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Things “Seen and Unseen”-The Nature of EFTs As Intangible and Attachable Property Under Admiralty Rule B

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Introduction

 

 

The Supreme Court has recognized the federal nature of the United States’ maritime law from its earliest days as embodied and protected in the U.S. Constitution, which ordains the judicial power of the federal sovereign to extend to “all cases of admiralty and maritime jurisdiction.” In a predominantly maritime nation, as it was at its founding, concerns for admiralty and ancient admiralty remedies dominated the Supreme Court’s docket.

In a 1979 case, the Second Circuit Court of Appeals recited from an 1890 Supreme Court opinion that “perpetrators of maritime injury are likely to be peripatetic” and recognized that “suits under admiralty jurisdiction involve separate policies to some extent.” The Second Circuit continued:

 

This tradition suggests not only that jurisdiction by attachment of property should be accorded special deference in the admiralty context, but also that maritime actors must reasonably expect to be sued where their property may be found.

 

In Winter Storm Shipping Ltd. v. TPL, 310 F.3d 263, 267 (2d Cir. 2002), Judge Haight, a seasoned admiralty judge sitting by designation in the Court of Appeals, wrote for the Court about the “history and characteristics of maritime attachment” as a “centuries old” remedy. Ironically, he commented:

 

. . . As early as 1825, the Supreme Court was able to say of the right of attachment in in personam admiralty cases that “this Court has entertained such suits too often, without hesitation, to permit the right now to be questioned.” Manro v. Almeida, 23 U.S. (10 Wheat.) 473, 486, 6 L. Ed. 369 (1825). “Maritime attachment is a feature of admiralty jurisprudence that antedates both the congressional grant of admiralty jurisdiction to the federal district courts and the promulgation of the first Supreme court Admiralty Rules in 1844.” Aurora Maritime Co. v. Abdullah Mohamed Fahem & Co., 85 F.3d 44, 47 (2d Cir. 1996).

 

 

Admiralty Rule B, quoted in part supra, contains the current provisions governing maritime attachment. “Rule B is simply an extension of this ancient practice.” Aurora, 85 F.3d at 47-48.

 

Winter Storm, as examined further below, held that electronic fund transfers (“EFTs”) are attachable property under Admiralty Rule B, which refers to the “tangible or intangible personal property of the defendant.”

In 2008, the Second Circuit in Consub Delaware LLC v. Schahin Engenharia Ltda., 543 F.3d 104, 109 (2d Cir. 2008) (emphasis added), held:

 

There has been no decision by an en banc panel overruling Winter Storm. Moreover, there is no justification for departing from the principle of stare decisis here where [defendant] has not shown that Winter Storm is unworkable, and where admiralty jurisdiction is the subject of congressional legislation and Congress remains free to alter the Winter Storm rule. In any event, Winter Storm was correctly decided.

 

Accordingly, the Second Circuit’s decision in The Shipping Corporation of India Ltd. v. Jaldhi Overseas Pte. Ltd., ___F.3d ___, 2009 U.S. App. LEXIS 22747 (2d Cir. Oct. 16, 2009), which overruled the Winter Storm decision on the attachability of EFTs “with the consent of all the judges of the Court in active service”, came as a considerable surprise to this tradition of “special deference.” The Court said that Winter Storm was “erroneously decided and therefore should no longer be binding precedent in our Circuit.”1

This article examines the EFT process and the two decisions.

The EFT Process

As defined in New York Uniform Commercial Code §4A-104(1):

 

“Funds transfer” means the series of transactions, beginning with the originator’s payment order, made for the purpose of making payment to the beneficiary of the order. The term includes any payment order issued by the originator’s bank or an intermediary bank intended to carry out the originator’s payment order. A funds transfer is completed by acceptance by the beneficiary’s bank of a payment order for the benefit of the beneficiary of the originator’s payment order.

 

A payment order is “an instruction of a sender to a receiving bank, transmitted orally, electronically, or in writing, to pay, or to cause another bank to pay, a fixed or determinable amount of money to a beneficiary . . . transmitted by the sender directly to the receiving bank or to an agent, funds transfer system, or communication system for transmittal to the receiving bank.” UCC §4A-103(a)(i)-(iii).

