Living In The Era Of Rule B:
Guidance For Parties And
Banks In Prosecuting,
Defending And Avoiding
Attachments
Presentation by:
Bruce G. Paulsen, Esq.
What is “Rule B”?
• Rule B is part of the Federal Rules of Civil Procedure for
U.S. District Courts, Supplemental Rules for Admiralty or
Maritime Claims and Asset Forfeiture Actions.
• Rule B allows a Plaintiff to “attach” or “garnish” the
tangible or intangible property of a foreign Defendant
where such property is located in the federal district in
which the Rule B action has been brought. The property
sought to be attached must be in the possession of the
“garnishee” (the third-party in possession of the
property) at the time of service of process. See Reibor
International Limited v. Cargo Carriers (Y,4 CZ-CO.) Ltd.,
759 F.2d 262 (2d. Cir. 1985) (prohibiting attachment of
after-acquired property).
What is “Rule B”? (cont.)
• A Rule B Plaintiff can attach a Defendant’s assets even
when the Defendant does not operate any business in
the United States and the underlying claim is governed
by the law of a foreign jurisdiction. As such, Defendants
are often blindsided by Rule B attachments. The
underlying claim might be between two Korean parties,
who are compelled to arbitrate in Karachi, Pakistan
under their charter party, but a party may still be subject
to a Rule B attachment in New York.
• In order to attach and/or garnish the property of a
Defendant, (i) the cause of action asserted by a Plaintiff
must arise within the court’s admiralty jurisdiction and
(ii) the Defendant must not be “found” within the
district.
The History of Rule B
• Because of the transient nature of the maritime
industry and related shipping assets, admiralty law
provides a number of unique remedies to Plaintiffs,
one of which is attachment of assets pursuant to
Rule B.
• The remedy of attachment has long been a part of
admiralty law and practice
• Historically, there are two recognized purposes of a
Rule B attachment:
1. To compel a Defendant’s appearance in the
maritime action; and/or
2. To provide security for the Plaintiff’s underlying
claim.
Additional Facts Regarding Rule B Actions:
Related Arbitrations & Recovery of
Attached Funds
•
The majority of Rule B cases currently being litigated in New York do not seek
to compel the Defendant’s appearance in the action. Rather, they are brought
in tandem with an arbitration (for example, one before the London Maritime
Arbitrators Ass’n) or a litigation in another country (or even federal district) to
provide security for that action.
•
*Practice note* - A Plaintiff is not required to file an arbitration
contemporaneously with, before, or even immediately after it seeks an
attachment in New York. Because of this non-stringent timeline, attachments
are frequently used by Plaintiffs strategically to gain a litigation advantage,
often to bring a Defendant “to the table” to expedite settlement discussions.
–
•
One caveat on bringing a Rule B claim prior to commencing arbitration: If a judge believes the
Plaintiff has no intention to go to arbitration and Rule B was utilized merely as a means to harass a
Defendant or induce settlement, he may dismiss the action entirely. See, e.g., Inter Ocean Ship
Repairs, L.L.C. v. Aries Ship Mgmt., 2009 U.S. Dist. LEXIS 11541 (S.D.N.Y. Feb. 11, 2009) (process
of maritime attachment and garnishment may not be ordered where the plaintiff lacks definite
plans to initiate litigation or arbitration.)
Plaintiff must pursue its claims – and succeed – in the ancillary proceeding to
recover any monies attached.
History of Rule B: Important Precedent
The Winter Storm of 2002: Electronic Funds
Transfers (“EFT”s) Are Attachable Property
• In 2002, the Second Circuit held that an EFT in the hands
of an intermediary money center bank (a substantial
number of which are in the Southern District of New York)
constituted attachable, intangible property of a Rule B
Defendant. Winter Storm Shipping, Ltd. v. TPI, a/k/a/ Thai
Petrochemical Ind. Pub. Co. Ltd., et al., 310 F.3d 263 (2d
Cir. 2002). In other words, EFTs could be attached as they
passed through the New York intermediary banks on their
way to or from overseas financial institutions. This
passing-through, without any other New York contacts,
would be sufficient to attach a putative Defendant’s funds.
• Attachment of EFTs has been heavily criticized by the
banking industry; banks frequently prepare amicus briefs in
connection with Rule B/EFT cases. Concerns include: that
attachments disrupt the financial markets and that these
attachments undermine the federal clearing system.
History of Rule B: Important Precedent
Aqua Stoli – Limits On A Judge’s Ability To
Vacate An Attachment
• In 2006, the Second Circuit heard the Aqua Stoli Shipping Ltd v. Gardner Smith,
460 F.3d 434 (2d Cir. 2006) case. This case was significant because the court
held that the discretion of the district judge to vacate an attachment, otherwise
validly issued under Rule B, was limited in scope.
• The Aqua Stoli factors a judge must apply to ascertain whether an attachment is
proper are:
1.)
Whether the Plaintiff has a valid prima facie admiralty
claim against the Defendant
2.)
Whether the Defendant cannot be found within the district
3.)
Whether the Defendant’s property can be found within the
district
4.)
That there are no maritime or statutory bars to attachment
History of Rule B: Important Precedent
Originator v. Beneficiary EFTs
•
In Aqua Stoli, although the issue was not before the Court, the Second
Circuit stated that, “[u]nder the law of this circuit, EFTs to or from a party
are attachable by a court as they pass through banks located in that
court’s jurisdiction.”
