Monday, September 27, 2010

Redelivery and Conflicts

Sometimes, we all have to take a big breath, close our eyes, and wade into a 64 page Court of International Trade Opinion. In this case, that opinion is United States v. Pressman-Gutman Co.

The substance of this case is interesting in that it deal with the liability a surety has when the importer breaches the terms of its customs bond. In particular, Customs was seeking $120,000 for Pressman-Gutman's failure to redeliver merchandise to Customs. When the importer failed to redeliver, Customs sought liquidated damages from Pressman-Gutman. This is the usual course of action because merchandise is, more often than not, already gone by the time the importer received the Notice to Redeliver. When Pressman did not pay the liquidated damages, Customs sought payment from American Motorist Insurance Co, or AMICO the surety. The surety also refused to pay and moved for additional collateral to protect it from what it viewed as impending liability and also for attorneys fees related to the action. Pressman and the surety maintain that the Notice to Redeliver was late and, therefore, they are under no obligation to redeliver and not liable for liquidated damages

An interesting side issue is that Pressman also argued that the attorney's representing the surety, who had at one time also represented it, were not entitled to attorney's fees due to a conflict of interest.

On the merits, the case turns on the timeliness of the Notice to Redeliver. The regulations permit Customs and Border Protection to demand redelivery within 30 days of the end of the conditional release period applicable to the merchandise. When Customs requests a sample, the conditional release period ends when Customs receives the sample. In this case, Customs demanded redelivery well beyond the the end of this period. Customs, however, argues that it properly extended the conditional redelivery period by 90 and notifying Pressman that the sample had been sent for laboratory analysis.

According to the CIT, the government's position is "bankrupt." The Court notes that 19 CFR 113.62(d) requires that Customs issue a Notice of Redelivery within 30 days of the end of the conditional release. Further, the Court noted 20 years of Customs rulings stating that the conditional release period ends on the delivery of sample to Customs. Thus, the Court found the United States had no basis on which to proceed against Pressman for liquidated damages.

The government raised three arguments in its defense. The first argument was that Customs properly extended the conditional release period by so notifying the importer. On this point, the Court found that the conditional release period ended 30 days after Pressman delivered the requested sample. The putative extension was made after that date. As a result, the Court held that even assuming Customs has the authority to extend a conditional release period, this one had lapsed and, therefore, was no longer available to be extended.

In it's second argument, the government pointed to 19 CFR 141.113(c), which requires that a Notice of Redelivery be issued "promptly." According to this argument, there is no definition of the term "promptly," and, therefore, the request in this case was timely. Noting the same customs rulings, the Court held that Customs has always defined "promptly" as meaning within 30 days of the receipt of samples, when requested. Thus, the Court rejected this argument.

The final legal argument was based upon internal Customs' memoranda noting that the agency has 30 days in which to demand redelivery or take other appropriate action. Based on this, the government argued that the notification that the samples had been sent for laboratory analysis and that the conditional release period had been extended was "other appropriate action." The Court disposed of this argument by noting that in the numerous headquarters rulings Customs has issued on this topic, not once did it use "other appropriate action" as the basis for extending the conditional release period. On the contrary, Customs seems to have consistently noted that this tight schedule can cause problems for the agency. Customs has repeatedly noted this concern and has, nevertheless, held customs to the 30 day post-samples period.

The government's last effort was to distinguish the case on the facts. The short version of this argument is that while a lot of HQ rulings seem to say that the 30 day post-sample period is strictly enforced, none of those cases involved a circumstance in which there was an affirmative effort by Customs to extend the period. The Court rejected that argument essentially on the weight of the prior discussion. According to the court, given the absence of evidence for a legal means of extending the period (especially after it had lapsed), the Court would not would not find one on the basis of the effort to document an extension.

This is one of those cases that might has a short shelf life, even assuming it survives an appeal. The regulations do not address the issue squarely. Almost all of the authority relied upon here is from rulings. Customs, like all federal agencies, has the authority to reconsider its legal interpretations of ambiguous laws and regulations. To do so, though, Customs has to jump through the proper administrative hoops. With respect to previously issued rulings, that means the revocation or modification process of 19 USC § 1625. It is a good bet that someone in Customs is looking at that right now.

