In the past we have touched upon Customs penalties under the main penalty statute, 19 USC §1592 (generally referred to as §592 of the Tariff Act of 1930). Although Customs administers many different laws, many of which are penal in nature, §592 penalties are the most pervasive and can be serious.
These penalties are based on material violations where there is an act of commission or omission by the violator which is effected through fraud, gross negligence or negligence.
The importer of record (IOR) as designated on the CBP Form 7501 is the party assuming primary liability for that entry. The importer of record generally may be the seller or purchaser of the imported merchandise, the Customs broker, or a consignee, and may be a non-resident (foreign) corporation. Although the IOR may be an individual, it is typically a corporation or similar limited liability entity that actually acts as the importer of record. Just as with conducting day-to-day business, the corporate entity is organized and utilized in order to shield individuals conducting that business from personal liability.
Most penalty cases are pursued against a corporate entity acting as an IOR, but there are situations where a corporate officer or individual within the corporation may be held personally liable for Customs penalties even when that individual is not the IOR. Situations where individuals and corporate officers are pursued by Customs are not particularly frequent, but they occur often enough to cause concern. A fairly recent case decided by the U.S. Court of Appeals for the Federal Circuit (CAFC), United States v. Trek Leather, Inc. and Harish Shadadpuri (No. 2011-1527 dated July 30, 2013) has an excellent discussion on this issue and ultimately found that the individual in that case was not liable for penalties in conjunction with the penalty assessed against the corporation. The actual decision was limited to the specific fact situation before the court.
However, this case was significantly important and controversial so as to recently result in the CAFC granting a Petition for Rehearing where the court will again reconsider these issues. It is worthwhile to outline the general issues discussed in the original decision because they are interesting. However, we necessarily will have a follow-up article once the court issues its subsequent decision on the Rehearing.
The underlying penalty case, as with so many penalty cases under §592, involved a failure to declare assists to Customs. Trek Leather, Inc. (TLI) was the importer of record and a separate corporation was the consignee of the imported men’s suits. Mr. Shadadpuri (the “individual”) was president and shareholder of TLI and also a 40% shareholder of the consignee. During the Customs investigation leading up to the penalty demand it was discovered that the individual had previously failed to declare assists for a different corporate importer. This apparently contributed to the issuance of the subject penalty case. TLI and the individual refused to pay the balance of duties owing for the assists and the government filed suit for a penalty of about $2.4 million initially, alleging fraud. The government also alleged gross negligence and negligence in the alternative.
During the argument of these issues, TLI contested the fraud allegation but conceded that the company had acted with gross negligence. The government proceeded on the negligence claims but, importantly, abandoned its fraud claim against the corporation. The individual’s defense regarding personal liability was that he could be personally liable only if the government “pierced the corporate veil” of TLI or established that he had either committed fraud, or aided and abetted fraud by TLI. The lower court agreed with the government on all its claims and granted summary judgment against the corporation for gross negligence and against the individual jointly and severally for the same penalty.
After consideration of the arguments set forth by the parties, the CAFC reversed the CIT’s judgment with respect to individual liability for Mr. Shadadpuri. The court stated that in order for the government to prevail against the individual personally it must have shown 1) that TLI committed fraud and that the individual aided and abetted that fraud, or 2) the government could have pierced TLI’s corporate veil. However, the government declined to pursue either one of these options on the theory that it would prevail against the individual on a negligence basis. The court considered all arguments and concluded that the government chose not to pursue the fraud and corporate veil options, and held that negligent action by the individual was not sufficient under the law for personal liability. The CAFC clearly stated the potential problem with the government’s theory is that it could expose all corporate officers and shareholders to personal liability for negligent acts taken on behalf of the corporation. The CAFC felt that this is a much broader reach than Congress intended and would also be directly contrary to long-standing principles of common law.
The aspects of the CAFC decision that are important to bear in mind are that generally there is no personal liability for corporate officers and shareholders in the absence of fraud. Under the culpability levels specified in §592, actions that are grossly negligent or a result of ordinary negligence would be subject to penalties but the corporation would be the appropriate party from which to seek penalties. If an individual was also incorporated, but acting as an “alter ego” of the corporation and the corporation was merely a “sham”, the corporate veil could be pierced resulting in personal liability. Finally, where an individual “aids or abets” a corporation in fraudulent conduct the individual may be personally liable, even when not the importer of record. However, certain issues peculiar to this case will be addressed again at the Rehearing and it is likely that some of these conclusions may be altered. We will update when the new decision is reached which will certainly have some interesting discussion of these issues.