Import laws and custom duties are not areas of the law into which I frequently (or lightly) venture, but I delve into these topics here and now because developments in these areas have served up yet another example where individual corporate officers have been held liable personally for matters that previously had been regarded exclusively as the source of corporate liability.
In September 16, 2014 en banc opinion (here), the United States Court of Appeals for the Federal Circuit held that a corporate official can be personally liable for unpaid duties and for (potentially massive) civil penalties in connection with undervaluing merchandise imported by his company.
This decision is discussed in a September 18, 2014 memo from the Katten Muchin law firm entitled “Introducing Corporate Liability into Corporate Negligence: An Analysis of the Trek Leather Decision” (here) and in a November 2014 memo from the Kirkland & Ellis law firm entitled “Individual Found Liable for Violations of U.S. Import Laws” (here).
Harish Shadadpuri is the President and sole shareholder of Trek Leather, Inc. Among other things, Trek imports men’s suits. The U.S Bureau of Customs and Border Protection (CBP) alleges that Trek was the importer of record of a 2004 shipment of men’s suits. The CPB alleges that by means of “false acts, statements and/or omissions” the company and its President “understated the dutiable value” of the shipment of suits, resulting in the underpayment of duties of $133, 605, in violation of the customs civil penalty statute, 19 U.S.C. Section 1592.
Section 1592 provides in pertinent part that “no person by fraud, gross negligence, or negligence” may “enter, introduce or attempt to enter or introduce any merchandise into the United States” by means of misrepresentations or omission.
The Court of International Trade had granted the government’s motion for summary judgment of liability as to both defendants. On appeal, the Federal Circuit had initially held that only importers of record and certain other indentified entities had the responsibility for making entry and that penalties under Section 1592 could only be imposed against those with that responsibility.
As the Katten Muchien memo summarized, in its initial decision the Federal Circuit had specified that “for the government to assess a penalty against an individual for violations stemming from entries filed by that individual’s import-of-record company, one of three activities had to arise: the government had to (1) ‘pierce the corporate veil’ to establish that the individual was in fact the importer-of-record; (2) establish that the individual him or herself was liable for fraud; or (3) establish that the individual was an aider and abettor of the company’s fraud.”
The individual sought en banc review of the Federal Circuit’s initial decision
The September 16, 2014 Decision
In a unanimous en banc decision written for the Federal Circuit by Judge Richard G. Taranto, the Court, setting aside the initial decision, held that the individual defendant could be held liable under the civil penalties statute for actions the Court found constituted the “introduction” of goods within the meaning of the statute. The Federal Circuit held that the term “introduce” in Section 1592 is broad enough to include acts that extend beyond the formal filing of an entry for the importation of goods.
Specifically, the appellate court held that the term “introduce” was broad enough to “cover actions that bring good to the threshold of the process of entry by moving goods into CBP custody in the United States and providing critical documents (such as invoices dictating value) for use in the filing of papers for an anticipated release into the U.S. commerce.”
In finding the individual defendant liable, the appellate court was explicit that it was not piercing the corporate veil nor was it holding the individual liable simply because of his status as an officer of the company. Rather, the court stated that it was holding him liable for conduct it found to have violated Section 1592.
The appellate court affirmed the judgment against the individual for unpaid duties of $45,245 and penalties of $534,420, plus interest.
As I said at the outset, import law and customs duties are not within my usual bailiwick. However I am always concerned with issues affecting the potential liabilities of corporate directors and officers. What struck me in reading this opinion, and particularly, in reading the law firm memos, is that the upshot of the Federal Court’s en banc decision is that individual officers may now be held liable under the import laws for conduct that previously had been regarded exclusively as a potential source of corporate liability.
As the Kirkland memo puts it, under this decision, “any corporate officer, compliance officer, or customs broker helping prepare or send invoices to be used for CBP entry has potential liability for ‘introducing’ merchandise in violation of law.”
The Katten memo adds that by opening up the possibility of personal liability for “introducing” goods – while at the same time leaving the term “introduce” itself open to interpretation — the appellate court may be “opening exposure to personal liability for all sorts of individuals who are simply trying to do their job.” The law firm memo adds that personnel may find that “their ordinary routines are filled with activities that may be construed as ‘introducing’ merchandise into the United States,” for which “they could find themselves facing personal liability.”
This case obviously has important risk management implications. Companies and their personnel have significant incentives to ensure that procedures used are compliant with import law requirements.
Because of my lack of familiarity with this area of the law, I hesitate to attempt too may generalizations or conclusions. I note simply that, first, this development presents yet another area of personal liability for corporate officials ; and, second, that this development raises the possibility of individuals being held responsible for liabilities that had previously been viewed as exclusively corporate. I note in that regard that the judgment against the individual here included not only a statutory penalty and interest, but also included the unpaid duties themselves, which to me clearly seems like a corporate rather than an individual responsibility.
From an insurance standpoint, it seems likely that the typical D&O Insurance policy would cover the defense fees and costs of an individual subject to an enforcement action of this type, However, most carriers would likely contend that the unpaid import duties as well as any civil penalties do not represent covered loss under their policies.
Speakers’ Corner: This week I will be in London to participate as a panelist and as a moderator at the Advisen European D&O Insights Conference (here), which will take place Wednesday at the Willis Building. If you will be at the conference, I hope you will make a point of saying hello, particularly if we have not previously met.
Break in the Action: There will be a brief interruption in the publication schedule for this site while I am on travel. The normal publication schedule will resume when I return to my office next week.