I. Introduction
American Maritime attachment under "Rule B" is an extraordinary remedy which permits pre-trial seizure of a defendant's property on an ex parte basis. First approved by the Supreme Court in 1825, the practice has been the subject of ongoing debate and controversy over the years.
U.S. Maritime attachment plays an important role in maritime dispute resolution both in the United States and abroad. Attachment is one of several ancient remedies recognized in admiralty since the earliest rulings of the United States judiciary1. Indeed, maritime attachment predates both the congressional grant of admiralty jurisdiction to the federal district courts and the promulgation of the first Supreme Court Admiralty Rules in 18442.
Because of the transient nature of maritime property and the need for special remedies to address situations unique to maritime commerce, maritime claimants have been afforded remedies not otherwise available to similarly-situated claimants under land-based law. Among these remedies is the ability to exercise "quasi in rem" jurisdiction over a non-resident defendant by restraining the defendant's assets within the jurisdiction3. Given this long history, the right of a maritime plaintiff to this remedy should not be lightly questioned4.
II. Rule B Basics
A. Purpose
A Rule B attachment serves two purposes: first, it establishes "quasi in rem" jurisdiction over the defendant property owner; second, the property which is attached provides a fund from which a decree can be paid after trial5.
B. Requirements
Since the Supreme Court's original version of the Admiralty Rules in 1844, there have been three requirements to obtain a maritime attachment: (1) the cause of action must arise within the court's admiralty and maritime jurisdiction; (2) the defendant "cannot be found" within the district; and (3) the defendant has, or shortly will have, assets within the district.
The second element that the "defendant cannot be found" in the district is unique and somewhat counter-intuitive. A defendant is not found within the district court's jurisdiction when he is not subject to personal jurisdiction (essentially, is not "doing business" within the district) or cannot be served with service of process within the district. When either of these factors exist, "property" of the defendant which is located within the district is subject to seizure. Unlike an in rem arrest, the property seized need not have an underlying connection to the plaintiff's claim. "Property" is defined broadly and includes traditional maritime assets such as vessels and cargo, as well as generic assets such as bank accounts, accounts receivable, debts, and other "intangible" property.
C. Ex Parte Application - Rule E(4)(f) Hearing
Rule B attachments occur "ex parte" (meaning without notice to the defendant). On its face, Rule B provides trial courts with almost no discretion in issuing an order of attachment. This is balanced by the protections under companion Rule E(4)(f) which provides that "any person claiming an interest in [the attached property] shall be entitled to a prompt hearing at which the plaintiff shall be required to show why the…attachment should not be vacated…"6 This provision is designed to satisfy U.S. constitutional requirements of due process so that the defendant is given a fair opportunity to contest the seizure, the amount of the security demanded, or any other alleged deficiency in the proceedings7. The post-attachment hearing "is not intended to resolve definitively the dispute between the parties, but only to make a preliminary determination whether there were reasonable grounds for issuing [the attachment]." 8
Rule E(4)(f) places the burden on the plaintiff to establish why the attachment should be maintained. In the post-attachment hearing, the Plaintiff must provide a probable cause showing that the attachment serves at least one of its two recognized purposes: (1) to compel the defendant's appearance and/or (2) to provide security in the event plaintiff is successful9.
Litigants and courts have differed over precisely what showing is necessary to satisfy the plaintiff's burden under Rule E(4)(f), particularly when the defendant argues that the security requested is unnecessary to secure a potential judgment. As discussed below, several courts have recently considered the solvency of a defendant company and have vacated attachments on the ground that a plaintiff did not "need" the security requested. Other courts have considered "need" as well as whether there has been "unfairness or prejudice" to the defendant property owner. Currently, there is no binding precedent on the lower courts regarding the utility of the "need" or fairness requirements in Rule B attachments. Until there is some guidance provided by the appeal courts, increased Rule B post-attachment litigation will be inevitable.
D. Rule B for Security Only?
There is some authority that a Rule B attachment cannot be used where the sole purpose is to obtain security. Other cases state that a plaintiff's motive for attachment is irrelevant, and as long as the required elements have been met, the attachment should be maintained10. Further, once a defendant's property has been attached, he cannot defeat the process by consenting to accept service of process or by appointing an agent to accept service after the fact11. Where a defendant is not personally served and does not personally appear in the lawsuit, he will typically enter a "restricted appearance" limited to protecting the attached asset from the claim. In these circumstances, the judgment rendered is limited to the value of the property attached.