Part two of this long opinion deals with an ethics questions that rarely arises in customs law. In the usual circumstance, customs lawyers represent importers and the adverse party is the United States government. There are, however, exceptions to that rule. For example, if a domestic party challenges the classification Customs applies to imports, the customs lawyer needs to look out for a conflict with clients who might be importers. Trade remedy cases also present conflicts. This case illustrates one of the few other conflicts and that is whether a lawyer may represent a surety that may have a claim against an importer that has also been represented by that lawyer.

In this case, the surety, AMICO, sought attorneys fees from Pressman, the importer. AMICO, as it happens, was represented in this matter by the same law firm that had initially represented Pressman in its administrative dispute with Customs over the validity of the redelivery request. Subsequently, AMICO hired the same law firm to review the substance of the administrative protests that law firm had filed for Pressman. Apparently, the possibility of a conflict had been raised a number of times before the law firm filed an appearance on behalf of AMICO.  When Pressman moved to disqualify the law firm, the firm withdrew its appearance and new counsel was substituted. AMICO moved for an award of attorneys fees including fees for the conflicted firm's work prior to its withdrawal.

Pressman defended the request for attorneys fees on the grounds that the attorneys should have been barred from representing AMICO because they had previously represented Pressman on the same matter, creating a conflict of interests.

The conflicts analysis here is somewhat complicated in that Pressman was no longer a client of the firm representing AMICO. That means the more limited conflicts rule regarding past clients applies. The New York version of that rule is DR 5-108, which states in part that:

[A] lawyer who has represented a client in a matter shall not, without the consent of the former client after full disclosure . . .
Thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client.

According to the opinion, it is indisputable that Pressman never waived the conflict. Further, the two matters on which the firm were engaged are at least substantially related if not two sides of a single dispute.

The real question is whether and when the two parties became adverse to one another. Keep in mind that throughout much of the administrative process, the two companies had interests that were aligned. That is, neither wanted to pay a dime to Customs. Thus, according to the lawyers, there was no conflict until such time as it became obvious that something might be paid to Customs. At that point, the surety and the importer have diverging--if not adverse interests--because the surety knows that if it suffers any liability, it will pursue the importer to recoup its losses. Further, in this case, the surety sought additional security from Pressman well before the law firm started working for AMICO. According to the Court of International Trade, that possibility creates at least the appearance of divided loyalties and, therefore, impropriety under DR 5-108. I'm not sure about when the appearance of impropriety triggers a true violation as it is generally easier to find such appearances after the fact. Nevertheless, in this case, it seems a real conflict existed at least after AMICO's request for additional security.

Under those circumstances, the Court held that Pressman could not be required to finance the legal work performed against its interests by lawyers who were conflicted. Thus, the Court denied the motion seeking fees with respect to that work, although it granted a request for fees for work performed by another work not relating to the conflicted lawyers.

And for that, I wish I could give all my lawyer readers ethics CLE credit.

Tuesday, September 21, 2010

Requests for Information As Disclosure Terminators

Recently, I mentioned that nothing of interest has been going on. That was a mistake. For weeks, I have been working on several fronts on an issue of interest to all importers. I think because I have been involved for a while, and because the issue started slowly enough, I did not notice that lots of people now seem to care. So, consider this a catch up post.

The issue in question is whether Customs and Border Protection can use the common Request for Information (CF28) or Notice of Action (CF29) as the record of the commencement of an investigation and evidence proving that an importer has received notice of the commencement of an investigation.

This matters for several reasons. Most important, importers who discover violations of certain customs laws may protect themselves from civil penalties (in excess of interest on unpaid duties) by completing a voluntary prior disclosure. In the disclosure, the importer sets out the incorrect and the corrected information, tenders duties owed and probably the interest, and walks away with, we hope, an improved compliance system. But, if the importer is on notice that Customs has already commenced an investigation into the same issue, the importer is stuck and cannot fully benefit from a disclosure. [As an aside, that does not necessarily mean that a disclosure is of no value, but that is a conversation about strategy for another post.]

There are lots of threads of conversation concerning this issue. One is a question of policy: Is it good for trade facilitation and compliance for Customs and Border Protection to attempt to preclude disclosures while publicly saying that it encourages disclosures? The second question is why is this happening? Is it a top-down policy or a strategy developed at the port level by personnel who are removed from the broader policy questions? Third, is it legally correct that a CF28 or CF29 can be the record of and provide notice of the commencement of an investigation? And, finally, even if the notice is proper, has the investigation actually be commenced properly.

