Saturday, October 03, 2015

Withdrawal Not As Easy As Expected

The second recent Court of International Trade decision of interest primarily to lawyers is United States v. International Trading Services, LLC and Julio Lorza. In this case, the lawyer representing International Trading Services and Mr. Lorza tried to withdraw from his representation of the corporate defendant while apparently continuing to represent the individual.

It is not very easy to fire a client in the middle of litigation. The CIT's Rule 75(d) requires that an appearance by an attorney may only withdrawn by order of the Court. It requires that the lawyer make a motion and that the motion be served on the client. Here, the corporate defendant dissolved pursuant to Florida law before counsel was hired by Mr. Lorza to represent both the defunct company and the individual. Counsel seeks to withdraw from representing the corporation on the entirely reasonable grounds that it no longer exists. Consequently, according to counsel, he has no corporate client to represent.

The United States opposed the motion.

Florida Bar rules state that a lawyer may only withdraw when "withdrawal can be accomplished without material adverse effect on the interests of the client" or for "other good cause." In other words, clients cannot be abandoned mid-matter without some really good reason. Also working against withdrawal is CIT Rule 75(b)(1). which requires that corporations appear in the Court represented by counsel.

What this comes down to is the question: If there is no corporation, why does it need representation? The answer is that under Florida law, ITS remains amendable to suit and is still part of the case. As such, it can only appear in Court through counsel. Without substitute counsel to represent the interests of the defunct company, withdrawal will result in adverse effects on ITS.

We should not confuse the question of whether ITS can continue as a defendant and whether Customs and Border Protection will be able to collect from it. Enforcing a judgment against a dissolved corporation raises numerous legal issues. The status of the company is controlled by state law. In some states, the dissolved corporation continues to exist for purposes of winding up and also for prosecuting or defending any actions. However, once the assets are distributed to creditors, there remains the question of whether Customs can collect from the presumably bloodless turnip.

Of course, as an individual, Mr. Lorza does not have the ability to simply dissolve. He still needs a lawyer.

Friday, October 02, 2015

Duped "Importer" Liable for Customs Fraud

There have been several recent cases at the Court of International Trade that merit discussion. Two, in particular, are primarily of interest to lawyers. They show the truth of the old adage that bad facts make bad law.

The first is United States v. Jeanette Pacheco. In this case, the United States of America is pursuing Ms. Pacheco to the tune of $2.6 million for her "role" in a customs fraud scheme. The "scheme" went like this: A licensed customs broker named Dionicio Bustamante approached Pacheco in a nightclub. He offered her a way to make some fast cash and gave her $200 to sign a customs power of attorney. It is not clear that Pacheco had any additional contact with Bustamante thereafter.

After that, Bustamante began making entry of dried peppers, declaring the value to be $0.11 per kilogram. It turns out that a legally correct value was $3.75 per kilogram. When Customs and Border Protection queried Pacheco about the value, she failed to respond. To complicate matters, the FDA declared the peppers adulterated, refused entry, and demanded redelivery. Pacheco failed to redeliver the peppers to Customs and Border Protection. That resulted in a liquidated damages claim of $184 thousand.

CBP issued penalty and pre-penalty notices to Pacheco. Eventually, the government sued her to collect the penalty and she failed to respond. In this decision, the Court of International Trade imposed a default judgment on Pacheco.

Pacheco's failure to appear in Court acts as an admission of liability. But, the Court of International Trade must still determine the amount of the penalty to be imposed. In doing so, the Court noted that "by providing her identity to Bustamente for $200 so that he could conduct customs business on his own behalf, Pacheco aided and abetted his fraud upon Customs." That emphasis is mine. The Court also noted that as the principal in the relationship, Pacheco can be held liable for the acts of the agent, meaning the broker Bustamente.

Given that, the Court looked at the circumstances to determine the amount of the penalty to be imposed. The Court found some aggravating factors including failing to respond to a request for records and the fact that the importations threatened the public health and safety. Also, although it is not clear when it happened, it appears that Pacheco lied to Customs about whether the peppers were hers. On all of these facts, the Court imposed a penalty in the full amount requested by Customs: $2,651,312.

I hate this case. Not because it is wrong, but because it is probably right. Pacheco did so many things wrong here that she basically sealed her fate. But, there is another story that can be told. It appears that Pacheco made the very stupid choice of signing a power of attorney without any understanding of what that means. She did so for a quick $200, which ended up costing her (at least on paper) $2.6 million.

