Corporate Officer of Men’s Suit Importer Avoids Joint Payment of $2,392,307 in U.S. Customs Penalties

On July 30, 2013, in Slip. Op. 11-527, U.S. v. Trek Leather, Inc. and Harish Shadadpuri, the Court of Appeals for the Federal Circuit (CAFC) reversed a U.S. Court of International Trade decision to impose penalties on the corporate officer of an “Importer of Record.”

“Trek Leather” (Trek), whose President and sole shareholder is Mr. Shadadpuri, was the Importer of Record for seventy-two (72) entries of men’s suits.  Mr. Shadadpuri is also a 40% shareholder to “Mercantile Electronics,” which was the consignee of these shipments.

Both Trek and Mercantile Electronics provided “assists” (in the form of fabric) to their suit manufacturers and failed to declare their value to US Customs.  Mr. Shadadpuri even admitted that he knew Trek (the Importer of Record) should have included the value of fabric assists in its duties but did not bother to do so.

 US Customs therefore brought a lawsuit claiming that under 19 USC §1592, both Trek and Mr. Shadadpuri, in his personal capacity, were liable for a penalty of $2,393,307 for fraudulently, knowingly, and intentionally understating the dutiable value of the imported men’s suits. 

Since Trek, a corporation, was the Importer of Record, Mr. Shadadpuri argued he could only be personally liable if the government established that he had pierced Trek’s “corporate veil” or established that he had either committed fraud, or aided and abetted Trek’s fraud, making him liable under 19 USC §1592.

 As Trek had conceded during the course of the litigation however, that its activity rose to a level of gross negligence, the government abandoned its fraud claim against Trek and instead proceeded alternatively on a claim of gross negligence.

 

Mr. Shadadpuri in his defense, argued that corporate officers of an Importer of Record are not directly liable for penalties under 19 USC §1592 – and the court agreed. 

 The CAFC’s 1999 decision in United States v. Hitachi America, Ltd., 172 F.3d 1319 (Fed. Cir. 1999), held that because one cannot “aid and abet” negligent conduct, Mr. Shadadpuri could not be liable for Trek’s admitted negligence unless the government could prove he was acting as Trek’s alter ego rather than as an officer of the corporation acting in his capacity as such.

 

The CAFC, agreeing with Mr. Shadadpuri, stated that under the basic principles of corporate law, Mr. Shadadpuri could not be personally charged with a claim of negligence for the actions he took on behalf of the corporation.

In CAFC’s own words:

 
“[T]he government [US Customs] has asked us to adopt a broad legal principle that would expose all corporate officers and shareholders to personal liability for negligent acts they undertake on behalf of their corporation.  Absent an explicit statutory basis for doing so, we decline to believe Congress intended to supplant the common law so completely…”

 To read the full decision, click here.

 

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