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Federal Circuit: Corporate Officer Not Personally Liable Under the Tariff Act for Negligent Misrepresentations Made in Customs Form
Practical Law Legal Update 2-535-9525 (Approx. 4 pages)
Federal Circuit: Corporate Officer Not Personally Liable Under the Tariff Act for Negligent Misrepresentations Made in Customs Form
by Practical Law Commercial
| Published on 02 Aug 2013 • USA (National/Federal) |
In US v. Trek Leather, Inc., the US Court of Appeals for the Federal Circuit held that a corporate officer and shareholder cannot be held personally liable for negligent misrepresentations he made to US Customs and Border Protections (CBP) on behalf of a corporation.
On July 30, 2013, the US Court of Appeals for the Federal Circuit published an opinion, holding that individual corporate officers and shareholders of an importer of record are not personally liable under Section 1592(c)(2) of the Tariff Act of 1930 (Tariff Act) for negligent misrepresentations made by the company (or its agents) to US Customs and Border Protection (CBP).
Background
Trek Leather, Inc. (Trek) was the importer of record for 72 entries of men's suits that it had received on consignment from Mercantile Electronics, LLC (Mercantile) in 2004 (for more information about consignment agreements, see Practice Note, Consignment). Harish Shadadpuri is the president and sole shareholder of Trek and a 40% shareholder of Mercantile.
Trek's import documentation did not account for the value of "assists" (add-ons) to the merchandise, as required under the Tariff Act. When Customs and Border Protection confronted Trek with the discrepancy between the prices paid for the suits and the omission of the assists from the documentation, Shadadpuri admitted that he knew Trek should have included the value of the assists in the duties and failed to do so. Neither Trek nor Shadadpuri paid the balance of the duties owed on the difference between the suits alone and the suits with the assists.The government filed suit in the Court of International Trade and alleged that Trek and Shadadpuri (in his individual capacity) were liable for a penalty of $2,392,307 for fraudulently, knowingly and intentionally understating the dutiable value of the imported merchandise. The government alternatively argued that the omission by Trek and Shadadpuri was either:
- Grossly negligent, which carries a civil penalty of $534,420.32.
- Plainly negligent, carries a civil penalty of $267,310.16.
The government moved for summary judgment and both Trek and Shadadpuri cross-moved for summary judgment. The following positions were taken in the motion and cross-motions:
- Trek conceded that it was grossly negligent in omitting the value of the assists and continued to object to the allegations of fraud.
- Subsequently, the government accepted Trek's gross negligence admission, abandoned its fraud claim against Trek and continued to prosecute the negligence claims against Shadadpuri as an individual.
- Shadadpuri claimed that he was not personally liable for his actions as an officer and shareholder of Trek.
Shadadpuri's cross-motion argued the following points:
- He was not a relevant person under Section 1494, which defines person as the importer of record.
- The Tariff Act did not provide personal liability for corporate officers of negligent corporations.
- The government should have but did not either:
- pierce the corporate veil between Shadadpuri and Trek; or
- prove Shadadpuri committed fraud under Section 1592(a)(1)(A) or aided or abetted fraud under Section 1592(a)(1)(B).
The Court of International Trade court agreed with the government, holding:
- Summary judgment as to Trek was proper for gross negligence under Section 1592(c)(2) (carrying a penalty of $534,420.32).
- Shadadpuri was jointly and severally liable for the same penalty because he was a member of the class of persons subject to liability under Section 1592(a), regardless that:
- he was not the importer of record; and
- Section 1592(a) does not have an exception for corporate officers.
Shadadpuri appealed the court's decision to the US Court of Appeals for the Federal Circuit, reasserting that absent a claim of fraud only the importers of record may be held directly liable for penalties under Section 1592(c)(2) and (c)(3).
On appeal, the government argued that even though Shadadpuri was not the importer of record he should be chargeable with the duties attributed to the persons named by Section 1592(a).
Outcome
The Federal Circuit overturned the Court of International Trade, holding that Shadadpuri cannot be held personally liable under Section 1592(c)(2). The appellate court reasoned that the prohibitions of Section 1592(a) (including both negligence and fraud-based liability) applied only to persons within the meaning of the Tariff Act. The court found the following points important in its decision to not hold Shadadpuri personally liable:
- The Tariff Act imposes merchandise entry requirements only on the importer of record and refers to importer as person in other relevant sections (see Section 1484(a)).
- Shadadpuri was not the importer of record but only an officer of the importer of record.
- The government did not attempt to either:
- pierce the corporate veil (between Trek and Shadadpuri); or
- establish liability under either of the fraud prohibitions of Section 1592(a).
Practical Implications
The Federal Circuit's decision maintains the protections afforded by the corporate form to importers of merchandise, despite apparent or alleged self-dealing between a number of closely held corporations. Corporate officers will not be liable, under Section 1592(a) of the Tariff Act, for negligently misrepresenting import information to Customs and Border Protection on behalf of corporations unless the government proves fraud or pierces the corporate veil.