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Rule B: The New “Plan A”Rule B: The New “Plan A”
An Overview of the Rule and An Overview of the Rule and Recent Developments Concerning Recent Developments Concerning Maritime Attachment in New YorkMaritime Attachment in New York
Larry KahnLarry KahnFreehill Hogan & MaharFreehill Hogan & Mahar
Stephenson HarwoodOne St. Paul’s Churchyard
London EC4M 8SH
July 16, 2008
OutlineOutline
I Maritime Attachment GenerallyI Maritime Attachment Generally
II Fighting the Attachment Remedy: Can an II Fighting the Attachment Remedy: Can an attachment be vacated?attachment be vacated?
III Avoiding AttachmentIII Avoiding Attachment
IV Counter-security: Is the Best Defense a Strong IV Counter-security: Is the Best Defense a Strong Offense? Offense?
V Q & AV Q & A
Maritime AttachmentMaritime Attachment
a.a. What is it and where did it come What is it and where did it come from?from?
b.b. How do I use Rule B?How do I use Rule B?
c.c. When is an attachment When is an attachment appropriate?appropriate?
d.d. Why is New York the focus of Why is New York the focus of maritime attachment?maritime attachment?
Origin of the RuleOrigin of the Rule
Common Problems Affect the Common Problems Affect the Bottom LineBottom Line
• Unpaid or Partially Paid FreightUnpaid or Partially Paid Freight• Unpaid or Partially Paid Charter HireUnpaid or Partially Paid Charter Hire• Unpaid Damage to Ships or CargoUnpaid Damage to Ships or Cargo• Unpaid Judgments and AwardsUnpaid Judgments and Awards• Damages from Bill of Lading FraudDamages from Bill of Lading Fraud
Difficulties in collection often result in loss, Difficulties in collection often result in loss, even when the claim is meritorious. even when the claim is meritorious.
Needs of CommerceNeeds of Commerce
For commerce to move, a credit facility For commerce to move, a credit facility was needed that would encourage was needed that would encourage loans to visiting shipsloans to visiting ships
Creditors need security, or at least a Creditors need security, or at least a means of obtaining security for means of obtaining security for claimsclaims
Maritime Arrest and Maritime Arrest and AttachmentAttachment
Maritime Arrest and Attachment Maritime Arrest and Attachment Answered the Need by Allowing Answered the Need by Allowing
Creditors to Restrain Mobile Creditors to Restrain Mobile Property to Enforce Maritime Property to Enforce Maritime
ClaimsClaims
How is a Creditor to Evaluate How is a Creditor to Evaluate Which Claims to Attempt to Which Claims to Attempt to
Collect?Collect?
Agreement in advance to a contractual dispute resolution Agreement in advance to a contractual dispute resolution clause that specifies the forum and law to be applied is clause that specifies the forum and law to be applied is helpful, but in the end provides only part of the answer.helpful, but in the end provides only part of the answer.
This is because the creditor will be able to take advice from This is because the creditor will be able to take advice from counsel as to whether its claim is likely to see a successful counsel as to whether its claim is likely to see a successful result on the law in the chosen forum, result on the law in the chosen forum, but ordinarily but ordinarily counsel will not be in a position to predict whether the counsel will not be in a position to predict whether the creditor will actually be able to collect on a resulting award creditor will actually be able to collect on a resulting award or judgment.or judgment.
When it comes to the bottom line, a successful award or When it comes to the bottom line, a successful award or judgment is not worth the paper it is printed on if it is judgment is not worth the paper it is printed on if it is uncollectible. uncollectible.
How is a Creditor to Evaluate How is a Creditor to Evaluate Which Claims to Attempt to Which Claims to Attempt to
Collect?Collect?
• Pursuit of claims only against large, well-Pursuit of claims only against large, well-established companies can be impractical: established companies can be impractical: often, more is owed (collectively) by often, more is owed (collectively) by smaller companiessmaller companies
• Pursuit of claims only against small Pursuit of claims only against small companies can be difficult, because companies can be difficult, because available assets are sometimes hard to available assets are sometimes hard to trace, and can be even harder to collecttrace, and can be even harder to collect
How is a Creditor to Evaluate How is a Creditor to Evaluate Which Claims to Attempt to Which Claims to Attempt to
Collect?Collect?• Ultimately, the best claims to pursue Ultimately, the best claims to pursue
are those that can be secured (or at are those that can be secured (or at least partially secured) in advance.least partially secured) in advance.
• Optimally, the method used to obtain Optimally, the method used to obtain security needs to be quick, security needs to be quick, inexpensive, and dependable.inexpensive, and dependable.
Vessel ArrestVessel Arrest
Vessel arrest permits a creditor to Vessel arrest permits a creditor to cause an alleged debtor’s ship to be cause an alleged debtor’s ship to be restrained in order to secure a restrained in order to secure a maritime claim that gives rise to a maritime claim that gives rise to a lien.lien.
Problems with Vessel ArrestProblems with Vessel Arrest
• The debtor needs to have ownership interest in a The debtor needs to have ownership interest in a vesselvessel
• The vessel needs to be in the district in which the The vessel needs to be in the district in which the arrest is soughtarrest is sought
• The vessel needs to be involved in the claim – The vessel needs to be involved in the claim – sister ship arrests are not permitted in the U.S.sister ship arrests are not permitted in the U.S.