•
Although this statement appears to definitively set forth the law, a
footnote in the Second Circuit’s opinion seemed to place into question its
earlier holding in Winter Storm as to whose property an EFT belongs to,
stating, “The correctness of our decision in Winter Storm seems open to
question, especially its reliance on Daccarett, 6 F.3d at 55, to hold that
EFTs are property of the beneficiary or sender of an EFT. Because
Daccarett was a forfeiture case, its holding that EFTs are attachable assets
does not answer the more salient question of whose assets they are while
in transit. In the absence of a federal rule, we would normally look to state
law, which in this case would be the New York codification of the Uniform
Commercial Code, N.Y. U.C.C. Law §§ 4-A-502 to 504. Under state law, the
EFT could not be attached because EFTs are property of neither the
sender nor the beneficiary while present in an intermediary bank.”
•
In light of this footnote, mixed authority on the issue as to the propriety of
“originator” versus “beneficiary” EFTs arose at the district court level.
History of Rule B: Important Precedent
Consub Delaware: Originator EFTs
• A case in which the major banks in New York submitted an amicus curiae
brief that was argued before the Second Circuit in May, and decided in
September of 2008, Consub Del. LLC v. Schahin Engenharia Limitada, 476 F.
Supp. 2d 305 (S.D.N.Y. 2007), asked the Second Circuit to overturn its
controversial Winter Storm Shipping v. TPI decision. The 2d Circuit refused
to overturn Winter Storm and expressly held that “Originator” EFTs - wire
transfers from a Defendant to a third party - were subject to attachment.
Consub Del. LLC v. Schahin Engenharia Limitada, 543 F.3d 104 (2d Cir.
2008).
• However, as in Aqua Stoli, the Second Circuit again expressed in a footnote
of the decision, “[w]e do not reach today the question of whether funds
involved in an EFT en route to a Defendant are subject to a Rule B
attachment.” Id. at 109.
• An EFT en route to a Defendant is referred to as a “beneficiary” EFT.
History of Rule B: Important Precedent
Jaldhi Overseas: Beneficiary EFTs
•
A case currently on appeal to the 2d Circuit, Shipping Corp. of
India, Ltd. v. Jaldhi Overseas PTE Ltd., 2008 U.S. Dist. LEXIS
49209, 1-2 (S.D.N.Y. June 27, 2008), held that “an attachment
pursuant to Rule B of the Supplemental Rules for Certain
Admiralty and Maritime Claims only applies to a Defendant's
property, and EFTs directed by third parties to a Defendant do
not become the Defendant's property until the transfer is
completed.” The district court vacated the attachment as a
result of its finding that a beneficiary EFT was not the property
of the Defendant.
•
The Jaldhi case will likely require the Second Circuit to decide
the issue it avoided in Consub Delaware – namely, whether or
not attachment of beneficiary EFTs is permissible.
History of Rule B:
Recent Precedent: Cala Rosa – Limits On A
Plaintiff’s Ability To Attach EFTs?
In a recent decision, Cala Rosa Marine Co. v. Sucres et
Deneres Group, 2009 U.S. Dist. LEXIS 7934 (S.D.N.Y.
Feb. 4, 2009), Judge Sheindlin refused to vacate an
order of attachment challenged by a Defendant, but by
refusing to include in her order two provisions which
have become a mainstay in Rule B litigation – (1) that
service be deemed continuous and (2) that employees of
the applying law firm be appointed as special process
servers (thus necessitating that a U.S. Marshal serve
process) – she effectively destroyed the Plaintiff’s ability
to attach an EFT.
History of Rule B:
Recent Precedent: Cala Rosa – Limits On A
Plaintiff’s Ability To Attach EFTs?
Judge Sheindlin found that continuous service conflicted with the Reibor
precedent and improperly allowed the attachment of after-acquired
property. In relevant part, her opinion states:
“Although this Court is clearly permitted to include a continuous service
provision in the attachment order, it is not required to do so. Because (1)
the Federal and Supplemental Rules make no provision for ‘continuous
service,’ (2) the relatively recent innovation of authorizing continuous
service circumvents the Reibor prohibition against attaching after-acquired
property, and (3) the practice is disruptive to the New York banking industry
and flouts the New York rule that Reibor adopted, this Court declines to
exercise its discretion to mandate banks to treat the service as continuous.
If banks elect to treat the service as continuous -- as the bank did in Winter
Storm -- they may do so; and if funds are subsequently attached, the
overwhelming authority provides that no vacatur will follow. But absent the
bank's consent, this Court no longer believes it is wise to require New York
banks to do what New York law does not require them to do.”
Prosecuting a Rule B Action:
Requirement #1:
MARITIME CLAIM
F.R.C.P. 9(h)(1) states:
“If a claim for relief is within the
admiralty or maritime jurisdiction and
also within the court's subject-matter
jurisdiction on some other ground, the
pleading may designate the claim as an
admiralty or maritime claim for purposes
of Rules 14(c), 38(e), and 82 and the
Supplemental Rules for Admiralty or
Maritime Claims and Asset Forfeiture
Actions. A claim cognizable only in the
admiralty or maritime jurisdiction is an
admiralty or maritime claim for those
purposes, whether or not so designated.”
Prosecuting a Rule B Action:
Requirement #1:
MARITIME CLAIM (cont.)
Recent case law has seen both an expansion
of what constitutes a maritime claim and an
increasing number of conflicts between
various judges as to what constitutes a
maritime claim.
Prosecuting a Rule B Action:
MARITIME CLAIM - Torts
•
Maritime torts – a tort must have a significant connection to traditional maritime activity and,
except in the case of certain seaman’s injuries, must either occur on navigable waters or be caused
by a vessel on navigable water.
