The Global Payments System

Transcription

1 The Second Circuit Overrules Winter Storm, Bolstering New York s Standing as a Center for International Funds Transfers SUMMARY We now conclude, with the consent of all of the judges of the Court in active service, that Winter Storm was erroneously decided and therefore should no longer be binding precedent in our Circuit. With these words, the Court of Appeals for the Second Circuit in The Shipping Corporation of India Ltd. v. Jaldhi Overseas PTE Ltd., decided earlier today, definitively overruled its opinion of seven years ago in Winter Storm Shipping, Ltd. v. TPI. As banks that participate in the global payments system well know, Winter Storm has wreaked havoc on the administration of electronic funds transfers passing through intermediary banks in New York. Although such transfers pass through New York only for an instant, and under uniform state law (Article 4A of the U.C.C.) are immune from attachment by creditors of the originator or the beneficiary of a payment order, the Second Circuit beginning in Winter Storm had held that EFT funds in the hands of an intermediary bank are subject to Admiralty Rule B attachment as property of the originator. This decision had been extended by a number of district court opinions to apply equally to the property of a payment order s beneficiary. As a result, New York banks who act as intermediary banks in the global payments system have for years been harassed by a veritable flood of maritime writs amounting to hundreds every day seeking to attach funds involved in payment orders. This interference with the funds-transfer process has adversely affected the efficiency and reliability of dollar-denominated payments. The New York commercial banking community, represented by The Clearing House Association L.L.C., has led the years-long effort to persuade the Second Circuit to overrule Winter Storm. We believe that today s ruling in Jaldhi that EFTs in the temporary possession of an intermediary bank... cannot be subject to attachment under Rule B will have an immediate and substantial beneficial impact on the efficacy of the global payments system and help to bolster New York s standing as a center for international funds transfers. New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 BACKGROUND In Winter Storm Shipping, Ltd. v. TPI, 310 F.3d 263 (2d Cir. 2002), the Court of Appeals for the Second Circuit surprised participants in the global payments system and held, contrary to Article 4A of the Uniform Commercial Code, that what is now Rule B(1)(a) of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions ( Rule B ) permitted attachment of the amount of a funds transfer payment order received by an intermediary bank as property of the originator of the funds transfer. This holding was first questioned by the Court of Appeals in Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., 460 F.3d 434, 446 n.6 (2d Cir. 2006) ( The correctness of our decision in Winter Storm seems open to question. ), but then subsequently endorsed in Consub Delaware LLC v. Schahin Engenharia Limitada, 543 F.3d 104 (2d Cir. 2008). As the Second Circuit noted in today s Jaldhi opinion, [t]he unforeseen consequences of Winter Storm have been significant. The practice of invoking Rule B to obtain a writ of attachment targeting fundstransfer credits received by banks in the Southern District of New York (the District ) has become the sine qua non for any anticipated or pending maritime dispute arising the world over. In particular, in the year since Consub was decided, maritime plaintiffs have swamped the Southern District with well over a thousand complaints asserting maritime claims and seeking Rule B writs of attachment involving funds transfer credits received by intermediary banks in New York. Almost all these actions assert claims against foreign parties with few or no U.S. contacts and, it would appear, without any basis to expect or believe that a defendant s property is present, or will be present, in the District. Many of these writs were, and still are, repeatedly served, day after day, for weeks or sometimes months on end without ever resulting in the attachment of property related to any funds transfer. The result is a staggering number of maritime writs that New York banks are required to process on a daily basis. The Second Circuit noted that, according to The Clearing House Association L.L.C. (the Clearing House ), from October 1, 2008 to January 31, 2009 alone maritime plaintiffs filed 962 lawsuits seeking to attach more than $1.35 billion. These lawsuits constituted 33% of all lawsuits filed in the Southern District during that period, and the resulting maritime writs only add to the burden of 800 to 900 prior writs already served daily on the District s banks. The explosion of maritime writs served on the banks has been logistically overwhelming. The banks have had to hire additional staff and suffer considerable expense to deal with the writs. Of even more significance, the Clearing House warned that this explosion of writs had created an additional threat to the U.S. dollar as the world s primary reserve currency and New York s standing as a center of international banking and finance. Confronted with this situation, companies around the world would consider restructuring their transactions to provide for payments in euros, sterling, yen or some other currency to avoid using U.S. dollars cleared through intermediary banks in the United States, or clear transactions through one of the proliferating off-shore dollar clearing networks. Because the only -2-

