Corporate Officers Not Liable for Company Negligence on Customs Docs, CAFC Says
Corporate officers can’t normally be held liable for their corporations’ negligent misstatements on entry documentation, said the Court of Appeals for the Federal Circuit July 30, reversing a lower court ruling. The Court of International Trade had in 2011 found Harish Shadadpuri liable for criminal penalties under 19 USC 1592 because of his actions as president of Trek Leather, which had admitted gross negligence in its failure to declare assists when valuing merchandise (see 11062115). CAFC said the lower court shouldn’t have, because only the importer of record (in this case Trek) can be held to the reasonable care standard for negligence purposes. To get a Section 592 conviction against a corporate officer, the government either has to “pierce the corporate veil” or allege fraud, CAFC said.
Sign up for a free preview to unlock the rest of this article
If your job depends on informed compliance, you need International Trade Today. Delivered every business day and available any time online, only International Trade Today helps you stay current on the increasingly complex international trade regulatory environment.
Shadadpuri was sole owner and president of Trek, which acted as importer or record on 72 entries of men’s suits in 2004. The suits had been produced using fabric provided by Trek. That fabric was an assist for valuation purposes, and should have been added to the price paid or payable. But Trek failed to add the cost of the fabric assist to the value of the merchandise, which resulted in underpayment of customs duties by $45,245.39. Trek admitted gross negligence in its failure to declare the assists.
It wasn’t the first time Shadadpuri faced legal troubles because of his treatment of assists on customs documentation. In 2002, the same CBP import specialist that later investigated Trek had discovered that Shadadpuri, acting on behalf of another company he had a hand in, didn’t declare the value of assists on other entries. Shadadpuri’s company paid $46,156,89 in unpaid duties, but the government didn’t act against Shadadpuri personally.
This time, the government went after both Shadadpuri and his company. It sought a $2.3 million dollar penalty each against Shadadpuri and Trek for fraudulent Section 592 violations. Alternatively, it wanted $534,420.32 for gross negligence, or $267,310.16 for negligence. It also wanted recovery of the unpaid customs duties. Trek admitted gross negligence, and the government abandoned its fraud claim. CIT ordered Trek to pay $534,420.32 in penalties. Shadadpuri admitted he knew Trek should have included the value of the assists when valuing the entries. But he argued that he could only be personally liable for penalties if the government decided to disregard Trek’s corporate personhood and associated protections for employees (“pierce the corporate veil”), or if he was found guilty of fraud or aiding and abetting fraud. Only the importer of record can be liable for Section 592 negligence penalties, he argued, and the importer of record was Trek. The court disagreed, and ordered Shadadpuri to pay a $534,420.32 penalty as well.
On appeal, CAFC reversed the lower court’s finding that Shadadpuri was liable for gross negligence penalties. Negligence happens when someone doesn’t exercise care, and the standard for care in Section 592 is the “reasonable care” standard found elsewhere in the customs laws (19 USC 1484). That standard applies only to importers of record, CAFC said. The government didn’t attempt to show Shadadpuri was the importer of record, so he couldn’t be found liable, the appeals court said. The government could have gone after Shadadpuri for fraud, but declined to do so when given the chance. And it didn’t try to argue corporate protections shouldn’t apply either. “Instead, the government has asked us to adopt a broad legal principle that would expose all corporate officers and shareholders to personal liability for negligent acts they undertake on behalf of their corporation,” CAFC said. Because Congress didn’t specify in the customs laws that liability for negligence extends to corporate officers, Shadadpuri couldn't be liable for Section 592 penalties for negligence, the appeals court said.
Judge Timothy Dyk dissented from the majority. The language of Section 592 doesn’t differentiate between two different types of “persons.” Instead, it sets penalties for any “person” that deprives the government of duties “by fraud, gross negligence, or negligence,” Dyk said. Congress was clear when it drafted the current Section 592 that “person” includes “any consignor, seller, owner, importer, consignee, agent, or other person or persons,” not just the importer of record. “Because Shadadpuri had been responsible for the submission of similarly false entries in the past, the Trade court reasonably deemed Shadadpuri’s actions negligent, rendering individually liable for his actions,” Dyk said.
(U.S. v. Trek Leather, Inc.; CAFC No. 11-1527, dated 07/30/13, Judges O’Malley and Plager, Judge Dyk dissenting)
(Attorneys: Stephen Tosini for plaintiff-appellee U.S. government; John Galvin of Galvin & Mlawski for defendant-appellant Harish Shadadpuri)