Wednesday, September 24, 2014

More on Trek

Sometimes even I hate lawyers.

Part of the job is to watch for developments in the law and advise clients on how those developments might impact them. Because lawyers are careful by nature, we have a tendency to see the worst possible outcome and tell our clients to be prepared for it. If I needed a literary analogy to insert here, I could do no better than Henny Penny. On the other hand, what happens if we fail to point out the worst possible outcome? Well, let's just say we might not be doing that part of our job that requires lawyers to keep their clients informed.

What does this have to do with Trek Leather? Many of my colleagues in the customs bar read the decision as greatly expanding the potential for customs penalty cases to be brought against individual corporate officers and compliance professions. Unfortunately, they are not wrong on that score. But, I think they may be overwrought.

Just to recap, the Federal Circuit decided in Trek Leather that the president and sole shareholder of an importing corporation could be held liable for customs penalties despite not being the importer of record. This is inconsistent with the general legal notion that an individual employee or officer is not liable for corporate debts unless that person engaged in criminal behavior, fraud, or was the legal alter-ego of the company. In fact, entrepreneurs start corporations for exactly this reason. In many cases, their lawyers have advised them to incorporate to avoid having personal liability for corporate actions. Generally, that is good advice.

Trek Leather was not a fraud case. The company admitted to negligence in the improper valuation of wearing apparel. And, at no point did Customs or the Department of Justice argue that it could "pierce the corporate veil" to treat the individual as the alter-ego of the company. Doing so usually requires proof that the company was not managed as a separate entity (e.g., commingling of funds, a lack of corporate formalities, under-capitalization, etc.). So, why is Mr. Shadadpuri, the officer involved, liable for customs penalties?

The reason is Congress and the Supreme Court. Both entities have a tendency to mess up a perfectly good legal argument.

Congress is responsible for the text of the penalty statute, 19 U.S.C. § 1592. That statute creates liability for any person the enters or introduces merchandise into the United States by means of fraud, negligence or gross negligence. Mr. Shadapuri is clearly a person. But, he did not enter the merchandise; Trek Leather did that. According to the full Court of Appeals, that means the only real question is whether Mr. Shadadpuri "introduced" merchandise by means of his own negligence or gross negligence.

This is where the Supreme Court comes into play. Back in 1909, the Supreme Court held that the penalty statute was broad enough to cover actions and people who do not make entry. That's U.S. v. Mescall. Furthermore, in a 1913 in rem case with the awesome name United States v. 25 Packages of Panama Hats, the Supreme Court (via Mr. Justice Lamar) determined that the  word "introduced" was added to the penalty law to ensure that it covers situations where the merchandise did not actually get entered. In the Panama Hats case, for example, the goods arrived at the port and no one ever claimed them or made entry. According to the Court, "Instead of punishing only for entering or attempting to enter on a fraudulent invoice, it punished an attempt by such means 'to introduce any imported merchandise into the commerce of the United States,'"

Based on this precedent, the Federal Circuit had this to say (sorry for the big quote):

Panama Hats confirms that, whatever the full scope of "enter" may be, "introduce" in section 1592(a)(1)(A) means that the statute is broad enough to reach acts beyond the act of filing with customs officials papers that "enter" goods into United States commerce. Panama Hats establishes that "introduce" is a flexible and broad term added to ensure that the statute was not restricted to the "technical" process of "entering" goods. It is broad enough to cover, among other things, actions completed before any formal entry filings made to effectuate release of imported goods. We need not attempt to define the reach of the term. Under the rationale of Panama Hats, the term covers actions that bring goods to the threshold of the process of entry by moving goods into CBP custody in the United States and providing critical documents (such as invoices indicating value) for use in the filing of papers for a contemplated release into United States commerce even if no release ever occurs.

What Mr. Shadadpuri did comes within the commonsense, flexible understanding of the "introduce" language of section 1592(a)(1)(A). He "imported men's suits through one or more of his companies." Gov't Facts at 1. While suits invoiced to one company were in transit, he "caused the shipments of the imported merchandise to be transferred" to Trek by "direct[ing]" the customs broker to make the transfer. Id. at 1-2, 4. Himself and through his aides, he sent manufacturers' invoices to the customs broker for the broker's use in completing the entry filings to secure release of the merchandise from CBP custody into United States commerce. Supra pp. 7-8. By this activity, he did everything short of the final step of preparing the CBP Form 7501s and submitting them and other required papers to make formal entry. He thereby "introduced" the suits into United States commerce.

