Maritime Attachment of Your Company’s Money in New York
China Newsletter, Holland & Knight
June 12, 2008
James "Jim" Hohenstein- New York
Francesca Morris- New York
The maritime process known as “Rule B attachment” is a powerful weapon in a company’s legal arsenal. The attachment process enables an immediate halt to the flow of funds in U.S. dollars going through the U.S. banking system, specifically through the banks in New York which on a daily basis handle millions of U.S. dollar transactions involving thousands of banks located worldwide.
Similarly, when used against a company, the Rule B attachment procedure can have an immediate and serious impact on a shipping company when payments to and from the company have suddenly been attached.
The purpose of this article is to briefly describe this legal procedure.
A Proceeding of a Maritime Nature
United States federal law allows a special procedure to attach a defendant’s assets where the plaintiff has a maritime claim. Fed. R. Civ. P. Supp. R. A. “Maritime claim” includes all the typical categories: collision damages, breach of contract (charter party, bill of lading and the like), although some claims are not “maritime” under U.S. law, such as a contract for the sale of a vessel.
The procedure allows the attachment, or freezing, of the defendant’s “tangible or intangible personal property.” Fed. R. Civ. P. Supp. R. B(1)(a). The procedure is known as “Rule B attachment” because it falls under Rule B of the Supplemental Rules for Certain Admiralty and Maritime Claims of the Federal Rules of Civil Procedure (the “Admiralty Rules”). Id.
Importantly, the property to be attached need not be maritime in nature and it need not have any connection to the claim. In other words, a defendant’s funds in U.S. dollars passing through the New York banking system can be attached. Rule B attachment can be used at virtually any point in a proceeding from the time of filing a complaint as well as through, and even after, trial. Rule B attachment can be used to obtain security for a claim being litigated elsewhere. Such attachments are frequently sought and ordered to provide security for maritime arbitrations or litigations in foreign jurisdictions such as London, Singapore, Hong Kong or Dalian. The attachment can be sought before the arbitration or litigation has commenced with the simple statement that the plaintiff intends to commence such proceedings. Rule B attachment can also be used to gain jurisdiction over the defendant for adjudication of the underlying dispute, up to the amount of the claim.
Under Rule B, the only notice required is service of process following attachment. The plaintiff is not required to notify the defendant when the action is commenced. As a result, defendants most frequently become aware of the suit after their assets have been attached.
Defendant Is Not Present in the District
Rule B allows attachment of the defendant’s assets located in the federal court district if the defendant cannot be found within the district. Admiralty Rule B(1)(a). Thus, Rule B concentrates on a defendant’s connections to the local federal court district and not on connections to a state or other geographical area. The term “found within the district” has been interpreted to require a “two pronged inquiry: first, whether [the respondent] can be found within the district in terms of jurisdiction, and second, if so, whether it can be found for service of process.” Seawind Compania, S.A. v. Crescent Line, Inc., 320 F.2d 580, 582 (2d Cir. 1963) (quoting Judge Weinfeld in United States v. Cia Naviera Continental S.A., 178 F. Supp. 561 (S.D.N.Y. 1959)).
For a defendant to be found within the district for jurisdictional purposes, the defendant must have sufficient contacts with the district to meet minimum due process standards. This usually means that a defendant must be doing business in the district on a continuous and systematic basis. See Parkroad Corp. v. China Worldwide Shipping Co., 05 CV 5085, 2005 U.S. Dist. LEXIS 11122, *3, 2005 AMC 1839 (S.D.N.Y. Jun. 6, 2005); Oregon Lumber Export Co. v. Tohto Shipping Co., 53 F.R.D. 351, 352 (W.D. Wash. 1970). Factors indicating a continuous and systematic presence include the presence of an office, bank account or other property, a telephone listing, local public relations work and a permanently-located employee. One way to prevent maritime attachment is to establish a presence in the district. See Holland & Knight Maritime Alert (November 6, 2007), Rule B Maritime Attachments in New York: A Possible Avoiding Strategy, by James H. Hohenstein, Richard A. Crowley and Anne-Mette E. Andersen, for a discussion of the means to establish a presence and the tax and corporate issues involved.
When requesting that the court issue an order for attachment, the plaintiff’s counsel will have to swear to a diligent search of available records such as phone books, the New York secretary of state’s listing of companies and Internet directories. A plaintiff must have a good faith basis to state that a defendant is not found within the federal court district.
If the parties to a contract have agreed that a federal district will be the jurisdiction in which disputes will be resolved, Rule B attachment is nonetheless available to attach assets in the district, if the party whose assets are attached is not found within the district for general jurisdiction purposes and service of process.
Judgment Is Limited
Once assets have been attached, if any judgment is rendered in the plaintiff’s favor, the judgment is limited to the value of the attached property, not the amount of the entire claim. The exception to this occurs when a defendant is personally served or enters a general appearance. Thus, if a plaintiff has a claim for $10 million and attaches $3 million under Rule B, any subsequent judgment can only be for a maximum of $3 million. However, having attached assets in one federal court district, a plaintiff may still attach assets in another separate federal court district and so on until it has attached the full amount of its claim.
