When Personal Liability is Not Proper
Importers may be able to rest a little easier as a result of a recent Court of Appeals decision negating the long held assumption in customs law that corporate officers can be held personally liable for their company’s violation of 19 USC 1592, which requires importers to exercise reasonable care in submitting entry documents to U.S. Customs and Border Protection (CBP). Until recently, CBP has treated corporate officers as severally and jointly liable with their company for not exercising reasonable care in the calculation of duties owed, declaration of assists, marking of country of origin, etc. However, on July 30, in the case of U.S. vs. Trek Leather Inc. and Harish Shadadpuri, the Court of Appeals for the Federal Circuit (CAFC) found that a corporate officer is not personally liable for his or her company’s gross negligence under 19 USC 1592(a) in not appropriately reporting fabric assists on its entry documents. The groundbreaking case involved a business owner named Shadadpuri, the president and sole shareholder of a company called Trek. Trek was the importer of record for 72 entries of suits over the course of half a year. Shadadpuri also had a 40-percent stake in Mercantile Electronics, which purchased fabric assists and had them incorporated into its suits by providing the assists to the manufacturers abroad. The entry documentation lacked information related to the cost of the assist in the price paid for the suits, resulting in Shadadpuri’s company paying less in duties than it should have paid. Referring back to “basic principles of corporate law” the CAFC overturned a Court of International Trade ruling, and found that Shadadpuri could not be held personally liable as a corporate officer because he was not the importer of record. Additionally, the court held that a third party cannot be held liable under a theory of aiding and abetting negligence unless CBP can demonstrate knowledge or intent. This case has significant implications for business owners, corporate officers and employees as it signals that CBP cannot go after them personally for violations of 19 USC 1592 (a) – in most cases. It is important to remember that the court referred back to “basic principles of corporate law” in arriving at its decision. These “basic principles” are not devoid of common sense; there are exceptions to the general rule that corporate officers are not liable for the negligence of their corporation. Business owners and corporate officers must be aware of what actions will lead to their personal liability so they can avoid it where possible.
The Perils of Being the “Importer of Record”
Being listed as the importer of record on entry documents will always increase your exposure to personal liability. As the court stated, one of the reasons Shadadpuri was cleared of liability was because he was not the importer of record. An importing company has several options in electing an importer of record, which can have huge implications on who will ultimately be held liable for violations of 19 USC 1592. Potential importers of record can be the business owner, the business itself or the customs broker. This recent case lends more credence to the idea that business owners and corporate officers should avoid listing themselves as importers of record (unless they love their company so much they are willing to personally go bankrupt for it). Best practices dictate that the company or corporation should be listed as the importer of record whenever possible.
Companies as Alter-Egos
As a “basic principle of corporate law,” business owners can still be held personally liable if they exercise a certain level of ownership or control over the business to the extent that the business can be described as the business owner’s alter ego. This principle may be most applicable to the owners of small and medium-sized businesses who manage companies with a limited number of shareholders. For example, John Doe starts a small business called John Doe Inc., where John Doe is the full owner and sole employee, and he operates this business from his personal computer at his home address. John Doe will likely be unable to avoid personal liability in the case that his company fails to comply with 19 USC 1592. The Supreme Court has set forth three elements for finding that a company is simply the alter ego of its owner: 1) The individual shareholder’s control over the corporation is so complete that the corporation has neither a separate mind, will, or existence of its own; 2) The individual shareholder’s control over the corporation is exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity; and 3) An injury or unjust loss resulted to the plaintiff from such control and wrong. Business owners should examine their company structure and the amount of ownership and control they have over their company. The more ownership and control, the more vigilant business owners or shareholders should be towards compliance with 19 USC 1592.
Don’t Commit Fraud
Business owners should also understand that the law does not excuse them being held accountable for fraud in the vast majority of circumstances. If CBP can show that a business owner or corporate officer committed fraud, it will likely prevail in holding them personally liable for a violation of 19 USC 1592. Fraud is defined as: 1) A false statement of a material fact; 2) Knowledge on the part of the defendant that the statement is untrue; 3) Intent on the part of the defendant to deceive the alleged victim; 4) Justifiable reliance of the alleged victim on the statement; and 5) Injury to the alleged victim as a result. In the context of 19 USC 1592, fraud would be the submission of fraudulent entry documents to customs. A business owner or corporate officer who does this will be unable to hide behind their corporation to avoid liability.
Avoid “Aiding and Abetting”
Business owners and corporate officers do not have to personally commit fraud, but can also face personal liability for “aiding and abetting,” a violation of 19 USC 1592. “Aiding and abetting” is a vague and broad legal concept. In the context of customs law however, simple knowledge of the violations on the part of a business owner or corporate officer should be enough to make way for personal liability. This means that business owners and corporate officers should take corrective action whenever it comes to their attention that their company is in violation 19 USC 1592. If a business owner or corporate officer fails to take action when it becomes apparent that their company has been intentionally submitting false or misleading entry documents to customs, they may be held personally liable for aiding or abetting fraud.
The Take Away
These exceptions to the general rule that business owners and corporate officers are not liable for the actions committed by their company are not just theoretical far-fetched theories that the government has little hope of winning on. The CAFC firmly stated in its opinion that had the government prosecuted Shadadpuri on a theory of fraud, or on the theory that the company was simply an alter ego, the government probably would have won. This should send a message to business owners and corporate officers that CBP still has some leeway in finding them personally liable and probably won’t stop trying. However, the decision does give a business owner a way out of being held personally liable if the business owner can structure a transaction, or their company, appropriately. To take full advantage of this groundbreaking case in customs law, we recommend you consult with experienced legal counsel to ensure that your company is doing business in a way that limits your exposure to liability.