3 contact with the United States in most of these transactions is the use of an intermediary bank in the United States to clear U.S. dollars, U.S. litigation could often be avoided entirely by the relatively simple expedient of using a different currency. As a result, the Clearing House has long argued that Winter Storm and its progeny have had a far greater, and damaging, potential impact on U.S. and foreign banks located in New York than ever could have been anticipated. THE JALDHI OPINION The specific issue presented in Jaldhi was whether Winter Storm should be extended to cases where the defendant is the beneficiary of the funds transfer, as opposed to the originator, as in Winter Storm. Neither party to the Jaldhi appeal advocated overruling Winter Storm. The Clearing House, however, as amicus curiae, urged the Second Circuit to consider the question of whether Winter Storm should be reconsidered and, upon consideration, overruled. And so the Court did, acknowledging that its holding in Winter Storm not only introduced uncertainty into the international funds transfer process..., but also undermined the efficiency of New York s international funds transfer business. In order to overrule the Court s earlier opinions (in Winter Storm, Aqua Stoli and Consub), the Jaldhi panel circulated the opinion in draft form to all active members of the Second Circuit prior to filing, and obtained the consent of all judges in active service. The Second Circuit examined the reasons offered in Winter Storm for its holding that relevant federal law indicated that funds-transfer payment orders were property of the originator of an EFT that could be attached in a Rule B proceeding, and upon further consideration found Winter Storm s reasons unpersuasive and its consequences untenable. The Jaldhi panel in particular took issue with Winter Storm s reliance on United States v. Daccarett, 6 F.3d 37 (2d Cir. 1993), a forfeiture case involving the drug trafficking and money laundering activities of a Colombian drug cartel. Consub endorsed Winter Storm s reliance on Daccarett. The Clearing House has long maintained that the Second Circuit s reliance on Daccarett in Winter Storm and in Consub was in error. In Jaldhi, the Second Circuit finally agreed, finding Winter Storm s reliance on Daccarett was misplaced. Daccarett did not decide that the originator or beneficiary of an EFT had a property interest in the EFT; it held only that funds traceable to an illegal activity were subject to forfeiture.... To be eligible for forfeiture, the EFTs needed only to be traceable to the illegal activities, and thus the court in Daccarett was required only to assess whether the EFTs in that case were in fact traceable to illegal activities. As a result, the Court held, [n]o further inquiry into the identity of the owner of the EFTs was necessary [in Daccarett] indeed, that question was wholly irrelevant. Without the support of Daccarett, the Jaldhi panel was unpersuaded that either the text of Rule B or our past maritime holdings relating to defendants bank accounts compel us to conclude as a matter of federal law that an EFT is defendant s... personal property, as required under Rule B. This is -3-

