United States Court of Appeals for the Federal Circuit

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1 United States Court of Appeals for the Federal Circuit UNITED STATES OF AMERICA, Plaintiff-Appellee, v. TREK LEATHER, INC., Defendant, and HARISH SHADADPURI, Defendant-Appellant. Appeal from the U.S. Court of International Trade, No. 09-cv-41, Judge Nicholas Tsoucalas BRIEF FOR AMICUS CURIAE THE AMERICAN ASSOCIATION OF EXPORTERS AND IMPORTERS IN SUPPORT OF APPELLANT HARISH SHADADPURI May 9, 2014 John M. Peterson Counsel of Record Maria E. Celis NEVILLE PETERSON LLP th Street, N.W., Suite 350 Washington, DC (202)

2 FORM 9. Certifi cate of Interest UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT United States v. Trek Leather, Inc., and Harish Shadadpuri No CERTIFICATE OF INTEREST Counsel for the (petitioner) (appellant) (respondent) (appellee) (amicus) (name of party) Amici Curiae (see below, field 1) certifies the following (use None if applicable; use extra sheets if necessary): 1. The full name of every party or amicus represented by me is: The American Association of Exporters and Importers (AAEI); and The Association of Service and Computer Dealers International/North American Telecommunications Dealers (ASCDI/NATD) 2. The name of the real party in interest (if the party named in the caption is not the real party in interest) represented by me is: The American Association of Exporters and Importers (AAEI); and The Association of Service and Computer Dealers International/North American Telecommunications Dealers (ASCDI/NATD) 3. All parent corporations and any publicly held companies that own 10 percent or more of the stock of the party or amicus curiae represented by me are: n/a 4. The names of all law firms and the partners or associates that appeared for the party or amicus now represented by me in the trial court or agency or are expected to appear in this court are: John M. Peterson and Richard F. O'Neill of Neville Peterson LLP April 23, 2014 Date Please Note: All questions must be answered cc: /s/ John M. Peterson Signature of counsel John M. Peterson Printed name of counsel (i)

3 FORM 19. Certifi cate of Compliance With Rule 32(a) ii CERTIFICATE OF COMPLIANCE WITH TYPE-VOLUME LIMITATION, TYPEFACE REQUIREMENTS, AND TYPE STYLE REQUIREMENTS 1. This brief complies with the type-volume limitation of Federal Rule of Appellate Procedure 32(a)(7)(B) or Federal Rule of Appellate Procedure 28.1(e). The brief contains [state the 6990 number of] words, excluding the parts of the brief exempted by Federal Rule of Appellate Procedure 32(a)(7)(B)(iii), or The brief uses a monospaced typeface and contains [state the number lines of text, excluding the parts of the brief exempted by Federal Rule of Appellate Procedure 32(a)(7)(B)(iii). ] 2. This brief complies with the typeface requirements of Federal Rule of Appellate Procedure 32(a)(5) or Federal Rule of Appellate Procedure 28.1(e) and the type style requirements of Federal Rule of Appellate Procedure 32(a)(6). The brief has been prepared in a proportionally spaced typeface using [state name and Microsoft version Office of word Word 2007 processing program] in [ Times New Roman (size 14) ], or The brief has been prepared in a monospaced typeface using [ ] with [ [ ]. /s/ Russell A. Semmel (Signature of Attorney) Russell A. Semmel (Name of Attorney) AAEI (State whether representing appellant, appellee, etc.) February 4, 2013 (Date)

4 iii TABLE OF CONTENTS PAGE CERTIFICATE OF INTEREST... i CERTIFICATE OF COMPLIANCE... ii TABLE OF AUTHORITIES... iv STATEMENT OF INTEREST... 2 STATEMENT OF AUTHORSHIP... 3 STATEMENT OF THE CASE... 3 STATEMENT OF FACTS... 5 ARGUMENT... 7 I. The Persons Subject to the Proscription of Section 1592(a) Are Limited to the Importer of Record and Any Person Who Aids or Abets Fraudulent Entry Practices II. A. Relevant Provisions of the Tariff Act Support This Reading B. The Legislative History of Section 592 and Other Tariff Act Provisions Supports This Interpretation History of Section a. Section 592 Generally b. Revitalization of Section 592 Prior to The 1978 Conversion to an in Personam Monetary Penalty Duties Owed By Persons Engaged in Entry of Merchandise Enhancement of Obligations by the Modernization Act A Court Must Pierce the Corporate Veil to Hold Corporate Owners, Officers, or Employees Directly Liable for Non-Fraudulent Violations of 19 U.S.C A. Corporate Limited Liability Is the Rule, Not the Exception B. Disregarding the Corporate Form Would Have Adverse Consequences for the Importing Community and the Government CONCLUSION... 30

