Published on:

Corporate Shareholder May Be Held Personally Liable for Customs Violations, According to Federal Circuit

The_Casa_del_Sombrero_Store_Montecristi_or_Panama_hats_(3964874440).jpgThe Federal Circuit Court of Appeals issued a decision in September that could have significant implications for businesses involved in importing goods. The court allowed customs regulators to “pierce the corporate veil,” which involves holding shareholders liable for acts of a corporation. U.S. Customs and Border Protection (CBP) claimed that a company, Trek Leather, Inc., failed to pay customs duties on goods that it had imported. The Court of International Trade (CIT) held Trek Leather and its sole shareholder, who also served as its president, jointly and severally liable for gross negligence. United States v. Trek Leather (“TL I“), 781 F.Supp.2d 1306 (USCIT 2011). A three-judge panel of the Federal Circuit reversed this ruling, U.S. v. Trek Leather (“TL II“), 724 F.3d 1330 (Fed. Cir. 2013), but an en banc panel affirmed it. U.S. v. Trek Leather (“TL III“), No. 2011-1527, slip op. (Fed. Cir., Sep. 16, 2014).

Trek Leather imported 72 entries of men’s suits during an eight-month period in 2004. Trek Leather’s sole shareholder owned other corporate entities, through which he reportedly purchased materials for use by foreign manufacturers in the production of those suits. Federal law required him to include the costs of these materials, known as “assists,” in the total price paid for the imported goods. The CBP alleged that he failed to do this, resulting in a lower reported cost and a lower customs duty. TL I, 781 F.Supp.2d at 1309.

The CBP commenced an action in the CIT, seeking to hold Trek Leather and its shareholder liable for “fraudulently, knowingly, and intentionally understating the dutiable value of the imported merchandise.” Id. at 1310, 19 U.S.C. § 1592(a). The shareholder argued that he was not the importer of record and therefore could not be held personally liable under § 1592(a). The CIT disagreed, ruling that liability is not limited to the importer of record. It held that both defendants committed gross negligence and were liable for $45,245 in unpaid customs duties and $534,420 in civil penalties.

A three-judge panel of the Federal Circuit reversed the CIT’s order. It noted that the shareholder was not an “importer of record” as defined by federal law in 19 U.S.C. § 1484(a)(2)(B). Trek Leather was the undisputed importer of record. The court held that the CIT’s ruling was too broad and could hold officers and shareholders personally liable for acts undertaken on behalf of the corporation that far exceed the common law. TL II, 724 F.3d at 1339-40.

After an en banc rehearing, the Federal Circuit reinstated the CIT’s order. The court held that the shareholder is a “person” within the meaning of § 1592(a), and that his actions were among those prohibited by that section. The court drew on a Supreme Court decision not mentioned in the earlier rulings, United States v. Mescall, 215 U.S. 26 (1909), which held that liability for customs violations was not limited to whoever made the actual customs entry. Another case, United States v. 25 Packages of Panama Hats, 231 U.S. 358 (1913), also supported a broad reading of the statute.

If you or your business is involved in a commercial dispute or other legal matter, you should consult with a knowledgeable and skilled business law lawyer. James G. Schwartz has represented Bay Area businesses since 1976. To schedule a free and confidential consultation to discuss your case, contact us today online or at (925) 463-1073.

More Blog Posts:

Shareholder in S Corporation Must Pay Tax Despite Exclusion from Management, Pleasanton Business & Commercial Law Blog, June 16, 2014

California-Based Space Transport Company Sues U.S. Government Over Anticompetitive Contract Bidding Process, Pleasanton Business & Commercial Law Blog, May 30, 2014

Supreme Court Limits Jurisdiction of U.S. Courts over Foreign Corporations with Domestic Subsidiaries, Pleasanton Business & Commercial Law Blog, March 28, 2014

Photo credit: By Alex Proimos from Sydney, Australia [CC-BY-2.0], via Wikimedia Commons.