In addition, plaintiffs should keep in mind that a quasi in rem judgment, which is a judgment against the attached assets, cannot be recognized in another jurisdiction.
Attachable Assets
Rule B has traditionally been used to attach tangible assets such as the vessel itself, bunkers or other property. In addition, Rule B may be used to garnish a nonresident defendant’s cash, funds on deposit, debts and other tangible property. Rule B has, however, been held not applicable to a beneficiary’s interest in an executory letter of credit and lines of credit. In re: Diakan Love, 584 F. Supp. 782, 784 (S.D.N.Y. 1984). It is worth mentioning again that the assets need not be maritime in nature and need not be related to the claim.
In executing an attachment, each branch of a bank is considered a separate and distinct business entity. Therefore, traditionally the branch in which the account is located must be served with the attachment order. However, service of process on the bank’s main office is sufficient to reach assets held by a branch office in the same jurisdiction if the branches are linked by a computer centralized at the main office. Digitrex, Inc. v. J. Howard Johnson, 491 F. Supp. 66, 68 (S.D.N.Y. 1980). In recent years increased centralization has made this the preferred method.
Since 2002 the attachment of electronic fund transfers (EFTs) has revolutionized attachment in the U.S., and particularly in the Southern District of New York which includes Manhattan. Foreign bank transactions being paid in dollars are routed through New York banks. A 2002 decision by the federal appeals court with jurisdiction over the Southern District of New York, the Second Circuit Court of Appeals, ruled that EFTs could be attached as they passed through the New York intermediary banks on their way to or from overseas financial institutions. Winter Storm Shipping v. TPI, 310 F.3d 263 (2d Cir. 2002), cert. denied, 539 U.S. 927 (2003). Since the Winter Storm decision, hundreds of attachment orders have been served on commercial banks in New York City. The New York banks claim that the attachment of EFTs has placed a burden on their operations and prominent New York banks have been involved in litigation criticizing the Winter Storm decision and seeking to have it overturned. See briefs filed Amicus Curiae by Federal Reserve Bank of New York and the Clearing House LLC in Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., No. 05 5385 CV (2d Cir. Feb. 2006).
According to the Clearing House, one New York bank in February 2006 had pending 70 active writs of maritime attachment seeking to attach over $195 million; another bank received 70 writs just on February 1, 2006; another received nearly 800 in December 2005, but had received only 65 in January 2004. Clearing House Brief Amicus Curiae, Aqua Stoli, No. 05 5385 CV (2d Cir. Feb. 22, 2006). The use of Rule B attachment has only increased in the two years since the Clearing House’s statements.
Attachment under Rule B only reaches the assets held by the garnishee at the time of service. However, courts in the Southern District of New York have allowed supplemental process to be served electronically and have allowed service made on a bank in the morning to be effective for the remainder of the day. See, e.g., Ythan Ltd. v. American Bulk Transport Ltd., 336 F. Supp. 2d 305, 307 (S.D.N.Y. 2004). This electronic all day service is justified as avoiding the “absurdity” of a plaintiff effecting service multiple times during the day to seize EFTs and the garnishee bank having to continuously accept that service. Ulisses Shipping Corp. v. FAL Shipping Co. Ltd., 415 F. Supp. 2d 318, 328 (S.D.N.Y. 2006). The effect of this electronic all day service is that any EFT bearing the name of the defendant passing through the garnishee bank on the day of service will be attached.
Vacating an Attachment
Once assets are attached, the defendant and any other party claiming an interest in the attached property is entitled to a prompt hearing to seek release of the attachment. Admiralty Rule E(4)(f).
The application is known as a motion to vacate an attachment. “The plaintiffs have the burden of proving ‘why the arrest or attachment should not be vacated or other relief granted’ consistent with Supplemental Federal Rules of Civil Procedure. See Fed. R. Civ. P. Supp. R. E(4)(f). The evidence must be viewed in the light most favorable to the party whose property is attached.” Unitas Finance Ltd. v. Di Gregorio Navegacao, Ltda., No. 99 1233, 1999 WL 33116415, *1 2008 AMC 1118 (D.N.J. Nov. 8, 1999). However, the grounds for vacating an attachment at an initial hearing are narrow. An attachment may be lifted only if (1) the defendant is present in a convenient adjacent jurisdiction; (2) the defendant is present in the district where the plaintiff is located; or (3) the plaintiff has already obtained sufficient security for a judgment. Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., 460 F.3d 434, 436 (2d Cir. 2006).
The narrow review notwithstanding, a Rule B attachment should be vacated if the property does not belong to the defendant, if the defendant is found in the district, or if the underlying claim is not a maritime claim.
For more information, email James H. Hohenstein or Francesca Morris at james.hohenstein@hklaw.com or francesca.morris@hklaw.com, respectively, or call toll free, 1.888.688.8500.
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