5 iv EXHIBIT A Memorandum from Ass t Comm r (Investigations), U.S. Cust. Serv., to All Special Agents, Minimum Evidence Guidelines for Establishing Violations of 19 U.S.C (June 11, 1974) PAGE TABLE OF AUTHORITIES PAGE(S) Cases A. Stucki Co. v. Worthington Indus., Inc., 849 F.2d 593 (Fed. Cir. 1988) Adolf Meller Co. v. United States, 220 Ct. Cl. 500 (1979) Anderson v. Abbott, 321 U.S. 349 (1944) Erskine v. United States, 84 F.2d 690 (9th Cir. 1936) Grothues v. IRS, 226 F.3d 334 (5th Cir. 2000) Hambleton Bros. Lumber v. Balkin Enters. Ltd., 397 F.3d 1217 (9th Cir. 2005) In re Hillsborough Holdings Corp., 166 B.R. 461 (Bankr. M.D. Fla. 1994) Minn. Mining & Mfg. Co. v. Eco Chems., Inc., 757 F.2d 1256 (Fed. Cir. 1985) Petzold v. United States, 116 Ct. Cl. 291 (1950) Powerex Corp. v. Reliant Energy Servs., Inc., 551 U.S. 224 (2007) United States v. Appendagez, Inc., 5 C.I.T. 74 (1983) United States v. Brown, 404 F. Supp. 968 (S.D.N.Y. 1975) United States v. F.H. Fenderson, Inc., 11 C.I.T. 199 (1987) United States v. Ford Motor Co., 29 C.I.T. 827 (2005) United States v. Ford Motor Co., 463 F.3d 1267 (Fed. Cir. 2006) United States v. Ford Motor Co., 463 F.3d 1286 (Fed. Cir. 2006) United States v. Golden Ship Trading Inc., 22 C.I.T. 950 (1998) United States v. Hitachi Am., Ltd., 172 F.3d 1319 (Fed. Cir. 1999).... 4, 20 United States v. Inn Foods, Inc., 560 F.3d 1338 (Fed. Cir. 2009)... 21

6 v PAGE(S) United States v. Islip, 22 C.I.T. 852 (1998) United States v. Jean Roberts of Cal., 30 C.I.T (2006) United States v. Matthews, 31 C.I.T (2007)... 21, 24 United States v. Modes, 13 C.I.T. 780 (1989) United States v. Nitek Elecs., Inc., 844 F. Supp. 2d 1298 (Ct. Int l Trade 2012) United States v. Optrex Am., Inc., 32 C.I.T. 620 (2008) United States v. Pan Pac. Textile Grp. Inc., 29 C.I.T (2005)... 13, 21 United States v. Priority Prods., Inc., 793 F.2d 296 (Fed. Cir. 1986) United States v. Scotia Pharms. Inc., 22 C.I.T. 638 (2009) United States v. Wagner, 434 F.2d 627 (9th Cir. 1970) Wachovia Bank, N.A. v. Schmidt, 546 U.S. 303 (2006) Statutes & Session Laws 19 U.S.C (1993)... 11, U.S.C (2006)... passim 19 U.S.C (1993)... 6, 11, U.S.C (1976)... 7, 15, U.S.C (2011)... passim 19 U.S.C (1993) U.S.C (1996)... 4 Customs Informed Compliance and Modernization Act of 1993, Pub. L. No , 107 Stat , 22 Customs Procedural Reform and Simplification Act of 1978, Pub. L. No , 92 Stat Regulations & Federal Register Publications 19 C.F.R. pt. 171 app. B (2000)... 23, 24 Legislative Materials Customs Procedural Reform Act of 1977: Hearing on H.R Before the Subcomm. on Int l Trade of the S. Comm. on Fin., 95th Cong. (1978)

7 vi PAGE(S) Administrative Rulings & Materials Customs Directive A (June 27, 2001) HQ (Jan. 20, 1999) HQ (Aug. 6, 1992) Miscellaneous 1 Wm. M. Fletcher, Cyclopedia of the Law of Private Corporations (West 2004) Bill Conroy, Our Changing Industry: Profiles of the Global Trade Professional, The Global Trade Prof., Summer Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. Chi. L. Rev. 89 (1985) John M. Peterson, Civil Customs Penalties under Section 592 of the Tariff Act: Current Practices and the Need for Further Reform, 18 Vand. J. Transnat l L. 679 (1985) Robert E. Herzstein, The Need to Reform Section 592 of the Tariff Act of 1930, 10 Int l Law. 285 (1976) William L. Dickey, Survivals from More Primitive Times: Customs Forfeitures in the Modern Commercial Setting under Sections 592 and 618 of the Tariff Act of 1930, 7 L. & Pol y Int l Bus. 691 (1975)

8 United States Court of Appeals for the Federal Circuit UNITED STATES OF AMERICA, Plaintiff-Appellee, v. TREK LEATHER, INC., Defendant, and HARISH SHADADPURI, Defendant-Appellant. Appeal from the U.S. Court of International Trade, No. 09-cv-41, Judge Nicholas Tsoucalas BRIEF FOR AMICUS CURIAE THE AMERICAN ASSOCIATION OF EXPORTERS AND IMPORTERS IN SUPPORT OF APPELLANT HARISH SHADADPURI Amicus curiae the American Association of Exporters and Importers (AAEI) hereby submits, pursuant to Federal Rule of Appellate Procedure (FRAP) 29(a), its brief in support of Appellant Harish Shadadpuri ( Shadadpuri ) and in response to this Court s order of March 5, 2014, which solicits amicus views in this en banc matter. (1)

9 2 STATEMENT OF INTEREST AAEI has been, for more than ninety years, the voice of American businesses in support of free and open trade among nations. AAEI represents numerous manufacturers, distributors, and retailers of a wide spectrum of products including electronics, machinery, footwear, automobiles, automotive parts, food, household consumer goods, textiles, and apparel as well as international companies, freight forwarders, customs brokers, and banks. AAEI is the premier national association representing the interests of exporters and importers before the United States, its agencies, Congress, the trade community, foreign governments, and international organizations. Most of AAEI s corporate members import merchandise into the United States. AAEI works tirelessly with its members and the trade community to educate them on the laws and regulations governing importing, and best practices for achieving and sustaining compliance therewith. As civil penalties under section 592 of the Tariff Act of 1930, 19 U.S.C (2011), are among the harshest in Federal law, 1 AAEI and its members have an important interest in ensuring that the law is fairly administered by CBP and correctly enforced by the courts. 1 See John M. Peterson, Civil Customs Penalties under Section 592 of the Tariff Act: Current Practices and the Need for Further Reform, 18 Vand. J. Transnat l L. 679, 680 (1985).