Some examples of valid maritime torts/causes of action:
–
A seaman injured on a vessel
• Slot machine attendant injured on riverboat casino had a maritime claim
• Seaman’s suit against doctor held to be a maritime claim where seaman was terminated
from his employment as a result of an erroneous medical examination – that took place
on land.
–
Injuries to passengers on excursion boats or other vessels for hire arising out of the fault of
vessel operator or owner
Some examples of activities which do NOT constitute maritime torts:
–
–
–
–
–
Claims by shipyard workers for asbestos injuries
Claims by painters who fell from a bridge
A products liability suit by a passenger on a pleasure craft against a manufacturer of a gun that
misfired while in the boat is non-maritime
A claim by a business invitee on board a naval vessel against a maintenance company that
negligently stripped wax causing plaintiff to fall is non-maritime.
Workers on fixed offshore oil platforms covered by the Outer Continental Shelf Lands Act do
not have admiralty causes of action unless their injuries are caused by a vessel because
artificial islands are treated as being part of the land.
Prosecuting a Rule B Action:
MARITIME CLAIM - Contracts
•
Maritime contracts -- “The threshold question . . . is whether the underlying transaction giving rise to the claim had
maritime commerce as its principal objective.” Crossbow Cement SA v. Mohamed Ali Saleh Al-Hashedi & Bros., 2008 U.S.
Dist. LEXIS 98319 (S.D.N.Y. Dec. 4, 2008). Is the contract “salty”? Examples of maritime contracts include:
–
charter party (but an undertaking to make a charter, or to procure a person to make one, is not within admiralty
jurisdiction);
–
contract to repair a vessel;
–
contract to insure a ship (however, a contract to build a ship is not a maritime contract);
–
policy of marine insurance (however, an agreement to make or procure a particular policy is not);
–
a bill of lading
–
a stevedoring contract
–
A contract to supply marine fuel
–
A contract for lease of cargo shipping containers
–
For repairing a vessel
–
For the use of a dry dock
–
For removing ballast
Prosecuting a Rule B Action:
More on Maritime Contracts
Exxon v. Central Gulf Lines, 500 U.S. 603 (1991)
•
Case raised issue as to whether admiralty jurisdiction extends to claims arising from
agency contracts. Exxon served as Waterman Steamship Corp.’s agent, and agreed
to supply Waterman’s vessels with fuel worldwide. Shortly after supplying fuel to a
vessel called the Hooper, Waterman filed for bankruptcy, and did not pay Exxon. In
connection with the bankruptcy proceedings, the charterer of the vessel, Central
Gulf Lines, agreed that it would pay for any obligations adjudged against the
Hooper in rem. This case arose from Exxon’s suit in the Southern District of New
York against the Hooper in rem and Central Gulf Lines in personam.
•
Below, the court rejected the suit as not falling within the court’s admiralty
jurisdiction based on its interpretation of a previous case, Minturn v. Maynard, 58
U.S. 477 (1855), which was interpreted by the 2d Circuit as a per se exclusion of
agency contracts from admiralty jurisdiction.
•
The Supreme Court held that such a per se exclusion was improper, and that
Minturn‘s holding was inconsistent with the principle that the "nature and subjectmatter" of the contract at issue should be the crucial consideration in assessing
admiralty jurisdiction.
Prosecuting a Rule B Action:
More on Maritime Contracts
Norfolk Southern R. Co. v. Kirby, 543 U.S. 13 (2004)
•
A “maritime case about a train wreck.” In relevant part, the Supreme Court
examined the scope of admiralty jurisdiction in a contract case.
•
Disputed contract was for shipment of machinery from Australia to Alabama. The
majority of the journey was by sea. The cargo arrived in the states unharmed from
this first leg, but was damaged during the land leg in a train accident.
•
Supreme Court held that the contract had a “more genuinely salty flavor”
(maritime), rather than a mere contract dispute in diversity. The “fundamental
interest giving rise to maritime jurisdiction is the protection of maritime commerce.”
Id. at 25. In Kirby, because the “primary objective” of the disputed bills of lading
were to transport goods by sea from Australia to Alabama, the contracts were
maritime.
•
Only if the contract’s sea components are insubstantial will the contract not qualify
as a maritime contract.
Prosecuting a Rule B Action:
Mixed Contracts
“Mixed” contracts, which contain both maritime and non-maritime
elements, are subject to the district court's admiralty jurisdiction
in the Second Circuit; Folksmamerica Reinsurance Co. v. Clean
Water of New York, Inc., 413 F.3d 307, 312 (2d Cir. 2005) sets
forth a two-part inquiry to determine whether admiralty
jurisdiction exists in such cases:
Part 1: “Threshold inquiry” – court must “initially determine whether
the subject matter of the dispute is so attenuated from the business of
maritime commerce that it does not implicate the concerns underlying
admiralty and maritime jurisdiction.”
Part 2: If the threshold inquiry is satisfied, the court must shift its
focus and determine whether the contract itself is “primarily maritime in
nature.” If the contract appears to be “mixed”, it will normally “fall
outside admiralty jurisdiction.”
Prosecuting a Rule B Action:
More on Maritime Contracts
A guarantee of performance on a maritime contract
is considered a maritime claim. An agreement to act as
a surety on a maritime contract, however, is not. See,
e.g., Transport Panamax, Ltd. v. Kremikovtzi Trade
E.E.O.D., 2008 U.S. Dist. LEXIS 48688 (S.D.N.Y. June
19, 2008).
Even a lone allegation that a defendant guaranteed
another’s obligations under a maritime contract could
result in an order of attachment. See, e.g., Cargill
International S.A. v. JSW Panama Holdings Corp., et. al.
