United States: Attaching Electronic Fund Transfers

Originally published in the New York Law Journal on March 28, 2005.

Assume a situation in which Party One in foreign country A asks his local bank to make a payment to the local bank of Party Two in foreign country B. Assume further that this transaction has absolutely nothing to do with the United States. Party One is probably not even considering the possibility that a third party, also not a citizen of the U.S., might be able to use the U.S. courts to attach that payment. In reality, Party One can be in for a rude awakening to the extent that there is a maritime claim against him anywhere in the world and the payment is made through an electronic fund transfer (EFT) with an intermediary bank in the United States.

Decisions in the Second Circuit and in the Southern District of New York confirm that EFT funds passing through intermediary banks in the United States may be attached in connection with litigation or arbitration in which a party has asserted maritime claims. This potentially alarming reality – the stark opposite of the rule for almost all non-maritime cases – warrants close attention by any maritime claim defendant that engages in dollar-denominated transactions and will therefore likely be a party to a payment transaction that passes through the United States, albeit in an electronic sense.

Winter Storm Shipping, Ltd., a foreign corporation operating in Malta, and TPI, a Thai corporation, were parties to an arbitration in London concerning a dispute over a claim for payment under a charter party. Winter Storm commenced an action in the Southern District of New York in which it sought to attach and garnish TPI’s assets pursuant to Rule B of the Supplemental Rules for Certain Admiralty and Maritime Claims and the Federal Arbitration Act.

The district court issued an ex parte order of attachment, which resulted in process of maritime attachment and garnishment being served multiple times on the Bank of New York (BoNY). After BoNY had been served four times, an EFT payment order came in to BoNY on TPI’s behalf. The EFT transaction was a payment pursuant to a contract between TPI and Oppsal Shipping Co., Ltd. ("Oppsal") – wholly unrelated to the contract between TPI and Winter Storm – that required payment in U.S. dollars. BoNY was acting as the intermediary bank in the transfer between TPI’s bank in Thailand and Oppsal’s bank in London.

BoNY placed $361,621.58, representing the amount of Winter Storm’s claims against TPI, in a suspense account, and issued a payment of the balance to Oppsal’s bank. At TPI’s request, the district court vacated the attachment, holding that "a wire transfer at an intermediary bank is not property subject to attachment under Rule B." ¹

The district court relied on Section 4-A-503 of New York’s Uniform Commercial Code, which provides that a court may only restrain a funds transfer at certain stages of the operation -- prior to initiation by the originator,² prior to execution by the originator’s bank, prior to release of funds by the beneficiary's bank,³ and prior to withdrawal of funds. Section 4-A-503 further provides that "A court may not otherwise restrain a person from issuing a payment order, paying or receiving payment of a payment order, or otherwise acting with respect to a funds transfer." The Official Comments to Section 4-A-503 acknowledge that the provision is "designed to prevent interruption of a funds transfer after it has been set in motion," and that, "in particular, intermediary banks are protected."

The limitations in this provision flow reasonably from principles of property law. Using the facts in the Winter Storm case to illustrate, Winter Storm was seeking to attach the assets of TPI, which owned assets in Thailand and had an account with its Thai bank there. Thus, had Winter Storm served an attachment order on the originating bank in Thailand (putting aside jurisdictional issues), that would have been (under the New York statutes) a legitimate attachment of a debt owed to TPI. But TPI had no assets in New York at BoNY. Rather, all that there was at BoNY were virtual credits and debits that BoNY had with the Thai bank (the originating bank) on the one hand and the English bank (the beneficiary bank) on the other. Because TPI had no property in New York, and relying on Section 4-A-503, the district court vacated the attachment.

The Second Circuit vacated the judgment and remanded the case with instructions to reinstate the attachment and retain jurisdiction.⁴ The analysis of the Second Circuit contrasts strikingly with that of the district court. The Second Circuit focused first on the centuries-old history of maritime attachments and the fact that there never has been a requirement that the property attached have a direct connection to the claim. The court noted that Admiralty Rule B(1)(a) allows attachment of "the defendant’s tangible or intangible personal property." The Second Circuit then engaged in a lengthy discussion of due process and concluded that, when a party transfers funds by means of an EFT, the funds may be made the subject of a maritime attachment in the hands of an intermediary bank without violating due process, whether or not the initiator of the transfer knew which intermediary bank would be used.

