Cala Rosa Marine Co. Ltd. v. Sucres et Deneres Group: A Shift in the Rule B Landscape

A recent decision in the Southern District of New York poses new and very high hurdles for maritime claimants seeking prejudgment attachment of electronic fund transfers (EFTs). If that decision becomes prevailing practice, as it well may, claimants will face new challenges, but banks will welcome a significant reduction in their paperwork.

Under Rule B of the Supplemental Admiralty Rules, if a defendant cannot be 'found' within the district, plaintiffs in maritime cases may attach the defendant's 'tangible or intangible personal property,' which has been interpreted to include EFTs, even before the complaint is served. This powerful tool is often used to secure potential awards in arbitrations or litigation proceedings abroad as well as to force a recalcitrant defendant to respond to claims that might otherwise be ignored or would be difficult to prosecute in other locations. Because EFTs in U.S. dollar transactions must pass through one of several New York banks, the number of Rule B cases has exploded in recent years as claimants have discovered its utility for catching funds as they travel through the international banking system.

That utility relies, however, on the ability to catch a transfer as it flies through the banking system, and especially reconciling the attachments with a 1985 United States Court of Appeals ruling that an attachment can apply only to funds that are in the hands of the garnishee at the time the order is served.¹ Because EFTs may spend only seconds within the control of any bank in the chain, it is virtually impossible to time the service of an attachment order so that it arrives after funds come in but before they are passed on to another bank. It has therefore become customary for an order of attachment to provide for 'continuous service,' i.e., any process of attachment will be deemed to be effective from the time it is served until the following business day, or some point in time, so that it can catch funds that come in during the designated period. It has also become customary for attachment orders to allow plaintiffs to make daily service using special process servers, often their own staff, so as not to go to the considerable expense of paying the U.S. Marshals to perform daily service.

In her February 4, 2009 opinion in Cala Rosa Marine Co. Ltd. v. Sucres et Deneres Group, however, Judge Shira A. Scheindlin made two rulings which have the practical effect of making a Rule B attachment of EFTs almost impossible.²

The Cala Rosa plaintiff sought an order permitting attachment of funds with the usual provisions for continuous service and appointment of a special process server who could serve the attachment order instead of the U.S. Marshal. In her decision, Judge Scheindlin expressly recognized that such provisions were essential in order to effect Rule B attachments of EFTs:

Given the Reibor prohibition on attachment of after-acquired property and given that ''[a]n EFT may be in the possession of a financial institution for only a very short period of time,' and may move through the bank 'almost instantaneously,' it follows that it would be virtually impossible for plaintiffs to attach EFTs unless garnishee banks are permitted to accept continuous service.' The continuous service provision is thus 'intended to avoid 'the absurdity, security problems, and inconvenience of requiring the garnishee banks to accept service repeatedly throughout the day.'' Indeed, 'the absence of such a continuing service provisioneither by court order or by consent from the garnisheewould inevitably result in the posting of lawyers and/or process servers at bank offices around the clock in an attempt to capture EFTs at the precise moment of their arrival.'
Opinion at 9-10 (citations and footnotes omitted).

Nevertheless, while the Court granted the order of attachment, Judge Scheindlin denied the request for continuous service and appointment of a special process server. The result is that if the plaintiff wishes to pursue its attachment of an EFT, it will have to station a Marshal at each of the banks which might be involved in a transfera very costly proposition, even if the Marshals agree, which is unlikelyand have the attachment papers served again and again throughout the day. Even if the plaintiff went to such lengths, such an exercise is likely to be fruitless.

The outcome in Cala Rosa is surprising and especially significant because Judge Scheindlin had previously taken an expansive view of Rule B and issued some of the most influential decisions on continuous service, leading to its adoption as the prevailing practice.³

In departing from her earlier rulings, especially her previous reading of Reibor, Judge Scheindlin gave much greater weight to the burden attachments of EFTs place on banks. If this ruling is followed by other judges or endorsed by the United States Court of Appeals for the Second Circuit, EFTs will be subject to attachment only if banks elect to consent to continuous service. Such consent is unlikely because banks would be concerned about breaching duties to their customers.

While this decision stands alone at the moment, other judges may well agree with its reasoning, especially because the recent proliferation of Rule B attachments has strained the resources of the federal court sitting in Manhattan.⁴Cala Rosa is therefore bad news for claimants, but good news for banks.

¹Reibor International Limited v. Cargo Carriers (KACZ-CO.) Limited, 759 F.2d 262 (2d Cir. 1985).

²Cala Rosa Marine Co. v. Sucres et Deneres Group, 09 Civ. 425 (SAS), 2009 U.S. Dist. LEXIS 7934 (S.D.N.Y. Feb. 4, 2009).

³ See, e.g., Consub Delaware LLC v. Schahin Engenharia Limitada, 476 F. Supp. 2d 305, 311 (S.D.N.Y. 2007), aff'd 543 F.3d 104 (2008) (holding that EFTs were attachable as they passed through intermediary banks); Ullises Shipping Corp. v. FAL Shipping Co. Ltd., 415 F. Supp. 2d 318, 328 (S.D.N.Y. 2006), overruled on other grounds by Aqua Stoli, 460 F.3d 434, 446 (2d Cir. 2006) (holding that '[s]ome provision for continuous service is required to allow attachment of EFTs without significant disruption to financial institutions'). In fact, the court in DSND Subsea AS v. Oceanografia, S.A. de CV, 569 F. Supp. 2d 339, 345-48 (S.D.N.Y. 2008), relied heavily on Judge Scheindlin's ruling in Ullises in upholding continuous service.

⁴ While maritime cases were only 10% of the Southern District's civil docket at the beginning of 2008, they now constitute over 30% of new filings.