Thus, a payor (or “originator”) instructs its foreign bank (the “originating bank”) to issue a payment order that directs the payee’s (or “beneficiary’s”) foreign bank (the “beneficiary’s bank”) to credit the beneficiary’s account there with the amount of the payment.

For a U.S. dollar transfer, a foreign originating bank’s payment order is always communicated to an American bank or to a foreign bank’s branch office in the United States. If the bank in the U.S. is not the same bank as the foreign originating bank, it is an “intermediary” bank. By statute, an “intermediary bank” is a “receiving bank other than the originator’s bank or the beneficiary’s bank.” UCC §4A-104(2).2

The Payment Order is communicated by a secure coded message system, such as that of the Society for Worldwide Interbank Financial Telecommunications (“SWIFT”). The “SWIFT message” is sent most often to the New York Clearing House Association that operates the Clearing House Interbank Payments System (“CHIPS”). CHIPS processes over 95% of cross-border U.S. Dollar transactions. As explained by the Second Circuit in Reibor International Ltd. v. Cargo Carriers Ltd., 759 F.2d 262 (2d. Cir. 1985):

 

To effect the transfer, a CHIPS computer operator at a terminal-located in the paying or sending bank-programs the payment order and transmits it to the central CHIPS computer, which stores it and then causes a sending form to be typed at the sending bank. After the sending bank approves the payment, this form is reinserted in the computer and “released.” At the moment of release, the central computer directs the terminals at the receiving bank and the sending bank to print out a credit ticket and a debit ticket; respectively credits and debits the appropriate Clearing House bank accounts; and records the transfer. The receiving bank keeps track of the funds received and makes them available immediately. Adjustments in the account books at the New York Federal Reserve Bank are not made until the next business day, however, after the central computer has determined which books owe, or are owed, what.

 

Often, there will be two intermediary banks involved: an American correspondent of the originating bank, and an American correspondent of the beneficiary’s bank.

Why an EFT is an Attachable Res

District Judge Kaplan aptly described the quandary confronting U.S. Courts in the modern era, as well as the standard by which the Courts should fashion relief. Although his comments had regard to the situs of EFTs, they apply as well to EFTs’ ownership:

 

In this wired age, the location of an intangible, especially a bank account, is a metaphysical question. By and large, bank deposits exist as electronic impulses embedded in silicone chips. In a sense, therefore, bank funds are both everywhere and nowhere. But the problem is not a new one. Before the advent of electronic banking, courts grappled with the dilemma of pinpointing the location of intangible assets. It is a dilemma that calls for a practical judgment. As Judge Cardozo so eloquently put it in Severnoe Securities v. London & Lancashire Inc. [255 N.Y. 120 (1931)]:

“The situs of intangibles is in truth a legal fiction, there are times when justice and convenience requires that a legal situs be ascribed to them . . . [citations omitted] . . . At the root of the selection is generally a common sense appraisal of the requirements of justice and convenience of particular conditions.” [Id. at 123-24, emphasis added]. Yayasan Sabah Dua Shipping SDN BHD v. Scandinavian Liquid Carriers Limited, 335 F. Supp. 441, 449 (S.D.N.Y. 2004).

 

The Second Circuit’s decision in U.S. v. Daccarett, 6 F.3d 37 (2d Cir. 1993), left no doubt that an EFT is an attachable res. The Second Circuit again acknowledged this point in Winter Storm Shipping, Ltd. v. TPI, 310 F.3d 263, 276 (2d Cir. 2002), and did not question it in Aqua Stoli Shipping Ltd. v. Gardner Smith Pty. Ltd., 460 F.3d 434 (2d Cir. 2006). Aqua Stoli queried only the property interest in an EFT that Shipping Corp. of India seized upon.

