Second Circuit Holds As A Matter of First Impression That Electronic Funds Transfers May Be Subjected to Maritime Attachment
December, 2002
by Kimbley A. Kearney and
In Winter Storm Shipping, Ltd. v. TPI, 2002 WL 31478850 (2d Cir. 2002), the Second Circuit decided as a matter of first impression that funds transferred by means of an electronic funds transfer (EFT) may be subjected to maritime attachment in the hands of an intermediary bank without violating constitutional due process.
Facts
Plaintiff Winter Storm chartered its vessel to defendant TPI to carry oil cargo from Saudi Arabia to Thailand. Winter Storm alleged that TPI breached the charter party by failing to pay the full freight due. Winter Storm sued TPI and invoked the district court’s admiralty jurisdiction. Winter Storm alleged that TPI could not be “found within the district” within the meaning of Admiralty Rule B(1)(a):
If a defendant is not found within the district, a verified complaint may contain a prayer for process to attach the defendant’s tangible or intangible personal property – up to the amount sued for – in the hands of garnishees named in the process.
Winter Storm sought an order directing the clerk to issue process of maritime attachment and garnishment, identifying “Chase Manhattan Bank and/or Bank of New York” as potential garnishees.
The district court entered an ex parte order of attachment. Process of maritime attachment and garnishment was served on the Bank of New York. At the time of service, the bank did not hold any of TPI’s funds. However, due to the service of process, the bank placed a stop order on any funds relating to TPI that were passing through the bank. TPI’s funds were later attached when it entered into an unrelated commercial transaction with another party.
The district court granted TPI’s motion to vacate the attachment order. Relying on state law, the court found that a funds transfer intercepted by an intermediary bank is not attachable “property” under Admiralty Rule B(1). The court held that allowing wire transfer credits to be attached at unforeseen and unknown intermediary banks violates due process. Because the attachment was the sole basis for jurisdiction over TPI, the district court dismissed the action. Winter Storm appealed.
Analysis
The Second Circuit disagreed, holding that EFT funds in the hands of an intermediary bank may be attached under Rule B(1). The court stated that the practical effect of the district court’s ruling was that EFT funds could not be subjected to maritime attachment unless defendant had specific advance knowledge of the name and address of the intermediary bank. Such a significant restriction should not be placed on maritime attachment.
Addressing the constitutionality of its newly announced rule, the court noted that Rule B(1) had been amended in 1985 in order to address due process concerns. As amended, the rule requires a plaintiff to appear before a judge instead of a clerk to secure attachment. Additionally, Rule E(4)(f) provides that a party whose assets are being attached is entitled to notice and a prompt hearing.
The court further ruled that TPI’s funds, in the hands of the intermediary bank during the implementation of an EFT, constituted “property” under Rule B(1). Rule B(1), broadly phrased, applies to “tangible or intangible” property. Thus, the property attached need not have a direct connection to the claim sued upon.
The Second Circuit rejected the district court’s reliance on Reibor Int’l, Ltd. v. Cargo Carriers, Ltd., 759 F.2d 262 (2d Cir. 1985) because in that case, the Second Circuit had deliberately refrained from deciding the issue. Instead, the appellate court looked to federal case law on EFT’s in the context of drug trafficking and civil forfeiture statutes, citing U.S. v. Daccarett, 6 F3d 37 (2d Cir. 1993), which held that EFT’s were “property” subject to seizure.
The court stated that because its holding was derived from federal law, there was no reason to look to state law for guidance, as the trial court had done. The trial court had relied upon UCC § 4-A-503, which prohibits courts from restraining EFT funds in the hands of an intermediary bank. Even if that section were applicable, it would be preempted by federal Rule B(1).
The Second Circuit vacated the district court’s judgment and remanded with instructions to reinstate the maritime attachment obtained by Winter Storm and to retain jurisdiction of the action.
Learning Point:
The Second Circuit’s ruling greatly expands the reach of maritime attachments and will undoubtedly increase their use.
Back to CM Report of Recent Decisions (2002v4) 2002 Volume 4 Table of Contents Back to New York CM Report of Recent Decisions (2002v4) 2002 Volume 4 Table of Contents
