CHARTERERS’ DEFAULT:

Security and Discovery

in the U.S.

By Charlotte Valentin

Rule C Arrest

Rule B Attachments

Discovery

Rule C Arrest

• In Rem – arrest of the vessel itself

RULE B ATTACHMENTS

RULE B is not dead!

Rule B still exists

Attachment is no longer possible for Electronic Funds Transfers (“EFT’s”)

Supplemental Rule B for Certain Admiralty and Maritime Claims (“Rule B”) provides

“If a defendant is not found within the district…, a verified complaint may contain a prayer for process to attach the defendant’s tangible or intangible personal property – up to the amount sued for – in the hands of garnishees named in the process. Fed. R. Civ. P. Supp. Rule B(1).

Purpose of Rule B

Without it, “defendants, their ships, and their funds easily could evade the enforcement of substantive rights of admiralty law.”

Obtaining jurisdiction over a foreign defendant and ensuring satisfaction (security) of a favorable judgment.

The Three Elements Needed For a Rule B Attachment

A valid maritime claim against the defendant

Defendant cannot be found within the district

Defendant’s property may be found within the district.

Element 1: A Maritime Claim

Maritime Claims

Charter party disputes, regardless of when arbitration or litigation is to occur

Ship repair contracts

Cargo claims

Maritime indemnity claims

Separable maritime portions of non-maritime contracts such as commodities purchase & sale contracts

Personal injury claims

Marine insurance contracts

Arbitration awards or foreign judgments on maritime claims.

Non Maritime Claims

Purchase and sales contracts

FFA breach claims

Contracts for brokerage services

Inseparable commodities purchase & sale contracts

Contracts to build a ship

Element 2: “Presence” In The District

“Presence” is determined by a two pronged inquiryFIRST, whether (the defendant) can be found within the district in terms of jurisdiction, and

SECOND, if so, whether it can be found for service of process.

Whether to register to do business

Generally, registering to do business in a state and having a registered agent for service of process is enough to qualify as being present

For EFT’s – New York

Pro: No Rule B attachment in that jurisdiction

Con: Subjects the company to jurisdiction in the jurisdiction for any claim

Element 3: “Property” Within The District

RULE B PROVIDES AN EXPANSIVE DEFINITION OF PROPERTY - Any tangible or intangible personal property

- vessels- bunkers- funds (but not EFT’s)- debts- real estate

THE DEFENDANT’S INTEREST IN THE PROPERTY MUST BE CLEAR

Bunkers – difficulties

Legal difficulties: Who owns the bunkers?

Practical difficulties: Removing bunkers−Attaching party must arrange

−Can be difficult

−Risk of pollution

−Arrange for storage

Alter Ego And Rule BALTER EGO DEFENDANTS MAY ONLY BE NAMED WHERE THE PLAINTIFF CAN SHOW REASONABLE GROUNDS THAT:

the primary defendant uses its alter ego to perpetrate a fraud

or

where the primary defendant so dominates and disregards its alter ego’s corporate form that the alter ego was actually carrying on the controlling corporation’s business instead of its own.

Under that standard, … actual domination, rather than the opportunity to exercise control, must be shown.”

Must provide the court with evidence/documents supporting allegations of corporate relationships – the court may allow discovery on this issue.

Challenging The Attachment – Motion To Vacate/Reduce

PLAINTIFF MUST PROVE

It has a valid prima facie admiralty claim against the defendant

The defendant cannot be found within the district

The defendant‘s property may be found within the district

There is no statutory or maritime bar to the attachment

BASES FOR VACATING

The defendant is subject to suit in a convenient adjacent jurisdiction

The plaintiff could obtain in personal jurisdiction over the defendant in the district where the plaintiff is located

The plaintiff has already obtained sufficient security for the potential judgment, by attachment or otherwise

BASES FOR REDUCTION

The plaintiff’s claim is overstated and cannot be justified based reasonable calculation of damages and evidence.

Charterers’ options when attachment has been granted:

Challenge the attachment (motion to vacate)

Post security (LOU, L/C, bond – the plaintiff can only be forced to accept a bond or cash)

Negotiate settlement of claim or security (escrow account, etc.)

File a counterclaim (counterclaim must arise from same transaction and cannot be solely for costs and fees)

Counter security is usually limited to the security amount

Discretion of judge

If attachment fully secured, counterclaim security often allowed for full amount of counterclaim

Wrongful Attachment

A plaintiff in a maritime case can be liable in damages for wrongful attachment.

However, the defendant must prove that the plaintiff acted with:

bad faithmalice, orgross negligence

Most U.S. courts do not allow wrongful attachment to be asserted as a counterclaim in the same suit that was initiated by such attachment.

DISCOVERY

Discovery in aid of foreign proceedings:

The court may order person or party to provide testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal

Foreign lawsuit

Foreign arbitration (including London arbitration)

Available when the court has

Subject matter jurisdiction – underlying proceedings / arbitration is brought under a maritime contract

Personal jurisdiction over

Person

Company

Vessel

THANK YOU