguments which had justified treating an EFT en route to a defendant (a ‘beneficiary EFT’) as their property. With Federal law out of the way, the judgment turns to consider the property rights position under State law. The Second Circuit appears to hold as a matter of NY law that, when attaching the assets of a defendant originator of a payment, the bank which originates EFT’s can only be injuncted before the start of a transfer. No other injunction is permitted against the bank. Critically, intermediary banks then have blanket protection from injunctions; the funds in the hands of the intermediary clearing bank are in effect untouchable. As the New York Uniform Commercial Code states: "until the funds transfer is completed by the acceptance by the beneficiary bank of a payment order for the benefit of the beneficiary, the beneficiary has no property interest in the funds transfer which the creditor can reach." It seems to be only when the funds have reached the beneficiary’s bank that the latter bank can be enjoined from crediting a beneficiary/defendant.

Looking ahead, and absent a successful appeal in SCI v Jaldhi to the Supreme Court, what this means is that after several years of benefiting from a quick, relatively cheap and available security process in New York, the maritime industry will now have to reacquaint itself with the requirements of other jurisdictions’ arrest and injunction regimes. This may be good news for those companies who want to do business in US dollars and evade their contractual obligations, but is not such good news for claimants who have previously had the advantage of a very efficient way of obtaining security. For any companies reading this article who are about to charter in from a disponent owner, or charter out, we suggest more thought should be given now to obtaining performance bonds/parent company guarantees, in case your counterparty fails to perform. There are, however, many pitfalls for the unwary with such documents and we strongly recommend legal advice is taken.

For further information on this subject please contact your usual Ince & Co contact.

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