'Inc.' No Longer A Safe Shield – Federal Circuit Greatly Expands Officer/Shareholder Liability Resulting From US Customs Violations

Keywords: shareholder liability, customs violations, IOR shareholders

On September 16, 2014, an en banc panel of the US Court of Appeals for the Federal Circuit (the "En Banc Panel") issued a far-reaching decision, Trek Leather III,1 greatly expanding corporate shareholders' and officers' potential liability for customs violations. It reversed Trek Leather II2issued by a three-judge panel of the Federal Circuit in July 2013, which had faulted the lower court decision ("Trek Leather I")3 as overly broad in extending liability beyond importers of record.

Trek Leather arose from Trek Leather Inc.'s ("Trek") importation of men's suits between February 2, 2004, and October 8, 2004. By undervaluing the merchandise in import documentations submitted to the US Customs and Border Protection ("CBP"), Trek underpaid customs duties. Trek, the corporation, was the importer of record for all relevant import transactions, but also implicated in this case is Trek's president and sole shareholder, Harish Shadadpuri. For more background on the Trek Leather litigation, please see our prior legal update, "'Inc.' No Longer a Shield? – Federal Circuit May Expand Officer/Shareholder Liability Resulting from US Customs Violations."

19 U.S.C. § 1592 is the main statute at issue in Trek Leather. Civil penalties for customs violations are typically imposed under this statute. It provides, in relevant part:

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—

1. 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

2. may aid or abet any other person to violate subparagraph (A).

   19 U.S.C. § 1592 (a)(1). The civil penalties, in turn, are provided in 19 U.S.C. § 1592(c). Section 1592 is commonly used to target importers of record for improper entries, because related statutes under Title 19 directly impose a duty of reasonable care on parties acting in such capacity.4 It is also clear that, when an importer of record is a corporation, personal liability can be pursued under an "aiding or abetting" theory as provided in subparagraph (B), or based on the common law principle of "piercing the corporate veil."

   In Trek Leather III, whether the underlying customs violation is one targeted by section 1592(a)(1)(A) is not in dispute. That is, the parties agreed that certain import-related actions by fraud, gross negligence or negligence through material false statement or material omission are present. The only real issue before the En Banc Panel is whether a person other than the importer of record may be held directly liable for such a violation under subparagraph (A). This is an issue with wide-ranging and significant implications.

   For example, both "aiding or abetting" and "piercing the corporate veil" are ancillary theories of liability premised on another party's violation, and they each set additional legal hurdles to imposing personal liability when the importer of...