• Only certain types of maritime claims give rise to Only certain types of maritime claims give rise to maritime liens which permit vessel arrestmaritime liens which permit vessel arrest
• Vessel arrest requires an advance sum (which Vessel arrest requires an advance sum (which varies from district to district), paid to the varies from district to district), paid to the Marshal in order to actually arrest the vesselMarshal in order to actually arrest the vessel
Problems with Vessel Arrest Problems with Vessel Arrest (cont’d)(cont’d)If substitute security is not provided, sale of the ship If substitute security is not provided, sale of the ship
at auction may yield unsatisfactory results:at auction may yield unsatisfactory results:• All creditors (including higher-ranking creditors) All creditors (including higher-ranking creditors)
must be notified of the sale, and they will take must be notified of the sale, and they will take from the proceeds ahead of the claimantfrom the proceeds ahead of the claimant
• Auction costs, which include advertising, can be Auction costs, which include advertising, can be high, and are deducted from the sale pricehigh, and are deducted from the sale price
• A “fire sale” result – not fair market value – is A “fire sale” result – not fair market value – is often the best caseoften the best case
• Auction and post-auction court proceedings Auction and post-auction court proceedings (confirming the sale) take time and add to (confirming the sale) take time and add to essentially unrecoverable legal costsessentially unrecoverable legal costs
Maritime Attachment – Rule Maritime Attachment – Rule BB• Rule B can be used against almost any Rule B can be used against almost any
debtor not “found” in the districtdebtor not “found” in the district• The debtor need only have an identifiable The debtor need only have an identifiable
interest in property in the districtinterest in property in the district• The property to be attached need not have The property to be attached need not have
any connection to the claimany connection to the claim• Rule B can be used with respect to almost Rule B can be used with respect to almost
any maritime claimany maritime claim• Other creditors need not be notifiedOther creditors need not be notified• The procedure is quick, inexpensive, and The procedure is quick, inexpensive, and
reliablereliable
What Does Rule B Provide?What Does Rule B Provide?
Rule B(1)(a) In an Rule B(1)(a) In an in personam in personam action: If a action: If a defendant is not found within the district defendant is not found within the district when a verified complaint praying for when a verified complaint praying for attachment and the affidavit required by attachment and the affidavit required by Rule B(1)(b) are filed, a verified complaint Rule B(1)(b) are filed, a verified complaint may contain a prayer for process to attach may contain a prayer for process to attach the defendant’s tangible or intangible the defendant’s tangible or intangible personal property – up to the amount sued personal property – up to the amount sued for – in the hands of garnishees named in for – in the hands of garnishees named in the process.the process.
Analysis of the RuleAnalysis of the Rule
Rule B(1)(a) Rule B(1)(a) In an In an in in personam personam actionaction: If a : If a defendant is not found defendant is not found within the district when a within the district when a verified complaint praying verified complaint praying for attachment and the for attachment and the affidavit required by Rule affidavit required by Rule B(1)(b) are filed, a verified B(1)(b) are filed, a verified complaint may contain a complaint may contain a prayer for process to attach prayer for process to attach the defendant’s tangible or the defendant’s tangible or intangible personal property intangible personal property – up to the amount sued for – up to the amount sued for – in the hands of garnishees – in the hands of garnishees named in the process.named in the process.
In an In an in personamin personam action action
This requirement mandates This requirement mandates that the action must be that the action must be one that is directly against one that is directly against the person (or business)the person (or business)
Analysis of the Rule (cont’d)Analysis of the Rule (cont’d)
Rule B(1)(a) In an Rule B(1)(a) In an in personam in personam action: action: If a defendant is not If a defendant is not found within the districtfound within the district when when a verified complaint praying a verified complaint praying for attachment and the for attachment and the affidavit required by Rule B(1)affidavit required by Rule B(1)(b) are filed, a verified (b) are filed, a verified complaint may contain a complaint may contain a prayer for process to attach prayer for process to attach the defendant’s tangible or the defendant’s tangible or intangible personal property – intangible personal property – up to the amount sued for – in up to the amount sued for – in the hands of garnishees the hands of garnishees named in the process.named in the process.
If a defendant is not “found” If a defendant is not “found” withinwithin the district the district
To be “found” for purposes of To be “found” for purposes of Rule B requires a 2-step Rule B requires a 2-step analysis:analysis:
(1)(1)Can the defendant be Can the defendant be personally served with personally served with process in the district?process in the district?
(2)(2)Is the defendant “doing Is the defendant “doing business” within the district in business” within the district in terms of minimum contacts?terms of minimum contacts?
BothBoth answers must “yes” for the answers must “yes” for the defendant to be founddefendant to be found
Analysis of the Rule (cont’d)Analysis of the Rule (cont’d)
Rule B(1)(a) In an Rule B(1)(a) In an in in personam personam action: If a action: If a defendant is not found defendant is not found within the district within the district when a when a verified complaint praying verified complaint praying for attachment and the for attachment and the affidavit required by Rule affidavit required by Rule B(1)(b) are filed,B(1)(b) are filed, a verified a verified complaint may contain a complaint may contain a prayer for process to attach prayer for process to attach the defendant’s tangible or the defendant’s tangible or intangible personal property intangible personal property – up to the amount sued for – up to the amount sued for – in the hands of garnishees – in the hands of garnishees named in the process.named in the process.
when a verified complaint when a verified complaint praying for attachment praying for attachment and the affidavit required and the affidavit required by Ruleby Rule B(1)(b) are filed B(1)(b) are filed
Timing for a determination of Timing for a determination of when the defendant may when the defendant may be “found” is based on the be “found” is based on the commencement of the commencement of the action, not some earlier (or action, not some earlier (or later) point.later) point.
Analysis of the Rule (cont’d)Analysis of the Rule (cont’d)
Rule B(1)(a) In an Rule B(1)(a) In an in in personam personam action: If a action: If a defendant is not found defendant is not found within the district when a within the district when a verified complaint praying verified complaint praying for attachment and the for attachment and the affidavit required by Rule affidavit required by Rule B(1)(b) are filed, B(1)(b) are filed, a verified a verified complaint may contain a complaint may contain a prayer for process to prayer for process to attach the defendant’s attach the defendant’s tangible or intangible tangible or intangible personal propertypersonal property – up to – up to the amount sued for – in the amount sued for – in the hands of garnishees the hands of garnishees named in the process.named in the process.
a verified complaint may a verified complaint may contain a prayer for process contain a prayer for process to attach the defendant’s to attach the defendant’s tangible or tangible or intangible intangible personal propertypersonal property
Essentially, all property is Essentially, all property is restrainable under this restrainable under this formulation. In the words of formulation. In the words of the Second Circuit Court of the Second Circuit Court of Appeals, the formulation is Appeals, the formulation is like the Maker’s Creed: all like the Maker’s Creed: all things seen and unseen.*things seen and unseen.*
*For historic reasons, though, *For historic reasons, though, real property is not real property is not restrainable. restrainable.
