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Corporate Officer Not Liable for Company’s Negligence in Not Reporting Fabric Assists

Thursday, August 01, 2013
Sandler, Travis & Rosenberg Trade Report

In a July 30 decision in U.S. v. Trek Leather Inc. and Harish Shadadpuri, the Court of Appeals for the Federal Circuit overturned a Court of International Trade decision and ruled that a corporate officer is not personally liable for his company’s gross negligence under 19 USC 1592(a) for not reporting fabric assists.

Trek, of which Shadadpuri is the president and sole shareholder, is the importer of record for 72 entries of men’s suits between Feb. 2 and Oct. 8, 2004. Trek and Mercantile Electronics, of which Shadadpuri is a 40% shareholder, purchased fabric assists and provided them to manufacturers abroad, which incorporated the assists in the production of the men’s suits at issue.

U.S. Customs and Border Protection subsequently discovered that the entry documentation for these suits failed to include the cost of the assists in the price actually paid or payable for the suits, thereby lowering the amount of duty paid. Shadadpuri had been investigated for similar behavior in the past but no action was taken against him at that time after the unpaid duties were tendered. In this case, Shadadpuri admitted that the assists should have been declared, but neither he nor Trek paid the remaining duties owed. The CIT ultimately decided that both Trek and Shadadpuri were grossly negligent and were jointly and severally liable for a civil penalty of $534,420 in addition to the duties still owed.

In a split decision, the CAFC reversed the CIT’s ruling, citing the “basic principles of corporate law” to hold that Shadadpuri cannot be personally chargeable with negligence for the actions he took in his capacity as a corporate officer and on behalf of Trek because he was not the importer of record. The majority also upheld the proposition that when an importer of record (i.e., Trek) is liable for negligence with respect to making entry, a third party (i.e., Shadadpuri) cannot be liable for aiding and abetting that negligence because such liability requires a demonstration of knowledge or intent.

In reaching this conclusion the majority rejected the government’s argument that the word “person” in 19 USC 1592(a), which prohibits the entry of merchandise by fraud, negligence or gross negligence, should be construed more broadly than “importer of record” is defined in 19 USC 1484 and 1485, which set forth the level of reasonable care required in conjunction with the entry of merchandise. Such a principle, the court states, “would expose all corporate officers and shareholders to personal liability for negligent acts they undertake on behalf of their corporation.”

The dissenting judge, however, pointed out that 19 USC 1592 contains no reference to 1484 and broadly sanctions any person who uses fraud, gross negligence or negligence to enter or attempt to enter merchandise into the U.S. The dissent also accuses the majority of ignoring the history of 19 USC 1592, asserting that its precursor “imposed liability for false statements to Customs on a wide range of individuals, including corporate representatives like Shadadpuri,” and that when the language of this provision was changed there was no intent to alter the range of persons covered.

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