E. Electronic Funds
In 2002, the U.S. Court of Appeals for the Second Circuit (New York) held that an "electronic fund" transfer in the hands of an intermediary bank constituted attachable intangible property of the defendant12. Such attachments can, however, generate controversy concerning whether the actual cyber-transfer is "owed" by the defendant and within the district from which the order of attachment has issued.
III. Rule B and the Genesis of the Purported "Need" Requirement
Nothing in Rule B, its legislative history or the Rule's Amendments requires a specific showing of the plaintiff's "need" for security. Similarly, there is nothing in the Rule which requires the court to assess the "fairness" of any particular attachment. Indeed, historically, the basis for Rule B attachments was that vessels and other assets in the shipping world are inherently transient. A wronged party can face diminished odds of recovering against a defendant who has fled the jurisdiction. Recently, however, a string of trial-level courts have re-examined the propriety of Rule B attachments. The point of departure for this re-examination is an Amendment to Supplemental Rule E in 1985 which emphasized that "any person, claiming an interest" in attached property is automatically "entitled to a prompt hearing at which the plaintiff shall be required to show why the arrest or attachment should not be vacated."13 This amendment has resulted in various interpretations of what a court may consider in Rule E post-attachment hearings.
One of the first cases to discuss the "need" requirement is Integrated Container14. In Integrated, the defendant's application to vacate a maritime attachment was denied, but the court mentioned "need" in two different contexts: First, the court noted that "[n]o matter how convincingly demonstrated the plaintiff's need for security," a maritime attachment cannot be granted if the defendant can be "found" within the district15. Second, and in response to the defendant's argument that the attachment was abusive, the Court noted that the plaintiff's "need" for security in that case was real, because the defendant had gone out of business16. The Integrated Court also commented that an attachment could potentially be considered "abusive" if obtained in one federal district while an in personam lawsuit could easily be commenced in an adjacent federal district17. (For those unfamiliar with the structure of U.S. federal courts, one state may have several federal district courts by region: for example, in New York, the Southern and Eastern Districts cover the New York City area.) The court's warning in Integrated foreshadowed such a situation in a single-state adjacent federal district case, as distinguished from attachments across state lines18. The Integrated court determined such abuse could be remedied by setting aside attachments which were "unfair." Notably, however, Integrated did not hold that a lack of proof of a maritime plaintiff's "need" for security constituted "unfairness" or that, henceforth, the absence of a showing of need would provide a general basis for vacating any maritime attachment.19
The single-state adjacent-district scenario envisioned by Integrated arose several years later in Royal Swan20. There, plaintiff sought a Rule B attachment in the Southern District of New York. The defendant challenged the attachment as unnecessary on the ground that its offices were located in the adjacent Eastern District in New York, that it had already appointed counsel in the underlying arbitration in the Southern District of New York, and that it had assets situated in the Southern District with which to satisfy any potential adverse award. Capitalizing on the adjacent-district argument first articulated in Integrated, the defendant in Royal Swan argued that the plaintiff had taken unfair advantage in exploiting the adjacent federal judicial districts and thus the attachment should be vacated on the basis of unfairness. The district court invited plaintiff to make a showing of "need" for the security under these unique circumstances. The Royal Swan plaintiff, for unexplained reasons, defaulted and made no proffer of need whatsoever.21 The Court vacated the attachment and so was borne the so-called "need" test.
The rationale applied in Royal Swan was subsequently followed by Judge Haight in FRATZIS M. Interestingly, that case involved the very same defendant and the exact same issue of adjacent-district attachment22. Unlike the plaintiff in Royal Swan, however, the FRATZIS M plaintiff took discovery and then forcefully asserted a need for security. The attachment was maintained. Thus, Royal Swan and FRATZIS M, when read together, probably stand for the limited proposition that in a single state-adjacent district situation, a question of "unfairness" may arise, but can be overcome by, inter alia, the plaintiff showing a "need" for the security.
Some of the questions relating to the utility and scope of the "need" test left by the earlier cases were partially addressed in Allied Maritime23. In Allied Maritime, Judge Scheindlin vacated a Rule B attachment as "unfair", reasoning that the defendant had established that it was financially secure and the plaintiff had failed to show a need for security beyond that of any other plaintiff24. While fairness appears to be a factor in Allied Maritime, recent cases have interpreted Judge Scheindlin's holding to contain an affirmative showing of "need" that a plaintiff must meet.
IV. The Recent Conflict in the New York Courts
Two recent decisions in the Southern District of New York, Aqua Stoli25, and SeaPlus Line26, have vacated attachments based on need. Each case is currently on appeal to the Court of Appeals for the Second Circuit. A third case, Blake Maritime27, which is not on appeal, has held need is not required to maintain a Rule B attachment.