Daccarett was an in rem forfeiture case, initiated under Rule C of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions of the Federal Rules of Civil Procedure. Because Daccarett involved an in rem proceeding, there was no occasion for the Court to consider who owned the funds. Daccarett did, however, helpfully clarify the juridical nature of an EFT:

 

The claimants’ conception of the intermediary banks as messengers who never hold the goods, but only pass the word along, is inaccurate. On receipt of the EFTs from the originating banks, the intermediary banks possess the funds, in the form of bank credits, for some period of time before transferring them on to the destination banks. While claimants would have us believe that modern technology moved the funds from the originating banks through the intermediary bank to their ultimate destination without stopping, that was not the case. With each EFT at least two separate transactions occurred: first, funds moved from the originating bank to the intermediary bank; then the intermediary bank was to transfer the funds to the destination bank, a correspondent bank in Colombia. While the two transactions can occur almost instantaneously, sometimes they are separated by several days. Each of the amounts at issue was seized at the intermediary bank after the first transaction had concluded and before the second had begun. 6 F.3d at 54 (emphasis added).

 

Accordingly, “an EFT while it takes the form of a bank credit at an intermediary bank, is clearly a seizable res under the forfeiture statutes.” Id. at 55. Daccarett has not been overturned and stands for a clear proposition under Supplemental Rule C of the attachability of an EFT “after the first transaction has concluded.” An EFT’s nature as a credit (necessarily held for someone’s account) is therefore comparable to the nature of a bank account, which does not contain the depositor’s cash, but merely represents the bank’s promise to pay the depositor, i.e. a credit. Citizen’s Bank of Maryland v. Strumph, 516 U.S. 16 (1995); U.S. v. Butterword-Judson Corp., 267 U.S. 387 (1925).

Winter Storm

In Winter Storm, as in Daccarett, process3 was “served upon BNY after funds had moved from . . . the originating bank, to [the] intermediary bank, but before [the intermediary bank] transferred the funds to . . . the destination bank.” 310 F.3d at 278. Accordingly, Winter Storm expressly held the originator retained an attachable interest in the EFT.

In Winter Storm, the Court explained that federal maritime law, as embodied in Rule B:

 

. . . provides that a maritime plaintiff may “attach the defendant’s tangible or intangible personal property.” It is difficult to imagine words more broadly inclusive than “tangible or intangible.” What manner of thing can be neither tangible nor intangible and yet still be “property?” The phrase is the secular equivalent of the [Nicene] creed’s reference to the maker “of all there is, seen and unseen.”

Professor Jarvis has said that:

Rule B also permits a plaintiff to attach intangible items, such as debts owed to the defendant. Such items may be attached even if they have not yet matured or have only partially matured. Of course, the defendant’s entitlement to the credit or interest in the debt must be clear. 310 F.2d at 276.

 

The Court further noted: “There is no question that federal admiralty law regards a defendant’s bank account as property subject to maritime attachment under Rule B . . . Nor are we able to discern in admiralty law or elsewhere a basis for regarding [defendant’s] funds in [intermediary bank’s] hands as anything other than funds held by [intermediary bank] for the account of [defendant].” Id.

In Winter Storm, the Second Circuit expressly reversed the District Court’s reliance on State law to define “property.” 310 F.3d at 267, 276:

 

It follows that the broad, inclusive language of Admiralty Rule B(1)(a) and the EFT analysis in Daccarett combine to fashion a rule in this Circuit that EFT funds in the hands of an intermediary bank may be attached pursuant to Admiralty Rule B(1)(a). Because that rule is derived from federal law, there is no occasion to look for guidance to state law. 310 F.3d at 278 (emphasis added).

 

Shipping Corp. of India (“SCI”)

 

The Policy Explanations and Other Rationale for a Sea Change

 

In SCI, the Court preceded its analysis with a review of “critical commentary” of the Winter Storm decision including that “some even suggested that Winter Storm has threatened the usefulness of the dollar in international transactions.” Moreover, note was made of the Clearing House Banks’ amicus arguments 4 (also made and ignored in Winter Storm and Consub Delaware) of the burden placed on its member banks by the volume of attachments. Indeed, the Court went back to an amicus brief submitted by the Federal Reserve Bank of New York seven years earlier in Winter Storm, which had not been re-filed in this case, in respect of “[u]ndermining the efficiency and certainty of fund transfers in New York” and to its “standing as an international financial center.”