But, was she really the principal in this transaction? She was legally, because she signed the POA allowing Bustamante to make entry on her behalf. But, it also does not appear that she had any knowledge of the importations, she did not decide to undervalue the goods, she did not know the goods were adulterated. When she "lied" to Customs that the goods were not hers, I suspect she had no idea that the goods were being imported in her name. The peppers probably were not hers as far as she was concerned. As far as I can tell, she did not order them, did not pay for them, and did not take delivery of them.

I'm not even sure she was the principal. In agency law, the agent works for the principal. Here, the agent was working entirely for himself (or so it appears). He duped her into signing the document and then used her identity to make fraudulent imports. I don't see why that is not a mitigating circumstance. My assumption is that Bustamante is the subject of his own penalty case and may even be subject to criminal prosecution. I don't know what happened to him.

This is a bad set of facts. Obviously, Pacheco should never have signed the POA. She should have responded to CBP. She should have responded to the penalty notices. She should have thrown Bustamante under the first bus she could find. But, despite all those mistakes, what we seem to have is identity theft with the victim now on the hook for $2.6 million. While that is probably legally correct, that seems wrong.

Monday, September 28, 2015

Ruling of the Week 2015.26: "Where Have I Been" Edition

[Updated because I either cannot spell, type, or proofread. The post is substantively the same.]

Life and work sometimes intervene to prevent me from being a full-time blogger. So, I missed a couple rulings. Sorry about that, I do my best.

I'm scanning rulings now for something of interest and stumbled on NY N266542 which is moderately NSFW and amusing to the 12 year old boy still stuck in my head. It involves a harness used when mommy and daddy love each other very much. The tariff classification is 6307.90.98 as an other made up textile article. The ruling is only of interest in a prurient way.

Another one that caught my eye is N266838 (Aug. 4, 2015) concerning the tariff classification of used vegetable cooking oil. The product comes from the Ivory Coast and is classified in 1518.00.40 as animal or vegetable oil chemically modified and inedible, not elsewhere specified or included. I'm not sure whether use in cooking results in chemically modified oil or that the oil is inedible in its imported condition. There was a second ruling on similar facts with the oil coming from Hungary.

What I think is interesting about this ruling is that it could be the start of an interesting business model. The oil was imported to be turned into biodiesel fuel. I wonder whether the rest of the world has enough left-over cooking oil to keep refineries going in the U.S. This would give us a whole new way to exploit oil reserves in other countries without actually having to drill for it.

The last ruling I'll note is NY N266719 (Aug. 4, 2015), in which Customs and Border Protection classified a tri-fold tabletop nativity scene made of metal panels depicting Mary and Joseph flanking the baby Jesus. The importer thought this should be classified as a Christmas item, which made sense to me. However, there is an eo nomine provision for nativity scenes in 9505.10.30, which is a festive articles provision and is duty free. Clearly, this item passes my Rabbinical Test for festive articles. That will be an important test to bear in mind as we approach the holidays.

Saturday, September 05, 2015

Ruling of the Week 2015.25: No Refund for CPSC Restricted Goods

[UPDATE: I changed the title of this post to more accurately reflect the content, and to not look like an idiot.]

Like a lot of other lawyers who do administrative law, I have lately been thinking about Customs and Border Protection's efforts to wrangle its partner government agencies into using the Automated Commercial Environment to submit data to Customs. If you have been dealing with Customs for the last year or so, you have probably seen this image.

What is happening is the mandatory use of Customs' ACE system for electronic filing of data for other agencies. Previously, this data might have gone to Customs on paper or in a different electronic system. If this works, it will be great. If you are an importer, make sure your broker is up to speed and has invested in the software and training necessary to keep up with these changes.

One of the agencies that is moving toward ACE implementation is the Consumer Products Safety Commission. CPSC regulates and enforces product safety. Products that do not satisfy existing CPSC standards or are shown to be unsafe can be deemed inadmissible. Customs' role is to ensure that importers have the necessary documentation to prove that the products meet any applicable safety standards (e.g., lead content, choking hazards, etc.).

Which brings me to the Ruling of the week: HQ H239257 (Jul. 25, 2013). The importer entered some lighters, which Customs released. However, the CPSC asked Customs to issue a Notice of Redelivery because the importer had failed to file a pre-importation report with CPSC. In this case, the importer actually redelivered the goods to Customs and subsequently exported them to Canada. [Side note to Canada: Be on the lookout for potentially dangerous lighters from America.]