10 3 Any interpretation of 1592 that disregards the liability limitations ordinarily accorded to corporate entities would have immensely negative consequences for the importing community, and would impede Congress legislative goal of promoting importer self-regulation using reasonable care within a regulatory environment of informed compliance. STATEMENT OF AUTHORSHIP In accordance with FRAP 29(c)(5), AAEI confirms that its board of directors has authorized the filing of this brief. No other party contributed to the drafting of the brief or contributed any money to the effort. The brief was drafted entirely by undersigned counsel for AAEI. STATEMENT OF THE CASE AAEI addresses two of the three questions posed by the Court in its Order of March 5, 2014 A) 19 U.S.C. 1592(a) imposes liability on any person who enter[s], introduce[s], or attempt[s] to enter or introduce merchandise into United States commerce by means of fraud, gross negligence, or negligence by the means described in 1592(a). What is the meaning of person within this statutory provision? How do other statutory provisions of Title 19 affect this inquiry? B) If corporate officers or shareholders qualify as persons under 1592(a), can they be held personally liable for duties and penalties imposed under 1592(c)(2) and (3) when, while acting within the

11 4 course and scope of their employment on behalf of the corporation by which they are employed, they provide inaccurate information relating to the entry or introduction of merchandise into the United States by their corporation? If so, under what circumstances? First, AAEI submits that the persons liable for 1592(a) penalties are (1) persons who qualify to act as importer of record pursuant to 19 U.S.C (2006) and are obligated to discharge statutory obligations attendant to that status, and (2) others who aid and abet the entry or introduction of merchandise in cases involving intentional fraud. See United States v. Hitachi Am., Ltd., 172 F.3d 1319, 1338 (Fed. Cir. 1999). Second, AAEI submits that corporate officers, shareholders and employees acting in their corporate capacities will not qualify as persons having liability for 1592(a) penalties, unless (1) they aid and abet intentional and fraudulent violations of the statute, or (2) the court finds cause to pierce the corporate veil and hold owners liable for the import violation and consequent penalties. Initially, we distinguish liability for a 1592 penalty from the ultimate collectability thereof. Liability on which the Court seeks comment here concerns whether or when direct liability for a 1592 violation and penalty may attach to an owner or other agent of a corporate importer. Collectability involves the distinct issue of whose assets might be reached to satisfy a 1592 penalty judgment against a corporate importer. Under 28 U.S.C (1996), a final judgment of the U.S. Court of International Trade (CIT) may be registered in any judicial district for

12 5 purposes of enforcement. If, in enforcement proceedings, a court determines that a corporate owner disregarded or abused the corporate form, or used the corporation improperly as his alter ego even for purposes wholly unrelated to importing the court might, subject to applicable veil-piercing rules, hold the owners liable for payment of the judgment. Amicus addresses only the question of liability. That being said, nothing in 1592, its history, or the development of related legal duties, evidences any Congressional intent to deprive importers of the ordinary liability limitations granted to those who transact business in the corporate form. STATEMENT OF FACTS Defendant Trek Leather, Inc. ( Trek ), a closely-held corporate importer, failed to declare fabric assists it had provided to manufacturers of imported garments, thereby undervaluing the garments and depriving the government of duties. Shadadpuri, Trek s president and shareholder, had submitted to U.S. Customs and Border Protection (CBP or Customs ), on behalf of the corporation, documents that failed to disclose the assists. Shadadpuri, having previously been investigated for similar violations, was aware that assists needed to be declared. Appellee the United States (the Government ) sued Trek and Shadadpuri in the CIT to recover 1592 penalties. The Government plead alternatively that the violations resulted

13 6 from negligence, gross negligence, or fraud; after Trek admitted to gross negligence, the Government dropped its fraud claim. The CIT then entered judgment holding both Trek and Shadadpuri jointly and severally liable for the grossly negligence violation and attendant penalties. App. 2. Shadadpuri appealed. A merits panel of this Court, in a 2-1 decision, vacated the CIT s judgment against Shadadpuri, ruling that, to hold Shadadpuri personally liable, the Government was required either (1) to pierce the corporate veil, by showing that Shadadpuri had abused the corporate form and was not entitled to corporate liability limitations; or (2) to prove Shadadpuri guilty of aiding and abetting a fraudulent violation of 1592(a). Slip. Op. at The panel noted that 19 U.S.C and 1485 (1993) imposed duties of reasonable care on the importer of record in this case a corporation and that 1592 penalties arising from failure to discharge those duties generally would not lie against persons other than the importer of record. Id. at 11. Since Shadadpuri was neither the importer of record nor its customs broker, and no veil-piercing analysis had been performed, the panel vacated the judgment against him. The Government argued that because 1592(a) states that no person may enter goods by means of prohibited activities, the term person should be defined broadly, to encompass any individual connected with a violation. The panel rejected this argument, finding no indication that Congress, in enacting 1592 in its