Prosecuting a Rule B Action:
Maritime Claim Trivia –
Would the subject matter listed below be
considered a “maritime claim” by a district court?
•
BREACH OF A CHARTER PARTY
•
YES
•
FORWARD FREIGHT AGREEMENT
•
YES (Brave Bulk Transport Ltd. v. Spot On Shipping
Ltd.), 2007 U.S. Dist. LEXIS 81137 (Oct. 30, 2007)
(disputes involving FFAs are maritime claims for
which Rule B attachment procedures are available)
•
CONTINGENT INDEMNITY CLAIM FOR BREACH OF
A CHARTER PARTY (ASSUMING ENGLISH LAW
GOVERNS)
•
NO (Bottiglieri di Navigazione SpA v. Tradeline LLC,
No. 07 0850 cv, 293 Fed. Appx. 36, 2008 U.S. App.
LEXIS 20028, at *2 (2d Cir. Sept. 17. 2008)
(affirming district court's finding "that plaintiff's
claim for indemnity against defendant was unripe
(and therefore not a valid prima facie claim)
•
A COMMODITY PURCHASE AGREEMENT RE: A
COMMODITY BEING TRANSPORTED BY LAND
•
NO
Prosecuting a Rule B Action:
Maritime Claim Trivia –
Would the subject matter listed below be
considered a “maritime claim” by a district court?
• BREACH OF A COMMODITY
PURCHASE AGREEMENT RE: A
COMMODITY BEING TRANSPORTED
BY SEA
• MEMORANDA OF AGREEMENT (MOAs)
FOR THE SALE OF VESSELS
• NO
(Glencore AG v. Bharat Aluminum Co., 2008
U.S. Dist. LEXIS 107063 (S.D.N.Y. Dec. 15, 2008)
(“we reach this conclusion bearing in mind that a
contrary holding would be another step toward
substantially expanding the reach of federal
admiralty jurisdiction. In recent years -- and in
recent months in particular -- Supplemental Rule B
maritime attachments have been filed with
increasing frequency.”)
• YES
(Kalafrana Shipping, Ltd. v. Sea Gull
Shipping Co., 2008 U.S. Dist. LEXIS 78247 (S.D.N.Y.
2008) (“the MoA is a contract for the purchase of a
launched ship that has been plying the seas for
some time. As such, it has a distinctly "salty flavor,"
for the sole purpose of a ship is to sail.”)
Prosecuting a Rule B Action:
Requirement #1:
MARITIME CLAIM (cont.) –
ALTER EGO ALLEGATIONS
If a Plaintiff can plead that a Defendant is the “alter ego” of another named Defendant,
the Plaintiff may attach the alter ego’s assets as well, even in the absence of contractual
privity. The following factors are indicators of an alter ego (William Passalaqua Builders,
et al. v. Resnick Developers South, Inc., et. al. 933 F.2d 131, 139 (2d Cir. 1990):
(1) whether corporate formalities are observed,
(2) whether the capitalization is adequate,
(3) whether funds are put in and taken out of the corporation for personal rather than
corporate purposes,
(4) whether there is overlap in ownership, officers, directors, and personnel,
(5) whether the corporate entities share common office space, address and telephone
numbers,
(6) the amount of business discretion displayed by the allegedly dominated
corporation,
(7) whether the alleged dominator deals with the dominated corporation at arms
length,
(8) whether the corporation is treated as an independent profit center,
(9) whether others pay or guarantee debts of the dominated corporation, and
(10) whether the corporation in question had property that was used by the alleged
dominator as if it were the dominator's own.
Prosecuting a Rule B Action:
Requirement #1:
MARITIME CLAIM - ALTER EGO ALLEGATIONS (cont.)
• In Tideline v. Eastrade Commodities, 2007 AMC 252 (S.D.N.Y. 2007), the
district court noted that “[t]he Court of Appeals' holding and rationale in
Aqua Stoli Shipping Ltd. [] strongly undermine the standard, stated in a
number of cases, that [a] hearing pursuant to Supplemental Rule E(4)(f) is
intended to ‘make a preliminary determination whether there were
reasonable grounds for issuing the warrant.’” (emphasis added). The
“reasonable grounds” standard would otherwise require a Plaintiff to
present evidence to justify the maintenance of a Rule B attachment if said
attachment is challenged by a Defendant.
• Instead, the Tideline court held, “the holding and overall rationale of Aqua
Stoli . . . imply that the ‘probable cause’ or ‘reasonable grounds’ standard is
generally improper when considering whether a maritime attachment must
be vacated. Under this logic, the Court should not engage in a broad
inquiry into evidence presented as to” the alter ego relationship. In sum, a
Plaintiff need not submit evidence as to these factors, but only demonstrate
that it has a “prima facie” claim against the Defendant on the basis of
alleged alter ego status.
Prosecuting a Rule B Action:
Requirement #1:
MARITIME CLAIM - ALTER EGO ALLEGATIONS (cont.)
• Vacating a Rule B attachment based on alter ego allegations is
difficult in practice because judges are reluctant to touch on the
merits of alter ego allegations and will simply look at the face of the
Complaint. However, there is also support for the opposing notion
that a Court does not abuse its discretion if it does, in fact, consider
facts raised outside of the Complaint in connection with a motion to
vacate an attachment. See SPL Shipping Ltd. v. Gujarat Chiminex
Ltd., 2008 U.S. Dist. LEXIS 95674 (citing to the Second Circuit’s
decision in Williamson v. Recovery Ltd. P'ship, 542 F.3d 43, (2d Cir.
