Securing Your Claim in the U.S. – The Net Widens
Securing Your Claim in the U.S. – The Net Widens
Introduction
In this scenario, the owners of the Naughty Rose are understandably nervous about bringing an action against Cut and Run Ltd. when Cut and Run appears to have no assets. However, if the owners can locate assets in the U.S. there are ways that the owners can freeze those assets to satisfy an eventual judgment.
1. A Proceeding of a Maritime Nature
In the United States, where there is a claim of a maritime nature, there is a special procedure to attach Defendant's assets to secure that claim. Fed. R. Civ. P. Supp. R. A. The procedure allows the attachment, or freezing, of the Defendant's "tangible or intangible personal property," and 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. Fed. R. Civ. P. Supp. R. B(1)(a). The owners have here an action of a maritime nature because it is a breach of contract action for delivery of off‑spec bunkers to the ship. The property to be attached need not be maritime in nature and it need not have any connection to the claim.
Attachment under Rule B can be used at virtually any point in a proceeding from the time of filing a complaint through, and even after, trial.
2. Defendant is Not Present in the District
The Defendant's assets located in the District can be attached if the Defendant cannot be found within the District. Fed. R. Civ. P. Supp. R. B(1)(a). "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)).
In order to establish that the Defendant cannot be found in the District where the action is commenced, the Plaintiff, or its counsel, should undertake a diligent search of phone books, the Secretary of State's listing of companies, etc. An affidavit by Plaintiff or counsel will have to aver to the diligent search when the petition for attachment is filed.
Although it is a requirement that the Plaintiff cannot be found in the District, Rule B attachment is nonetheless available where the parties have agreed that the jurisdiction will be the forum in which to resolve disputes. Therefore, even if the bunker supply contract here had a forum selection clause selecting the Southern District of New York, Naughty Rose could still execute a Rule B attachment if Cut and Run did not have a presence in the District but had attachable assets there.
3. Judgment is Limited
However, following the attachment, if any judgment is rendered in Plaintiff's favor, the judgment is limited to the value of the attached property, not the amount of the entire claim, unless the defendant is personally served or enters a general appearance. This means that if the claim is for $10 million and $3 million is attached, the judgment can only be for a maximum of $3 million. However, having attached assets in one location Plaintiff may still attach assets in another separate jurisdiction and so on until it has attached the amount of its claim.
In addition, Plaintiffs should keep in mind that a quasi in rem judgment, that is a judgment against the attached assets, cannot be recognized in another jurisdiction.
4. Attachable Assets
The only assets that will be attached are the ones that are in the hands of the garnishee at the moment it is served with the attachment. Limonium Maritime S.A. v. Mizushima Marinera, S.A., 961 F. Supp. 600, 609 (S.D.N.Y. 1997), aff'd. mem., 201 F.3d 431 (2d Cir. 1999) ("A Rule B attachment only reaches assets in the hands of a garnishee at the time of the service of the writ of attachment") (citing Reibor Int'l Ltd. v. Cargo Carriers (KACZ‑CO), Ltd., 759 F.2d 262, 265‑66 (2d Cir. 1985); Metal Transport Inc. v. Account No. 232‑2‑405842 at Chase Manhattan Bank, N.A., No. 89 Civ. 8505 (JFK), 1990 WL 55687, at *2 (S.D.N.Y. April 26, 1990); Union Planters Nat'l Bank v. World Energy Systems Assoc., 816 F.2d 1092, 1098 (6th Cir. 1987)). As a court in the Southern District of New York has succinctly explained,
The case law, the authorities, and basic logic demonstrate that no quasi in rem jurisdiction under Rule B can exist without some res to be attached. In fact, for Rule B attachment to be appropriate, it is clear that the property must be located within the district and the property must belong to the defendant.
Blueeye Nav. v. Oltenia Nav., Inc., No. 94 Civ. 1500 (LAP), 94 Civ. 2653 (LAP), 1995 WL 66654, at *4 (S.D.N.Y. 1995) (citations omitted). As will be explained, the question of what assets are being held at the time of service is the area in which the net has widened with regard to assets held by banks.
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, lines of credit, and other tangible property. 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. Plaintiff, therefore, has to serve process on the branch in which the account is located. 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).
It is the attachment of electronic fund transfers ("EFTs") that has revolutionized attachment in the U.S. in recent years. These EFTs have been attached as they are routed through intermediary financial institutions in New York, on their way to, or from, overseas financial institutions. This is only an issue in New York, and not elsewhere in the U.S., because foreign bank transactions being paid in dollars are routed through New York. Since the decision allowing EFTs to be attached, Winter Storm Shipping v. TPI, 310 F.3d 263 (2d Cir. 2002), cert. denied, 539 U.S. 927 (2003), numerous attachment orders have been served on commercial banks in New York City.
According to a recent filing in the Second Circuit Court of Appeals, which has jurisdiction over New York federal courts, 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; that bank had received only 65 in January, 2004. The outlook for this year is more of the same: in January 2006, 28 new writs were obtained authorizing service on 16 banks and attempting to attach over $43 million.
