Wednesday, July 31, 2013

Time to Catch Up, Part 1: Trek Leather

I am sorry to report that I have a backlog of decisions to review. So, let's get started.

Do you remember United States v. Trek Leather, Inc.? No? I'm not surprised as I appear not to have bothered to cover the decision from the Court of International Trade. You might want to go back and read that for context. Here, we will discuss the decision from the Court of Appeals for the Federal Circuit.

The question presented in Trek Leather is whether a corporate officer, in this case Harish Shadadpuri, can be held personally liable for negligence in relation to a customs entry for which the corporation was the importer of record. In this case, Shadadpuri was the president and sole shareholder of the importer of record and also a 40% shareholder of the consignee for 72 entries of men's suits. Upon entry, Trek Leather (which I will call Trek Leather to distinguish it from the fine people at Trek Bicycle Corp.) failed to properly declare the value of fabric provided to the foreign manufacturer. That material was an assist, which must be added to the value of imported merchandise declared to Customs and Border Protection. As it happens, this had been an issue for a company run by Shadadpuri two years earlier. That made Customs unhappy and Customs charged both Trek Leather and Shadadpuri as an individual with customs fraud and, in the alternative, gross negligence or negligence.

Shadadpuri argued that because Trek Leather was the importer, he could only be held personally liable if (1) the government proved that there was no legal distinction between him and the corporation (known legally as "piercing the corporate veil"), (2) he committed fraud, or (3) he aided and abetted a fraud by Trek Leather. Eventually, Trek Leather, the corporate entity that was the importer of record, admitted to gross negligence and the government abandonded the fraud claim. That left Shadadpuri facing liability only for negligence (gross or otherwise). As it happens, it is impossible to "aid and abet" negligent conduct by someone else. In other words, people are only responsible for their own negligence. In this case, Shadadpuri said the importer of record was the negligent party.

Nevertheless, the government proceeded on the theory that Shadadpuri is a "person" covered by the penalty statute, 19 USC 1592(a). That statue prohibits any person from entering merchandise into the United States by means of fraud, gross negligence, or negligence. The Court of International Trade held that Trek Leather and Shadadpuri were jointly and severally liable as "persons" who were grossly negligent with respect to the entry of merchandise.

On appeal, Shadadpuri's argument was that as long as there was no fraud on his part or on Trek Leather's part (which was conceded by the government), he could not be held liable for negligent actions by the importer of record. This is because the obligations to act with reasonable care (meaning the absence of negligence) apply only to importers of record. See, for example, 19 USC 1484.

That means the government needed to convince the Court of Appeals for the Federal Circuit that a corporate officer who does not personally commit fraud can be held liable for the negligence of the corporation. According to the government, that follows from the broad meaning of the term "person" in section 1592.

The Court did not accept this invitation. Rather, it started from the premise that the corporation is, absent a pierced corporate veil, a separate legal entity from its officers. Further, as stated above, one cannot aid and abet the negligence of another party. Finally, negligent conduct actionable under section 1592 requires that the actor violate some duty owed to Customs. In this case, that duty arises with respect to the obligation to exercise reasonable care when making an entry. That duty attaches to the importer of record, not to individual corporate officers nor to anyone else. Thus, the government could not make a case against Shadadpuri. Had the government wanted to do so, according to the Court, it should have either stuck to its original fraud allegation or tried to pierce the corporate veil.

As it is, corporate officers can probably sleep a little bit more easily tonight. Note that is not legal advice and corporate officers should not assume they are not responsible for corporate actions.

In a dissenting opinion, Circuit Judge Dyk noted that the earlier version of the penalty statute would have imposed liability on Shadadpuri as an agent of Trek Leather. The legislative history to the current act states that the change in language was not intended to change the scope of persons subject to penalties. Early on, the Court of International Trade held that the current language permitted a corporate officer to be liable for violations of section 1592. Further, according to Judge Dyk, there is no support for the distinction the majority draws between negligence and fraud. In either case, no person may make entry in violation of the statute. Thus, Judge Dyke would have upheld the decision of the Court of International Trade.

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