2008), as support for the position that a “district court does not
abuse its discretion when it considers evidence outside of the
pleadings on motion to vacate an order.”)
Prosecuting a Rule B Action:
Requirement #2:
DEFENDANT CANNOT BE “FOUND” WITHIN THE DISTRICT
AS OF THE FILING DATE OF THE COMPLAINT
To determine whether a
particular Defendant may be
“found” within the district, a
court will engage in a twopronged inquiry.
Seawind Compania, S.A. v. Crescent Line,
Inc., 320 F.2d 580 (2d Cir. 1963)
FIRST
May the Defendant be “found”
within the district for purposes of
personal jurisdiction?
SECOND
May the Defendant be “found”
within the district for purposes of
service of process?
Prosecuting a Rule B Action:
Requirement #2:
CAN THE DEFENDANT BE “FOUND” WITHIN THE
DISTRICT? SOME EXAMPLES IN PRACTICE
DOES THE DEFENDANT HAVE AGENTS IN NEW YORK?
Defendant may be found within the district based on the actions of its
agents. See Metal Transport Corp. v. Canadian Transport Co., 526 F. Supp.
234 (S.D.N.Y. 1981) (Defendant was "found" within the district for
purposes of Rule B because it conducted continuous and systematic
activity in New York through the acts of its shipping agent, which
"arrange[d] for the discharge and loading of cargo, including the hiring
and paying of stevedores, handle[d] the port-to-port operation of
chartered vessels and monitor[ed] and report[ed] to [Defendant] on the
payment of freight monies," thus making clear that Defendant was
jurisdictionally present within the district and amenable to service of
process through its general agent) its bank account); but see SK Shipping
(Singapore) Pte Ltd. v. Petroexport Ltd., 2008 U.S. Dist. LEXIS 81752
(S.D.N.Y. 2008) (Defendant’s agent, located in Brooklyn, New York with an
office in Manhattan, who bound Defendant to disputed charter party with
Plaintiff, did not enable Defendant to be “found” within district because
agent provided similar services to other entities in New York).
Prosecuting a Rule B Action:
Requirement #2:
CAN THE DEFENDANT BE “FOUND” WITHIN THE
DISTRICT?
HAS THE DEFENDANT REGISTERED TO DO
BUSINESS IN NEW YORK?
Designation of a registered agent for service of process
within the district means that the Defendant may be
"found" within the district for Rule B purposes. See
Pioneer Navigation Ltd. v. STX Pan Ocean (U.K.) Co.,
Ltd., No. 08 Civ. 10490, 2008 U.S. Dist. LEXIS 103255,
2008 WL 5334550 (S.D.N.Y. Dec 18, 2008); but see
Erne Shipping v. HBC Hamburg Bulk Carriers GMBH
Prosecuting a Rule B Action:
THE VERIFIED COMPLAINT &
SUPPORTING AFFIDAVIT
Rule B requires that the Plaintiff’s complaint be:
(a) verified; and
(b) accompanied by an affidavit – prepared by
either the client or the client’s attorney – which
states “that, to the affiant’s knowledge, or on
information and belief, the defendant cannot be
found within the district.” L. Adm. R. B.1.
requires that the affidavit “list the efforts made
by and behalf of the plaintiff to find and serve
the defendant within the district.”
Prosecuting a Rule B Action:
A Plaintiff’s “Extraordinary” Remedy
Rule B permits pre-trial, ex
parte attachment –
meaning, the Defendant
need not be aware of the
complaint before his assets
are seized.
Also, Plaintiff’s are not
required to post security to
initiate a Rule B action.
Prosecuting a Rule B Action:
ORDER OF ATTACHMENT
Trial courts have limited discretion concerning the issuance of an order of
attachment – the court will review the affidavit and complaint, and if the
conditions of Rule B appear to exist, an order will be entered authorizing
process of attachment and garnishment.
Prosecuting a Rule B Action:
Order of Attachment
Following are some typical qualities of an Order of Attachment:
(1)
It will direct the clerk of the court to issue process of maritime attachment against all
“tangible and intangible” property of the Defendant;
(2)
It will appoint persons to serve the process (as well as any supplemental process) upon
“any garnishees” named in the order. The manner in which this is to be done is entirely
within the judge’s discretion;
(3)
It will confirm the scope of the service.
(4)
It will allow (where requested) the Plaintiff to file its papers under seal. This strategy
might work to prevent a Defendant from diverting funds away from New York. However,
Courts are unwilling to allow this to go on indefinitely. See Kola Shipping Ltd. v. Shakti
Bhog Foods, 2009 U.S. Dist. LEXIS 14392 (S.D.N.Y. Feb. 24, 2009) (where “the action was
maintained under seal from its inception until [approximately four months later], there is
no basis to believe that Defendant attempted to divert its funds to avoid attachment.
Plaintiff cannot maintain an order of attachment indefinitely in the sheer hope that
defendant's property may one day be found within the district.”)