14 7 current form, intended to set aside common law principles of limited liability for corporate acts, or the requirement of veil-piercing to hold an individual liable therefor. Judge Timothy B. Dyk dissented, arguing that the question of who is a person under 1592 should be broadly construed. On March 5, 2014, the Court en banc vacated the panel decision, reinstated the appeal, and requested party and amicus briefing regarding the issues AAEI addresses herein. ARGUMENT The legal obligations of importers, and the statutory basis for imposing liability under 19 U.S.C. 1592, have evolved over time. Before 1978, 1592 was an in rem forfeiture statute, enforced against goods imported by means of false statements. While the list of persons who might originate false statements was broad, the statute imposed no personal liability on any of them. Nonetheless, the statute required (1) a false statement, (2) by someone engaged in the entry or introduction of the goods, (3) without reasonable cause to believe the truth thereof. 19 U.S.C (1976) The Customs Procedural Reform and Simplification Act of 1978 ( Reform Act ), Pub. L. No , 92 Stat. 888, transformed 1592 into an in personam monetary penalty provision. In describing the persons subject to the false entry

15 8 proscription, the statute focused on those who enter or introduce or attempt to enter or introduce merchandise into the United States by means of false and material statements, acts or practices, or by means of material omissions, or those who aid and abet such importations. Section 484 of the Tariff Act, 19 U.S.C. 1484, limited the persons entitled to make entry of merchandise, and imposed on the importer of record various legal duties. The principal focus of 1592 remained on the importers of record engaged in entry of goods. There was no indication that Congress intended the statute to disregard corporate identity or impose direct liability against shareholders, officers, or employees acting in their role as corporate agents. Where owners and officers were held liable for 1592 penalties, it was for aiding and abetting fraud. The Customs Informed Compliance and Modernization Act of 1993 ( Modernization Act ), Pub. L. No , 107 Stat. 2057, significantly changed the legal obligations imposed on importers of record, adding a duty to make entry using reasonable care that entry declarations were not merely factually accurate, but also legally correct. As Congress intended, the courts have adopted the reasonable care standard as the touchstone for determining when an importer is liable for a 1592 penalty. Failure to exercise reasonable care subjects the importer to penalty liability, while a showing that reasonable care was exercised is a defense.

16 9 As the statutory duty of reasonable care devolves only on the 1484 importer of record, it seems unlikely that Congress intended 1592 liability to extend to individuals not subject to the statutory duty, unless some abuse of the corporate form occurs. Nor is there any indication that Congress intended that courts disregard importers corporate status and impose 1592 liability on their owners, officers, or directors absent a veil piercing exercise. For this Court to hold otherwise would have devastating consequences on the importing community, and significantly frustrate Congress goal of having a self-regulated domestic importing sector. I. The Persons Subject to the Proscription of Section 1592(a) Are Limited to the Importer of Record and Any Person Who Aids or Abets Fraudulent Entry Practices. The Court in its Order first asks [w]hat is the meaning of person as used in 1592(a), and [h]ow do other statutory provisions of Title 19 affect this inquiry. AAEI submits that when relevant sections of the Tariff Act are read in pari materia, direct liability under 1592(a) is imposed on the importer of record as defined in 1484, and persons who aid and abet the importer of record in fraudulent activities. added): A. Relevant Provisions of the Tariff Act Support This Reading. Section 1592(a), entitled Prohibition, provides, in relevant part (emphasis

17 10 (1) General rule. Without regard to whether the United States is or may be deprived of all or a portion of any lawful duty, tax, or fee thereby, no person, by fraud, gross negligence, or negligence (A) may enter, introduce, or attempt to enter or introduce any merchandise into the commerce of the United States by means of (i) any document or electronically transmitted data or information, written or oral statement, or act which is material and false, or (ii) any omission which is material, or (B) may aid or abet any other person to violate subparagraph (A). The statute focuses on a person who enters or introduces merchandise into the United States. Entry is a term of art under the customs laws, and relates to an importer of record s submission to CBP of documents describing imported goods and providing information necessary for the assessment of duties thereon. The person having the right to make entry is by law limited to that person, natural or legal, who qualifies as the importer of record under Section 1484(a) requires, with exceptions not here relevant, that merchandise imported into the United States be entered with CBP by the importer of record, either personally or through an agent, using reasonable care. Section 1484(a)(2)(B) identifies who may act as importer of record: When an entry of merchandise is made under this section, the required documentation or information shall be filed or electronically 2 Similar requirements apply to persons authorized to introduce goods into the United States in other transactions.

18 11 transmitted either by the owner or purchaser of the merchandise or, when appropriately designated by the owner, purchaser, or consignee of the merchandise, a person holding a valid [customs broker s] license under 1641 of this title. The statute thus defines the importer of record based upon its relationship to the merchandise being entered the owner or purchaser, or a customs broker designated by the owner, purchaser, or consignee of the goods. Manifold statutory duties devolve upon the person who is importer of record. This includes making entry using reasonable care, a standard of responsible conduct for legal compliance first imposed on importers by the Modernization Act. Section 481(c) of the Tariff Act, 19 U.S.C. 1481(c) (1993), obligates the importer to provide truthful invoice information. Section 1485 requires the importer of record to declare under oath that prices and other statements in the invoice and entry documents are true and correct, and to produce to CBP at once any documents showing that entry statements are not true or correct. The importer of record is personally indebted to the government for the payment of duties, taxes, and fees on the merchandise entered, 19 U.S.C. 1485(d), and must post a bond to secure the government for payment of duties and other obligations, id. 19 U.S.C (1993). This Court has indicated that this bundle of legal obligations imposed on the importer of record is inextricably linked to 1592, see United States v. Ford Motor Co., 463 F.3d 1286, (Fed. Cir. 2006) (violations of 1484 and

