In 2002 the Second Circuit Court of Appeals, in the case of Winter Storm Shipping, Ltd. v. TPI, held that electronic fund transfers (EFTs) could be seized under Federal Supplemental Admiralty Rule B as the funds momentarily pass through intermediary banks on the way to their final destination. Since the Second Circuit's jurisdiction includes New York, and since a majority of EFTs involving international dollar transactions pass through New York intermediary banks, this ruling meant that a vast array of payments could be seized as they electronically passed through New York, even though the parties and transactions had no relationship with New York or with the intermediary banks. The Winter Storm decision led to an explosion in Rule B cases in New York, and gave rise to a cottage industry of attorneys and others specializing in Rule B collection. For example, from October 1, 2008 to January 1, 2009, there were 962 lawsuits filed in the Southern District of New York seeking Rule B attachment, which constituted 33% of all lawsuits filed during that period.

From the moment it was decided, the Winter Storm case has been controversial and many have called for its reversal. Banks have been forced to spend significant time and money responding to Rule B writs and monitoring their transfers. Banks and commercial interests have also argued that this permissive mechanism for seizing EFTs has discouraged international companies from engaging in U.S. dollar transactions or using New York banks for international agreements. Despite criticism of the Winter Storm rule from many quarters--including rulings from federal trial judges within the Circuit that questioned the soundness of this decision--the Second Circuit has rejected repeated requests to reverse this ruling, most recently doing so in its 2008 decision of Consub Delaware, LLC v. Schahin Engenharia Limitada, 543 F.3d 104 (2nd Cir. 2008).

Therefore, it was quite a surprise to many when on October 16, 2009, a panel of the Court issued the decision of The Shipping Corporation of India v. Jaldhi Overseas PTE, Ltd., which reversed Winter Storm, finding that EFTs are not the "property" of the defendant while they pass through intermediary banks and are therefore not subject to Rule B attachment while in the hands of those banks. In essence, the Court based its ruling on two grounds: (1) the Winter Storm court had incorrectly concluded that prior case law supported the finding that EFTs were attachable property and (2) in the absence of controlling admiralty law precedent, the court should have looked to New York state law, which says that EFTs are not the property of the transferor or transferee while in transit.

The Jaldhi Overseas court acknowledged that it was unusual to reverse recent circuit court precedent, particularly when the reversal is not affirmed by the Court en banc (all judges in the circuit). However, the court cited the legal error of the Winter Storm case and the negative practical effects of ruling on New York courts and banks as compelling reasons justifying overruling a prior decision. The Jaldhi Overseas court also noted that it circulated this opinion to all judges in the Second Circuit and did not receive any objections, in a process they call "mini en banc."

If the Jaldhi Overseas decision stands, it is not an exaggeration to say that this ruling will send a shock wave through the New York maritime law community. As noted, hundreds of plaintiffs and their attorneys have used the Winter Storm case to massively increase the Rule B practice in New York federal courts, which has obviously resulted in significant work for admiralty firms. With the reversal of the Winter Storm case, the scope and volume of Rule B practice in New York courts is certain to decrease dramatically. It will be interesting to see how the legal community reacts to this unexpected change in the law.

Lafcadio Darling specializes in commercial and maritime litigation, representing a wide variety of large and small business and individual clients. In addition to being licensed in Washington and California, Lafcadio also holds an LL.M. from University College London and is a licensed solicitor in England & Wales.