Prosecuting a Rule B Action:
The Luck of the Draw
Both recent case law (and recent experiences of S&K litigators) make clear that the Judge randomly
assigned – out of 44 total judges in the Southern District – may have an effect on the scope of
the order issued – or whether the order is even approved. For example:
(1)
Judge Sheindlin (Cala Rosa Marine Co. v. Sucres et Deneres Group, 2009 U.S. Dist. LEXIS 7934
(S.D.N.Y. Feb. 4, 2009)) has indicated that she may decline to allow continuous service, and
may decline to allow law firm appointed servers, limiting service to the U.S. Marshal;
(2)
Judge Rakoff (Shipping Corp. of India, Ltd. v. Jaldhi Overseas PTE Ltd., 2008 U.S. Dist. LEXIS
49209 (S.D.N.Y. June 27, 2008)) has indicated that EFT “property” is limited to property
emanating from the Defendant’s accounts, and that there can be no attachment of third party
funds on their way to a Defendant – as they are not Defendant’s property until the transfer is
completed; and
(3)
Judge Sullivan (Chug Lin Marine Serv. Corp. v. China Chance Shipping Ltd., 2008 U.S. Dist.
LEXIS 106417 (S.D.N.Y. Dec. 15, 2008)) has denied applications for maritime attachment,
requiring more of a basis to attach property where Plaintiffs could plead only that a Defendant
“is believed to have or will have property” that may be found in the district.
Prosecuting a Rule B Action:
The Clerk’s Issuance of Process of Maritime
Attachment and Service of Process
After the clerk of the court issues
process, it must be served upon the
garnishees.
Where the property sought to be
attached is a vessel or tangible
property aboard a vessel, only a
marshal may serve initial process and
any supplemental process.
With respect to any “tangible or
intangible” property other than a
vessel (or property thereon), the
Court may permit anyone “specially
appointed by the court” to serve the
“summons, process and any
supplemental process.”
RuleB(1)(d)(ii).
Prosecuting a Rule B Action:
The Clerk’s Issuance of Process of Maritime
Attachment and Service of Process
Plaintiff must give “prompt notice to the
defendant of the attachment” where the
defendant’s property has been attached.
That notice “shall be in writing, and may be
given by telex, telegram, cable, fax, or other
verifiable electronic means.” L. Adm. R. B.2
Rule B From A Garnishee Bank’s Perspective:
Quotes from a February 13, 2009 article in
TradeWinds entitled “Judge Slams ‘Rule B’ rodeo.”
“[T]he attachment of EFTs or wire transfers in New York has gradually
established itself as a basic practical step in shipping disputes
throughout the world, to some extent supplanting the traditional
practice of arresting ships to secure maritime claims.”
The proliferation of the attachment of wire transfers in New York
explains why:
“Banks hate Rule B.” Id.
Rule B From A Garnishee Bank’s Perspective:
Garnishee’s Obligations When
Served With Process
•
A garnishee must attach all property
in its possession at the time of service of
process. See Reibor International Limited
v. Cargo Carriers (Y,4 CZ-CO.) Limited.
•
A Plaintiff may serve interrogatories
upon a garnishee if they are annexed to
its Complaint.
•
A garnishee has 20 days to answer
the Complaint and any interrogatories.
•
If the garnishee “admits any debts,
credits, or effects” of the Defendant, it
must hold these “in the garnishee’s hands”
or “pa[y] into the registry of the court”
such property.
Third Party Interests In Attached Property
Often, circumstances arise in which a third party has an interest in property
attached pursuant to Rule B. These third parties are frequently notified by
the garnishee bank, and these parties may have to intervene. Some
contemporary issues:
Does a Rule B attachment trump a prior perfected security interest, i.e.,
does Rule B trump the N.Y. U.C.C.? Compare K/S A/A Sea Team et Co. v.
Colocotronis (Greece) S.A., 1978 U.S. Dist. LEXIS 16786 (S.D.N.Y. Jul. 5,
1978) (a “lien creditor under the UCC [is] subordinate to a prior perfected
security interest in the attached property”) with Winter Storm (2d Cir.
rejected a garnishee bank’s motion to vacate the Rule B attachment
brought to enable the bank to exercise a right of set-off created by the New
York Debtor and Creditor Law, Sec. 151; the Second Circuit held that the
statute conflicted with and was preempted by the plaintiff’s Rule B right of
attachment). This issue is currently being briefed in the Southern District.
Rule B From A Garnishee Bank’s Perspective:
Analyzing the burden on a garnishee bank
The transient nature of EFTs, and the manner in which Plaintiff’s and
courts structure the orders of maritime process to account for the transient
nature of EFTs, impose a significant burden on the banking sector.
For example, it would be nearly impossible for a Plaintiff to properly
time service of process on a bank in order to capture a wire transfer, as wire
transfers occur instantaneously. In order to compensate for this difficulty,
courts have crafted orders which in essence permit banks to deem the papers
to be served repeatedly and continuously for 24 hours from the time they were
initially presented. Further, these orders will also typically require that a
Plaintiff serve garnishees on a daily basis to ensure that any transfers within 24
hours prior, or 24 hours subsequent, to service are captured. But see Cala
Rosa (discussed previously).
As is typical, a Plaintiff’s counsel will be appointed as a “special
process server” who can effectuate service. The initial service is generally
required to be by hand. However, a garnishee has the right to require the
Plaintiff to serve in the manner it deems fit – by hand delivery, facsimile, or
email, for example.
Defending a Rule B Action:
MOVING TO VACATE THE ATTACHMENT:
Entitlement to a Prompt Hearing
Supplemental Rule E(4)(f) entitles “any person
claiming an interest in [attached property] . . . to a
prompt hearing at which the plaintiff shall be
required to show why the . . . attachment should
not be vacated or other relief granted.”
This hearing “shall be conducted by a judicial
officer within three court days, unless otherwise
ordered.” L. Adm. R. E.1.
Defending a Rule B Action:
MOVING TO VACATE THE ATTACHMENT (cont.)
Aqua Stoli Factor #1
As noted above, a Defendant may move to vacate on any one of the four Aqua Stoli
factors:
1.)
