United States: Rule B Prevails: Second Circuit Decides "Consub Delaware"

Dozens of Rule B actions are filed every month leading to issuance of Rule B orders in generally accepted wording, as reviewed by the judges in the Southern District of New York, permitting attachment of electronic fund transfers ("EFTs"). The efficacy of this remedy is precisely because the intermediary clearing house banks, through which dollar EFTs are made, are located in Manhattan. Provided that the underlying claim is maritime and that the defendant cannot be "found" in the Southern District of New York, i.e. that it has no agent for service of process and does not conduct business (or, arguably, has not registered to do business) then EFTs from or to that defendant are fair game. The Second Circuit's 2002 decision in Winter Storm noted that "[m]aritime attachment is centuries old." The Second Circuit later explained in a 2006 decision, Aqua Stoli, the necessity for such relief because:

It is precisely the risk of winning a Pyrrhic victory, after a lengthy arbitration against a "peripatetic" defendant who has made the award uncollectible, that makes Rule B a necessary and uniquely admiralty remedy.

The Aqua Stoli decision cast doubt upon the correctness of Winter Storm in a footnote (infamous footnote six) but in its text agreed with the holding. That footnote has cast a long shadow over the use of Rule B. That lingering doubt was, to large extent, resolved by the Second Circuit's decision today in Consub Delaware LLC v. Schahin Enganharia Ltda. Consub obtained a Rule B attachment order and managed to attach an EFT made by Schahin to a third-party. Schahin then sought release of the EFT, arguing that the funds while "in transit" were not "property" within the meaning of Rule B. It also argued that an "English Courts" forum selection clause prohibited the attachment action. The District Court, following Winter Storm, disagreed with both arguments. Nevertheless, it certified the denial of the vacatur, based on the ownership of the EFTs, for interlocutory appeal. Leave to appeal the forum selection clause issue was obtained from the Second Circuit.

The Decision

The New York admiralty bar has waited, with some trepidation, for the outcome of the appeal, which was argued in May 2008. Although the majority of district judges in the Second Circuit accept that Winter Storm is controlling, there is one judge in particular who disagrees and draws a distinction between "originator" EFTs, which he considers attachable property, and "beneficiary" EFTs, which he considers are not (contrary to other judges who have considered the issue). Indeed, his recent order releasing some $3.5 million of "beneficiary" EFT is presently on appeal.

The Second Circuit's decision deals, expressly, with the issue of whether EFTs in the hands of an intermediary bank are "property" of the originator so as to be subject to Rule B attachment. Schahin argued that New York law answered this question. The Court rejected that assertion with the declaration "[o]ur holding today ought to jettison any speculation that this [foot]note [six] in Aqua Stoli foretold the demise of Winter Storm." The Court held that the Aqua Stoli footnote acknowledged that federal law, that is Rule B, "governs the issue of who owns the funds in an EFT as they pass through an intermediary bank" and affirmed the Winter Storm "rule" that "EFT's to [x] or from a party are attachable . . .". The preceding "x" marks footnote one and the source of future appeals.

The Next Footnote

Unfortunately, having anointed the Winter Storm decision as a "rule," Consub Delaware adds its own footnote one: "We do not reach today the question of whether funds involved in an EFT en route to a defendant are subject to a Rule B attachment." (emphasis in original). Whether "beneficiary" EFTs are "property" within the meaning of Rule B, as stated to be part of the Winter Storm "rule," was therefore not expressly decided.

The Court did note, however, that even if the Winter Storm "rule" was in doubt the Court was not free to overrule a prior decision unless an intervening Supreme Court decision cast doubt on the prior decision or an "en banc" (full panel) of the Court overruled it. The Court concluded that Congress "remains free to alter the Winter Storm rule" but that it could not and, in any event, would not because Winter Storm was "correctly decided." The Court then reviewed the Winter Storm's reasoning and, in another footnote, commented that the "[b]ecause New York law does not apply to the permissibility of the attachment of the EFT funds, we do not reach questions of Schahim's property interest in the funds under New York law." It might be argued, and no doubt will be, that the first footnote leaving the attachability of "beneficiary" EFTs open to question is answered by the latter footnote and the Winter Storm "rule."

The Court also rejected the argument that the English Courts forum selection clause "divests courts outside of the selected forum of admiralty jurisdiction."

Conclusion

Consub Delaware clearly is a victory for the admiralty bar. To the extent that the clearing house banks have not learned to live with the "nuisance" of Rule B attachments since 2002 they will likely have to look to Congress for relief. Alas, the last chapter has not yet been written: the lone judge vacating "beneficiary" EFTs will have his day in Court on the issue based, now, on footnote one.

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