Analysis of the Rule (cont’d)Analysis of the Rule (cont’d)
Rule B(1)(a) In an Rule B(1)(a) In an in in personam personam action: If a action: If a defendant is not found defendant is not found within the district when a within the district when a verified complaint praying verified complaint praying for attachment and the for attachment and the affidavit required by Rule affidavit required by Rule B(1)(b) are filed, a verified B(1)(b) are filed, a verified complaint may contain a complaint may contain a prayer for process to attach prayer for process to attach the defendant’s tangible or the defendant’s tangible or intangible personal property intangible personal property – up to the amount sued for – up to the amount sued for –– in the hands of garnishees in the hands of garnishees named in the process.named in the process.
- up to the amount sued for -- up to the amount sued for -
This explains the quantum This explains the quantum that may be sought in an that may be sought in an attachment, which most attachment, which most judges in the Southern judges in the Southern District of New York take District of New York take literally (though some literally (though some judges interpret this judges interpret this phrase as meaning only phrase as meaning only the principal claim amount the principal claim amount sought without any sought without any interest or costs interest or costs component).component).
Analysis of the Rule (cont’d)Analysis of the Rule (cont’d)
Rule B(1)(a) In an Rule B(1)(a) In an in in personam personam action: If a action: If a defendant is not found defendant is not found within the district when a within the district when a verified complaint praying verified complaint praying for attachment and the for attachment and the affidavit required by Rule affidavit required by Rule B(1)(b) are filed, a verified B(1)(b) are filed, a verified complaint may contain a complaint may contain a prayer for process to attach prayer for process to attach the defendant’s tangible or the defendant’s tangible or intangible personal property intangible personal property – up to the amount sued for – up to the amount sued for – – in the hands of garnishees in the hands of garnishees named in the process.named in the process.
in the hands of garnishees in the hands of garnishees namednamed in the process. in the process.
For property to be restrained, For property to be restrained, it must actually be “in the it must actually be “in the hands” of a garnishee who hands” of a garnishee who is named in the process is named in the process (writ). (writ).
When is an attachment When is an attachment appropriate?appropriate?
The remedy may be used in aid of The remedy may be used in aid of either domestic or foreign cases either domestic or foreign cases (litigation or arbitration), but may (litigation or arbitration), but may only be used in conjunction with ripe only be used in conjunction with ripe maritimemaritime claims. claims.
What Types of Claims are What Types of Claims are Maritime?Maritime?
The term is, surprisingly perhaps, not The term is, surprisingly perhaps, not well-defined. Essentially, the well-defined. Essentially, the question lies with the Court as to question lies with the Court as to whether the claim seems “salty whether the claim seems “salty enough”. This policy has led to some enough”. This policy has led to some peculiar results.peculiar results.
Maritime v. Non-Maritime Maritime v. Non-Maritime ClaimsClaims• Contract to repair a Contract to repair a
vesselvessel• Demurrage claims in Demurrage claims in
charter partiescharter parties• Torts occurring at sea Torts occurring at sea
and affecting ships in and affecting ships in navigationnavigation
• A claim that is A claim that is maritime in the place maritime in the place where the merits are where the merits are to be heard, even if to be heard, even if not in Americanot in America
• Contract to build a Contract to build a vesselvessel
• Demurrage claims in Demurrage claims in (certain) sales contracts(certain) sales contracts
• Torts occurring on land Torts occurring on land regardless of impact on regardless of impact on ships at seaships at sea
• A claim that is maritime A claim that is maritime in America, even if not in America, even if not in the place where the in the place where the merits are to be heardmerits are to be heard
Possible Effect of Possible Effect of KirbyKirby
The Courts had long held that the boundaries of maritime tort The Courts had long held that the boundaries of maritime tort jurisdiction were well-defined, but that the boundaries of jurisdiction were well-defined, but that the boundaries of maritime contract jurisdiction were less clear.maritime contract jurisdiction were less clear.
In 2004, however, in In 2004, however, in Norfolk Southern Ry. v. James N. Kirby Norfolk Southern Ry. v. James N. Kirby
Pty. Ltd.Pty. Ltd., the U.S. Supreme Court significantly expanded the , the U.S. Supreme Court significantly expanded the concept of maritime jurisdiction. Even though the loss in concept of maritime jurisdiction. Even though the loss in that case, under a multimodal b/l was land based and the that case, under a multimodal b/l was land based and the carriage involved significant inland rail carriage in addition carriage involved significant inland rail carriage in addition to the ocean voyage, the court nonetheless found maritime to the ocean voyage, the court nonetheless found maritime jurisdiction to be present. The key, the Supreme Court jurisdiction to be present. The key, the Supreme Court found, was whether the principal objective of the contract found, was whether the principal objective of the contract was maritime commerce. was maritime commerce.
KirbyKirby’s Development’s Development
Following the Supreme Court’s lead in Following the Supreme Court’s lead in KirbyKirby, the 11, the 11thth Circuit Court of Appeals held that a sexual assault Circuit Court of Appeals held that a sexual assault on land by an off-duty crewmember against a on land by an off-duty crewmember against a cruise ship passenger gave rise to admiralty tort cruise ship passenger gave rise to admiralty tort jurisdiction. jurisdiction. Doe v. Celebrity Cruises, Inc.Doe v. Celebrity Cruises, Inc.
Legal scholars now agree that courts have continued Legal scholars now agree that courts have continued to expand admiralty jurisdiction where changes in to expand admiralty jurisdiction where changes in the industry merit those expansions and where the industry merit those expansions and where broadened definitions will provide greater recourse broadened definitions will provide greater recourse to justice for individuals who participate in the to justice for individuals who participate in the industry. industry.
Ripeness and TimingRipeness and Timing
Only a ripe maritime claim is securable under Rule BOnly a ripe maritime claim is securable under Rule B
A claim is ripe if it is direct and in personam against A claim is ripe if it is direct and in personam against the defendant.the defendant.
Contingent indemnity claims are generally found Contingent indemnity claims are generally found “unripe”.“unripe”.