Next, the Second Circuit addressed the most significant issue -- whether the defendant actually owned property in New York that could be the subject of an attachment. The court noted that there is no question but that a defendant’s bank account is property that is subject to a maritime attachment. Arguably, however, that was an irrelevant statement since the account that was attached at BoNY was not TPI’s account. Ultimately, the Second Circuit based its decision on its finding "no principled basis for applying a different analysis or arriving at a different conclusion," from that reached in United States v. Daccarett, ⁵ which held that "‘an EFT while it takes the form of a bank credit at an intermediary bank is clearly a seizable res under the forfeiture statutes.’"⁶

Inasmuch as Daccarett was a drug seizure case brought under a statute different from the admiralty statute, there are at least arguments to be made in favor of reaching a different conclusion in Winter Storm. Nevertheless, once the Second Circuit made this holding, it was easy for the court to ignore the provisions of U.C.C. § 4-A-503, which it did by saying that the provision was preempted by federal law.

District Courts in the Southern District of New York have followed Winter Storm. Noble Shipping, Inc. v. Euro-Maritime Chartering Limited ⁷ was a case with facts similar to those in Winter Storm – a claim for payment under a charter party, an arbitration in London, an action in federal court in New York to secure the claim, and an unrelated EFT transaction through an intermediary in New York – except that the defendant was the intended beneficiary of the transfer, rather than the originating party. The district court denied a motion by Euro-Maritime Chartering Limited ("EMC") to vacate the attachment, readily disposing of EMC’s argument that the funds in transit were not property subject to maritime attachment.

The court rejected EMC’s argument that Winter Storm was distinguishable because EMC was the intended beneficiary of the funds, observing, "Indeed, Winter Storm itself relied on a case [Daccarett] in which the defendants who sought unsuccessfully to vacate attachments were the intended beneficiaries of the EFT."⁸ The district court denied EMC’s subsequent motion for certification, noting that "EMC is unable to identify any contrary authority interpreting a maritime attachment under federal law."⁹

An attachment of EFT funds in transit in a maritime case likewise survived a challenge in Ythan Limited v. Americas Bulk Transport Limited.¹⁰ The district court in Ythan, like the Noble Shipping court, quickly dismissed the defendant’s argument that the funds were not property subject to attachment, using a comparison to Winter Storm.

There are, of course, advantages and disadvantages -- depending on whose ox it is being gored -- to permitting the attachment of EFT funds in transit, whether or not in the maritime context.

Judge Scheindlin, who wrote the district court opinion in Winter Storm, expressed concern about the fairness of attaching funds that have no connection to a U.S. transaction and that likewise have no relationship to the matter in connection with which they may be attached. In her decision, Judge Scheindlin opined that "Permitting wire transfer credits to be attached at unforeseen and unknown intermediary banks runs contrary to the (minimal) due process accorded maritime defendants."¹¹

Section 4-A-503 of the U.C.C. seems consistent with such reasoning, while also taking into account the needs of the banking industry. The Federal Reserve Bank of New York expressed similar priorities in an amicus curiae brief that it submitted to the Court of Appeals in Winter Storm in support of TPI’s motion for rehearing and rehearing en banc. In that brief, the Federal Reserve spoke of a balance effected by the rule of Section 4-A-503: "efficiency is fostered by protecting the intermediary banks; justice is fostered by expressly telling litigants where the process should be served."¹² It then argued that the Second Circuit’s decision in Winter Storm "disrupt[ed] this balance and threaten[ed] the efficiency of funds transfer systems, perhaps including Fedwire."¹³ Certainly, the possibility of attachment of EFT funds in transit is a blow to confidence in EFT transactions.

On the other hand, maritime law has a long history of providing recourse and security where a potential debtor may otherwise easily evade judicial authorities and evade payment. The Second Circuit emphasized the importance of such protections – including their relationship with due process standards. If EFT funds cannot be seized in transit, creditors with valid claims may be denied justice.

Like the policy arguments, the potential ramifications of the Winter Storm decision may be seen as positive or negative, depending in part on one’s position in a given litigation. The availability of attachment in such cases has emerged as a potential tool that is available to parties with maritime claims. At the same time, parties that are defendants to maritime claims anywhere in the world and who transact business that involves making or receiving payments in U.S. dollars must be mindful that, along with the benefit of using the world’s most popular business currency is the risk of an attachment order from a court in New York.

Lawrence W. Newman and David Zaslowsky are partners in the Litigation Department of the New York office of Baker & McKenzie LLP. They are co-authors of Litigating International Commercial Disputes (West Group). Susan R. Knox, an associate in the Litigation Department of the New York office of Baker & McKenzie LLP, assisted in the preparation of this article.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.