BizChina

U.S. Supplemental Admiralty Rule B is an amazing rule. Absolutely amazing, and, in many ways, quite unlike anything else in the US judicial system, and so arcane as to not really fit in it so well any more. Under this rule, if a plaintiff has a maritime claim against another party and that other party is not within the district in which the lawsuit is commenced, the plaintiff may seize the defendant's assets without having to post a bond. To put it more bluntly, one party can seize millions of dollars of another party's assets without notice and without having to post a bond. To put it mildly, this is an incredibly strong mechanism to collect money from a defendant.

The rule was originally instituted mostly to aid vessel suppliers in recovering from non-paying vessel owning companies without a local presence that would allow them to be sued locally.
But there have always been a fair number of judges who have hated this rule due to its lack of procedural or monetary safeguards and those judges typically will not issue the attachment order unless the plaintiff has dotted every single "i" and crossed every single "t".

In 2002, the U.S. Federal Court of Appeals (this is the court that covers New York) held that plaintiffs could seize electronic fund transfers (EFTs) under Federal Supplemental Admiralty Rule B. This ruling created a cottage industry of which my firm was a more than willing participant. Let me explain.

Any time there is a bank to bank dollar transaction, the funds "ping" a bank in New York (I borrowed the word ping from the computer world because I think it fits what actually happens). So if a company in Hong Kong pays a company in Japan $600,000, that $600,000 will almost certainly go through a New York City intermediary bank, at least for a split second in time. Or if a company in Nebraska sends $950,000 to a company in China, the same thing will happen. Likewise, if a company in Russia pays a company in Seattle.

Now here is why it matters.

Since nearly all dollar denominated international transactions pass through New York intermediary banks, the ruling meant that a massive number of payments could be seized as they electronically pinged these New York banks, without need even for the posting of a bond. Something around one third of all federal court cases in the Southern District of New York (New York City) involved plaintiffs seeking Rule B attachments.

And my firm was always in the thick of things as a number of our clients are in the business of supply fuel or spare parts to vessels and a number of our clients are in the fishing and other maritime related industries. Click here for an interesting article written by a Dalian attorney about a China cargo arrest we did with that firm back in 2003.

And we loved the New York seizures most of all because there is nothing better to seize than real money. In just the last year or so, we had the following sucesses:

-- We successfully seized funds in New York City that were going from Japan to Hong Kong to collect on debt owed to a Singapore client.
-- We successfully seized funds in New York City that were going from a Korean company to a Russian company to collect on a debt owed to our Hong Kong client.
-- We successfully seized funds in New York City that were going from a German company to a Chinese company to collect on debt owed to our U.S. client.

And in all of these cases, we not only collected every penny owed, plus interest, we also managed to recover our clients' attorneys fees. If you are a foreign company and your funds have been seized in the United States and you really do owe the money, it just does not make a lot of sense to hire an expensive New York City lawyer to fight it, especially if your creditor's contract states that the prevailing party gets interest and attorneys' fees.

But these Rule B EFT cases in New York have always been controversial and, even more so than the traditional Rule B cases, there are judges who hate them. In New York (or so we have been told by NYC lawyers) there were judges who would sit on this cases in the hopes it would be too late by the time they ruled.

Banks never much liked the Rule either because they were forced to spend large amounts of time and money dealing with the courts' rule B orders. And probably most importantly, there has been a growing feeling that maybe the United States should not be doing things right now that encourage foreign transactions to be conducted in a currency other than the U.S. dollar.

But on October 16, 2009 (mere days after I and our local NYC counsel had just secured a Rule B order from a New York court against a Russian fishing company that owed my client money) the Federal Court of Appeals, in the case of The Shipping Corporation of India v. Jaldhi Overseas went off and reversed its 2002 decision permitting such transfers. The court held that its 2002 decision was wrong in finding EFTs to be attachable property.

In my case that was pending at the time Jaldhi came down, we are still fighting for the money on various grounds on which the Jaldhi case has no applicability. But the days of easy seizures of money appear to be over and what was in many cases the best avenue for collecting debt from a Chinese company has just disappeared.

We had a case against a Chinese company waiting in the wings, but that is now on indefinite hold.

It was a good seven years.

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I am in a terrific China Law ListServ (yes those things do still exist), graciously run by Professor Donald Clarke of the Chinese Law Prof Blog. There are some seriously smart and knowledgeable people on the ListServe and much of the discussion is more geared toward China law academics than practitioners. I typically skim every email, but really read only around 25 percent.

Over the last few days, there have been a number of emails regarding Julie Harms, an American and a Harvard graduate, who has been petitioning Beijing regarding trespassing charges her (Chinese?) boyfriend is facing. I skimmed the first email or two on this and quickly determined Ms. Harms' situation was of no relevance to my law firm, to our clients, or to this blog.

I was wrong.

Petitioning is a "system" in China where citizens (people?) dissatisfied with their local government officials or legal matters (or really, whatever) seek to voice their grievances with "Beijing." According to Carl Minzer describes it as follows:

"[P]etitioning’ [is] a traditional means of seeking justice firmly rooted in Chinese history. Defined broadly as an effort to “go past basic-level institutions to reach higher-level bodies, express problems and request their resolution,” petitioning includes a variety of practices that parallel, overlap, and in some cases replace formal legal channels. These practices have survived into the post-1949 People’s Republic of China in the form of citizen petitioning of numerous “letters and visits” (xinfang) bureaus distributed throughout all Chinese government organs, including the courts.

Development of a modern legal system over the past two decades has not eliminated these petitioning practices and institutions. Formal Chinese legal institutions have developed internal means of accommodating petitioning behavior. Since the 1990s, Chinese authorities have also passed a web of regulations to govern both petitioners’ practices and the operation of national, provincial, and local xinfang bureaus.

Today, I read a really interesting post on the Law & Border Blog, entitled, "Would a Foreigner Complain about Chinese Visa Problems Through the “Petitioning” System?" The Law & Border blog is written by a US lawyer, Gary Chodorow, whose practice focuses "focuses on representing companies and investors in U.S. visa matters." So, Chodorow naturally focuses on whether foreigners might start using China's petitioning system to seek resolution to their China visa issues and his post concludes by seeking "reader comments about whether it may be useful for a foreigner to make complaints about China visa issues through the petitioning system."

Which got me to thinking. Might foreigners also use the petitioning system to complain about other Chinese legal matters as well? What about an employer who unfairly loses a lawsuit to an employee? What about the owner of a Wholly Foreign Owned Entity (WFOE) who is not allowed to leave China because a Chinese citizen is falsely claiming the WFOE owes him or her money? The possibilities are endless.

I know almost nothing about the petitioning system but I think I know enough to know that it is not likely to be a viable option for foreign businesses. Right? What do you think? Ms. Harms' actions certainly do at least raise some new issues.

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