Subject to the Court’s discretion, a Contingent Subject to the Court’s discretion, a Contingent indemnity claim may be “ripe enough” for an indemnity claim may be “ripe enough” for an attachment, however if:attachment, however if:
• The plaintiff itself has already been sued and/orThe plaintiff itself has already been sued and/or• The plaintiff itself has already provided security to The plaintiff itself has already provided security to
another party in the chainanother party in the chain
TimingTiming
Under the Arbitration Act (9 U.S.C. §8), in Under the Arbitration Act (9 U.S.C. §8), in a case “otherwise justiciable in a case “otherwise justiciable in admiralty, then notwithstanding admiralty, then notwithstanding anything herein to the contrary, the anything herein to the contrary, the party claiming to be aggrieved may party claiming to be aggrieved may begin his proceeding hereunder by libel begin his proceeding hereunder by libel and seizure of the vessel or other and seizure of the vessel or other property of the other party according to property of the other party according to the usual course of admiralty the usual course of admiralty proceedings….” proceedings….”
TimingTiming
No similar provision of the U.S. Code No similar provision of the U.S. Code exists to allow an attachment in aid exists to allow an attachment in aid of a foreign or domestic litigation, of a foreign or domestic litigation, but the Courts have (thus far) found but the Courts have (thus far) found no reason to give litigants fewer no reason to give litigants fewer rights than those who have chosen to rights than those who have chosen to arbitrate. arbitrate.
The time to seek an The time to seek an attachment is attachment is at or beforeat or before the the
commencement of commencement of proceedingsproceedings
Not the time to be sporting!Not the time to be sporting!
In a recent case in which London arbitration In a recent case in which London arbitration proceedings had already begun, the proceedings had already begun, the claimant became concerned that the claimant became concerned that the respondent would be unable to pay the respondent would be unable to pay the award and asked for security.award and asked for security.
Over the period of about two months, the Over the period of about two months, the parties negotiated over security, including parties negotiated over security, including quantum, terms and conditions of an quantum, terms and conditions of an escrow, and other matters.escrow, and other matters.
In the meanwhile…In the meanwhile…
Back in New York, the Back in New York, the respondent created a bona respondent created a bona fide business presence in fide business presence in
New York, thereby rendering New York, thereby rendering itself “found” within the itself “found” within the
district.district.
Negotiations thereafter Negotiations thereafter (predictably, perhaps) broke (predictably, perhaps) broke
off without any posting of off without any posting of security. security.
By the time New York By the time New York counsel were asked to seek counsel were asked to seek security pursuant to Rule B, security pursuant to Rule B, the defendant was already the defendant was already “found” in New York and an “found” in New York and an attachment was precluded. attachment was precluded.
The Geographical FocusThe Geographical Focus
Maritime attachment practice in the Maritime attachment practice in the United States is pursuant to United States is pursuant to Supplemental Rule B, which is Supplemental Rule B, which is applicable in every district court applicable in every district court nationwide. nationwide.
New York, however, is the undeniable New York, however, is the undeniable epicenter of maritime attachment epicenter of maritime attachment practice. Why is this?practice. Why is this?
International wire transfers of International wire transfers of U.S. dollars pass through New U.S. dollars pass through New YorkYorkC Transport Panamax Ltd. v. Pacific Ocean C Transport Panamax Ltd. v. Pacific Ocean
Resources Ltd.Resources Ltd., 06 CIV 11413 (RJH) , 06 CIV 11413 (RJH) ((unreportedunreported).).
In In C TransportC Transport, plaintiff commenced a Rule B , plaintiff commenced a Rule B action against defendant and a wire transfer action against defendant and a wire transfer was restrained while en route from a non-was restrained while en route from a non-party’s Chinese Bank to the defendant’s party’s Chinese Bank to the defendant’s Swiss Bank. The wire instructions specified Swiss Bank. The wire instructions specified that the funds were to be wired through the that the funds were to be wired through the Swiss Bank’s US dollar account in Swiss Bank’s US dollar account in Connecticut.Connecticut.
C TransportC Transport
In the motion to vacate the In the motion to vacate the attachment on the basis that the attachment on the basis that the funds were restrained outside of the funds were restrained outside of the district (in Connecticut), the court district (in Connecticut), the court undertook an analysis of the banking undertook an analysis of the banking system, which included testimony system, which included testimony from UBS Bank.from UBS Bank.
C Transport FindingsC Transport Findings
The Court found that the subject wire, like all US dollar The Court found that the subject wire, like all US dollar wire transfers, passed through CHIPS (Clearing House wire transfers, passed through CHIPS (Clearing House Interbank Payment System), which is physically Interbank Payment System), which is physically located at the Federal Reserve Bank in New York. located at the Federal Reserve Bank in New York.
While those funds were temporarily at the Fed en route While those funds were temporarily at the Fed en route to Connecticut, they became subject to the to Connecticut, they became subject to the jurisdiction of the New York Court Order Authorizing jurisdiction of the New York Court Order Authorizing the attachment.the attachment.
Since UBS Bank maintained an office in New York, and Since UBS Bank maintained an office in New York, and had been served with the writ at its New York had been served with the writ at its New York location, it was subject to the New York Court Order location, it was subject to the New York Court Order Authorizing the attachment.Authorizing the attachment.
C TransportC Transport Conclusion Conclusion
As a result, the plaintiff’s attachment As a result, the plaintiff’s attachment was maintained and no court has was maintained and no court has since questioned the correctness of since questioned the correctness of the the C TransportC Transport decision. decision.
And the parties’ counsel each And the parties’ counsel each withdrew the protective suits they withdrew the protective suits they had filed in Connecticut.had filed in Connecticut.
Fighting Attachment - Fighting Attachment - VacatureVacature
Bases for Opposing an Bases for Opposing an AttachmentAttachment
A party whose property has been A party whose property has been restrained may seek a prompt post-restrained may seek a prompt post-attachment hearing pursuant to Rule attachment hearing pursuant to Rule E(4)(f) at which the validity of the E(4)(f) at which the validity of the attachment may be tested.attachment may be tested.
