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.”
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.
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.
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.
“[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.
“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.
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.
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,
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…”
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