Saturday, December 06, 2014

Obligor, Obligee, Life Goes On

Hartford was a surety in the marketplace
Sunline imported crawfish from abroad
Sunline says to Hartford, "Man, I need your cash"
And Hartford says this while it shakes Sunline's by the hand

Obligor, obligee, goods come in
Lala, how the goods come in

If you are visiting this blog, you probably know that most importers use a bond secured by a surety company. The surety agrees that if the importer defaults, the surety will pay Customs and Border Protection any duties owed. In return, Customs agrees to release the merchandise to the importer before the entry is liquidated and duties paid. The surety bond is the oil that lubricates the whole system. Without the security of the bond, Customs would hold on to merchandise until it had cash in its metaphorical agency hands.

Surety bonds are a common means of insurance for all kinds of deal including your local bail bondsman to complicated financial transactions. As a result, there is a lot of law surrounding the relationship between the surety, the obligee (i.e., CBP, the party protected by the bond), and the obligor (i.e., principal on the bond, meaning the importer). One aspect of the law is that the surety cannot be held to have secured an obligation that includes more risk than was disclosed to it. If one of the parties withholds information that would have altered the surety's risk assessment, the surety can be released from the obligation.

So, what happens if U.S. Customs and Border Protection as an importer under investigation at the time the importer goes to a surety for a bond? Does Customs have to tell the surety that the sketchy importer is not a good risk? That's the basic issue in Hartford Fire Insurance Company v. United States, a recent decision from the Court of Appeals for the Federal Circuit. I am not a journalist nor am I bound by any journalistic ethics; nevertheless, you might read this with the knowledge that my firm handled this case.

The underlying facts here are that the importer, a company called Sunline Business Solution Corporation, imported fresh crawfish tail meat from a Chinese producer called Hubei. These entries were subject to a 223% antidumping duty order. Hubei sought a new shipper review, during which time is was permitted the rely on a bond to secure the payment of duties rather than make cash deposits. Eventually, it was determined that Hubei was not entitled to an individual dumping rate and Sunline refused to pay. That left the surety, Hartford, on the hook.

Hartford's complaint is that had it known that Customs was investigating Sunline for import violations, it would have either not secured the bond or done so on different terms. According to Hartford, that constitutes an abuse of discretion by Customs, which unreasonably increased its risks. As a result, it believes it should be released from the obligation.

No such luck, according to the Federal Circuit. The Court found that the bare allegation that Customs was investigating Sunline was not sufficient to plausibly suggest an abuse of discretion by Customs. The investigation itself remains confidential and Hartford did not plead facts establishing a connection between the investigation and the entries of the Hubei merchandise.

The Court seems to have focused on the fact that sureties are in the business of undertaking risk for third parties. As such, part of the surety's business is assessing that risk. One Court cited in the decision said "The policy behind surety bonds in not to protect a surety from its own laziness or poorly considered decision." That is harsh and possibly from a different context, but there it is. The Federal Circuit quoted the government's brief, which argued that "Hartford's claim improperly seeks to convert Customs' obligation to protect the revenue of the United States into a duty owed to Hartford and impermissibly shift the responsibility for assessing a surety's risk from the surety to the Government."

The reason I say that the harsh statement above might come from a different context is two fold. First, I freely admit that I have not read the cited case. Second, in the case of a customs surety bond, we do not have a free market in which information flows unimpeded between the surety, the obligor, and the obligee. Instead, sureties operate in a strange world in which Customs, the obligor, knows a lot more about the potentially sketchy businesses seeking the services of the surety. This means that CBP, by accepting the terms of the bond in exchange of the release of the merchandise, effectively creates the potential liability for the surety. Because it withholds relevant information from the surety, it necessarily increases the surety's risk. If this were three private parties, that would not fly and the surety might be released.

But, this is not a contract between three private parties. Furthermore, Customs cannot go around telling the world that an importer is under investigation. Maybe it could have simply refused to accept the bond amount or rejected the entries in their entirety without comment. That would be the equivalent of what lawyers call a "noisy withdrawal," which sounds dirty but isn't. In the noisy withdrawal, the lawyer tells the Court "I need to quit, your honor, but I am not at liberty to say why and, by the way, any other lawyer who takes this case should be wary." That is code for "My client is lying to the Court." Customs could have made some kind of noisy withdrawal to alert Hartford that there was additional risk here. Customs did not do that.

This case is a motion to dismiss for failure to state a claim. The case was dismissed on the pleadings and not because of a failure of the legal theory. Maybe a better case will come along to test the theory.

Two down. Apologies to Lennon and McCartney.

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