Federal Circuit Will Reconsider Personal Liability of Corporate Officer's Grossly Negligent Misrepresentation to Customs

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A corporate officer of an importer of record is not directly liable for gross negligence when misrepresenting the value of imported merchandise to Customs and Border Protection, according to the Federal Circuit Appeals Court ruling in United States v. Trek Leather, Inc. on July 30, 2013.[1] This seemingly well settled principle, based on traditional notions of personal liability protection under the corporate law shield, will soon be tested because the Federal Circuit has granted the U.S. Government’s petition for an en banc rehearing of this case.[2]

At the core of the Federal Circuit’s upcoming en banc decision will be the statutory interpretation of 19 U.S.C. § 1592(a), which imposes liability on any “person” who introduces merchandise into U.S. commerce by “fraud, gross negligence, or negligence” through means of material and false statements or through omission of material information to CBP upon entry.[3] To be clear, at issue in the underlying case is whether a corporate officer of an importer of record, absent a piercing of the corporate veil or a showing of fraud (only gross negligence is alleged in this case), can nonetheless be held personally liable under the statute.[4]

The underlying case involves a lawsuit filed by the U.S. government in the U.S. Court of International Trade (CIT) against Trek Leather Inc. and the company’s president and sole shareholder, Harish Shadadpuri, for failing to declare the value of dutiable fabric assists in the price of seventy-two entries of men’s suits imported between February 2004 and October 2004.[5] In essence, undervaluing the price of these men’s suits meant an “under-collection of customs duties owed.”[6]Shadadpuri had been the subject of a prior CBP investigation in 2002 while acting on behalf of another company.[7] He had been specifically instructed that fabric assists are dutiable and thus had to be included on all import documentation.”[8] Although a claim for fraud against Shadadpuri could have arguably been a strong one and would have perhaps justified piercing the corporate veil, the government abandoned any attempt to claim fraud after Trek Inc. conceded to gross negligence and necessarily implicated Shadadpuri to some degree as well.[9]

Even still, the government’s position for imposing liability under § 1592 relies on a plain meaning construction of the statute.[10] The government maintains that Shadadpuri is a “person” under the statute, which plainly prohibits the type of behavior at issue and broadly imposes liability on any “person” as opposed to strictly limiting the class of people to “importers of record.”[11] The opposition emphasizes statutory structure of the Tariff Act generally, pointing to Title 19, for example, which refers only to the “importer of record” as the responsible party for submitting entry documents, thereby implicating only Trek Leather, Inc. and not Shadadpuri personally.[12]

Now that the July 2013 court opinion holding a corporate officer not personally liability for gross negligence under the statute has been vacated, the en banc rehearing will prove instructive on the veil piercing potential of § 1592(a). While the Federal Circuit’s decision is impossible to predict at this point, its decision will inevitably have far-reaching effects on corporations, limited liability companies, and limited liability partnerships alike.[13]

[1] United States v. Trek Leather Inc., 724 F.3d 1330, 1331 (Fed. Cir. 2013).

[2] See Rossella Brevetti, Federal Circuit Will Review Case on Liability of Corporate Officers En Banc, International Trade Reporter, Mar. 5, 2014, .

[3] See United States v. Trek Leather, Inc., No. 2011-1527 (Fed. Cir. 2014), available at http://www2.bloomberglaw.com/.

[4] Susan K. Ross, Corporate Officers Becoming Liable for Negligent Acts is Reconsidered, Corporate Alert, March 26, 2014, http://www.msk.com/images/ps_attachment/attachment2172.pdf (PDF).

[5] Trek Leather Inc., 724 F.3d at 1331 (Fed. Cir. 2013).

[6] Dennis Crouch, Federal Circuit to Take on Corporate Law Question of CEO Liability for False Submissions, Patentlyo (March 5, 2014), http://patentlyo.com/patent/2014/03/corporate-liability-submissions.html.

[7] United States v. Trek Leather Inc., 781 F. Supp. 2d 1306, 1309 (Ct. Int’l Trade 2011) (noting that no action was filed as a result of the 2002 investigation because Mercantile Wholesale, Inc. paid $46,156.89 in duties after admitting failure to add the value of the assists in the price paid to Customs for the merchandise imported).

[8] Id.

[9] Seeid. at 1311; see also United States v. Trek Leather Inc., 724 F.3d 1330, 1332 (Fed. Cir. 2013) (noting that Shadadpuri conceded he knew Trek should have included the value of the fabric assists in its duties and that because neither Shadadpuri nor Trek paid the balance of the duties owed to CBP as a result of the misrepresentation, this lawsuit ensued); See also Ross, supra note 4, at 2.

[10] See Trek Leather Inc., 781 F. Supp. 2d., at 1307 (Ct. Int’l Trade 2011).

[11] Id. See generally John Brew & Nicole M. Jenkins, Trade & Customs Law 101: Importation Process Basics (Feb. 2010), http://www.crowell.com/documents/customs-101-importation-process-basics.pdf (PDF) (defining importer of record as the “owner or purchaser of merchandise, or a licensed broker designated by the owner, purchaser, or consignee of the merchandise”).

[12] Crouch, supra note 6.

[13] Ross, supra note 4, at 3.

Posted by Andrea D. Solorzano on Wed. April 16, 2014 8:00 AM
Categories: Free Trade, International Law

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