In United States v. Trek Leather, Inc. and Harish Shadadpuri, the United States Court of Appeals for the Federal Circuit found Harish Shadadpuri, the president and sole shareholder of the importer of record, Trek Leather, Inc. personally liable for gross negligence under the Tariff Act of 1930 for his role in understating the dutiable value of imported men’s suits when the merchandise was undergoing customs clearance.
The Federal Circuit held that Mr. Shadadpuri’s actions fell within the broad definition of “introduce” within the penalty provision of the Act, regardless of the fact that Mr. Shadadpuri did not personally enter the undervalued imported suits. § 1592 is the penalty term of the Act. It provides for three degrees of culpable conduct: negligence, gross negligence, and fraud in connection with the importation goods into the United States.
There are a variety of ways § 1592 may come into play. Most often, as in the Trek case, the importer makes a miss-declaration on the customs entry, such as miss-describing the import product, using the wrong tariff classification (which establishes the rate of duty applicable to the goods), or stating the wrong value for the goods. And it doesn’t matter if the miss-declaration results in a lower or higher duty payment than the government is entitled to collect, in either case it is a miss-declaration subject to penalty under § 1592.
The Court determined that Mr. Shadadpuri should be held personal liabile for the miss-declaration of the imported value of the shipment because he transferred the ownership of the imported suits to Trek for customs clearance while in transit to the United States, personally selected the customs broker to prepare entry documents for the imported suits, and supplied the customs broker with commercial invoices that omitted an element of value that should have been part of the entered value of the shipment. The cost of fabric “assists” provided to the manufacturer by the importer should have been added to the imported value of the suits but were not. This resulted in an undervaluation of the suits for customs purposes.
The court found that Mr. Shadadpuri personally introduced the suits into the United States Commerce by “[doing] everything short of the final set of preparing CBP Form 7501s and submitting them and other required papers to make formal entry.” Mr. Shadadpuri filed an appeal with the U.S. Supreme Court seeking review of the decision. Unfortunately for Mr. Shadadpuri, and perhaps others who may find themselves in Mr. Shadadpuri’s shoes in dealing with U.S. Customs and Border Protection (CBP) in the future, the Court declined to review the decision. As a consequence, the decision will stand and CBP has a precedent that justifies extending prospective liability for penalty claims to persons not previously thought to be exposed to such liability.
The Court’s decision to extend Tariff Act penalties to an individual, other than the corporate importer of record, may have merit when dealing with a violation of the import laws that constitutes fraudulent conduct. However, the decision raises a number of potentially troubling issues.
As noted above, CBP may now pursue claims for enforcement of penalty claims directly against individuals thought to be responsible for acts or omissions that give rise to a penalty claim. Whether and to what extent CBP will exercise this authority remains to be seen. But it certainly looms as a threat to those who are involved in the import activities of their companies.
This leads to the issue as to whether the court’s interpretation of the application of the language and intent of § 1592 should be allowed to override the very sanctified concept of limited liability on the part of officers, directors, employees, and shareholders of corporations or similarly situated entities.
Potentially this decision could be used as a loophole for imposing personal liability on individual owners, officer, directors, and employees of importer of record companies for unintentional, innocent mistakes, as well as those that are classified as fraudulent or intentional. Mr. Shadadpuri’s conduct appears on the face of it both intentional and fraudulent. However, there is a gray area between such conduct and lesser degrees of culpability that could be interpreted as treating less egregious conduct as fraudulent and exposing an individual to personal liability for a penalty claim.
Long term, creative and enterprising plaintiffs’ counsel might even find a use for the Trek case in civil litigation, to avoid the limited liability corporate protections, especially when a case involves small, closely held companies, which tend to be rather loose in maintaining corporate formalities and in treating corporate assets as both company and personal.
It is all a matter of perspective and interpretation of the facts. When one considers that deference is given by courts to decisions of CBP and other federal agencies, the burden would rest on the individual in such situations to have to prove he or she does not fall within the scope of the Trek decision.
As a consequence, the Trek court has set a potentially dangerous precedent. CPB may now justifiably and indiscriminately impose civil penalties, not only on the importer of record company, but any individual acting on behalf of the importer of record, possibly regardless of the level of culpable conduct on the part of the individual. In addition, the Trek decision may give impetus to increased issuance of penalties and enforcement effort by CBP, by increasing the pool of those potentially liable for a penalty.
Insuring the Risk?
Clearly greater care needs to be taken in how those representing their company in connection with its importation of merchandise conduct themselves. This is particularly necessary since at present there is no insurance product available that is designed to address the prospective exposure created by the Trek case.
Covering liability for intentional acts committed by an insured for customs violations, or for any intentional acts committed by the insured that are in violation of their policy, are normally excluded in insurance policies. Coverage for gross negligence is also going to be nearly impossible, given the implication that the violation was more than a simple mistake.
Many have thought that possibly Errors and Omissions Insurance (E&O) might be an option to this exposure, but E&O policies generally cover third-party claims, such as when an importer seeks to recover losses from a customs broker or transportation intermediary. What appears to be the more likely approach to covering situations like the Trek case would be to see if your insurer would consider expanding coverage under a Directors & Officers Liability Policy (D&O). In any event, an insurance policy that is being sought to cover these types of claims would have to be manuscripted by the insurer.
The major challenge for an insurer to come up with an insurance product to cover these types of claims is that it will have a difficult time quantifying the risk to determine what the potential exposure is, and then calculating the appropriate premium.
It remains to be seen how CBP and the Justice Department will apply the Trek case, which is not easy to predict. If an importer is concerned with protecting against claims similar to Trek, they should consult with their insurance broker to identify their exposures so that they can search the insurance market to see if there is an insurer willing to cover such risk.