I can't spend too much time on all these questions. The first two require only a brief comment, which will not be backed up with any empirical evidence. Just based on experience and conversations with importers, this seems to be bad policy. Whether or not it was intended as such, the use of the very common CF28 and CF29 looks as if the agency is playing a game of "gotcha." Importers are very used to seeing these communications as a routine means of Customs either collecting basic compliance information or informing the importer of Customs' decision regarding already submitted information. In other words, these documents have been viewed as a non-threatening, cooperative channel of communications. Assuming this practice continues, that will rapidly no longer be the case. Also, because the CF28 and CF29 are generally communications from an Import Specialist and not from Fines, Penalties, and Forfeitures, using it as notice of an investigation seems on its face to be inherently questionable. It kind of like having the waiter at a fancy restaurant deliver the bill (a routine task) while flashing a badge and a gun (an implied threat). That does not encourage good customer relations.

As to why? I have no idea. My guess is that this started with a clever and overly zealous Import Specialist who was worried that an importer might be on the verge of exercising its right to make a disclosure. I suspect, but don't really know, that enforcement minded Customs personnel have never liked the disclosure process anyway. It really is a get-out-of-jail-free card (unless you count the time, administrative costs, and legal fees). Maybe the notion spread among port personnel that this was a good tool to increase the collection of revenue through penalties and to strengthen enforcement. I don't know that to be the case, but it makes sense to me.

On the third question, the regulations (19 CFR 162.74) are quite clear on what constitutes evidence that the importer is on notice of the commencement of an investigation.

(i) Knowledge of the commencement of a formal investigation —(1) A disclosing party who claims lack of knowledge of the commencement of a formal investigation has the burden to prove that lack of knowledge. A person shall be presumed to have had knowledge of the commencement of a formal investigation of a violation if before the claimed prior disclosure of the violation a formal investigation has been commenced and:
(i) Customs, having reasonable cause to believe that there has been a violation of 19 U.S.C. 1592 or 19 U.S.C. 1593a, so informed the person of the type of or circumstances of the disclosed violation; or
(ii) A Customs Special Agent, having properly identified himself or herself and the nature of his or her inquiry, had, either orally or in writing, made an inquiry of the person concerning the type of or circumstances of the disclosed violation; or
(iii) A Customs Special Agent, having properly identified himself or herself and the nature of his or her inquiry, requested specific books and/or records of the person relating to the disclosed violation; or
(iv) Customs issues a prepenalty or penalty notice to the disclosing party pursuant to 19 U.S.C. 1592 or 19 U.S.C. 1593a relating to the type of or circumstances of the disclosed violation; or
(v) The merchandise that is the subject of the disclosure was seized; or
(vi) In the case of violations involving merchandise accompanying persons entering the United States or commercial merchandise inspected in connection with entry, the person has received oral or written notification of Customs finding of a violation.

It should be clear that options (ii) through (vi) are not involved here. That means the question is whether a CF28 or CF29 informs the importer of the type of or circumstances of the disclosed violation. I hate to say it, but maybe. The CF29 Notice of Action is usually issued to an importer after an Import Specialist has taken the time to review the entry documentation and often after requesting additional information. In that case, it seems possible that the Import Specialist might have, as is required, "reasonable cause" to believe that a violation has occurred. So, if the CF29 comes after reasonable cause and in fact notifies the importer of the type or circumstances of the violation, it might very well provide sufficient notice. [Keep in mind that I still think it is bad policy.]

The CF28 is a different animal. This is a request for information. To me, that means that the Import Specialist is effectively saying to the importer, "I am not sure what is going on here. I need more information to determine whether you are right." That strikes me as a really poor basis on which to later argue that the Import Specialist had reasonable cause to believe anything about that particular importation. I can imagine a circumstance in which the Import Specialist includes very specific language in the CF28 designed to indicate the commencement of an investigation. But there has to be more than a question to be asked for there to be an investigation. That goes to my last question.

