Consub Delaware LLC v Schahin Engenharia Limitada (2d Cir., Docket No. 07-0833-cv) (Sept. 23, 2008)
A Claimant in English proceedings froze the Defendant’s US-Dollar electronic funds transfer (EFT) in New York after obtaining a US Court order made pursuant to Rule B of the US maritime procedural rules. The Defendant challenged attachment of the funds arguing that under New York state law (rather than US federal law) the funds being transferred not be considered the Defendant’s property whilst in the hands of the intermediary clearing bank, relying on a footnote in the 2006 appellate decision Aqua Stoli. The appellate Court held that New York state law did not apply to attachments under Rule B for maritime claims, which federal law governed as it was maritime in nature.
The Facts
On 8 November 2001, Consub (a US company) entered into a contract with Schahin (a Brazilian company) to provide and operate vessels to carry out maintenance and reporting on submarine fibreoptic cables on the high seas. The contract provided for English law and High-Court jurisdiction. On 26 November 2003, Consub claimed against Schahin in London for its fees. Schahin challenged formal service of the English proceedings in Brazil.
On 13 November 2006, Consub filed proceedings in the US District Court for the Southern District of New York, requesting an order to attach any of Schahin’s property found there, on the basis of Rule B of the Supplementary Rules for Certain Admiralty and Maritime Claims of the US Federal Rules of Civil Procedure (“Rule B”). The next day, the Court issued an order allowing attachment up to US$5,986,117.65. On 4 December 2006, a payment by electronic funds transfer (EFT) of US$4,281,767.96 from Schahin to a bank in Zurich was being cleared through intermediary banks in New York, and was attached.
As many readers may be aware, Rule B allows claimants or creditors to attach assets in order to later satisfy Courts’ judgments or arbitrators’ awards for maritime claims. US Dollar payments are cleared through US clearing banks in New York. By filing legal proceedings in the Southern District of New York (comprising Manhattan), claimants worldwide are able to freeze US-Dollar payments coming from defendants as they are being cleared.
On 15 December 2006, Schahin applied to the Court to vacate the attachment, arguing that an EFT was not property of the sender or the receiver under New York law (as opposed to US federal law). On 13 February 2007, Judge Scheindlin of the US District Court issued an order denying the application to release the funds, following the 2002 decision of the US Second Circuit Court of Appeals (the “Second Circuit”) in Winter Storm. Winter Storm established the rule that Rule B permitted funds remitted by EFT and originating from a defendant to be frozen.
Schahin appealed the order to the Second Circuit, arguing that EFTs are not subject to Rule B attachments. Schahin relied on a footnote in the Second Circuit’s 2006 decision in Aqua Stoli, where it set out a four-part test for attachments under Rule B to be permitted. Schahin’s argument was as follows:
1. Under Aqua Stoli, a requirement for attaching assets under Rule B is that the defendant has property within the jurisdiction of the US District Court; and
2. A footnote in Aqua Stoli stated that, in the absence of federal law, New York state law (specifically, Article 4 of New York’s Uniform Commercial Code) would consider an EFT to be neither property of the sender nor the receiver.
Primary issue - EFTs are subject to attachment
The Second Circuit held that attachments under Rule B are not affected by New York state law regarding banking transactions. In the US, maritime law is designated by the Constitution as being the subject of federal (US) law. Federal law pre-empts state law in the fields which it governs. Attachment of assets for maritime claims under Rule B was held to be part of admiralty law which had important policy reasons for being in place – i.e. providing a remedy against inherently international parties. Therefore, it was ruled irrelevant which party under New York state law would be considered the owner of EFT funds whilst the intermediary bank transferred them.
The Second Circuit held that interpretation of federal law in the Second Circuit (comprising the states of New York, Connecticut and Vermont) on this point is governed by Winter Storm. Winter Storm clearly established that EFTs from a defendant were subject to attachment under Rule B. It was confirmed that this rule would remain in place unless (a) overruled by an en banc decision (a decision made by all the Circuit Judges of the Second Circuit) or (b) a decision of the US Supreme Court cast doubt on it.
This decision upheld the Winter Storm rule - that EFTs originating from a defendant may be attached to secure maritime claims. We note that the order upheld by the Second Circuit was made by Judge Scheindlin, who very recently made a potentially groundbreaking order in Kalafrana extending maritime jurisdiction to contracts for the sale of existing vessels.
One point that was left undecided (in footnote 1) was whether funds being wired to (rather than from) a defendant would be subject to attachment under Rule B. It could be that, with the recent popularity of Rule B as a remedy, the Second Circuit will address the point.