Whether the Plaintiff has a valid prima facie admiralty claim against the
Defendant. The following cases are examples of successful motions by
Defendants to vacate an attachment in light of this factor: Marubeni Int'l Petroleum
(Singapore) Pte Ltd. v. Prestige Marine Servs. Pte Ltd., 2009 U.S. Dist. LEXIS 5174
(S.D.N.Y. Jan. 26, 2009) (court granted Defendant’s motion to vacate attachment
finding that a contract to supply fuel to “indeterminate vessels” do not fall within the
court’s admiralty jurisdiction; if a claim is not a maritime claim, it cannot satisfy the
first Aqua Stoli factor); Glencore AG v. Bharat Aluminum Co., 2008 U.S. Dist. LEXIS
107063 (S.D.N.Y. Dec. 15, 2008) (Defendant’s motion to vacate attachment granted
where Plaintiff’s suit was for alleged breach of a commodity purchase agreement
because a “commodity purchase agreement -- even one that involves maritime
shipment of the commodity -- is not maritime in nature.”) In addition, challenges in
light of an alter ego theory would fit into this category. See, e.g., Pink Goose
(Cayman) LTD v. Sunway Traders LLC, 2008 U.S. Dist. LEXIS 82081 (S.D.N.Y. Oct.
17, 2008) (“alter-ego theories of liability are prima facie admiralty claims so long as
the underlying claim arose in admiralty”).
Defending a Rule B Action:
MOVING TO VACATE THE ATTACHMENT (cont.)
Aqua Stoli Factors #2 - 4
2.) Whether the Defendant cannot be found within the district. A
Defendant who is registered to do business in New York, or one which has
an active, exclusive agent in New York, or even one who may be located in
an “adjacent district,” might move to vacate an attachment based on this
factor. See, e.g., Glory Wealth Shipping Servs. v. The Rice Co., 2008 U.S.
Dist. LEXIS 106468 (S.D.N.Y. Dec. 23, 2008) (“Defendant's registration
with the New York Secretary of State satisfies the jurisdictional prong of
the Seawind test”); Petroexport v. SK Shipping (Defendant not found
within district where its agent was non-exclusive);
3.) Whether the Defendant’s property can be found within the
district. Challenges to the propriety of attachment of EFTs would fall
within this category. See, e.g., Consub Delaware (Defendant
(unsuccessfully) argued that funds in transit via an EFT are not “property”
within the meaning of Rule B).
4.) There exist maritime or statutory bars to attachment.
Defending a Rule B Action:
Practice Pointer:
Amenability to Service in a “convenient, adjacent
district”
• A Defendant may challenge/avoid Rule B attachment if it is amenable to service in a
“convenient, adjacent district.” Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd.
• The scope of this phrase has not been clearly defined by the Courts:
– Swiss Marine Servs. S.A. v. Louis Dreyfus Energy Servs. L.P., 2008 U.S. Dist.
LEXIS 93095 (S.D.N.Y. 2008) (Connecticut determined to be a convenient,
adjacent forum. This case is currently on appeal to the 2d Circuit.)
– Ivan Visin Shipping, Ltd. v. Onego Shipping & Chartering B.V., No. 08-CV-1238,
2008 U.S. Dist. LEXIS 25028 (S.D.N.Y. Apr. 1, 2008) (New Jersey determined to
be a convenient, adjacent forum), motion for reconsideration denied, 543 F.
Supp. 2d 338 (S.D.N.Y. 2008)
– But cf. First Am. Bulk Carrier Corp. v. Van Ommeren Shipping (USA) LLC, 540 F.
Supp. 2d 483, 485 (S.D.N.Y. 2008) (an “adjacent district” “generally viewed as
one of another federal court within the same state . . . Not one in a different
state, even if the two states are adjacent.”)
Defending a Rule B Action:
Practice Pointer:
Posting Security
Any transactions conducted in U.S.
dollars are potentially subject to attachment.
Therefore, a Rule B attachment may
detrimentally impact a shipping client. To
quickly avoid disruption, a Defendant may
make a strategic decision to post security in
exchange for Plaintiff’s agreement to stop
serving the order of attachment.
Defending a Rule B Action:
Practice Pointer:
Asserting a counterclaim seeking countersecurity
If a Defendant opts not to move to vacate an attachment,
FRCP Supplemental Rule E(7)(a) provides for “Security on
Counterclaim”, and enables a Defendant to obtain security
in connection with a “counterclaim that arises from the
transaction or occurrence that is the subject of the original
action.” In such cases, the Plaintiff “must give security for
damages demanded in the counterclaim unless the court,
for cause shown, directs otherwise. ” (emphasis added).
HOWEVER…
Defending a Rule B Action:
Practice Pointer:
More on countersecurity
Despite the fact that the language appears to mandate
countersecurity, the language of Rule E(7) directing that
security be granted “unless the court for cause shown,
directs otherwise” makes it entirely clear that the trial
court possesses broad discretion in deciding whether to
order countersecurity. Result Shipping Co. v. Ferruzi
Trading USA Inc., 56 F.3d 394, 399 (2d Cir. 1995).
In exercising that discretion, two major principles govern:
(1) parties should be placed on an equal footing with
respect to security; and (2) Rule E(7) is not meant to be so
burdensome so as to prevent the bringing of the suit.
Defending a Rule B Action:
Practice Pointer:
Registering to “Do Business” in New York
• As indicated earlier, district courts have allowed some Defendants to
avoid a Rule B attachment where those Defendants have (1)
registered with the New York Secretary of State as a foreign
corporation licensed to do business there and (2) appointed an
agent for service of process in the S.D.N.Y.