After exporting the goods, the importer asked Customs for a refund of the duties it paid. Note, this is not a drawback claim. The importer just wants its money back and pointed to 19 USC 1558. Under that statute, duties cannot be refunded after the release except for certain circumstances. Relevant to this situation, Customs can refund duties paid "[w]hen prohibited articles have been regularly entered in good faith and are subsequently exported or destroyed pursuant to a law of the United States and under such regulations as the Secretary of the Treasury may prescribe." (I added the emphasis.)

The problem is that when federal agencies interpret their regulations, they sometimes give very specific and technical meanings to terms. Here, the rub is the word "prohibited." The lighters could have been entered into the United States had the importer properly documented them with the CPSC. Consequently, the lighters were not "prohibited," they were merely "restricted." Prohibited merchandise cannot lawfully be imported under any circumstances. Restricted merchandise, on the other hand, can be imported when the importer proves it has satisfied the legal requirements for entry.

Because the lighters could have been imported into the United States if the importer satisfied CPSC requirements, they were merely restricted and not prohibited. As such, CBP refused to refund the duty deposits.

So, when will Section 1558 apply? What is truly prohibited merchandise? Here is CBP's helpful page for travelers. As you might imagine, illegal narcotics and child pornography are both prohibited merchandise. But, it is unlikely that the importer will have declared those goods to Customs and paid duty. Under certain circumstances, Absinthe is prohibited (keep that thujone level down, please) as are unsafe toys and items made of dog and cat fur. There are others including lottery materials from any other country.

One industry that I suspect might qualify for refunds under this provision is the makers and importers of smokers' wares that have been needlessly and cruelly labeled drug paraphernalia [probably NSFW by many standards], which is prohibited merchandise.

Saturday, August 29, 2015

Ruling of the Week 2015.25: Stipulation Schmipulation

This one is for the lawyers. I'll try my best to make it not too far "inside baseball."

Cases in the Court of International Trade don't always result in a published opinion. There are lots of ways customs cases get resolved. It is possible that one side or the other will just give up and file a voluntary dismissal. In other cases, the parties come to an agreement as to the proper treatment of the entry in favor of the plaintiff. When that happens, the parties file a Stipulated Judgment on Agreed Statement of Facts under Rule 58.1. The Court will usually then enter the judgment and Customs will reliquidate the entry with a refund to the plaintiff or cut a lump-sum refund check.

Sometimes there is a combination of events. Because of the large number of related cases at the CIT, the Court has a unique process by which it allows parties to designate a case a "test case" (Rule 84) while suspending other cases that involve the same issues. Once the test case is resolved, the suspended cases are moved to a "Suspension Disposition Calendar" (Rule 85) for resolution. Usually (at least in my experience), the suspended cases will be resolved consistent with the test case. That means that if the plaintiff wins, the suspended cases will be resolved by a Rule 58.1 stipulation. If the government wins, the suspended cases will be dismissed.

The reason I am going on about this is the recent Customs and Border Protection ruling HQ 236655 (May 27, 2015). The underlying question was the tariff treatment and NAFTA eligibility of evening primrose oil. You may recall evening primrose oil from its earlier work here. In an earlier phase of the dispute, CBP denied several protests and the importer filed summonses at the Court of International Trade. Those cases were resolved on a Rule 58.1 Stipulated Judgment on Agreed Statement of Facts. According to those judgments, the EPO was to be reliquidated as a food preparation and as qualifying for preferential treatment under the NAFTA. In other words, the Customs and the Department of Justice decided that the importer was correct and a judge of the United States Court of International Trade issued an order to that effect.

Fast forward to subsequent entries. One might think that Customs would provide those entries the same treatment as it did the entries in the court cases. That turns out not to be the case. Customs liquidated contrary to the judgment, classifying the EPO as a vegetable oil not qualifying for NAFTA. The importer protests, as you would imagine, and pointed to the prior judgments of the Court of International Trade.

This raises two very important issues.

First, does CBP have to treat a stipulated judgments as precedential decisions that control the liquidation of future entries not covered by the summonses? Second, if CBP wants to take an action contrary to the stipulated judgments, must it go through the public notice process to alert the trade that it is limiting the application of a court decision?

On the first issue, the stipulated judgment states that "the products subject to this action" will be liquidated as food preparations with NAFTA preference, as the importer wanted. In addition, the DOJ lawyer involved apparently sent an email to counsel for the importer stating that EPO capsules would be liquidated accordingly. Taken together, the importer claims this binds CBP on future entries.