According to 19 CFR 162.74:

A formal investigation is deemed to have commenced as to additional violations not included or specified by the disclosing party in the party's original prior disclosure on the date recorded in writing by the Customs Service as the date on which facts and circumstances were discovered or information was received that caused the Customs Service to believe that a possibility of such additional violations existed. Additional violations not disclosed or covered within the scope of the party's prior disclosure that are discovered by Customs as a result of an investigation and/or verification of the prior disclosure shall not be entitled to treatment under the prior disclosure provisions.
So, there has to be a writing indicating that some Customs official knew on a date certain that there was the possibility of an undisclosed violation. On the face of the regulation, a well-crafted CF28 might do that. However, the regulation needs to be understood in the context of what Congress intended when it created the penalty statute.

The importer's responsibilities were substantially revamped in the Customs Modernization Act of 1993, which also brought us the North American Free Trade Agreement. In the congressional reports that accompanied the Mod Act, the House and Senate set out in some detail their expectation of how Customs was to manage the relationship between opening investigations and importer prior disclosures.

For example, the House Committee on Ways and Means said that the commencement of an investigation should result in the "creation of a formal document or electronic transmission that will serve as evidence, if so required, of the formal opening of an investigation. That document or transmission must be maintained by Customs Office of Enforcement or other central unit to be designated with Customs." The report goes on to state that when Customs has "reasonable cause to believe" that a violation has occurred, the Office of Enforcement or other central unit shall consider the facts that have been recorded and make a determination as to whether the facts merit the opening of a formal investigation. See S. Rept. 103-361, 103d Cong., 1st Sess. 122. According to the Senate Report, the Finance Committee expected hat these requirements for the creation of a record and centralized review would "allay the trade community's concerns that the benefits of prior disclosure will be denied in the absence of tangible evidence."

To me, without the benefit of the circumstances in any particular case, an Import Specialist acting alone is not via a CF28 or CF29 is not consistent with Congressional intent regarding the formal opening of an investigation. There needs to be some higher-level review and some centralized record. Without that, this has the feel of the denial of prior disclosure without tangible evidence. But, we must keep in mind, whether that is the case will depend on the facts of each particular case.

Recently, AAEI raised the issue with Customs and Border Protection. Customs' response is on the AAEI web site. Basically, Customs says they have the legal authority to use the CF28 and CF29 as notice of the commencement of an investigation as well as the written record thereof. But, they say that the CF28 should not be routinely used for that purpose. The CF29, on the other hand, will be used for that purpose. Despite that conclusion, Customs promises to issue guidelines clarifying the use of the CF28.

In the end, this practice strikes me as based on bad policy. As I said, it seems inconsistent with an effort to foster cooperation and collect revenue via disclosures. It seems punitive and hyper technical. Despite that, it might be perfectly legal. It is, however, going to lead to much more complicated disputes over when and how the alleged investigation was opened. Suddenly, customs lawyers (who are more often on the receiving end of discovery requests) are going to brushing up on our discovery techniques because there is now going to be a fight about the paper trail.

Thursday, September 16, 2010

What's Happening

This is just a reminder that I am still here, in case you were wondering. I have been on the lookout for something interest to post. Lately, there have been slim pickings.

The ACLU is pursuing another lawsuit challenging Customs and Border Protection's policy and practice of relating to searches of digital storage devices including laptops and phones at the border. Here is their press release. I wish them luck, but they have a very tough legal row to hoe. The advantage that the ACLU has in its case is that the plaintiff is a much more sympathetic character than the child porn smuggler usually caught up in these cases.

On top of that, I should alert you to a couple upcoming speaking gigs, both NAFTA related.

First, I will be talking about NAFTA verifications at the International Trade Club of Chicago on Friday, September 24. Then, I am really excited to be doing a full-day presentation on NAFTA, internal reviews, and planning for compliance for the Midwest Global Trade Association in the Minneapolis area. If you are reading this and attend either event, please be sure to introduce yourself to me.

Last thing, I've been getting a relatively large number of spam comments lately. Rather than turn on comment moderation, I plan to ignore them. Please do the same.

Thursday, September 02, 2010

Hey Accountants!

I have an article in the latest edition of BNA Tax Planning International, Indirect Taxes (Vol. 8, No. 8, Aug. 2010). The article is entitled "Challenging Customs in the United States Court of International Trade." I'd provide a link to the article, but it is in an old-school paper publication and the on-line version requires a subscription. So, run out and look for the article on the newsstand. I hope it is next to something with Kim Kardashian on the cover.