Saturday, August 18, 2007

Ford Wins Another Round

This almost qualifies as breaking news: Yesterday, the CAFC reversed most of the CIT's decision in one of the Ford penalty cases. This one involved Ford's mishandled application of a foreign trade zone to parts for cars and trucks. Ford mistakenly treated all the parts as if they were for cars and paid duties on the merchandise in its condition as withdrawn from the zone for entry. Unfortunately, Ford only applied the rate for cars (2.6% at the time) not the rate for trucks, which was 25%. Consequently, Ford allegedly underpaid duties to the tune of $5.3 million.

Ford told the Customs Service about the error but was, nevertheless, the subject of a fraud investigation that lasted almost four years. During that time, apparently very little investigating actually happened. Customs extended liquidation of the relevant entries and finally liquidated them almost four years after the date of the last entry. Ford protested the liquidations arguing that the entries had liquidated by operation of law. Not surprisingly, CBP denied the protests. In a prior decision, the Federal Circuit held that Customs delay was unreasonable, that the entries had liquidated by operation of law, and that Ford was entitled to a refund of the $5.3 million.

While all this was going on, Ford executed a series of waivers of the statute of limitations. Each waiver but the last included a notation from Customs that is was "acknowledged and accepted." The last, however, only said "acknowledged."

Showing terrific creativity, the government turned around and tried to get its $5.3 million back through a penalty action. The reasoning appears to be that even though Ford did not owe the money because the entries were liquidated as entered, the entries were still negligently made and the U.S. was denied revenue as a result. That makes some sense under the facts.

The U.S. appealed from the Court of International Trade decision to dismiss the case on the grounds that (1) the U.S. never "accepted" the statute of limitations waiver and (2) the penalty case was precluded by the earlier CAFC decision that liquidations had been unreasonably delayed.

In what was likely a gut wrenching moment for Ford, the CAFC reversed on both those points. First, regarding the waiver, the CAFC held that a waiver of the statute of limitations is a unilateral act by the potential defendant. It does not require any "acceptance" from the government. In other words, a waiver is not a contract; carbolic smoke balls notwithstanding. [Note to readers: that gratuitous comments was for the lawyers out there. They are rolling on the floor laughing at this moment.]

Regarding whether the prior CAFC decision precluded the government pursuing a penalty case, the Court was equally to the point. The Court held that nothing in the prior Ford case had anything to do with whether a penalty could be brought under 19 USC 1592. It dealt only with whether Customs could collect the duties four years after entry when liquidation had been unreasonably delayed by an investigation that did not get very much attention from Customs. Thus, the Federal Circuit reversed the CIT's "issue preclusion" decision.

Alone, these holdings by the CAFC would have been worse for Ford that the re-issuance of the Edsel. But, the CAFC had one additional point to make. Simply put, you can only violate sec. 1592 if your negligence, gross negligence, or fraud results in some injury to the U.S. even if there is no revenue loss. In this case, the U.S. could have collected the $5.3 million had it liquidated the entries in a timely manner and denied Ford's protest. Instead, the U.S. let everything get stale, which ultimately cost it the opportunity to recover the money. In other words, because Ford's negligence did not prevent the U.S. from collecting the money, there is no way for the U.S. to try and recover it in a penalty case.


Paul Vandevert said...

Larry: This is Paul. Thanks for the blog item on yet another Ford penalty case epic. But, to me this case is all but a complete loss. Customs only added the claim for the actual duty when Ford won the duty refund case. But, the penalty case has been hanging around for 21 years now and we're back to square one on that. Yes, the Government theoretically has to prove injury, but in practice the Courts haven't recognized nor actually enforced that "minor" detail. Ford is still on the hook for about $34 million in penalties.

If you're interested, I can give you an interesting take on how the CAFC's ruling on SOL waivers could play out. This could be a classic case of Customs winning a skirmish, but losing a big-time war.

Anonymous said...

Why does the Customs service always do whatever it wants to importers with a near total disregard for its own laws?

For instance time and time again they will have nothing else to back them up but say but say the word "and" over the word "or". And they conclude the word "and" makes the case and that is precedance to impose a penalty.

Then several years later in an unrealted case, say a duty refund case, they will say that the word "and" is not enough to preclude relief over the word "or". Do you see what I mean?

Basically they just do whatever they want. The Customs lawyers are juse there to take your money on your way out of business.