Local Rules in New York provide that Local Rules in New York provide that “prompt” means within three court “prompt” means within three court days, unless the court directs otherwise.days, unless the court directs otherwise.
The E(4)(f) HearingThe E(4)(f) Hearing
Rule E(4)(f) makes clear that the burden is on Rule E(4)(f) makes clear that the burden is on the plaintiff to demonstrate why the the plaintiff to demonstrate why the attachment should be maintained, otherwise attachment should be maintained, otherwise the attachment is to be vacated. the attachment is to be vacated.
There are otherwise no set guidelines There are otherwise no set guidelines concerning how a Rule E(4)(f) hearing is to be concerning how a Rule E(4)(f) hearing is to be presented, leaving such issues to the presented, leaving such issues to the creativity of the parties in presenting their creativity of the parties in presenting their positions.positions.
Rule E(4)(f) HearingsRule E(4)(f) Hearings
Decisions on whether to submit Decisions on whether to submit documents, hear witnesses, and documents, hear witnesses, and even to hold oral argument, are even to hold oral argument, are made on a case-by-case basis made on a case-by-case basis pursuant to the requests of the pursuant to the requests of the parties and the discretion of the parties and the discretion of the district judge.district judge.
Rule E(4)(f) HearingsRule E(4)(f) Hearings
The primary guidance given to judges is not The primary guidance given to judges is not found in any rule or code section, but rather in found in any rule or code section, but rather in the official commentary to the Rule, which the official commentary to the Rule, which states:states:
“Rule E(4)(f) is designed to…[guarantee] a prompt post-seizure hearing at which [the defendant] can attack the complaint, the arrest, the security demanded, or any other alleged deficiency in the proceedings”.
Rule E(4)(f) HearingsRule E(4)(f) Hearings
To this we add the bases for vacature set forth in To this we add the bases for vacature set forth in Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd.Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., , 460 F.3d 434 (2d Cir. 2006): “a district court must 460 F.3d 434 (2d Cir. 2006): “a district court must vacate an attachment if the plaintiff fails to sustain vacate an attachment if the plaintiff fails to sustain his burden of showing that he has satisfied the his burden of showing that he has satisfied the requirements of Rules B and E….a district court requirements of Rules B and E….a district court may vacate the attachment if the defendant shows may vacate the attachment if the defendant shows at the Rule E hearing that 1) the defendant is at the Rule E hearing that 1) the defendant is subject to suit in a convenient adjacent jurisdiction; subject to suit in a convenient adjacent jurisdiction; 2) the plaintiff could obtain 2) the plaintiff could obtain in personamin personam jurisdiction over the defendant in the district where jurisdiction over the defendant in the district where the plaintiff is located; or 3) the plaintiff has the plaintiff is located; or 3) the plaintiff has already obtained sufficient security for the already obtained sufficient security for the potential judgment, by attachment or otherwise.”potential judgment, by attachment or otherwise.”
The only rule may be that The only rule may be that there are no rulesthere are no rules
Ultimately, in determining the rules to be applied to a Rule E(4)(f) hearing, it has been consistently held that “[t]he inherent power to adapt an admiralty rule to the equities of a particular situation is entrusted to the sound discretion of the district judge sitting as an admiralty judge.”
Greenwich Marine Inc. v. S.S. ALEXANDRA, 339 F.2d 901, 905 (2d Cir. 1965).
Avoiding Attachment: How to Avoiding Attachment: How to Dodge a BulletDodge a Bullet
Strategy 1: Avoid restraint of Strategy 1: Avoid restraint of your paymentyour payment
One strategy employed by those One strategy employed by those concerned about a possible concerned about a possible attachment is to attempt to avoid attachment is to attempt to avoid having a payment caught. having a payment caught.
Generally, this involves making and Generally, this involves making and receiving payments through a receiving payments through a “paying agent”. “paying agent”.
Paying AgentsPaying Agents
There are problems with using paying agents, There are problems with using paying agents, though:though:
1. While you can control how payments are 1. While you can control how payments are made by you, you cannot control how made by you, you cannot control how payments are made to you. Sometimes, payments are made to you. Sometimes, your debtor will (deliberately or your debtor will (deliberately or inadvertently) reference the Rule B inadvertently) reference the Rule B defendant’s name in the wire instructions, defendant’s name in the wire instructions, which will lead to restraint by the bank’s which will lead to restraint by the bank’s interdiction software.interdiction software.
Paying AgentsPaying Agents
2. There may be commercial pressure to 2. There may be commercial pressure to explain why all payments are routed explain why all payments are routed through a third party, or word may get out through a third party, or word may get out “on the street” that payments to ABC Corp. “on the street” that payments to ABC Corp. are routinely routed through BCD Corp. If are routinely routed through BCD Corp. If word gets out, plaintiff’s counsel will ask the word gets out, plaintiff’s counsel will ask the Court to permit restraints of BCD Corp. Court to permit restraints of BCD Corp. funds as funds being transferred “for or on funds as funds being transferred “for or on behalf of” the defendant.behalf of” the defendant.
Paying AgentsPaying Agents
3. Ultimately, a company’s trading 3. Ultimately, a company’s trading pattern becomes known and funds of pattern becomes known and funds of the paying agent will be captured. The the paying agent will be captured. The defendant can engage in an endless defendant can engage in an endless circle of creating new paying agencies, circle of creating new paying agencies, but this inevitably will have commercial but this inevitably will have commercial impact as it will become plain that the impact as it will become plain that the defendant is attempting to avoid a defendant is attempting to avoid a creditor. creditor.
Alter egosAlter egos
Many companies are part of a group of Many companies are part of a group of companies. To avoid attachment of companies. To avoid attachment of the debtor group member’s property, the debtor group member’s property, the organization will act as a unified the organization will act as a unified whole, disregarding the debtor whole, disregarding the debtor member’s independence and member’s independence and conducting the debtor’s business as its conducting the debtor’s business as its own or through other arms of the own or through other arms of the organization.organization.
Alter egosAlter egos
Under these circumstances, U.S. law Under these circumstances, U.S. law permits restraint of an alter ego’s permits restraint of an alter ego’s property as property of the main property as property of the main defendant. The plaintiff need only make defendant. The plaintiff need only make a a prima facieprima facie showing of showing of eithereither fraud fraud oror domination and control. domination and control.