Because attachment under Rule B only reaches the assets held by the garnishee at the time of service, courts in the U.S. 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. Ythan Ltd. v. American Bulk Transport Ltd., 336 F. Supp. 2d 305, 307 (S.D.N.Y. 2004). The justification for this electronic all‑day service is to avoid the "absurdity" of a plaintiff effecting service multiple times during the day to seize transferred assets 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). This is the point at which the rule, requiring attachment only of assets held by the garnishee at the time of service, is being eroded. It appears that the courts in the Southern District of New York are not enforcing the "moment in time" aspect of Rule B attachment where banks are the garnishees.
5. Dual Purpose
Rule B has the dual purpose of:
(1) obtaining security for Plaintiff's claim; and
(2) in personam jurisdiction over a non‑resident Defendant.
What this means is that the Plaintiff can use Rule B to attach property located in the District and then use the attached assets as a basis for the court to exercise jurisdiction over the Defendant. Thus, Rule B is not just a procedural device to assist in securing the claim made in other litigation. Rule B allows a Plaintiff to commence the suit on its primary claim by the act of attaching the assets. However, a Rule B action can be commenced in conjunction with a suit in another state or another country to gain security for a claim litigated elsewhere.
Attachments can be particularly helpful in enforcing a foreign arbitral award in the U.S. Generally speaking, a plaintiff cannot enforce a foreign arbitral award unless a defendant has minimum contacts with the jurisdiction to satisfy due process requirements. Monfegasuge de Reassurances S.A.M. v. Nak Naftogaz of Ukraine, 311 F.3d 488, 497 (2d Cir. 2002). Attaching a Defendant's property under such circumstances ensures that a Plaintiff will have assets against which it can enforce a judgment and that there is a jurisdiction available in which the judgment can be enforced.
6. Notice to Defendant
Under Rule B(2), the only notice to the Defendant that is required is the service of process. However, if the Plaintiff seeks a default judgment, the Plaintiff will have to show that service was made by mail, with a return receipt, or under the Federal Rules of Civil Procedure or by other diligent but unsuccessful method.
7. Substitute Security
Under Rule E of the Supplemental Admiralty Rules, a Defendant can obtain immediate release of the attached property by posting substitute security which is generally in the form of a bond, or if the Plaintiff will accept it, a club letter.
8. Answering an Attachment
Having received a writ of garnishment, the garnishee has 20 days from the date of service in which to respond and identify any assets that it is holding. Rule B(3)(a). On a practical level where banks are receiving daily all‑day service they should reach an agreement with Plaintiff's counsel about their answers to avoid having to provide daily answers after the 20th day.
The Plaintiff can also serve a list of questions on the Garnishee with the Complaint; these are known as "Interrogatories" which the Garnishee must also answer within 20 days.
The Defendant also has an obligation to answer the Complaint. Under Rule B(3)(b) the Defendant has 30 days to answer the complaint. This is measured not from the date of service on the Defendant, but from the date the Garnishee is served with the attachment.
9. Vacating an Attachment
All is not lost for the Defendant and any other party claiming an interest in the attached property. Under Rule E(4)(f) of the Supplemental Rules for Admiralty and Maritime Claims those parties are entitled to a prompt hearing.
(f) Procedure for Release from Arrest or Attachment. Whenever property is arrested or attached, any person claiming an interest in it shall be entitled to a prompt hearing at which the plaintiff shall be required to show why the arrest or attachment should not be vacated or other relief granted consistent with these rules.
Unfortunately, the phrase "prompt hearing" is not defined, and in jurisdictions such as the Southern District of New York where local rules define how prompt the hearing should be, procedural maneuvers can still delay the process.
On 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. 9‑1233, 1999 WL 33116415, *1 (D.N.J. Nov. 8, 1999).
Recent court decisions have vacated attachments that are abusive, unfair or otherwise not in keeping with an attachment's traditional purposes. See e.g., Aqua Stoli v. Gardner Smith Pty Ltd., 384 F. Supp. 2d 726, 730 (S.D.N.Y. 2005). These courts required plaintiffs to show that the attachments were intended to achieve at least one of the historical purposes of Rule B attachments: (1) to obtain jurisdiction; or (2) to secure a judgment. Id. at 729.
Aqua Stoli is on appeal, and other district courts have since rejected any requirement that a plaintiff show that it "needs" the attachment and that it is unfair. See Blake Maritime, Inc. v. Petrom S.A., 05 Civ. 8033 (PAC), 2005 U.S. Dist. LEXIS 26310, at *9 (S.D.N.Y. Oct. 31, 2005). Thus, right now, it is not clear if the courts will try to rope in the rampant use of maritime attachments that has resulted from the Winter Storm decision. What is clear is that maritime attachments are being used widely to attach assets, and particularly to freeze EFTs in midstream. There are accusations that service of a large number of attachment processes on a large number of banks is a means of obtaining discovery to locate a defendant's assets. This was not the intended use of Rule B, but the net that Rule B has traditionally cast to attach assets has widened following Winter Storm.
DISCLAIMER:
The contents of this paper are not intended to be, and should not be construed as, legal advice. The assistance of attorneys should be sought with regard to any specific circumstance for which legal advice is required.
[1] This paper is intended to expand and supplement the presentation made at the Norton Rose / Holland & Knight seminar on May 11, 2006 at Piraeus, Greece.