Applying the statute to Mr. Shadadpuri does not require any piercing of the corporate veil. Rather, we hold that Mr. Shadadpuri's own acts come within the language of subparagraph (A). It is longstanding agency law that an agent who actually commits a tort is generally liable for the tort along with the principal, even though the agent was acting for the principal. Restatement (Second) of Agency § 343 (1958); Restatement (Third) of Agency § 7.01 (2006). That rule applies, in particular, when a corporate officer is acting for the corporation. 3A Fletcher Cyc. Corp. § 1135 (2014). We see no basis for reading section 1592(a)(1)(A) to depart from the core principle, reflected in that background law, that a person who personally commits a wrongful act is not relieved of liability because the person was acting for another. See United States v. Matthews, 533 F. Supp. 2d 1307, 1314 (Ct. Int'l Trade 2007), aff'd, 329 F. App'x 282 (Fed. Cir. 2009); United States v. Appendagez, Inc., 560 F. Supp. 50, 54-55 (Ct. Int'l Trade 1983). That is as far as we go or need to go in this case. We do not hold Mr. Shadadpuri liable because of his prominent officer or owner status in a corporation that committed a subparagraph (A) violation. We hold him liable because he personally committed a violation of subparagraph (A).

So there you have it. Mr. Shadadpuri is liable for his own bad acts. At a minimum, he personally made false representations to Customs as a result of his own negligence. The fact that he was an officer of the importing entity is not the basis for his liability. Rather, it is his own personal bad acts.

That brings me back to customs lawyers and Henny Penny, AKA Chicken Little. We were all very happy for our clients when the initial three-judge Federal Circuit panel held that only the importer of record could be liable for negligence under the customs penalty statute. Many of us, myself included, believed that to be the correct result for the reasons stated by the first panel. In brief, that panel held that negligence in the customs context is an absence of reasonable care. Reasonable care, in turn, is a statutory creation that specifically applies only to importers of record. Thus, it follows quite nicely that only the importer can fail to exercise reasonable care and be liable for customs penalties. Those two statutes are now decoupled from one another.

When the full Court of Appeals agreed to rehear the appeal, the Cassandras of the customs bar were cursed with a vision of the future in which anyone who submits materially false or incomplete information to customs can end up a defendant in a penalty case. And, like Cassandra of ancient Troy, we were right. The decision of the Federal Circuit, as written leads to that possibility. In my view, that's a bad thing.

But, is it the end of the world? Probably not. We need to keep some perspective. This may be a good example of the lawyers' adage that "Bad facts make for bad law." Mr. Shadapuri was, in Customs' view a bad guy. He was warned about assists previously and provided information to the broker that omitted references to assists. He was not a diligent compliance professional who was doing the best he could with the information available to him. Nor was he a diligent corporate office who delegated authority to a trained compliance professional and supervised as needed. He was the individual responsible for the information provided to Customs and he appears to have known or at least should have known it was wrong.

The bottom line from Trek Leather is this: there is no automatic immunity from penalties for everyone but the importer of record. But, there is also no automatic liability for corporate officers and compliance professionals. Rather, what we now know (barring an unlikely reversal by the Supreme Court) is that the statute exposes individuals to liability for their own false or incomplete representations to Customs and Border Protection.

That understanding does not change materially my advice to companies and compliance personnel. That advice remains, "Be sure you know that what you are saying is true and that, if asked, you can prove it." In my view, Trek does not mean that Customs compliance people need to personally and specifically prove up everything they ever say to Customs. Reliable corporate records are those records on which the corporation relies. The import manager at a commercial bakery need not find the tree from which its imported cinnamon was harvested. But, if the bakery says it came from Vietnam, that manager needs to have a reasonable basis on which to make that statement.

Of course, I know that "reasonable basis" is the giant gap in that statement. My "reasonable" may not be reasonable to the Office of Fines, Penalties, and Forfeitures and the Court of International Trade may have a different view on what is reasonable. What I do know is that "reasonable care" requires something less than absolute certainty. I cannot say and will not try to define it here in the absence of specific facts. Unfortunately, i am coming to the conclusion that reasonable care is much like pornography in the mind of Mr. Justice Stewart:

I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.

Before Trek, I advised clients to be reasonably certain about what they say to Customs. After Trek, I give the same advice. The difference is that now I can add that by doing so they protect the importer and themselves.

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