Federal Appeals Court Considers Key Maritime Attachment Case
On May 15, 2008, the Second Circuit Court of Appeals in New York heard oral argument in the case of Consub Del. LLC v. Schahin Engenharia Limitada, 476 F. Supp. 2d 305 (S.D.N.Y. 2007). The Consub v. Schahin case is significant to maritime companies and their attorneys because the court is being asked to overturn its controversial 2002 decision of Winter Storm Shipping v. TPI, which gave maritime creditors powerful new rights in maritime claims.
Under Supplemental Admiralty Rule B, anyone making an admiralty or maritime claim can file suit in any federal district in which the defendant has property, so long as the defendant is not located in the district. Upon the filing of a Rule B action, the court obtains jurisdiction over the defendant, and has the power to attach any property in the district, regardless of whether the parties or property have any connection with that district. This Rule B process can be used even if the parties are also litigating the claim in another court or in private arbitration.
In the Winter Storm case, the defendant was a Thai company being sued by a Maltese plaintiff for breach of a charter to carry oil from Saudi Arabia to Thailand. To secure its claim, the plaintiff brought a Rule B action in the Southern District of New York, seeking to attach all of the defendant’s property, including an Electronic Fund Transfer (EFT) payment routed from Thailand to Scotland through New York bank. Even though the defendant had no bank account in New York, there was no connection with New York and the transfer was totally unrelated, the Winter Storm court held that the transferred funds could be frozen to satisfy the claim. Finding that EFTs passing through New York constituted “property” under Rule B, the court held that payments either to or from the defendant could be attached. Therefore, any payments passing through any New York bank would be frozen until the full amount claimed was reached.
The Winter Storm case is particularly significant because of its location. Most EFTs of payments involving U.S. dollars are routed through intermediary banks in New York. This happens automatically and often without the knowledge of the parties. Transactions having no connection to New York—or to the United States—may still pass through New York banks and are therefore subject to Rule B attachment. Thus, any company doing international business or dealing with a New York bank is vulnerable to attachment of any funds in, or passing through, New York banks to satisfy any maritime claim anywhere in the world. Many companies and banks have complained of the expense, risk and inconvenience of this rule, and the creation of a “cottage industry” of international claimants suing in New York courts.
The controversy following Winter Storm has come to a head in the Consub v. Schahin case, in which the appellant has asked the appeals court to overturn its 2002 decision. In requesting that Winter Storm be abandoned, the appellant argues that a broad rule allowing attachment of all EFTs to or from a defendant is not supported by Rule B itself or by the case law upon which Winter Storm relied.
It is difficult to predict how the Second Circuit will rule on this case, but it is certain that the outcome will be of critical importance to any maritime companies doing international business. We hope to hear from the court in the next few months, so stay tuned.
