CAFC Turnaround in Corporate Officer Liability Suit May Create New Risks for Compliance Managers
The Court of Appeals for the Federal Circuit affirmed a Court of International Trade ruling in Trek Leather that said corporate officers can be liable for negligent misstatements on entry documentation in a Sept. 16 decision. The ruling marks an apparent change of heart for the CAFC, which reviewed the question of corporate officer liability in the case as part of an en banc rehearing (see 14030601). The Appeals Court previously ruled against the CIT and found that Trek Leather's owner, Harish Shadadpuri, was not liable for his company’s undervaluation of entries of men’s suits (see 13073025). Customs lawyers said the case should be the source of serious concern for corporate compliance executives who may face new risk as a result of the finding.
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At issue was whether liability for entry documentation negligence, outside of fraud, can apply beyond the importers of record as CIT found in 2011 that both Trek Leather and Shadadpuri were jointly liable for the unpaid duties "The question before us is simply whether [Shadadpuri] engaged in any conduct respecting any of the suit shipments that constitutes entering, introducing, or attempting to enter or introduce merchandise into United States commerce under section 1592(a)(1)(A)," said the unanimous CAFC decision. "We conclude that he did." Judge Kathleen O'Malley, who ruled against the CIT in the previous CAFC decision, seemingly changed course in the en banc decision. Judge S. Jay Plager, who also sided against the CIT with O'Malley in the original case, did not participate in the en banc review.
The court focused on the definition of "introduce" within the statute, which prohibits anyone to "enter, introduce, or attempt to enter or introduce” goods without a certain level of care. The court said it specifically avoided weighing in on the definition of "enter" within the statute. "Controlling precedent has long established that 'introduce' gives the statute a breadth that does not depend on resolving the issues that 'enter' raises," the court said. "And the term 'introduce' readily covers the conduct of Mr. Shadadpuri." Shadadpuri "did everything short of the final step of preparing the CBP Form 7501s and submitting them and other required papers to make formal entry," and thereby “introduced” the suits into the U.S., the court said.
The court seemed to want to avoid weighing in on the question of the definition of "entry", but the case will likely create more questions than it answers, said John Peterson, a lawyer with Neville Peterson. The court essentially divides up the statute's liability between those who "enter" and those who "introduce," he said. "My sense is that the Federal Circuit was trying to tailor its decision on narrow grounds, but didn't understand some of the complexities of modern importing," he said. "The Trek Leather decision opens up many new questions which will take years to resolve." While Peterson filed an amicus brief voicing concerns for the American Association for Exporters and Importers in the case, his thoughts on the case here are on his own behalf, he said.
The CAFC took much of its rationale from a 1913 Supreme Court case, U.S. v. 25 Packages of Panama Hats. That case involved the seizure of panama hats, which, despite never being entered, were found to have been "introduced" and therefore could be forfeited. "That's fine on the question of forfeiture, but tells us little about dealing with the current in personam version of Section 1592, which has grades of culpability built in, and a duty recovery provision," said Peterson. For instance, if an "introducer" is not the importer of record, "who is liable for the payment of duties, can he or she be held liable for 'withheld duties?,' Peterson asked.
The decision should be especially scary for import managers and compliance officers, said Peterson. "Trek Leather suggests that [a] person, in the course of acting as an agent for the corporate importer of record, could be individually liable as an 'introducer,'" he said. "If I'm an importer manager for a company, handling the documents for entries, I'm knocking on my boss' door, demanding an indemnity from the company." Larry Friedman, a customs lawyer with Barnes Richardson, also said the decision may most directly affect corporate compliance employees and small business owners. "This means that really anyone who provides incorrect information to Customs in conjunction with an entry (or attempted entry) might be liable for a material false statement or omission," he said. "The party will still have the ability to show that he or she made the statement using reasonable care, but that is not always easy to accomplish. "
Notably, though, the court did not say that the penalties "could be imposed on corporate shareholders and officers without first piercing the corporate veil," Peterson said. "Officers and shareholders of large companies, who are less likely to be directly involved with import operations, have little to worry about" while owners of closely held companies face far more risk, he said. Trek's lawyer, Jack Mlawski of Galvin & Mlawski, didn't return a request for comment. Mlawski took over the litigation after Trek's previous lawyer in the case, John Galvin, died in the spring. -- Tim Warren
(U.S. v. Trek Leather, Inc.; CAFC No. 11-1527, dated 09/16/14)
(Attorneys: Stephen Tosini for plaintiff-appellee U.S. government; John Galvin of Galvin & Mlawski for defendant-appellant Harish Shadadpuri)