• The majority of district court judges in the S.D.N.Y. have held that
these activities are sufficient to demonstrate that a Defendant may
be “found” within the Southern District and therefore is not properly
subject to a Rule B attachment. See Pioneer Navigation Ltd. v. STX
Pan Ocean Co., No. 08 Civ. 10490, 2008 U.S. Dist. LEXIS 103255
(S.D.N.Y. Dec. 18, 2008).
Defending a Rule B Action:
Pitfalls of Registering
to Do Business in New York
•
Registration does not guarantee immunity from a Rule B attachment – the Second Circuit held
oral argument on this issue on February 13, 2009, but has yet to issue a written opinion.
Compare the following:
–
STX Pan Ocean (UK) v. Glory Wealth (U.K.) Co., Ltd., No. 08 Civ. 10490, 2008 U.S. Dist.
–
Erne Shipping v. HBC Hamburg Bulk Carriers GMBH , 409 F. Supp. 2d 427 (S.D.N.Y. 2006) –
–
Stolt Tankers v. Geonet Ethanol, No. 08 Civ. 4382, 2008 U.S. Dist. LEXIS 92706 (S.D.N.Y.
LEXIS 103255, (S.D.N.Y. Dec 18, 2008) (Designation of a registered agent for service of
process within the district means that the Defendant may be "found" within the district for
Rule B purposes.)
registering to do business in and of itself is insufficient to avoid Rule B. Defendant must also
conduct some actual business in the state to be subject to its jurisdiction.
Nov. 3, 2008) – failure to appoint a designated agent for service of process in the district (as
opposed to Albany, New York), was insufficient to vacate a Rule B attachment
•
A Defendant risks subjecting itself to the general jurisdiction of New York State and Federal
Courts by virtue of registering.
•
Though defendants fear tax consequences from registering to do business, registering should not
in and of itself alter a company's tax posture.
Defending a Rule B Action:
Application Form for Registration of a Foreign Corporation
Defending a Rule B Action:
How to Register to Do Business in New York:
Filing of the Application for Authority Form
The corporation/LLC must file the signed
“Application for Authority” (with backer) and supporting
documents (LLC’s must also file a Certificate of
Publication). The Application must be:
(1)
Executed by an Officer, Director, Member,
Manager or other authorized person; whose
(2)
Name and title must be printed or typed
beneath signature line
The corporation must also register each entity for
which it wishes to avoid the potential for a Rule B
attachment.
Defending a Rule B Action:
How to Register to Do Business in New York:
Supporting Document Requirements
The supporting documents:
• Cannot be more than one (1) year old.
• Must be issued by an official of the jurisdiction of incorporation and indicate the
company's continued existence.
• Name, jurisdiction and date of formation indicated on the Application for
Authority must be consistent with the supporting document.
• Examples of typical supporting documents: (i) Certificate of Good-standing
(most common and almost always acceptable) and (ii) excerpt of commercial
register.
• Must be in English language. If issued originally in a foreign language must be
accompanied by a Certified English Translation.
Defending a Rule B Action:
How to Register to Do Business in New York:
Name Requirements
–
Cannot conflict with any domestic/foreign entity existing or qualified
in NY
–
If there is a name conflict, a fictitious name will have to used while
doing business in New York
–
Must contain an acceptable indicator, i.e., Corp., Corporation, Inc.,
Incorporated, Limited, Ltd., L.L.C., LLC, Limited Liability Company (a
period must trail any abbreviated corporate indicator)
–
If the entity's name does not contain an acceptable indicator, an
acceptable indicator will have to be added to the entity's name when
doing business in New York
Defending a Rule B Action:
How to Register to Do Business in New York:
Fees
–
$225/$250 State Filing fee
–
~$150 correspondent fees (we work with a number of correspondents such as
CSC and CT Corporation, and receive substantial discounts – reflected here)
–
~$150 annual "service address" fee – an address will be indicated on the
application where process served on the SoS shall be sent. Normally a
correspondent's address is used – the above fee reflects our discounts
received
–
Expedited services fees – NY filings and results thereof can be slow; it usually
pays to go with an expedited filing/result service fees e.g. $75 same day filing
and $75 same day result
–
LLC Publication Fee – LLC’s have a publishing requirement in the County in
which they will be “located.” New York County is the most expensive to
publish in ($1,500 - $2,500), depending on the newspapers selected by the
County Clerk.
Defending a Rule B Action:
How to Register to Do Business in New York:
Maintenance Expenses/Filings
–
~$150 annually to correspondent for use of their "service address" (as
mentioned above)
–
$300 annual maintenance fee due State of New York (corporations only). This
presumes no New York source income.
–
CT-245 Disclaimer of Tax Liability to be filed annually with NY State
Department of Taxation and Finance (corporations only). This also presumes
no New York source income.
–
Biennial Statement – a form will be sent every other year to the entity
corporation c/o the service address; there is a $9 fee to file the biennial
statement (corporations only).
–
LLC’s will be asked to complete a “Request for Information” form for the New
York Department of Taxation and Finance.
Defending a Rule B Action:
How to Register to Do Business in New York:
Warnings
–
New York Department of State is not user friendly, e.g., you
cannot pre-clear questionable documents
–
Non-traditional supporting documents can cause filing delays
e.g. not every jurisdiction issues a Certificate of Good-standing
and New York Examiners are not familiar with the supporting
documents of every jurisdiction
–
Filed documents will be stored on micro-film; they will be
REJECTED if they are not of good quality, have black borders,
are illegible, etc.