Two Defaults and a Surety Payment

Lately, more customs penalty cases (at least among those making it to the Court of International Trade) seem to be ending in defaults. Such is the case with United States v. Selecta Corporation, LLC and also United States v. Six Star Wholesale, Inc.

In Selecta, the United States sought a $51,102 penalty (plus interest). The defendant failed to respond to the complaint. Under the Court's Rule 55, a plaintiff can expedite a default judgment by showing through an affidavit (or otherwise) that the defendant failed to defend itself. When such a showing is made, the Clerk of the Court must enter the default. After the default is entered, the remaining party (typically the plaintiff) may apply to the Court for the entry of a default judgment. That's an interesting piece of rules trivia.

Here, plaintiff did not do that and the Court (i.e., the judge) ordered the default. To secure a default judgment, against which the United States can try to collect, the Court is to consider three factors:

  • Will denial of the motion prejudice the plaintiff?
  • Does defendant have a meritorious defense?
  • Did defendant's culpable conduct contribute to the default?

The Selecta penalty stems from two prior disclosures Selecta made in 2009 relating to incorrect classifications and values on entries of medical scrubs and lab coats. Selecta calculated and tendered a loss of revenue of nearly $835 thousand. The $51,102 at issue in this case represents the interest penalty assessed by Customs after Selecta completed the otherwise successful disclosure.

This is an important reminder for importers contemplating a prior disclosure. It is incorrect to say that a disclosure prevents a penalty. Technically, there can be a penalty of an amount up to the interest accrued on the unpaid duties, taxes, and fees.

Given the facts presented and the failure of Selecta to respond, the Court of International Trade ordered Selecta to pay the interest plus post-judgment interest (i.e., interest on the interest) and costs.  All in all, assuming Selecta still exists, it would have been cheaper to pay because the interest is continuing to add up. Selecta had already made disclosures, thereby admitting the violations. Unless there was an intervening bankruptcy or dissolution of the business, I'm not sure why this ended up as a default rather than an out of court settlement.

Six Star concerns an effort by the United States to collect unpaid duties of $243 thousand and a penalty of $496 thousand. Here, the underlying violations relate to improperly classifying merchandise and failing to deposit antidumping duties on wire hangers and polyethylene retail carrier bags. After considering the three factors above, the court moved on to determining the liability.

The Government sought the maximum penalty of two-times the lawful duties owed as the penalty. Regardless of the amount sought, even in a default, the Court must determine the appropriate penalty in its discretion. When doing so, the Court does not presume that the maximum is appropriate starting point for consideration. Rather, the Court is to start by looking at all the available facts.

Here, the Court provided some useful guidance for importers. It noted that importers must act with "reasonable care" in providing entry-related information to Customs and Border Protection. Reasonable care requires that the importer (or its agent) "review information regarding the nature and classification of the imported merchandise and information on the underlying transaction, including [a] review of available documentation, to ensure that the merchandise is properly classified and assessed with appropriate duties--including antidumping duties--upon entry." Unfortunately for Six Star, the Court concluded that "even a modicum of effort on the part of Six Star would have uncovered" the false statements and failure to make required deposits. Making matters worse, the Court's review of the administrative record showed no evidence of any steps by Six Star to ascertain the correct classification or applicable duties and no evidence of the kind of extraordinary cooperation that would result in mitigation of the penalty amount.

One further point the Court addressed is the impact of the surety's payment of part of the duties owed. The Court noted that the government collected $100 thousand from the importer's surety. That does not reduced the loss of revenue from the importer for purposes of calculating the penalty. It only goes to the duty collection. The Court further noted that collecting from the surety required time and effort to be expended by the government. Thus, as a matter of discretion, the Court imposed a civil penalty based on two times the remaining unpaid duties.

How the Court calculated the final penalty is a little confusing. If calculated on the government's asserted loss of revenue, the maximum penalty would be $486 thousand (2 x $243 loss of revenue). Given that the payment by the surety had made the government partially whole, the Court imposed a lesser penalty of $386,456. This amount was two time the still unpaid duties plus the duties paid by the surety or $143,228.02 x 2 (unpaid duty) + $100,000 (duties paid by surety). This means that the prior payment by the surety was not doubled in the resulting penalty, it was added just once, which recognizes that the government has had that money and benefits the defendant.


Anonymous said…
The calculation of that penalty is very confusing. If it really is to compensate the government for collecting money from the surety I'd like to see evidence that was more than the cost of a piece of letterhead and an email. Better than the maximum though, so there's that.

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