19 give rise to a gross negligence penalty under 1592); United States v. Ford Motor Co., 463 F.3d 1267, 1279 (Fed. Cir. 2006) (failure to disclose value information pursuant to 1484 was punishable under 1592). The panel correctly made a similar observation in this appeal. When the relevant Tariff Act provisions are read in pari materia, it is clear that the person directly subject to the 1592(a) proscription against false entry is the importer of record. Had Congress wished to so obligate a broader class of persons on the same terms, it could have done so. It would be anomalous for this Court to rewrite the Tariff Act to hold that persons, natural or legal, on whom Congress has not imposed these obligations, are equally answerable for breaches thereof. By no means does this insulate persons other than the importer of record from any liability under Others may become liable, but only if they aid and abet fraudulent violations of the statute, established by clear and convincing evidence. See 19 U.S.C. 1592(a), (e). Congress must be presumed to have intended these differences in the scope of setting and proving liability. As Congress defined the importer of record with reference to its relationship to the goods being imported, 3 the importer may be either a natural or a legal 3 A substantial body of administrative precedent addresses who has the right to make entry of merchandise under the statute. See, e.g., Customs Directive A (June 27, 2001) (defining owner and purchaser of goods as

20 13 person. 4 Congress designation binds CBP and the courts; if imported goods are corporate property, neither the Executive nor the Judiciary may adopt a legal fiction that they are personal property of a corporate officer or employee. CBP has always accepted corporate importers of record, and benefitted by doing so, as this places the vast wealth of corporations at the government s disposal for satisfaction of duty and tax obligations. A cardinal rule of statutory construction is that, absent contrary legislative intent, identical phrases within the same statute, which address the same subject matter, should normally be given the same meaning. Powerex Corp. v. Reliant Energy Servs., Inc., 551 U.S. 224, 232 (2007). Equally settled is that statutes addressing the same subject matter generally should be read in pari materia as if they were persons having a financial interest in a transaction ); see also CBP Headquarters Ruling (HQ) (Jan. 20, 1999) (nominal consignee cannot act as importer of record); HQ (Aug. 6, 1992) (freight forwarders lack financial interest and may not be importer of record). If entries are filed by someone not legally entitled to act as importer of record, that person is nonetheless subject to the statutory obligations and liabilities, including 1592(a) penalties. See, e.g., United States v. Pan Pac. Textile Grp. Inc., 29 C.I.T (2005); United States v. F.H. Fenderson, Inc., 11 C.I.T. 199 (1987). 4 As noted in United States v. Appendagez, Inc., 5 C.I.T. 74, 80 (1983) (emphasis added): The Customs Procedural Reform and Simplification Act s phrase, no person, in section 592 replaced language in the previous statute that listed the persons who would be held accountable for entering or introducing merchandise into this country by means of false invoices as any consignor, seller, owner, importer, consignee, agent or other person or persons. No limitation was placed on whether such persons were corporations or natural persons and none can be implied.

21 14 one law. Wachovia Bank, N.A. v. Schmidt, 546 U.S. 303, (2006). Given the Tariff Act s imposition of a bundle of legal obligations to the importer of record, including obligations relating to the truthfulness and legal accuracy of entry statements it is compelling to identify the importer of record as the person directly liable for any violation of 1592(a). Others who aid and abet the importer of record in an intentional violation of the statute may also be held liable. 5 B. The Legislative History of Section 592 and Other Tariff Act Provisions Supports This Interpretation. By defining the importer of record as the owner or purchaser of imported merchandise, the Tariff Act admits of the possibility in modern commerce, the probability that the importer of record will be a legal person, such as a corporation. Historical development of 1592 and associated sections of the Tariff Act makes clear that Congress was not only aware that the statute would operate against corporations, but was solicitous of corporate concerns. It is helpful to analyze (1) the history of section 592 and its resurrection from disuse, (2) its conversion in 1978 from an in rem forfeiture to an in personam monetary penalty, (3) legal duties historically owed by persons engaged in the entry of merchandise, and (4) the enhancement of those duties by the Modernization Act in The Government having abandoned its claims of intentional violation, the question of aiding and abetting is not presented in this appeal.

22 15 1. History of Section 592. a. Section 592 Generally. Descended from maritime forfeiture laws, section 592 was before 1978 an in rem sanction that forfeited merchandise entered or introduced into the United States by using false statements. 6 Section 592 of the Tariff Act provides that 6 Prior to its 1978 amendment, section 592, entitled Penalty Against Goods, provided: If any consignor, seller, owner, importer, consignee, agent, or other person or persons enters or introduces, or attempts to enter or introduce, into the commerce of the United States any imported merchandise by means of any fraudulent or false invoice, declaration, affidavit, letter, paper, or by means of any false statement, written or verbal, or by means of any false or fraudulent practice or appliance whatsoever, or makes any false statement in any declaration under the provisions of section 485 of this Act (relating to declaration on entry) without reasonable cause to believe the truth of such statement, whether or not the United States shall or may be deprived of the lawful duties, or any portion thereof, accruing upon the merchandise, or any portion thereof, embraced or referred to in such invoice, declaration, affidavit, letter, paper, or statement; or aids or procures the making of any such false statement as to any matter material thereto without reasonable cause to believe the truth of such statement, or is guilty of any willful act or omission by means whereof the United States is or may be deprived of the lawful duties or any portion thereof accruing upon the merchandise or any portion thereof, embraced or referred to in such invoice, declaration, affidavit, letter, paper, or statement, or affected by such act or omission, such merchandise, or the value thereof, to be recovered from such person or persons, shall be subject to forfeiture, which forfeiture shall only apply to the whole of the merchandise or the value thereof in the case or package containing the particular article or articles of merchandise to which such fraud or false paper or statement relates. The arrival within the territorial limits of the United States of any merchandise consigned for sale and remaining the property of the shipper or