The Court next discussed how the effectiveness of Rule B had been “cabined” or limited by its decision this year in STX Panocean (UK) Co. v. Glory Wealth Shipping Pte Ltd., 560 F.3d 127 (2d Cir. 2009), upholding “registration” as a basis for defeating Rule B and other lower court restrictions. Reference was made to a lower court decision rejecting “continuous service,” which, if upheld, “would arguably limit the reach of Winter Storm.” These limitations, including one judge’s requirement of proof of an EFT being made “beyond a hunch,” “[t]aken together … may have limited the practical usefulness of our holding in Winter Storm to plaintiffs and thus the practical effects of overturning that decision.” This justification, if it may be so termed, was made “to allay any concerns that the decision in this case is wholly unanticipated, surprising, or disruptive to ongoing financial practices.”

Legal Reasoning

 

Beneficiary EFTs

 

The Court first noted that its decision complied with the requirements for en banc reversal and that there were two reasons for doing so: first, Winter Storm had erroneously relied on a prior decision upholding seizure of EFTs in a criminal case, which were used by a Colombian cartel to transfer funds, under a penal statute; and secondly, that “the effects of Winter Storm on the federal courts and international banks in New York are too significant to let this error go uncorrected.”

The Court reviewed Winter Storm’s rationale and decided that its “reasons [are] unpersuasive and its consequences untenable” and its reliance on a criminal case “misplaced.” Accordingly, under Rule B “the question of ownership [of the Rule B property] is critical” because if the “res is not the property of the defendant, then the court lacks jurisdiction.”

Although Winter Storm had relied upon Rule B’s broad language defining property as “tangible or intangible”, the Panel was not persuaded by the “text of Rule B” that EFTs are a defendant’s property. Further, in the absence of “federal maritime law to guide our decision”, New York State law should be considered, which “does not permit attachment of EFTs that are in possession of an intermediary bank.” An “authoritative comment” to the New York Uniform Commercial Code “states that a beneficiary has no property interest in an EFT”—a comment cited to the Court by amicus briefs in Winter Storm and Consub Delaware. Again, “[t]aken together,” New York law established that “EFTs are neither the property of the originator nor the beneficiary while briefly in the possession of an intermediary bank” and “cannot be subject to attachment under Rule B.”

 

Originator EFTs

 

The Court sent back the question—not raised on appeal—as to whether “there are grounds for not vacating the remaining [originator EFT] portions of the attachment order” (emphasis added). The Lower Court, without briefing or a hearing, vacated those attachments.

Conclusion

The dire warnings as to Rule B’s “damage [to] New York’s standing as an international financial center,” made in 2002 and before the global credit crisis of 2008, which were entirely unrelated, were clearly influential. Despite the fact that banking interests had been calling for overturning Winter Storm, contrary to the Court’s suggestion, this decision is “unanticipated, surprising” and a complete volte face from 2008. Numerous pending appeals before the Second Circuit, as well as hundreds of Rule B cases pending in New York, have already been significantly impacted. No doubt an equal number of pending arbitrations and litigations proceeding around the world, many of which are proceeding solely on the basis that security has been obtained for an eventual award or judgment under a Rule B attachment of EFTs, will also be affected.

The reality of the Court’s remark that “we must not overstate the practical effect of our holding in this case” because of recent limitations on the remedy remains to be seen.


  1. The Court stated, in a footnote, that in “overturning Winter Storm, we also abrogate any decision insofar as it has relied on Winter Storm, specifically [Consub Delaware]”-a reversal of views by the entire court from a decision from just the prior year.
  2. A “receiving bank” is “the bank to which the sender’s instruction is addressed.” UCC §4A-103(d). A “sender” is “the person giving the instruction to the receiving bank.” Id. §4A-103(e). Thus, an intermediary bank can be both a “receiving bank” and a “sending bank.”
  3. In Daccarett, the process was a Warrant of Arrest under Supplemental Rule C. In Winter Storm, the process was a Process of Maritime Attachment and Garnishment (“PMAG”) under Supplemental Rule B.
  4. The amicus brief was deemed filed by an order on the same date of the decision so that arguments in it were never addressed to the Court.

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