The Official Comments to §4-A-503 acknowledge that the provision is “designed to prevent interruption of a funds transfer after it has been set in motion,” and that, “in particular, intermediary banks are protected.”
The limitations in this provision flow reasonably from principles of personal property law. Using the facts in the Winter Storm case to illustrate, Winter Storm was seeking to attach the assets of TPI, which owned assets in Thailand and had an account with its Thai bank there. Thus, had Winter Storm served an attachment order on the originating bank in Thailand (putting aside jurisdictional issues), that would have been (under the New York statutes) a legitimate attachment of a debt owed to TPI.
But TPI had no assets in New York at BoNY. Rather, all that existed at BoNY were virtual credits and debits that BoNY had with the Thai bank (the originating bank) on the one hand and the English bank (the beneficiary bank) on the other. Because TPI had no property in New York, and relying on §4-A-503, the district court vacated the attachment.
The Second Circuit reversed and remanded the case with instructions to reinstate the attachment and retain jurisdiction. In doing so, the Circuit relied on the holding in a drug seizure case brought under the federal forfeiture statutes.6
There is much to be criticized in the regime established by Winter Storm. First, it is only the property of a defendant that should be subject to attachment, yet the Second Circuit effectively ignored the law that defined such property rights. The Federal Reserve Bank of New York made that point in an amicus brief that it submitted to the Second Circuit in Winter Storm in support of TPI’s motion for rehearing en banc.
In that brief, the Federal Reserve spoke of a balance effected by the rule of §4-A-503: “efficiency is fostered by protecting the intermediary banks; justice is fostered by expressly telling litigants where the process should be served.” It then argued that the Second Circuit’s decision in Winter Storm “disrupt[ed] this balance and threaten[ed] the efficiency of funds transfer systems, perhaps including Fedwire.”
Likewise, the New York Clearing House Association, an association of leading commercial banks, submitted an amicus brief in which it argued that the Second Circuit decision had ignored relevant property law and adopted a position that was bad policy.
Recent Criticism
A number of recent decisions have focused on problems with the Winter Storm regime. Judge Richard Holwell, for example, recently criticized the decision in Hannah Brothers v. OSK Marketing & Communications Inc., pointing out the failure of Winter Storm to adopt §4-A-503 of the U.C.C. and also said that it “has become conventional wisdom in this district that Winter Storm . . . may merit reconsideration by the United States Supreme Court or the en banc Second Circuit.”7
In Shipping Corp of India v. Jaldhi Overseas PTE Ltd., Judge Jed Rakoff distinguished between attachments in which the defendant was the originator of the EFT (as was the situation in Winter Storm) and those in which the defendant was the beneficiary. As to the latter, Judge Rakoff held:
He thus vacated the attachment of EFTs made before the transfer to the beneficiary. Judge Rakoff recognized that other courts had disagreed with him on this issue and certified it to the Second Circuit, which, in its most recent decision on the issue, stated that it was not reaching the question of whether funds involved in an EFT en route to a defendant are subject to a Rule B attachment.9
Logically, however, if funds on their way to a beneficiary of an EFT are not subject to Rule B attachment, funds from an originator should, under the UCC, be treated in the same way.
In connection with the Hannah Brothers appeal as well, the Clearing House submitted an amicus brief in which it advocated the reversal of Winter Storm and also described some of the burdens that had been imposed on the banks, such as the fact, that between Oct. 1, 2008, and Jan. 31, 2009, maritime plaintiffs filed 962 lawsuits, constituting one-third of all lawsuits filed in the Southern District, seeking to attach a total of $1.35 billion.10
In another recent decision, Judge Shira Scheindlin (the judge in Winter Storm) noted the well established principle that a plaintiff may only attach funds that are in the hands of a garnishee at the time the attachment order is served. Given the fact that EFTs can move through a bank almost instantaneously, there would seem to be a need to serve the bank around the clock in order to capture an EFT at the moment of its arrival.
In order to surmount this obstacle, a practice developed around Rule B attachments that the order direct the garnishee bank to treat the order as continuously served for a day.
Judge Scheindlin referred to the huge burden that the Rule B attachments were imposing on banks and the fact that such cases made up one-third of the docket of the Southern District.11 And she noted that New York had a very slight interest in the underlying dispute between two foreigners who had agreed to arbitrate their dispute in London. The court therefore declined to exercise its discretion to mandate that the banks treat the service as continuous.
Judge Scheindlin also refused to appoint a plaintiff-designated process server, meaning that only the U.S Marshal could serve process (which, in turn, meant that the process would not be served throughout the day because of the numerous other obligations of a U.S. Marshal). Judge Scheindlin recognized that constraining a Rule B order in these ways could significantly reduce the efficacy of the Rule B attachment but believed this was within the proper exercise of her discretion.
Conclusion
The Federal Reserve Bank of New York and leading commercial banks are on record as saying that Winter Storm is bad law and bad policy.
The burden imposed on banks from the huge number of Rule B cases filed in the Southern District of New York is undeniable. And the interference with international commerce is manifest when parties find their U.S. dollar transfers frozen in transit in transactions that have nothing to do with the United States.
Worse yet, the best advice a lawyer can give a client for avoiding this risk is to conduct its business in a currency other than U.S. dollars or clear transactions through one of the proliferating off-shore dollar clearing networks. This is especially bad for the United States in a time that other governments, such as the Chinese, are suggesting that the pre-eminent role of the dollar be reevaluated.
Under normal circumstances, court decisions that interpret statutes in a way considered by many to be wrong as a matter of law and that also pose a risk to the pre-eminent position of the U.S. dollar in the global economy should draw Congressional attention. In today’s economic crisis, the interest in such scrutiny should be even greater.
Because it seems unlikely that the Second Circuit will overrule Winter Storm, it would seem to be time for Congressional or other action that would have the effect of making clear that, consistent with the provisions of the UCC, EFTs may not be attached in transit, including through Rule B attachments.
Lawrence W. Newman and David Zaslowsky are partners in the litigation department of the New York office of Baker & McKenzie. They are co-authors of “Litigating International Commercial Disputes” (West Group) and can be reached at [email protected] and [email protected], respectively.
Endnotes:
1. Rule B of the supplemental Rules for Certain Admiralty and Maritime Claims.
2. Often in fund transfers, the originator’s bank does not have a U.S.-dollar account at the beneficiary’s bank and so is required to use an intermediary bank.
3. For purposes of this article we assume that there is a maritime claim against the defendant and that the defendant is not “found” in New York. A company registered to do business in New York would be “found” here.
4. Winter Storm Shipping, Ltd. v. TPI, 310 F.3d 263 (2d Cir. 2002).
5. Winter Storm Shipping, Ltd. v. TPI, 198 F.Supp.2d 385, 392 (S.D.N.Y. 2002).
6. 310 F.3d at 278.
7. Hannah Brothers v. OSK Marketing & Communications Inc., 2009 U.S. Dist. LEXIS 34927 (S.D.N.Y April 24, 2009), n. 3.
8. 08 Civ. 4328, Memorandum Order, June 27, 2008.
9. Consub Delaware LLC v. Schahin Engenharia Ltda., 543 F.3d 104 (2d Cir. 2008).
10. Brief for Amicus Curiae of The Clearing House Association LLC in Support of Defendant-Appellee, p. 3.
11. Cala Rosa Marine Co. Ltd. v. Sucres et Deneres Group, 2009 U.S. Dist. LEXIS 7934 (S.D.N.Y. Feb. 4, 2009).