23 16 when in the importation of merchandise in commercial shipments, a person enters or introduces, or attempts to introduce, imported merchandise by means of any false statement in a declaration without reasonable cause to believe the truth of that statement, the merchandise or its domestic value is forfeited to the United States. Adolf Meller Co. v. United States, 220 Ct. Cl. 500, 502 (1979). The range of persons who might originate a false statement or practice was broadly defined, encompassing any consignor, seller, owner, importer, consignee, agent, or other person or persons, but the statute also required that such person enter[s] or introduce[s], or attempt[s] to enter or introduce merchandise into the United States by means of a document or statement without reasonable cause to believe the truth of such statement. Thus, the fundamental elements of the violation were (1) a false statement, (2) by someone engaged in entry or introduction of goods, (3) who lacked reasonable cause to believe the statement s truth. Section 592 expressly linked the false documents or statements to the entry requirements of section 485. The state of mind element (or defense) was directed to the person making entry. See Petzold v. United States, 116 Ct. Cl. 291 (1950) (importer of pearls held to consignor, and the acceptance of a false or fraudulent invoice thereof by the consignee or the agent of the consignor, or the existence of any other facts constituting an attempted fraud, shall be deemed, for the purposes of this section, to be an attempt to enter such merchandise notwithstanding no actual entry has been made or offered.

24 17 have violated 1592 by using invoice with false values because she was not innocent by any means ). As a 1974 Treasury Department memorandum 7 states, actual falsity was required. CBP then the U.S. Customs Service (USCS) directives implementing the pre-1978 law made clear that the statute did not impose personal liability on any person described therein. It also notes that section 592 could be triggered by false and material statements made by any person connected with the importation including individuals, partnerships, corporations, customhouse brokers or exporters. A violator under the statute, however, may be beyond the jurisdiction of the U.S. court. b. Revitalization of Section 592 Prior to By the mid-twentieth century, section 592 had lapsed into disuse. Seizure of goods entered by false statements was impracticable when falsehoods were discovered after the goods release. Forfeiture was too draconian a penalty for many minor violations. 7 See Ex. A (Memorandum from Ass t Comm r (Investigations), U.S. Cust. Serv., to All Special Agents, Minimum Evidence Guidelines for Establishing Violations of 19 U.S.C (June 11, 1974)). The same directive defines Entry as the entire Customs transaction, i.e., from the presentation of invoices to the release of the merchandise. Introduction was described to be less inclusive, meaning to bring forward for consideration. The term can cover the unloading and placement of merchandise into general order. This directive also notes that [a]n employer is presumed to be responsible for the negligence of his employees or other agents under his direction.

25 18 The Treasury Department revived section 592 in the late 1960s and early 1970s, when it determined, in lieu of actual seizure and forfeiture of goods, to demand from importers the forfeiture value of the merchandise, and to allow them to seek mitigation of the claims under section 618 of the Tariff Act, 19 U.S.C William L. Dickey, Deputy Undersecretary of the Treasury, crafted guidelines for imposing and mitigating 1592 penalties, adopting administratively a voluntary disclosure program that allowed importers to avoid penalties by selfdisclosing errors. The mitigation guidelines, which foreshadowed the 1978 amendments to section 592, provided reduced maximum penalties based upon the culpability of the violator and the loss of revenue resulting from the violation. The revival of section 592 was not without problems. The most significant arose from the fact that CBP was in every case required to issue an initial demand for the full forfeiture value of the merchandise involved in a violation, often with serious consequences for publicly-traded corporate importers. Thus when publicly-traded Standard-Kollsman, Inc., received a penalty demand for $42.5 million, its share price fell by 20%, and did not recover until the case was settled upon payment of a mitigated penalty of $1.65 million. A $110 million claim against Electronic Memories & Magnetics Corp., relating to a $330,000 loss of revenue, depressed that company s share price until the matter was settled upon payment of $1 million. See Robert E. Herzstein, The Need to Reform Section 592 of the Tariff Act

26 19 of 1930, 10 Int l Law. 285, 287 (1976). Even the revitalization s author recognized the problems it caused corporate importers. See William L. Dickey, Survivals from More Primitive Times: Customs Forfeitures in the Modern Commercial Setting under Sections 592 and 618 of the Tariff Act of 1930, 7 L. & Pol y Int l Bus. 691 (1975). Section 592 s revival was almost entirely administrative. A penalized importer had little choice but to pay the mitigated penalty demanded. Otherwise, CBP withdrew the offer and sued in Federal court to recover the full forfeiture value. The court could determine only whether a violation had occurred; an affirmative finding resulted in judgment against the importer for the full forfeiture value. Few importers risked defending section 592 claims in court; none who did succeeded. See, e.g., United States v. Brown, 404 F. Supp. 968 (S.D.N.Y. 1975), aff d 538 F.2d 315 (2d Cir. 1976); United States v. Wagner, 434 F.2d 627 (9th Cir. 1970). Judicial review of a section 592 penalty was an all-or-nothing gamble few importers were willing to take. 8 Nor did the pre-1978 law satisfy Customs. While former section 592 allowed for assessment of penalties, it contained no mechanism for allowing CBP to recover duties lost as a result of a violation. 8 See Customs Procedural Reform Act of 1977: Hearing on H.R Before the Subcomm. on Int l Trade of the S. Comm. on Fin., 95th Cong. 74 (1978) (statement of William D. Outman, Esq.).

