Learning Moments

United States v. Tip Top Pant, Inc and Saad Nigri is an interesting case from the Court of International Trade that provides all kinds of useful lessons.

The facts are that Tip Top imported shorts from Mexico and made a claim for duty-free treatment under NAFTA. Customs issued a CF28 Request for Information relating to the claim. In the request, Customs stated that “Due to the fact that this office is already reviewing your invalid claims, you are no longer eligible for the provisions set forth under 19 C.F.R. § 162.74.” What we have there is an effort to avoid the importer making a prior disclosure to protect itself against penalties. The regulations are clear that an importer loses the right to make a disclosure when it has notice that Customs has opened an investigation into the matter. But, an investigation is not “a review.” In theory, Customs reviews, to one degree or another, all kinds of entries: good, bad, and fraudulent. A simple entry review is not a formal investigation. Is this really enough to preclude a disclosure? I don’t know, but someone is going to have to ask the courts someday.

Another interesting point about the CF28 is that it declares the entries to contain “invalid claims” even before the importer has had an opportunity to respond. What kind of process is that?

The next thing I find fascinating is that the United States brought this case to Court before it completed the administrative penalty process. It is possible Customs was facing an impending statute of limitations problem and had to get into Court right away. The Court, however, took note of the incomplete process.

The United States made a motion for summary judgment arguing that all the facts necessary to establish liability for the company and its CEO Mr. Nigri had been established. The Court, however, found that Customs had not followed the proper penalty process by giving the defendants a full opportunity to rebut the claims against them. More over, Customs had never responded to the importer’s petition to mitigate the penalty. Without a complete penalty process, the Court refused to grant summary judgment for the government.

Last, and actually most interesting, is the case against Nigri personally. The facts do establish that Nigri was the person in charge of Tip Top Pants at the relevant times. In other words, if there were false claims, they happened on his watch. The complaint the United States filed asserts that Tip Top was the importer of the merchandise. It further asserts that the merchandise did not qualify for duty-free treatment as claimed. Lastly, the complaint says that Nigri was CEO and Chairman of the company.

Based on this pleading, the Court independently raised the question of whether that is enough to make Nigri a party and finds it is not. According to the Court, the complaint did not allege any behavior on Nigri’s part that was evidence of his negligence. Without allegations of negligence or other behavior leading to personal liability, the Court held that the United States had failed to allege a cause of action against Nigri. Thus, the case was dismissed with respect to him.

Now what? The Court was pretty clear that it is late in the litigation to amend the complaint to assert a claim against Nigri. Depending on the statute of limitations status of the case, the United States might be able to bring a separate case against him. For that, we’ll have to wait and see.

Of more immediate interest to compliance managers are the lessons from the CF28. First, always respond. You will do yourself and your company no good hoping the 28 goes away. If you need an extension to respond, ask. If you have a reasonably good story, you are likely to get an extension. Second, even if we assume that a CF28 is an appropriate vehicle to notify an importer of an investigation, what harm might have come from filing a disclosure? It would have at least permitted the argument that a disclosure was properly made. The possible downside is that to complete the disclosure, you might have to give up all the information Customs is going to use against you in a penalty if the disclosure is truly invalid. That is a risk. But, it is also most likely the case that Customs would have received that same information via an administrative summons or in discovery. So, an attempt at a disclosure may not hurt and might be very valuable. That decision, however, is one you need to talk through with your lawyers and management. I’m not making any recommendation here.