Ulisses Shipping Corp. v. FAL Shipping Co. Ulisses Shipping Corp. v. FAL Shipping Co. Ltd.Ltd., 415 F.Supp.2d 318 (S.D.N.Y. 2006)., 415 F.Supp.2d 318 (S.D.N.Y. 2006).
Alter egosAlter egos
Ultimately, alter egos become subject Ultimately, alter egos become subject to attachment in the same way as to attachment in the same way as paying agents. The fact that the paying agents. The fact that the alter ego may be a viable separate alter ego may be a viable separate entity is generally of no assistance, entity is generally of no assistance, particularly when the merits of the particularly when the merits of the underlying dispute are being underlying dispute are being addressed in a foreign forum. addressed in a foreign forum.
Alter egosAlter egos
One theory, though, that remains to be fully One theory, though, that remains to be fully explored is the extent of the application of explored is the extent of the application of foreign law: foreign law: i.e.i.e., why should a foreign , why should a foreign company be subject to U.S. federal law on company be subject to U.S. federal law on alter ego liability? What if the foreign alter ego liability? What if the foreign entity is behaving in a manner consistent entity is behaving in a manner consistent with its own law but which would give rise with its own law but which would give rise to corporate veil-piercing in the U.S.? to corporate veil-piercing in the U.S.?
Under the right circumstances, it may be Under the right circumstances, it may be possible to vacate an alter ego restraint. possible to vacate an alter ego restraint.
Strategy 2: Undermine the Strategy 2: Undermine the RuleRuleThe second strategy typically employed is The second strategy typically employed is
to undermine Rule B by disrupting the to undermine Rule B by disrupting the plaintiff’s ability to apply for an plaintiff’s ability to apply for an attachment in the first place. attachment in the first place.
Clearly, the potential defendant cannot Clearly, the potential defendant cannot make its activities giving rise to the make its activities giving rise to the claim “non-maritime” and cannot claim “non-maritime” and cannot prevent the claim from lying in prevent the claim from lying in personam against it.personam against it.
““Found within the District”Found within the District”
A potential defendant can, however, A potential defendant can, however, attempt to render itself “found” within attempt to render itself “found” within the district for purposes of Rule B. the district for purposes of Rule B.
As seen above, this requires the As seen above, this requires the defendant’s presence in terms where defendant’s presence in terms where it would need to be both (a) capable it would need to be both (a) capable of being served in the district and (b) of being served in the district and (b) doing business in the district.doing business in the district.
““Found within the District”Found within the District”
Many companies fearing Rule B attachment Many companies fearing Rule B attachment have obtained a license to conduct business have obtained a license to conduct business in New York, which under well-established in New York, which under well-established New York state law means that the entity is New York state law means that the entity is actually “conducting business” throughout actually “conducting business” throughout the state, regardless of the level of actual the state, regardless of the level of actual activity. Such companies typically appoint activity. Such companies typically appoint their New York counsel as agents for service their New York counsel as agents for service of process, thereby theoretically rendering of process, thereby theoretically rendering themselves “found”. themselves “found”.
““Found”Found”
In the past two months, there have been six In the past two months, there have been six separate decisions all finding that such separate decisions all finding that such incorporation tactics will successfully incorporation tactics will successfully preclude attachment under Rule B. preclude attachment under Rule B.
These decisions find fault with a Magistrate These decisions find fault with a Magistrate Judge decision from approximately 18 Judge decision from approximately 18 months ago which found that a company months ago which found that a company that had done the same thing – plus had that had done the same thing – plus had actual business contacts in the district and actual business contacts in the district and was actively seeking office space in New was actively seeking office space in New York – was still not sufficiently “found”, York – was still not sufficiently “found”, maintaining the Rule B attachment. maintaining the Rule B attachment.
Sidebar / Related Topic: Sidebar / Related Topic: Convenient Adjacent DistrictConvenient Adjacent District
Are the decisions correct?Are the decisions correct?
Older case law, which recalls the original purpose of Older case law, which recalls the original purpose of maritime attachment – to allow restraint of a foreign maritime attachment – to allow restraint of a foreign entity’s assets within the district so as to be able to entity’s assets within the district so as to be able to secure a potential judgment – holds that the secure a potential judgment – holds that the appointment of counsel for the purpose of avoiding appointment of counsel for the purpose of avoiding attachment is a nullity. attachment is a nullity.
Under older case law too, the business contacts with Under older case law too, the business contacts with the district must be “substantial”, “continuous”, and the district must be “substantial”, “continuous”, and “likely to continue in the future”. “likely to continue in the future”.
These requirements are not met by the paper These requirements are not met by the paper companies that are now routinely being established.companies that are now routinely being established.
Will New York incorporation / Will New York incorporation / licensure kill Rule B?licensure kill Rule B?
Likely not. As indicated, it won’t be long Likely not. As indicated, it won’t be long before a challenge arises based on the older before a challenge arises based on the older case law. If the older case law prevails, then case law. If the older case law prevails, then the current fad of New York incorporation / the current fad of New York incorporation / licensure will likely fade. licensure will likely fade.
Even if incorporation / licensure does preclude Even if incorporation / licensure does preclude Rule B attachment, actions can still be Rule B attachment, actions can still be brought in other U.S. jurisdictions where brought in other U.S. jurisdictions where property (likely debts) of the defendant can property (likely debts) of the defendant can be found. be found.
Counter-security: fighting Counter-security: fighting backback
Counter-securityCounter-security
Rules E(2) and E(7) concern counter-Rules E(2) and E(7) concern counter-security. Rule E(2) provides counter-security. Rule E(2) provides counter-security for certain statutory “costs” security for certain statutory “costs” (under the American Rule, “costs” do (under the American Rule, “costs” do not include legal fees). More not include legal fees). More important for our purposes is Rule important for our purposes is Rule E(7).E(7).