4 precisely the position advanced by the Clearing House in several appeals following Winter Storm, and finally in Jaldhi. In the absence of controlling federal law, the Court reaffirmed its prior holding in Reibor Int l Ltd. v. Cargo Carriers (KACZ-Co.) Ltd., 759 F.2d 262 (2d Cir. 1986), that it should look to state law to determine whether EFTs can be considered a defendant s property for purposes of attachment under Rule B. New York and every other state has adopted Article 4A of the U.C.C., which makes clear that neither the originator nor the beneficiary of a funds transfer has a property interest in a funds transfer when in transit, and specifically when received by an intermediary bank in the funds-transfer process. See U.C.C. 4A- 502(d) & cmt. 4; 4A-502(b); 4A-503 & cmt. The Jaldhi panel therefore held that [b]ecause EFTs in the temporary possession of an intermediary bank are not property of either the originator or the beneficiary under New York law, they cannot be subject to attachment under Rule B. Sullivan & Cromwell represented the Clearing House in the Jaldhi appeal. IMPLICATIONS Winter Storm significantly impeded the funds-transfer process and threatened to derail thousands of business transactions. One significant problem for banks has been that the only practical way in which they could accommodate post-winter Storm attachments has been by frequent amendment to their software filters used to identify transactions involving entities and other persons whose financial transactions are blocked under OFAC regulations. OFAC administers U.S. economic sanctions programs arising under the Trading with the Enemy Act, 50 U.S.C. app. 5, the International Emergency Economic Powers Act, 50 U.S.C , and other statutes. The process of constantly amending the software filters to deal with this flood of maritime attachments has greatly increased the burden on the banks, requiring them to take down their OFAC filters almost every day, vastly increasing the chance that the OFAC database would be corrupted by the manipulation, and substantially increasing the number of hits, including numerous false positives that these filters now generate, creating real risks of inefficiency and error. In addition, the mass influx of maritime writs generated significant operational expenses and potential exposure to foreign laws. Today s Jaldhi opinion eliminates these risks, makes New York far more hospitable to the global payments system, and strengthens the primacy of the U.S. dollar as the currency of choice for international business transactions. The Second Circuit s decision is also timely, coming a month after the Court heard an appeal by the government in Export-Import Bank of the United States v. Asia Pulp & Paper Co. In that case, the U.S. Attorney s Office, representing the Export-Import Bank of the United States, vigorously argued that the Winter Storm rule permitting restraints on EFTs should be extended to the Federal Debt Collection Procedures Act, 28 U.S.C et seq. (the FDCPA ). The USAO s principal argument was that the Winter Storm holding, i.e., that broad, inclusive language in a federal collections statute (Rule B) amounts to a federal law that authorizes the garnishment of the amount of a funds transfer at an -4-

5 intermediary bank, also justifies attaching funds transfers under an equally broad federal collections statute (the FDCPA). The panel that heard the Export-Import Bank appeal observed at oral argument that the government had tied its position to the mast of Winter Storm, and its ship thus may also sink. The expansion of the Winter Storm rule by the government in the Export-Import Bank case could very well have prompted further attempts, in the Second Circuit and other jurisdictions, to restrain funds transfers based on the broad definition of property in the FDCPA or other federal statutes that define property broadly. * * * Copyright Sullivan & Cromwell LLP

6 ABOUT SULLIVAN & CROMWELL LLP Sullivan & Cromwell LLP is a global law firm that advises on major domestic and cross-border M&A, finance and corporate transactions, significant litigation and corporate investigations, and complex regulatory, tax and estate planning matters. Founded in 1879, Sullivan & Cromwell LLP has more than 700 lawyers on four continents, with four offices in the U.S., including its headquarters in New York, three offices in Europe, two in Australia and three in Asia. CONTACTING SULLIVAN & CROMWELL LLP This publication is provided by Sullivan & Cromwell LLP as a service to clients and colleagues. The information contained in this publication should not be construed as legal advice. Questions regarding the matters discussed in this publication may be directed to any of our lawyers listed below, or to any other Sullivan & Cromwell LLP lawyer with whom you have consulted in the past on similar matters. If you have not received this publication directly from us, you may obtain a copy of any past or future related publications from Jennifer Rish ( ; rishj@sullcrom.com) or Alison Alifano ( ; alifanoa@sullcrom.com) in our New York office. CONTACTS New York Bruce E. Clark clarkb@sullcrom.com H. Rodgin Cohen cohenhr@sullcrom.com Laurent S. Wiesel wiesell@sullcrom.com Michael M. Wiseman wisemanm@sullcrom.com NY12531: B -6-