Pleading Matters

The penalty case against Greenlight Organic Inc. and now its owner and president seems to be a case that will not end. For background, read the previous posts here and here.

This issue raised in the most recent Court of International Trade decision has to do with a penalty claim the United States is asserting against Mr. Parambit Singh Aulakh, the owner and president of the importer. The case against Mr. Aulakh is premised on the allegation that Greenlight, under the direction of Mr. Aulakh, misclassified and undervalued shipments of athletic apparel on approximately 122 entries.

There are two Court rules in play in this phase of the case. To survive a motion to dismiss under CIT Rule 12(b)(6), the complaint must contain sufficient factual matter to state a claim to relief that is plausible on its face. That means the complaint must contain assertions of facts that allow the Court to draw a reasonable inference that the defendant is liable. It is not enough for the plaintiff to set out conclusions of law. The complaint must state the facts that, if proven to be true, would allow the Court to conclude that the plaintiff is entitled to the relief sought.

When the allegation is that defendant has committed fraud, Rule 9(b) requires that the circumstances constituting fraud be stated "with particularity."

Here, Mr. Aulakh claims that the Department of Justice has failed to state a claim for which relief can be granted because it has not stated with particularity how he personally engaged in any fraudulent behavior. In response, the Government appears to rely on the defendant's position in the company and the fact of the false representations about the merchandise. But, 19 USC 1592(a) requires the government to show that a person entered, introduced, or attempted to enter or introduce merchandise into the United States by means of a material and false statement or omission. That means there must be reason to believe that the defendant personally did something to violate the statute.

There is no question but that Mr. Aulakh is a person subject to the statute (despite the corporate nature of the importer). This was all hashed out in Trek Leather. I don't like the wholesale rejection of the notion of separate corporate existence. Typically, individuals are not responsible for corporate liability unless the Court makes a formal determination that the corporation is the alter ego of the individual or "pierces the corporate veil." In customs law, that does not have to happen. Any person involved in an entry is potentially liable for penalties under section 1592. That means that corporate managers who oversee customs compliance are potentially at risk. That risk, however, should not be overstated. To the extent managers have responsibilities for compliance, if they are doing their jobs properly, they will be exercising reasonable care and, therefore, even if there is a disagreement with Customs, not subject to a penalty. Of course, no one wants to be charged with a civil penalty and forced to undertake the expense and risk associated with defending against the claim. Thus, the whole Trek Leather imbroglio.

That's not the issue here. The problem for the Government is that the complaint is overly conclusory. First, the complaint does not specify the entries at issue, the alleged loss of revenue, or the correct HTSUS classification. Furthermore, the complaint does not state when, how, or what Mr. Aulakh did that constituted participation in the alleged fraud.  Mainly, it seems to rely on the premise that he was in charge and, therefore, participated in the fraud.

That is not enough. According to the Court, "Absent adequate facts supporting the fraud allegations, Plaintiff cannot impute knowledge to Aulakh merely by virtue of his position of power and influence over Greenlight."

That did not end the matter. Rather than dismissing the case, and in the absence of bad faith, undue delay or other undue prejudice, the Court exercised its discretion to allow the Government to amend the complaint to cure these defects. The Government has 45 days from the date of the opinion to do so.

There is an additional oddity in this case: Greenlight has not had a lawyer for eight months. That is problematic because corporations can only appear in federal court through counsel. Given that circumstance, the Court pointed out that the case may be subject to a default judgment.

But, there can be no default judgment without a valid case to pursue. If the Government does not get a properly pleaded complaint filed in 45 days, the case will be dismissed. That would be a win for Mr. Aulakh. On the other hand, the Court seems to be suggesting that if the complaint is fixed and if Greenlight (and presumably Mr. Aulakh) does not show up to defend, the Court will entertain a motion for a default judgment, which would be a win for the Government. Of course, we do not know if the Government would ever be able to collect on that judgment, but that is for another day.






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