Rule E(7)Rule E(7)
When a person who has given security for When a person who has given security for damages in the original action asserts a damages in the original action asserts a counterclaim that arises from the counterclaim that arises from the transaction or occurrence that is the transaction or occurrence that is the subject of the original action, a plaintiff for subject of the original action, a plaintiff for whose benefit the security has been given whose benefit the security has been given must give security for damages demanded must give security for damages demanded in the counterclaim unless the court for in the counterclaim unless the court for cause shown, directs otherwise. cause shown, directs otherwise. Proceedings on the original claim must be Proceedings on the original claim must be stayed until this security is given unless stayed until this security is given unless the court directs otherwise.the court directs otherwise.
Rule E(7)Rule E(7)
When a person who has given When a person who has given security for damages in the security for damages in the original actionoriginal action asserts a asserts a counterclaim that arises from counterclaim that arises from the transaction or occurrence the transaction or occurrence that is the subject of the that is the subject of the original action, a plaintiff for original action, a plaintiff for whose benefit the security whose benefit the security has been given must give has been given must give security for damages security for damages demanded in the demanded in the counterclaim unless the court counterclaim unless the court for cause shown, directs for cause shown, directs otherwise. Proceedings on otherwise. Proceedings on the original claim must be the original claim must be stayed until this security is stayed until this security is given unless the court directs given unless the court directs otherwise.otherwise.
When a person who has given When a person who has given security for damages in the security for damages in the original actionoriginal action
It is established that the It is established that the requirement to “give” security requirement to “give” security is not taken to require any is not taken to require any degree of voluntary giving. degree of voluntary giving. Restraint of property is Restraint of property is “giving security”.“giving security”.
Rule E(7)Rule E(7)
When a person who has given When a person who has given security for damages in the security for damages in the original action original action asserts a asserts a counterclaim that arises from the counterclaim that arises from the transaction or occurrence that is transaction or occurrence that is the subject of the original actionthe subject of the original action, , a plaintiff for whose benefit the a plaintiff for whose benefit the security has been given must give security has been given must give security for damages demanded security for damages demanded in the counterclaim unless the in the counterclaim unless the court for cause shown, directs court for cause shown, directs otherwise. Proceedings on the otherwise. Proceedings on the original claim must be stayed original claim must be stayed until this security is given unless until this security is given unless the court directs otherwise.the court directs otherwise.
asserts a counterclaim that arises asserts a counterclaim that arises from the transaction or from the transaction or occurrence that is the subject of occurrence that is the subject of the original actionthe original action
The counterclaim must (a) be The counterclaim must (a) be asserted and (b) arise from the asserted and (b) arise from the transaction or occurrence that is transaction or occurrence that is the subject of the original action. the subject of the original action.
The counterclaim need not be The counterclaim need not be maritime in nature, however, to maritime in nature, however, to earn counter-security.earn counter-security.
A counterclaim that seeks damages A counterclaim that seeks damages for wrongful restraint under Rule for wrongful restraint under Rule B does not “arise” from the B does not “arise” from the transaction or occurrence that is transaction or occurrence that is the subject of the original action. the subject of the original action.
Rule E(7)Rule E(7)
When a person who has given When a person who has given security for damages in the security for damages in the original action asserts a original action asserts a counterclaim that arises from counterclaim that arises from the transaction or occurrence the transaction or occurrence that is the subject of the that is the subject of the original action, original action, a plaintiff for a plaintiff for whose benefit the security whose benefit the security has been given must give has been given must give security for damages security for damages demanded in the demanded in the counterclaimcounterclaim unless the court unless the court for cause shown, directs for cause shown, directs otherwise. Proceedings on otherwise. Proceedings on the original claim must be the original claim must be stayed until this security is stayed until this security is given unless the court directs given unless the court directs otherwise.otherwise.
a plaintiff for whose benefit the a plaintiff for whose benefit the security has been given must security has been given must give security for damages give security for damages demanded in the demanded in the counterclaimcounterclaim
Counter-security only secures Counter-security only secures “damages”. Whether “damages”. Whether “damages” includes “damages” includes recoverable interest, recoverable interest, disbursements, “costs” disbursements, “costs” (including fees) is a divided (including fees) is a divided issue. issue.
Rule E(7)Rule E(7)
When a person who has given When a person who has given security for damages in the security for damages in the original action asserts a original action asserts a counterclaim that arises from the counterclaim that arises from the transaction or occurrence that is transaction or occurrence that is the subject of the original action, the subject of the original action, a plaintiff for whose benefit the a plaintiff for whose benefit the security has been given must give security has been given must give security for damages demanded security for damages demanded in the counterclaim in the counterclaim unless the unless the court for cause shown, directs court for cause shown, directs otherwise.otherwise. Proceedings on the Proceedings on the original claim must be stayed original claim must be stayed until this security is given unless until this security is given unless the court directs otherwise.the court directs otherwise.
unless the court for cause shown, unless the court for cause shown, directs otherwise.directs otherwise.
Counter-security is nearly automatic Counter-security is nearly automatic and usually can only be avoided in and usually can only be avoided in cases where counter-security would cases where counter-security would be inequitable, often based on the be inequitable, often based on the impecuniosity of the plaintiff (such impecuniosity of the plaintiff (such as an injured seaman). as an injured seaman).
For a corporation to succeed on this For a corporation to succeed on this basis, it must show that the basis, it must show that the counter-security demanded would counter-security demanded would act as a bar to seeking Rule B relief act as a bar to seeking Rule B relief in the first instance. Though there in the first instance. Though there have been attempts, no current have been attempts, no current case has allowed such avoidance.case has allowed such avoidance.
Rule E(7)Rule E(7)
When a person who has given When a person who has given security for damages in the security for damages in the original action asserts a original action asserts a counterclaim that arises from counterclaim that arises from the transaction or occurrence the transaction or occurrence that is the subject of the that is the subject of the original action, a plaintiff for original action, a plaintiff for whose benefit the security whose benefit the security has been given must give has been given must give security for damages security for damages demanded in the demanded in the counterclaim unless the court counterclaim unless the court for cause shown, directs for cause shown, directs otherwise. otherwise. Proceedings on Proceedings on the original claim must be the original claim must be stayed until this security is stayed until this security is given unless the court directs given unless the court directs otherwise.otherwise.
