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Court Penalizes Importer for Misclassification, Delays Ruling on CEO Liability

Monday, October 16, 2017
Sandler, Travis & Rosenberg Trade Report

In an Oct. 12 decision the Court of International Trade ruled that an importer was grossly negligent in misclassifying numerous entries of footwear and ordered it to pay more than $1.5 million in unpaid duties. However, the court said more information is needed to determine whether the importer’s president and CEO is personally liable for the misclassification and thus a share of those duties.

This case constitutes an effort by U.S. Customs and Border Protection to recover unpaid duties and a monetary penalty for entries of footwear incorrectly classified as rubber tennis shoes under HTSUS 6402.91.40. The CIT agreed with CBP that the importer is liable for gross negligence because it knew the style and composition of its footwear (because it had designed it), repeatedly misdescribed the footwear and instructed its customs brokers to enter the footwear using a tariff provision it knew was incorrect, and failed to correct its errors (and continued using the incorrect classification) when advised by CBP.

The importer argued that it relied at all times on its counsel’s legal opinion that the entries were properly classified, but the court pointed out that this counsel was not hired until after CBP got involved. The importer also asserted that it relied on its general manager to hire experienced employees and competent customs brokers to determine classifications, but the court responded that (a) importers bear ultimate responsibility for correct classification and (b) there is “overwhelming evidence” that in this case the importer provided classification information to its brokers rather than the other way around. Finally, the court states that third-party lab tests relied on by the importer actually found the footwear to have features that disqualified them from classification as rubber tennis shoes.

The CIT thus ordered the importer to pay $1.57 million in unpaid duties, plus interest. The court said that CBP is also eligible to recover a civil penalty up to the statutory maximum of $20.8 million but that it will defer a decision on the final amount of that penalty until all liable parties have been identified. The court explains that there are still material facts in dispute as to the liability of the importer’s CEO and a separate company CBP claims is the importer’s successor.

The court states that under federal common law a successor entity may be responsible for its predecessor’s debts when the successor is a mere continuation of its predecessor. In addition, successor liability is usually contingent upon the transfer of assets from the predecessor. While there is no dispute that the two companies at issue had common shareholders, managers, officers, business departments, employees, manufacturers, customers, company suites, equipment, and telephone numbers and shared a business address, the court states, there is no record evidence that the purported successor purchased the importer or otherwise obtained its assets. There is also a dispute as to whether the two companies carried on the same business.

With respect to the importer’s CEO, the CIT finds undisputed evidence that he played a role in causing the importer’s footwear to be shipped to the U.S. However, there is conflicting evidence regarding his role in determining the tariff provision under which the footwear would be entered.

On this last point, the CIT states that misclassifying goods (or causing them to be misclassified) in a document prepared for the purpose of entering goods that a person causes to be shipped to and unloaded at a U.S. port falls within the term “introduce” for purposes of determining personal liability for corporate entry violations under U.S. v. Trek Leather. In that September 2014 decision the Court of Appeals for the Federal Circuit distinguished between those who enter goods (e.g., the importer of record) and those who introduce goods into U.S. commerce and broadly defined the latter, thus extending to import managers, compliance officers, business owners, and others personal liability for fraudulently or negligently providing information on company imports.

The Trek Leather ruling, and the CIT’s decision in this case, highlight the dangers to corporate officers of failing to meet their compliance responsibilities. This topic is covered in more detail in one of ST&R’s on-demand webinars; click here for more information.

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