27 20 2. The 1978 Conversion to an in Personam Monetary Penalty. In converting section 592 into an in personam penalty, Congress in 1978 did not deviate from the statute s focus on the person making entry. The prohibition in current 19 U.S.C. 1592(a) states that no person, by fraud, gross negligence or negligence may enter, introduce, or attempt to enter or introduce any merchandise into the commerce of the United States by means of false and material statements, acts or practices, or material omissions. As noted above, entry is a statutorily-defined act, which 19 U.S.C requires be performed by the importer of record, in turn defined as the owner or purchaser of the goods concerned. It is unlikely that Congress intended to focus in personam penalty liability on an overbroad class of persons, many of whom may be beyond the jurisdiction of the U.S. court, particularly since the amended statute vested collection and enforcement authority in Federal courts that would need to establish personal jurisdiction over violators. See 19 U.S.C. 1592(e). 9 Courts have been less than clear on which persons may be held liable for section 592 penalties. Current 1592(a) imposes liability on those who enter or introduce goods by improper means, as well as on those who aid and abet such importations. In Hitachi, supra, 172 F.3d 1319, this Court affirmed that aiding 9 See, e.g., United States v. Scotia Pharms. Inc., 22 C.I.T. 638 (2009) (section 1592 complaint dismissed against two defendants over whom the court could not obtain personal jurisdiction).

28 21 and abetting liability attaches only to intentional and fraudulent violations of 1592(a). Virtually all cases where persons other than importers of record have been subjected to 1592(a) liability were grounded in accusations of fraud. See United States v. Inn Foods, Inc., 560 F.3d 1338, 1348 (Fed. Cir. 2009); United States v. Priority Prods., Inc., 793 F.2d 296 (Fed. Cir. 1986); United States v. Matthews, 31 C.I.T (2007), aff d 329 F. App x 282 (Fed. Cir. 2009); Pan Pac. Textile, supra, 29 C.I.T. 1013; United States v. Islip, 22 C.I.T. 852 (1998); United States v. Golden Ship Trading Inc., 22 C.I.T. 950 (1998); United States v. Modes, 13 C.I.T. 780 (1989). Although the courts did not always explicitly describe the non-importer defendants as aiders and abettors, individual defendants in these fraud cases were presumably susceptible to direct liability on an aiding and abetting theory. This case stands apart because Trek, the importer, was held liable based on gross negligence, while Shadadpuri was held jointly and severally liable, with no aiding and abetting finding, and no piercing of the corporate veil. The CIT simply reasoned that 1592(a) imposes liability on anyone in the vicinity of the violation, citing two inapposite cases involving judgments grounded in intentional fraud: The language of section 1592 leaves room for those other than the importer of record to be held accountable for violations. United States v. Matthews, 31 C.I.T. 2075, 2083 (2007); see also United States v. Golden Ship Trading, 22 C.I.T. 950, 953 (1998) ( The plain

29 22 language of the statute itself, which uses the term person rather than importer, refutes [this] contention. ). App. 4. But this is concededly not a fraud case. Shadadpuri is not the importer of record, nor is he liable on an aiding and abetting theory. There is, in fact, no statutory basis on which he may be held personally liable. 3. Duties Owed By Persons Engaged in Entry of Merchandise. As noted above, persons qualifying as importers of record are subject to various duties regarding entry of merchandise, 19 U.S.C. 1484, provision of invoices, id. 1481, and certification of statements under oath, id Failure to discharge these duties properly will lead to the imposition of penalties under 1592(a). Given the statutory framework, it makes little sense to suggest that persons upon whom these statutory duties do not devolve for example, an engineer employed by a corporate importer, tasked with compiling a list of assists are equally liable for penalties imposed for breach of these obligations. A broad reading of persons liable for 1592 violations makes even less sense given the enhancement of importer duties enacted by Congress in Enhancement of Obligations by the Modernization Act. The Customs Informed Compliance and Modernization Act of 1993, supra, significantly enhanced the obligations owed by persons engaged in the entry of merchandise by amending 19 U.S.C to require that entry be made using

30 23 reasonable care. Prior to the amendment, importers were obligated only to furnish factually truthful descriptions of the merchandise they were importing. The reasonable care requirement added an obligation that entry be made using care to ensure also that entry statements were legally correct. While not requiring an importer to guarantee legal correctness, the standard does require that importers have in place a process to ensure that entry statements which state classification, appraised value, country of origin, etc. are correct as a matter of law. The standard for whether penalties may be imposed is not whether the statements were legally correct, but whether the importer used reasonable care in making them. CBP and the courts have accepted the statutory obligation to make entry using reasonable care as the touchstone for determining whether a violation of 1592 has occurred, and whether the importer has established a sufficient defense to a claim of violation. For its part, CBP has incorporated the standard into its regulations. See 19 C.F.R. pt. 171 app. B (Guidelines for the Imposition and Mitigation of Penalties for Violations of 19 U.S.C. 1592) (defining negligence as acts done through either the failure to exercise the reasonable care and competence expected from a person in the same circumstances, and tying the reasonable care standard to liability under 1592) 10 Prepenalty and penalty notices have predicat- 10 Paragraph (D)(6), entitled Reasonable care, states:

