April 2010 Newsletter
Dear friends and colleagues:
Welcome to the inaugural edition of what we hope will become a useful service, an e-mail newsletter providing regular updates on developments of interest in U.S. maritime law.
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Here are the “top” stories at the moment:
Broad Expansion of Pre-Judgment Attachment Under New York State Law
On February 16, 2010, New York’s Court of Appeals issued a decision in Hotel 71 Mezz Lender LLC v. Falor, 2010 NY Slip Op 01348, 2010 N.Y. LEXIS 41 (Feb. 16, 2010), which upheld a plaintiff’s right to obtain a pre-judgment attachment order against out of state defendants and to use the attachment order to direct garnishees present in New York to restrain intangible property (i.e., any property that is not evidenced by a written instrument) regardless of where such property may actually be located.
The plaintiff in the case was a lender that had commenced an action against a number of out of state defendants who were guarantors of the loan. After the defendants appeared in the action, the plaintiff obtained an ex parte attachment order against the defendants pursuant to CPLR § 6201, and had served same on a garnishee (also one of the named defendants) while the garnishee was temporarily in New York.
The plaintiff then proceeded to move for summary judgment and to confirm the attachment order, by showing that it had a cause of action against the defendants upon which it would probably succeed on the merits and which exceeded all known counterclaims. The lower court granted both summary judgment on liability and the motion to confirm the order of attachment. On appeal, the First Department reversed the lower court’s rulings, holding that the court lacked jurisdiction over the defendants’ property interests, relying on a 1904 Court of Appeals decision finding that the situs of an intangible debt is the debtor’s domicile.
However, the Court of Appeals reversed the First Department, holding that the 1904 decision had been overruled by the United States Supreme Court a year later, and was also inconsistent with the CPLR which had been enacted over 50 years later. Specifically, the Court of Appeals held that the situs of intangible property is wherever the owner or a garnishee of the owner are present, and thus may be restrained by service of an attachment order on a garnishee that can be found in New York.
This holding builds upon the Court of Appeals’ decision last year in Koehler v. Bank of Bermuda Ltd., 12 N.Y.3d 533, 911 N.E.2d 825, 883 N.Y.S.2d 763 (2009), which similarly found that a garnishee with a presence in New York could be directed to turn over property of a judgment debtor to a judgment creditor pursuant to Article 52 of the CPLR, regardless of where the property was actually located. The difference here, of course, is that the Court of Appeals has now held that the same result can be obtained through a pre-judgment attachment, rather than just through a post-judgment turnover proceeding.
Extension Granted For New Medicare Settlement Reporting Requirements
As you may be aware, Section 111 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (“MMSEA”), 42 U.S.C. §§ 1395y(b)(7) & (8), created new requirements for all liability insurers (including self-insured companies), no-fault insurers, and workers’ compensation insurers, mandating the reporting of any settlement payments made to claimants who are Medicare eligible. Under MMSEA Section 111, the affected entities, which can include even foreign P&I Clubs and their members, must register for reporting with the Centers for Medicare & Medicaid Services (“CMS”), test the Section 111 data exchange process, and transition into production data exchanges on the required schedule. On February 16, 2010, CMS posted an update to its website, advising that the date for the first reports to be made has been pushed back from April 1, 2010 to January 1, 2011, effective immediately. However, the April 1, 2010, deadline for foreign entities to register with CMS for reporting remains unchanged.
Although the new reporting requirements are officially unrelated to the Medicare Secondayer Payer laws which permit the government to recover Medicare payments made to claimants from “first payers,” such as insurers of entities that have made settlement payments to claimants, some observers believe that the institution of mandatory reporting by liability insurers can only be a prelude to the eventual expansion of CMS recovery efforts into the realm of liability settlements as well. Given that the costs of funding Medicare are certain to expand in the future, liability insurers may indeed become a target that is too rich to pass up.
No Help For Rule B From Supreme Court
Following the Second Circuit’s decision in Shipping Corp. of India Ltd. v. Jaldhi Overseas Pte Ltd., 585 F.3d 58 (2d Cir. 2009), SCI (the plaintiff below) filed a petition for writ of certiorari with the United States Supreme Court. Although Jaldhi (the defendant below) declined to file a response to SCI’s petition, the Maritime Law Association of the United States and the Clearing House Association LLC both filed amicus briefs. The MLA brief urged that the petition be granted, citing the need for uniform Federal laws regarding maritime attachments, whereas the Clearing House brief argued that the petition should be denied on the grounds of mootness and the lack of a Circuit split.
On February 24, 2010, the petition and amicus briefs were distributed to the Justices for consideration during a March 19, 2010, conference. The following Monday, the Supreme Court posted its Orders list showing that the petition had been denied (with Justice Sotomayor obstaining for unspecified reasons - perhaps due to her involvement in Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., 460 F.3d 434 (2d Cir. 2006), or her closeness to the issue generally). The result is unsurprising given that the Supreme Court only grants such petitions in a very small percentage of cases, and only this past January had denied a petition for certiorari in another case involving a similar issue (whether New York corporate registration laws could trump Federal maritime law in defining whether a defendant can be found within the district for the purposes of Rule B).
In any event, with the denial of SCI’s petition, the Supreme Court has closed off any chance of relief from the Jaldhi decision for the time being. Any hope for the reinstatement of the ability to attach electronic funds transfers while in the hands of intermediary banks will have to come from the Second Circuit itself, from a Congressional amendment to Rule B, or from an amendment to New York’s codification of the Uniform Commercial Code.
