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:
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.
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.
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