In Aqua Stoli Shipping, Judge Rackoff held that various electronic fund transfers seized by the plaintiff pursuant to Rule B should be released from attachment because the plaintiff's "purpose in obtaining the attachment order was purely tactical -- to obtain leverage over the defendant", and because "[p]laintiff's ability to collect a prospective judgment was remarkably secure", given that "defendant is a very large stable company with no demonstrative history of failing to make good on judgments [and thus] attachment of EFTs will be as available post-judgment as it has been pre-judgment."28 The decision has generated significant controversy, not the least of which includes comparison to the recent rapid downfall of other "very large, stable" companies such as Enron, Worldcom and Arthur Andersen. The decision adds a non-statutory "judge-made" element to the Rule B analysis which will require, in virtually all cases, a new assessment involving satellite litigation of the defendant's financial condition. This will undoubtedly lead to far more challenges to Rule B attachments, and increased litigation of what has traditionally been a rather straightforward process.
Roughly two months after the Aqua Stoli decision, another judge in New York's Southern District, Judge Crotty, decided Blake Maritime, which also involved attachment of electronic fund transfers. In upholding and maintaining the attachment, Judge Crotty noted, contrary to Aqua Stoli, that adding a "need" or "necessity" requirement to Rule B constitutes a re-writing of the law on maritime attachments. The court noted that the "need test" is not found anywhere in Rule B29. The court also went on to distinguish Aqua Stoli on the ground that the defendant in that case was financially sound whereas in Blake Maritime the defendant's evidence of financial stability was less convincing.
A very recent case that supports the "need" requirement is SeaPlus Line. There, Judge Koeltl adopted the reasoning of Allied Maritime and Aqua Stoli in requiring plaintiff to demonstrate need, and further held that even if the plaintiff meets the need requirement, the motion to vacate may still be granted if the moving party is able to demonstrate undue hardship30. After conducting an analysis of the defendant's financial condition, Judge Koeltl concluded that plaintiff had not provided sufficient evidence to show the defendant would not be able to satisfy an award. Accordingly, the attachment was vacated.
As mentioned above, the Aqua Stoli and SeaPlus Line cases are currently on appeal to the Second Circuit. The Blake Maritime case is pending London arbitration and will not be appealed; however, Judge Crotty's views could be examined by the Second Circuit on the appeal of the Aqua Stoli and SeaPlus cases.
V. Counter-Security/ "Gag Orders"
Occasionally overlooked by litigants is the fact that Supplement Rule E(7) allows for the posting of counter-security in the event of a counterclaim. Recently, the issue of counter-security has shown to be instrumental in aid of London arbitration. In Daeshin Shipping31, not only was the plaintiff required to post counter-security after attaching defendant's EFT's, the court ordered a stay of London arbitration between the parties pending the Plaintiff's posting of the counter-security.
Further demonstrating the reach of Rule B, it is also within the courts authority to issue "gag orders" in special circumstances, preventing garnishees from revealing to defendants the contents of court orders that may need to be kept confidential to assist in obtaining security.32
VI. Conclusion
Rule B, coupled with its Supplemental counterparts, has proved to be a dynamic remedy, whose utility only appears to be growing. For the time being, however, and at least until the Second Circuit Court of Appeals decides the issue, maintenance of Rule B attachments may now require the additional requirement of establishing "need" based upon a defendant's poor financial condition. This will undoubtedly lead to far more challenges to Rule B attachments and increased litigation of what has traditionally been a rather straightforward process.
This article is intended to be informational only and it should not be relied on as legal advice. Legal counsel should be engaged before taking any actions with respect to matters discussed herein.
With thanks to Don P. Murnane and Jr. Michael C. Elliott of Freehill Hogan & Mahar LLP for preparing this article
1. Atkins v. Fibre Disintegrating Co., 85 U.S. (18 Wall.) 272, 303 (1873) ("[t]he use of the process of attachment in civil causes of maritime jurisdiction by courts of admiralty…has prevailed during a period extending as far back as the authentic history of those tribunals can be traced"), citing the Temporary Process Act of September 29, 1789 and the Process Act of 1792.
2. Aurora Maritime Co. v. Abdullah Mohamed Fahem & Co., 85 F.3d 44, 47 (2d Cir. 1996).
3. Atkins, 85 U.S. at 303.
4. Manro, 23 U.S. (10 Wheat.) at 486 ("[t]his Court has entertained such suits too often, without hesitation, to permit the right [of maritime attachment] to be questioned"); see also. Winter Storm Shipping, Ltd. v. TPI, 310 F.3d 263, 268 (2d Cir. 2002).