31 24 ed claims for 1592 penalties on the importer s failure to exercise reasonable care, failing to exercise reasonable care has been identified as a predicate for establishing a violation of 1592, and a demonstration that the importer has in fact exercised reasonable care has been recognized as a defense to a 1592 penalty assessment. See, e.g., Matthews, 31 C.I.T. at 2080 (noting that defendants had not attempted to establish the defense of reasonable care ); United States v. Jean Roberts of Cal., 30 C.I.T. 2027, 2040 (2006) (failure to exercise reasonable care identified as basis of prepenalty and penalty claims); United States v. Ford Motor Co., 29 C.I.T. 827, (2005) (acknowledging that 1592 liability can be predicated on showing a failure to exercise reasonable care, and that a showing that the General Standard: All parties, including importers of record or their agents, are required to exercise reasonable care in fulfilling their responsibilities involving entry of merchandise. These responsibilities include, but are not limited to: providing a classification and value for the merchandise; furnishing information sufficient to permit Customs to determine the final classification and valuation of merchandise; taking measures that will lead to and assure the preparation of accurate documentation, and determining whether any applicable requirements of law with respect to these issues are met. In addition, all parties, including the importer, must use reasonable care to provide accurate information or documentation to enable Customs to determine if the merchandise may be released. Customs may consider an importer s failure to follow a binding Customs ruling a lack of reasonable care. In addition, unreasonable classification will be considered a lack of reasonable care (e.g., imported snow skis are classified as water skis). Failure to exercise reasonable care in connection with the importation of merchandise may result in imposition of a section 592 penalty for fraud, gross negligence or negligence.

32 25 importer exercised reasonable care is a defense to a penalty), aff d in part, supra, 463 F.3d The CIT noted in United States v. Nitek Electronics, Inc. that [A]an importer could respond to a claim of gross negligence by alleging that it exercised reasonable care, an assertion (if true) that would sufficiently rebut an allegation of negligence as well. 844 F. Supp. 2d 1298, 1308 (Ct. Int l Trade 2012); and in United States v. Optrex America, Inc. that Because Optrex did not exercise reasonable care under the facts of this case, including the failure to follow the advice of counsel, the court holds that it is subject to penalties under 1592(c). 32 C.I.T. 620, 622 (2008). Thus, as section 592 of the Tariff Act has evolved from an in rem seizure statute to an in personam monetary penalty, the liability for violations has likewise evolved, now resting on the persons charged with the statutory obligation to exercise reasonable care importers of record, as defined under 1484 and persons who might aid and abet them in intentional violations of their duties of care under that statute. II. A Court Must Pierce the Corporate Veil to Hold Corporate Owners, Officers, or Employees Directly Liable for Non-Fraudulent Violations of 19 U.S.C A. Corporate Limited Liability Is the Rule, Not the Exception. Nothing in the Tariff Act suggests that Congress intended that the corporate form be disregarded when dealing with offenses by corporate importers of record.

33 26 The Supreme Court has stated that [l]imited liability is the rule not the exception; and on that assumption large undertakings are rested, vast enterprises are launched and huge sums of capital attracted. Anderson v. Abbott, 321 U.S. 349, 362 (1944). Shareholder protection through the corporate form is ingrained in our economic and legal systems, Hambleton Bros. Lumber v. Balkin Enters. Ltd., 397 F.3d 1217, 1227 (9th Cir. 2005), and is a fundamental principle of corporate law, Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. Chi. L. Rev. 89, 89 (1985). Limited corporate liability promotes investment, diversification, and management risk-taking. It permits the fair valuation and equality of corporate shares by disregarding the individual wealth of shareholders, and permits the operation of organized and stable equity markets. See generally id. Disregarding the corporate form piercing the corporate veil to hold individual owners and officers liable for corporate liabilities is considered an extraordinary equitable remedy, applied in only the most extraordinary cases. In re Hillsborough Holdings Corp., 166 B.R. 461, 468 (Bankr. M.D. Fla. 1994); see also 1 Wm. M. Fletcher, Cyclopedia of the Law of Private Corporations 43 (West 2004). Limited liability is the rule in tax matters, Grothues v. IRS, 226 F.3d 334 (5th Cir. 2000) and in customs duty matters, Erskine v. United States, 84 F.2d 690

34 27 (9th Cir. 1936). In Minnesota Mining & Manufacturing Co. v. Eco Chemicals, Inc., this Court noted: The corporate form is not readily brushed aside. However, when substantial ownership of all of the stock of a corporation in a single individual is combined with other factors clearly supporting disregard of the corporate fiction on grounds of fundamental equity and fairness, courts have experienced little difficulty and have shown no hesitancy in applying what is described as the alter ego or instrumentality theory in order to cast aside the corporate shield and to fasten liability on the individual stockholder. 757 F.2d 1256, 1264 (Fed. Cir. 1985) (emphasis added) (quoting 1 Wm. M. Fletcher, Cyclopedia of the Law of Private Corporations (rev. ed. 1983)); see also A. Stucki Co. v. Worthington Indus., Inc., 849 F.2d 593, 596 (Fed. Cir. 1988) ( only if the evidence reveals circumstances justifying disregard of the status of [the infringer] and [defendant] as distinct, separate corporations may the veil be pieced). Mere ownership or commanlity thereof is insufficient; domination and control must be shown. Had the CIT performed a similarly exacting review of the relationship between Shadadpuri and Trek, it might (or might not) identify grounds to pierce the veil. The CIT s error was holding Shadapuri liable without performing that exercise. An extensive recital of the law of veil piercing is beyond the scope of this brief. It is sufficient to note that Congress (1) carefully concentrated legal responsibilities for lawful entry of merchandise in the importer of record, (2) focused 1592 liability on the person who enters or introduces merchandise, and (3)