Customs disagreed. Citing a couple prior cases, Customs stated that a stipulated judgment is a contract in the nature of a settlement agreement between the parties. The unique aspect of a stipulated judgment is that it is entered into in open court and ratified by the Judge. That makes it enforceable. But, because it is a contract, it is enforced like a contract. A party to a contract is only entitled to the benefits of the contract. In this case, and in the case of most stipulated judgments, the agreement is limited to the entries "subject to the action." That means that the stipulation only covers those entries on the summons and Customs need not apply it to future entries.

This may be surprising. After all, this is a judgment and the judgment is enforceable. Beyond the specific language of the stipulation, the real problem is that customs law is governed by a 1927 Supreme Court case called United States v. Stone & Downer. Under that case, the normal rules of federal civil procedure do not apply. Technically, we do not have res judicata. That means that the decision in one case does not dictate the outcome of a future case involving the same parties and the same facts. As we say in Customs law, each entry stands on its own. So, CBP's analysis, I am sad to say, makes some sense to me.

On the second issue, CBP held that it is not required to publish a notice that it is limiting the stipulated judgment. We need to take a step back because if you are a regular lawyer who does not do customs litigation, this will sound crazy.

Under 19 USC 1625(d), Customs has the ability to publish a notice limiting the application of a court decision. This allows Customs to effectively limit a court decision to the party and particular products involved, avoiding wider application of the legal principle. Lawyers might reasonably wonder why this is constitutional and what allows Congress to tell an Executive branch agency that it can limit a decision of the Judiciary. I don't know the answer and think, if pushed, this would be unconstitutional. Happily, it only happens in rare circumstances.

Here, Customs relied on its decision that the stipulated judgment is a contract and not a true judgment of the Court. Given that premise, there is no need for Customs to publish a notice limiting the stipulated judgment because it is self limiting to the entries at issue.

So that's the ruling. What's the impact?

There is currently a bit of controversy over how cases are managed at the Court of International Trade. Some lawyers like to file a summons and leave the cases unassigned while working with the government to arrive at a stipulated judgment. This can take a long time and works as long as the Court gives extensions to the initial 18-month period to remain on the "Reserve Calendar." Other lawyers move more quickly to designate a test case and litigate the matter. Afterwards, the parties likely can work out stipulated judgments for any suspended cases.

Looking at this ruling, it strikes me that an importer who expects to continue to import the item will not want to rely on a stipulated judgment without an actual decision from the Court of International Trade. That means more reliance on the test case-designation process and less on the Reserve Calendar.

Another new concern might be the actual terms of the agreement. For the most part, the terms are dictated by the Court's Form 9, which only addresses the stipulable entries. Should lawyers be inserting additional language in the agreement to control future entries? I would like to do that, but it seems likely to be a deal breaker for Justice. Also, rumor has it that some judges do not like deviation from Form 9. Maybe the better approach is to have an actual settlement agreement that addresses future entries. That is still probably a deal breaker. So that is a quandary.

Friday, August 21, 2015

Finality of Liquidation and the Loss of Defenses

Most people assume that when sued by the United States for unpaid customs duties, taxes, fees, and interest, the defendant will have an opportunity to assert all available defenses to the claim against it. That is technically true. The question is which defenses are available. United States v. American Home Assurance Co., has made the answer to that question a bit clearer, but maybe not in a good way.

American Home ("AHAC") is the surety on a number of bonds covering the importation of mushroom and crawfish tail meat from China. Both of those products are subject to antidumping duty orders. Customs and Border Protection liquidated the entries and assessed antidumping duties. When the importer defaulted, the government tried to collect from AHAC and informed AHAC of its intent to seek post-judgment interest. AHAC protested the demands for payment of duties and interest. Customs denied the protests.  Therein lies the problem.

Section 1514 of the Tariff Act of 1930 (19 USC 1514) makes a liquidation final and conclusive on all parties including the United States, unless the someone files a valid protest. If the protest is denied, the importer or surety can file a summons in the Court of International Trade challenging the denial. Absent a summons, the denied protest renders Customs' decision final and conclusive. Finality is a bar to an importer's efforts to seek a refund of overpaid duties and also a bar to a duty recovery action by Customs. If there was a violation through fraud, gross negligence, or negligence, Customs can try to collect duties and interest going back five years, but that is the exception.

This case is a little different because the claim for interest was not asserted at liquidation. Rather, it came in the first demand for payment on the bond that CBP made to the surety, AHAC. AHAC attempted to defend the interest claim against it, but was shut down.

