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The Death of The Recent "Rule B Phenomenon"
The Shipping Corporation of India -v- Jaldhi Overseas Pte Ltd
On 16 October 2009, the Second Circuit of Court of Appeals in New York delivered a seismic ruling overturning its own landmark decision in Winter Storm Shipping Ltd (2d Cir 2002), that Electronic Funds Transfers ("EFTs") were considered "property" capable of attachment under Rule B of the Admiralty Rules. In doing so, it has removed one of the most potent weapons in an admiralty claimant's armoury.
In view of the transient nature of maritime assets, Rule B was deployed by admiralty claimants to obtain security for foreign legal proceedings by attaching the Defendant's "tangible [or] intangible property". The efficacy of Rule B as a means of obtaining security was greatly enhanced when, in 2002 in Winter Storm, the Second Circuit Court of Appeals held that EFTs (which are simply instructions to transfer funds from one account to another) constituted "property" of the Defendant, so as to bring them within the Rule B jurisdiction. Given that virtually all international US Dollar dominated transactions are fleetingly routed through the New York banking system, Winter Storm in one stroke, extended to maritime claimants an extremely potent and relatively straightforward means of obtaining security for overseas claims.
It was, however, the unintended side effects of Winter Storm, with which the Second Circuit Court of Appeals was seemingly most concerned in Jaldhi Overseas. In particular, the extension of the Rule B Jurisdiction to EFTs had resulted in an explosion in the number of lawsuits filed in New York. Furthermore, all Rule B writs once issued had to be served - and re-served daily - on the New York banking system, threatening to overwhelm it.
By way of illustration, the Second Circuit Court of Appeals noted that in just the 4 months to the end of January 2009 alone, some 962 lawsuits were filed seeking to attach a total $1.35 billion. The resultant writs only added to the burden of some 800 - 900 other writs which were already being served daily on the banking system. Indeed, the Second Circuit Court of Appeals accepted that the extension of Rule B to EFTs threatened to undermine the efficiency and certainty of fund transfers in New York. This development could, if left uncorrected, discourage Dollar dominated transactions and indeed damage New York's standing as an international financial centre.
The Second Circuit Court of Appeals weighed up against this disruption the potentially dramatic effect that overturning Winter Storm would have on the law of maritime attachments in New York. Nevertheless, the court recognised that the decision had met with considerable judicial and academic hostility since it was handed down in 2002 and indeed, a succession of subsequent decisions had sought to limit its reach and potency. Nevertheless, despite the Second Circuit Court of Appeals' attempt to play down the implications of over-ruling Winter Storm, nevertheless it significance is not to be under-stated.
Technically, the Jaldhi Overseas judgment was confined to those EFTs where the Defendant was the beneficiary of the EFT rather than the originator. However, the Second Circuit Court of Appeals remanded back to the District Court the issue of the status of "originator" attachments whilst also seemingly making clear that it saw neither type of transfer as susceptible to attachment under Rule B.
One further question which appears to be left unresolved by the judgment is the exact status of existing EFT attachments under Rule B. Current reports from New York suggest that the judges are simply releasing all Rule B attachments over EFTs (seemingly without regard to whether they are "beneficiary" or "originator" attachments). However, the full ramifications of the judgment have yet to be worked out.
It is to be noted, in closing, that whilst the recent phenomenon of Rule B attachments over EFTs is well and truly dead, the Rule B jurisdiction is still very much alive and well for other types of property.
If any further information is required, please do not hesitate to contact Andrew Purssell or Stephen Limbert on 020 7623 4255.
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