5. Aurora Maritime Co., 85 F.3d at 48.
6. Supplemental Rule E(4)(f), Fed. R. Civ. P.
7. Id., Advisory Committee Note, 1985 Amendment.
8. Salazar v. The ATLANTIC SUN, 881 F.2d 73, 79-80 (3d Cir. 1989).
9. Manro v. Almeida, 23 U.S. (10 Wheat.) 473, 489 (1825); Swift & Co. Packers v. Compania Colombiana Del Caribe, S.A., 339 U.S. 684, 693 (1950); Winter Storm Shipping Ltd. v. TPI, 310 F.3d 263, 268 (2d Cir. 2002).
10. See HBC Hamburg Bulk Carriers, BmbH & Co. KG v. Proteinas y Oleicos S.A. de C.V., 2005 U.S. Dist. LEXIS 8009 (S.D.N.Y. 2005); see also Parkroad Corp. v. China Worldwide Shipping Co., Ltd., 2005 WL 135034 (S.D.N.Y. 2005).
11. HBC Hamburg Bulk Carriers, 2005 U.S. Dist. LEXIS.
12. Winter Storm Shipping Ltd. v. TPI, 310 F.3d 263 (2d Cir. 2002).
13. Suppl. Rule E(4)(f), Fed. R. Civ. P.
14. Integrated Container Services, Inc. v. Starlines Container Shipping Ltd., 476 F. Supp. 119, 124-25 (S.D.N.Y. 1979).
15. Id. at 122.
16. Id. at 124.
17. Id.
18. See Western Bulk Carriers (Australia), Pty. Ltd. v. P.S. Int'l, Ltd., 762 F.Supp. 1302, 1309 (S.D. Oh. 1991), where the court determined there was no abuse of Rule B in attaching an Indiana corporation's assets in the Southern District of Ohio (where the defendant could not then be "found") rather than filing an in personam claim in the neighboring district court in Indiana, where the defendant could be found and where it maintained significant assets.
19. Both Integrated and Central Hudson Gas and Elec. Corp. v. Empresa Naviera Santa, S.A., 845 F.Supp. 150, 153 (S.D.N.Y. 1994) stand for the proposition that a demonstrated need by the plaintiff for security is one way to show the use of the attachment mechanism was not abusive.
20. Royal Swan Nav. Co. Ltd. v. Global Container Lines, Ltd., 868 F.Supp. 599 (S.D.N.Y. 1994).
21. Royal Swan, 868 F. Supp. at 605-607; see also Rolls Royce Industrial Power (India) v. M.V. FRATZIS M, 1996 A.M.C. 390, 392 (S.D.N.Y. 1995)(noting that the Royal Swan plaintiff "did not press its need for security with any vigor, going so far as to fail to respond to pertinent inquiries by the court"). It is evident from the Royal Swan decision that the Court had concerns about certain representations made to the Court in order to obtain the attachment in the first place. Id. at 607. This suspicion may well have been the impetus behind the Court's decision to vacate the attachment as "unfair".
22. Rolls Royce Industrial Power (India) v. M.V. FRATZIS M, 1996 A.M.C. 390 (S.D.N.Y. 1995).
23. Allied Maritime, Inc. v. The Rice Corp., 2004 U.S. Dist. LEXIS 20353 (S.D.N.Y. 2004).
24. Id. citing Signet Shipping Co. v. Southern Hardwoods, Inc., 108 F. Supp. 2d 649 (E.D.LA. 2000) (Allied Maritime is the only case ever to cite Signet for this or any other proposition).
25. Aqua Stoli Shipping Ltd. v. Gardner Smith Pty. Ltd., 2005 U.S. Dist. LEXIS 19139 (S.D.N.Y. 2005).
26. SeaPlus Line Co. LTD v. Bulkhandling Handymax AS, 05 CV 4813 (JGK) (S.D.N.Y. Dec. 13, 2005).
27. Blake Maritime, Inc. v. Petrom S.A., No. 05 Civ. 8033 (PAC), 2005 WL 2875335 (S.D.N.Y. Oct. 31, 2005).
28. Aqua Stoli Shipping Ltd., 2005 U.S. Dist. LEXIS at *7-8.
29. Blake Maritime, Inc., 2005 WL 2875335 at *2.
30. SeaPlus Line Co. LTD., 05 CV 4813 (JGK) at *6, 10-11.
31. Daeshin Shipping Co. Ltd. v. Meridian Bulk Carriers, Ltd., 2005 U.S. Dist. LEXIS