According to the Court, the interest assessment is a protestable charge or exaction. The decision to impose interest was not ministerial or automatic. Rather, Customs had to apply law and facts to determine whether AHAC might be held responsible for interest. Consequently, CBP made a protestable decision. The fact that the charge or exaction was first asserted after liquidation does not change the fact that it was protestable and, in fact, protested.

Because AHAC did not challenge the denied protests in the Court of International Trade, the denial became final and conclusive. As a result, according to the Court, AHAC must pay the interest claimed up to the value of the bonds.

This raises all kinds of hackles.

What this means is that an importer who is dissatisfied with a denied protest has no choice but to pay Customs or go to the Court of International Trade as a plaintiff. Normally, that is what one would expect and it is not a tremendous problem. However, there is a statute that requires that plaintiffs pay all of the disputed duties, taxes, and fees before commencing the action in the CIT. That means that if the protesting party cannot afford to pay the duties allegedly owed (as sometimes happens) and cannot file a lawsuit, the act of filing the unsuccessful protest will have waived any opportunity to assert defenses in the eventual collection action. That is a terrible result that hurts the importer coming and going.

In the long run, will this create a disincentive to file protests? It might. If my product is being improperly assessed at a high rate of duty but I don't have the money or wherewithal to litigate in the CIT, what is my best option? Previously, I might have filed a protest and then decided how to go forward if it were denied. Now, am I better off making entries at the lower rate of duty contrary to instructions from CBP, but with internal and external evidence of reasonable care? Eventually, CBP will make that into a penalty case in which I will be able to assert all of my defenses. Clearly, that is a risky strategy because the penalties will be more severe than the duties unless I have a rock-solid case of reasonable care. But, importers do disagree with Customs and Customs is not always right. In some (likely rare cases) that may be the best way to proceed.

One important final point: Although I am saying I don't like the result, I am not saying it is wrong. In fact, with a limited amount of time spent on research, I can't see why it might be wrong. I generally think that defendants have the right the right to assert all available defenses in civil actions brought by the United States. This case does not violate that principle. But, it limits the scope of available defenses where there is a denied protest. That seems like a big price to pay. But, the finality of liquidation is a shield as well as a sword. Often, an importer will seek refuge in the fact that the liquidation is final and cannot be revisited by Customs. This is the same principle, although it favors the U.S. There is a certain symmetry to that.

Thursday, August 20, 2015

Ruling of the Week 2015.24: How Wide is Your Bike Lock?

Although I have actually been on my bike a shamefully few times this year, I remain interested in all things related to cycling, particularly commuting by bike. A key tool for a bike commuter is a good, solid lock. Thus, I noticed H168717 (July 17, 2015) in the August 12, 2015 Customs Bulletin. You will need to scroll to page 90 to find the ruling.

The issue is the proper classification of Master Lock cable locks. Customs originally classified the locks in HTSUS item 8301.10.50 as "Padlocks: not of cylinder or pin tumbler construction: Over 6.4 cm in width." That tariff item has a duty rate of 3.6%. Master Lock argued for classification in item 8301.10.20, which covers locks with a width not over 3.8 cm and has a duty rate of 2.3%.

I am going to save myself two thousand words by saying, this is what we are talking about:

8020D: Picture from Amazon
8119DPF: Picture from Amazon
You can see where this is going, right? The sole question is, "What is the correct way to measure the width of these locks?"

There are a couple of possible answers. First, it might be the length between the red lines in the top picture. That seems to encompass the width of the locking mechanism. The curved inserts on each side would be considered other parts of the assembly; probably extensions of the cable. Another way to measure the width is to consider it to be the distance between the far ends of the "shoulders." This extends the width further.

While you think about that, ask yourself this illuminating additional question: How long is the lock?

Think about it.

The answer matters.

It turns out that CBP has not been measuring the width of the lock at all. Rather, it has been measuring that segment of the length made up by the lock itself. "Length" refers to the longest dimension of a body. Put another way, length is the longest straight line that can be drawn through a body. Based on that, CBP has always included the cable in the length of the lock. It is, therefore, inconsistent (and incorrect) to treat the length of the lock as its width.

Customs and Border Protection has made a course correction. It now recognizes that the width is the line perpendicular to the length. As a result, it is approximately, this:

Note that the picture here is based on a picture in the ruling. It appears to me that W does not include the height of the "shoulder." This image is one I made to approximate what is in the ruling. Don't rely on it as an exhibit.

Having re-measured the locks, Customs agreed with Master Lock that they are classifiable in 8301.10.20 as being less than 3.8 cm in width. That is a win for Master Lock and a good decision by CBP.