Proceedings on the original claim Proceedings on the original claim must be stayed until this must be stayed until this security is given unless the security is given unless the court directs otherwise.court directs otherwise.
Courts have held that even Courts have held that even where the merits are being where the merits are being decided in a foreign forum, decided in a foreign forum, the Court is still within its the Court is still within its power to enjoin the plaintiff power to enjoin the plaintiff from proceeding until counter-from proceeding until counter-security is posted. Advancing security is posted. Advancing the claim under such the claim under such circumstances is treated as circumstances is treated as contempt of court.contempt of court.
Recent Decisions - Recent Decisions - CountersecurityCountersecurity
Chiquita Int’l Ltd. v. M/V BOSSEChiquita Int’l Ltd. v. M/V BOSSE, 518 , 518 F.Supp.2d 589 (S.D.N.Y. 2007).F.Supp.2d 589 (S.D.N.Y. 2007).
In Chiquita, plaintiff secured a Rule B against defendant. Defendant, having a counter-claim related to the same action, but wishing to be able to secure interest, costs and other damages, sought its own Rule B against plaintiff.
ChiquitaChiquita
The Chiquita Court held that the defendant was required to raise its request for counter-security within the context of the already filed action and therefore vacated the defendant’s Rule B as procedurally invalid, denying the defendant any counter-security.
Recent Decisions - Recent Decisions - CountersecurityCountersecurityNaias Marine S.A. v. Trans Pacific Carriers Co.
Ltd., 2008 U.S. Dist. LEXIS 2438 (S.D.N.Y. Jan. 10, 2008).
In Naias, the defendant had initially commenced a Rule B against the plaintiff. That action was terminated when plaintiff provided full security to Trans Pacific. Plaintiff then commenced its own Rule B against defendant to secure a potential costs judgment (it had no counterclaim per se).
NaiasNaias
Trans Pacific successfully vacated Naias’ attachment because a costs judgment would not “arise from” the same transaction or occurrence as the original action.
The Court also concluded that Naias’ time to seek security for such costs was while Trans Pacific’s case was still active. Naias’ failure to act at that time precluded security for such costs (which might have been awarded had they been requested) now.
Recent Decisions - Recent Decisions - CountersecurityCountersecurityBhatia Shipping and Agencies Pvt. Ltd. v. Alcobex Metals Bhatia Shipping and Agencies Pvt. Ltd. v. Alcobex Metals
Ltd.Ltd., 07 CIV 9346 (BSJ) (S.D.N.Y. July 3, 2008) (not yet , 07 CIV 9346 (BSJ) (S.D.N.Y. July 3, 2008) (not yet reported)reported)
Facts: Bhatia agreed to deliver Alcobex’s pipes to Facts: Bhatia agreed to deliver Alcobex’s pipes to England. Bhatia appears to have mistakenly England. Bhatia appears to have mistakenly delivered those pipes without surrender of original delivered those pipes without surrender of original bs/l. Alcobex was not paid and made a demand bs/l. Alcobex was not paid and made a demand against Bhatia. Bhatia admitted the error and asked against Bhatia. Bhatia admitted the error and asked its underwriter to pay the claim. No payment was its underwriter to pay the claim. No payment was made and Alcobex did not timely advance its claim. made and Alcobex did not timely advance its claim. Bhatia moved the English High Court for declaratory Bhatia moved the English High Court for declaratory judgment on time bar. Months later, Alcobex brought judgment on time bar. Months later, Alcobex brought its own action, in India, for damages. The English its own action, in India, for damages. The English Court granted Bhatia’s action and awarded costs. Court granted Bhatia’s action and awarded costs.
BhatiaBhatia
Bhatia sought to enforce its judgment via a Rule B Bhatia sought to enforce its judgment via a Rule B attachment. Funds were secured and Alcobex moved to attachment. Funds were secured and Alcobex moved to vacate on the following grounds:vacate on the following grounds:
1) Bhatia's costs judgment was not maritime under Naias 1) Bhatia's costs judgment was not maritime under Naias MarineMarine
2) Bhatia's claim was not maritime in any event and the court 2) Bhatia's claim was not maritime in any event and the court lacked admiralty jurisdictionlacked admiralty jurisdiction
3) Both parties were Indian3) Both parties were Indian4) Bhatia's English action was brought in bad faith since 4) Bhatia's English action was brought in bad faith since
Bhatia was not the injured party and since India was a more Bhatia was not the injured party and since India was a more convenient and less expensive forumconvenient and less expensive forum
5) Even if admiralty jurisdiction existed, under equitable 5) Even if admiralty jurisdiction existed, under equitable principles, this court should vacate the attachment and principles, this court should vacate the attachment and deny recognition of the English judgment which was deny recognition of the English judgment which was rendered by defaultrendered by default
BhatiaBhatia
Alcobex's arguments were all rejected by the Court. Alcobex's arguments were all rejected by the Court.
1) While a claim merely for costs without more may not be 1) While a claim merely for costs without more may not be maritime (Naias), a judgment by a maritime court for money maritime (Naias), a judgment by a maritime court for money damages (to either side), even solely for costs, is maritime.damages (to either side), even solely for costs, is maritime.
2) The enforcement of a foreign admiralty judgment is an 2) The enforcement of a foreign admiralty judgment is an exercise of this court's admiralty judgment (citing Victrix)exercise of this court's admiralty judgment (citing Victrix)
3) The proper place to challenge jurisdiction is not in the court 3) The proper place to challenge jurisdiction is not in the court where an enforcement action is taking place (SDNY), but where an enforcement action is taking place (SDNY), but rather in either the place where the court's jurisdiction is rather in either the place where the court's jurisdiction is subject to question (England) or where jurisdiction is proper subject to question (England) or where jurisdiction is proper and brought in the alternative (India)and brought in the alternative (India)
Maritime Attachment: Maritime Attachment: Anything but StaticAnything but Static
Q & AQ & A
Larry KahnLarry KahnFreehill Hogan & Mahar, LLPFreehill Hogan & Mahar, LLP
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