The Shipping Corporation of India Ltd., vs. Jaldhi Overseas PTE Ltd. Opinion

October 16, 2009

On October 16, 2009, in an opinion issued in relation to The Shipping Corporation of India, Ltd. v. Jaldhi Overseas PTE Ltd., the Second Circuit Court of Appeals has overturned its prior decision in Winter Storm Shipping Ltd. v. TPI, and unequivocally held that electronic funds transfers (“EFTs”) are no longer subject to attachment under Rule B of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions of the Federal Rules of Civil Procedure (“Rule B”).

An electronic funds transfer, or EFT, is simply an instruction to transfer funds from an account located at one bank to an account located at another. In the case of international transactions to be executed in U.S. dollar denominations, the funds must first be cleared through an intermediary bank in the United States. Generally, the major international financial institutions perform this clearing function through their branches located in New York City. Previously, as funds were briefly cleared via the New York bank, they could be subject to attachment in Rule B proceedings. Today’s Second Circuit ruling, however, has ruled that such attachments are no longer permissible.

Under Winter Storm, the Second Circuit had held that EFTs were the “property of the defendant” named in a Rule B attachment application and, therefore, such property was subject to attachment by the court in maritime proceedings where a defendant could not be found in the district. This decision ushered in an era where maritime plaintiffs increasingly used the powers afforded by Rule B to attach defendants’ funds as security for foreign proceedings. Between October 1, 2008 and January 31, 2009, Rule B actions accounted for 33% of all lawsuits filed in the Southern District of New York, seeking to attach a total of US $1.35 billion.

In Jaldhi, the Court recognized that its holding in Winter Storm introduced uncertainty in the international funds transfer process and undermined the efficiency of New York’s international funds transfer business. They noted that “[u]ndermining the efficiency and certainty of funds transfers in New York could, if left uncorrected, discourage dollar-denominated transactions and damage New York’s standing as an international financial center.”

The Jaldhi Court reasoned that the validity of a Rule B attachment depended on the determination that the transfer at issue was the property of the Rule B defendant at the moment the transfer was attached. The Court noted that federal law has not historically recognized a property interest in EFTs when they are in the hands of an intermediary bank. Its decision in Winter Storm relied, in part, on a prior case, U.S. v. Daccarett, which allowed the forfeiture of EFTs connected to illegal enterprises. The Jaldhi Court distinguished between property subject to forfeiture in connection with a criminal action and property subject to attachment in satisfaction of a civil obligation. In so doing, the Second Circuit noted that there is no federal maritime law that determines property rights in EFTs. Without relying on Daccarett, there was no other basis under federal law which otherwise allowed a civil plaintiff to attach ETFs belonging to, or for the benefit of, a civil defendant. Therefore, the Jaldhi Court determined that attachment of ETF funds could only survive if permitted by New York state law.

To that end, the Court determined that New York state law does not permit the attachment of EFTs that are temporarily in the possession of an intermediary bank. New York law only allows a court to restrain a defendant’s funds at a beneficiary bank after the transfer has been completed. Moreover, under New York law, a creditor of the originator of an EFT can levy on the account of the originator in the originator’s bank before the funds transfer is initiated. Taken together, these provisions of New York law establish that EFTs are neither the property of the originator nor the beneficiary while briefly in the possession of an intermediary bank and therefore are not subject to attachment pursuant to Rule B.

The Court’s decision in Jaldhi puts an end to Rule B attachments seeking solely the attachment of EFTs as security for foreign proceedings. It is as yet unclear whether district courts will summarily vacate all Rule B attachments currently seeking EFTs or whether a defendant will need to institute a Motion to Vacate such an attachment. The Court’s ruling, however, has no bearing on the attachment of funds of a defendant’s bank accounts within New York State, or other tangible or intangible property within the state, which is the property of the defendant.

If you have any questions or concerns, please contact an attorney in the maritime group at Seward & Kissel.