Supreme Court Holds Oral Argument In Maritime “Train Wreck” Case
Oral argument (click here for the transcript) was recently held before the United States Supreme Court in Kawasaki v. Regal-Beloit, a case which could transform the rights and liabilities of ocean carriers involved in the international shipment of goods to and from the United States.
Following the Ninth Circuit’s decision in Regal-Beloit Corp. v. Kawasaki Kisen Kaisha Ltd., 557 F.3d 985 (9th Cir. 2008), the Supreme Court granted certiorari in order to decide whether the Carmack Amendment applies to the inland rail leg of an intermodal shipment when the shipment was made under a through bill of lading issued by the ocean carrier that extended COGSA.
Petitioners Kawasaki and K-Line argued that Carmack does not apply because: (1) they do not own or operate a railroad and are therefore not rail carriers under the statute; (2) Carmack does not apply to through shipments from foreign countries; (3) the inland portion of through shipments is governed by COGSA; and (4) Carmack’s language prior to its 1978 recodification bars its application to ocean carriers during through movements. Petitioner Union Pacific argued that, even if Carmack does apply to inland legs, the parties before the Court expressly opted out of its application.
Respondent Regal-Beloit countered that Carmack does apply because: (1) the statute’s plain language says so and petitioners’ citation to a prior version of the statute is improper; (2) petitioners did not validly contract around their Carmack obligations; and (3) K-Line is a rail carrier as defined by Carmack.
A number of amicus briefs have been filed. The United States, the International Group of Protection and Indemnity Clubs, the Association of American Railroads, and the World Shipping Council all support petitioners’ position that Carmack does not apply to ocean carriers. The Transportation and Logistics Council and the American Institute of Marine Underwriters filed a joint brief in favor of respondent’s position.
Surprise Stay From Second Circuit: A Glimmer of Hope For Rule B?
One of the messier issues created by the Second Circuit’s decisions in Shipping Corp. of India Ltd. v. Jaldhi Overseas Pte Ltd., 585 F.3d 58 (2d Cir. 2009), and Hawknet, Ltd. v. Overseas Shipping Agencies, 587 F.3d 127 (2d Cir. 2009), amended by Hawknet, Ltd. v. Overseas Shipping Agencies, 2009 U.S. App. LEXIS 28599 (2d Cir. Nov. 13, 2009), was whether improperly restrained funds must be released in the case where there was a subsequent agreement to transfer the funds into the Court’s Registry Investment System or into a private escrow account.
The decisions on this issue have been all over the map. For example, compare Judge Kaplan’s decision in Navinord S.A. v. Eastbourne Maritime Limited, 09 Civ. 3761 (S.D.N.Y. Nov. 19, 2009) (holding that transfer of attached funds into an escrow account in London “placed them beyond the reach of Jaldhi”), with Judge Buchwald’s decision in Anatolia Denizcilik Sanayi Ve Ticaret Ltd. STI. v. Cowansville Holding Limited, 2010 U.S. Dist. LEXIS 3878 (S.D.N.Y. Jan. 14, 2010) (directing release of funds held in escrow account at Bank of New York Mellon).
Judge Sullivan had joined the fray on January 27, 2010, with the issuance of an order in Front Carriers Ltd. v. Transfield ER Cape Ltd., holding that even though the parties had previously agreed to place attached funds into an escrow account at JPMorgan Chase Bank, the funds had to be released from escrow due to the applicability of Jaldhi and Hawknet. Front Carriers appealed the order and also moved for a stay pending appeal. Judge Sullivan denied the request for a stay, but granted a temporary stay so that Front Carriers could further seek a stay from the Second Circuit.
In a surprising development, on March 24, 2010, the Second Circuit granted Front Carriers’ request for a stay. The Second Circuit had spiked a similar request for a stay pending appeal just this past January in an appeal from Judge Koeltl’s decision in HC Trading Intern. Inc. v. Crossbow Cement, SA, 2009 U.S. Dist. LEXIS 111889 (S.D.N.Y. Dec. 2, 2009), where he had held that “the fact that the parties agreed to place the funds in an escrow account ... does not provide this Court with jurisdiction over the defendant or its property in this case.” The panel had denied the request for a stay on the grounds that the appellants had failed to establish that they would suffer irreparable harm absent a stay, because they had not alleged that the appellees were insolvent. Perhaps anticipating this issue, Front Carriers had argued in its request that Transfield was insolvent.
Among the panelists deciding Front Carriers’ motion for a stay was Circuit Judge Peter W. Hall, who was on the panel that had decided Hawknet and had previously issued a scathing Order denying a stay application in Oldendorff Carriers GmbH & Co. KG v. Bama Conshipping, S.L., 09-4523-cv (2d Cir. Nov. 3, 2009), where he wrote that “[i]t is clear from this Court’s decision in [Jaldhi] that Appellant may no longer maintain a Rule B attachment against Electronic Funds Transfers. That being the case, as defined by our current jurisprudence, the likelihood of success with respect to any argument by Appellant aimed at persuading us or the District Court otherwise would be nil.” The other panelists were Circuit Judge Reena Raggi, and Judge Gregory W. Carman of the United State Court of International Trade, sitting by designation. While the order itself is void of any indication as to why the stay was granted, it is a sign that the Second Circuit wants to issue a further ruling on the fate of Rule B post-Jaldhi.