Yes, U.S. Importers (and Transactional Attorneys), There can be Successor Liability for Customs Duties and Penalties

These days, U.S. exporters and transactional attorneys know (or should know) that there is successor liability for export violations, whether the violations occurred under the Export Administration Regulations (EAR) or the International Traffic in Arms Regulations (ITAR).  Press releases and publications of civil penalty settlements and consent agreements are issued almost daily by either or both of the agencies that administer and enforce these export control regimes and the related statutes – the U.S. Department of Commerce, Bureau of Industry and Security (BIS), and the U.S. Department of State, Directorate of Defense Trade Controls (DDTC), respectively.

The same is true for violations of the numerous comprehensive and targeted sanctions programs administered and enforced by the Department of Treasury, Office of Foreign Assets Control (OFAC).  In case you miss any of those publicly issued notices from the U.S. Government, law firms and consultants re-tell or provide a link to each announced settlement through client advisories, alerts, articles, blogs, and tweets.  And there are plenty of scary presentations given around the world daily, rightfully extolling compliance, avoiding criminal investigations and penalties, and the threat of denial of export privileges.  More than occasionally, the cases involve export violations that occurred at an acquired domestic or foreign subsidiary; yet, the successor company is “on the hook” for the violations.

But importers, both U.S.-based and non-resident importers, should not feel left out of the successor liability spotlight. U.S. Customs and Border Protection (Customs) does not routinely publish information about civil penalty cases that are resolved administratively. There are just too many and probably most are not as interesting to read as the export and sanctions penalty settlements tend to be. However, the U.S. Department of Justice (DOJ) regularly files cases to collect unpaid penalties and duties in the U.S. Court of International Trade. One such recently filed case is United States v. Adaptive Microsystems, LLC, et al., Court No. 12-00122, and this case involves a claim for successor liability.

In this case, CBP is pursuing a claim for unpaid duties and penalties under 19 U.S.C. § 1592 (“section 592”).  CBP is pursuing it claim against a defendant that it alleges is responsible for the debts of a now-defunct Wisconsin company. Both that defendant and the defunct company have the same name – Adaptive Microsystems, LLC.  Customs alleges that from 2005-10, the defunct company intentionally or negligently misclassified imports of LED panels from Malaysia, using duty-free tariff headings.

The facts show that 95% of the defunct company was owned by another Wisconsin, non-party company (of which a particular non-party individual owned a 15.8% share) and that the non-party individual served as executive vice president of the defunct company. In 2011, the defunct company’s bank initiated a receivership action against the company in state court, resulting in a receiver being appointed.  Interestingly, Customs acknowledged that the receiver provided notice of the receivership action, yet Customs did not intervene in the action, instead relying on its priority creditor status under federal law.

A month after the receivership was initiated, however, Customs issued a pre-penalty notice of unpaid duties to the defunct company and upon apparently not receiving a response from any party, in July, 2011, Customs issued a penalty notice to the defunct company, demanding payment of outstanding duties and penalties in the amount of approximately $6.8 million. Meanwhile, after an unsuccessful auction of assets in the receivership action, at direction of the state court, the receiver entered into a purchase agreement with a Wisconsin company named AMS Acquisition , LLC. The purchase agreement called for AMS Acquisition, LLC to operate the business of the defunct company and its affiliates, including hiring a substantial number of employees to continue in their positions, and retaining the executive vice president who held the same position in the defunct company and has an ownership interest in the company that ultimately had an ownership interest in the defunct company. The sale was approved by the state court, but the Customs penalty was not addressed.  Instead, the court approved the sale as free and clear of all claims and encumbrances, “or interests of any kind or nature.”

After the sale, company names were changed and the new company transferred shares of stock to the executive vice president. Less than a year later, Customs filed the lawsuit against the new entity, the defunct company, and the holding company that was organized for the underlying transaction, alleging that the new company defendant had purchased some portion of defunct company “out of receivership and it liable” for the defunct company’s debts.

Earlier this year, the defendant (“New AMS”) moved for summary judgment arguing that it did not succeed to the alleged unpaid duties and penalties of the defunct company and that its purchase of the defunct company’s assets did not assume these liabilities. Customs countered by arguing that there was a genuine issue of material fact as to whether one of four common law exceptions to Wisconsin’s general rule against successor liability applied.

Analyzing Wisconsin law, the Court of International Trade found that the de facto merger exception did not apply. There facts clearly showed that the executive vice president “did not receive his shares as consideration for the receivership sale” and the evidence also showed that at the time of the asset purchase, there was no plan that he was to become a shareholder. The court noted that under Wisconsin law, courts consistently refuse to apply the de facto merger exception when no shares changed hands in a sale. Accordingly, New AMS’s motion for summary judgment was granted as to this exception. The court then analyzed the mere continuation exception to the successor liability rule.

Under this exception, Customs argued that the new company was a mere continuation of the defunct company because there was “significant overlap” between the two companies. Customs pointed to the fact that New AMS hired substantially all of the defunct company’s employees and that the executive vice president was retained as an officer and owner the new company. Applying Wisconsin law, the court noted that the key element of mere continuation exception is a common identity of officers, directors, and shareholders in the purchasing and selling corporations and that the overlap of ownership and control, not merely the continuation of the same business operations, is the true test. The court also rejected New AMS’s argument that absolute identity of the officers and owners is required under the mere continuation exception and noted that the evidence presented by New AMS left open the possibility that other officers might have overlapped as well. For these reasons, the court found that a genuine issue of material fact existed and denied summary judgment on this exception.

This case illustrates that Customs is willing to pursue acquiring companies in asset purchase transactions for unpaid duties and penalties of the acquired company.  Significantly, despite notice of the receivership, Customs chose not to participate in those proceedings, but instead issued a pre-penalty notice to the defunct company to which the Receiver apparently did not respond. Presumably, New AMS had knowledge of that notice and the ensuing penalty notice, yet none of the parties involved in the sale addressed the unpaid duties and penalties liability, instead apparently deciding that the state court’s approval of the sale as “free and clear” and the general rule against successor liability in an asset purchase would shield New AMS.  While New AMS eventually may be relieved of liability for the defunct company’s unpaid duties and penalties, it is embroiled in litigation with the DOJ/Customs for more than a year now and little doubt has divulged details about the sale, company structure, and relationship of the parties that private companies tend to not have to provide to federal government lawyers and agencies.

Transactional attorneys should take particular note of this case and be sure to properly address outstanding Customs duty and penalty liabilities during due diligence or, as in this case, a receivership sale.  Counsel experienced with identifying and addressing the Customs issues in a transaction such as this could have provided necessary support prior to the sale being consummated and head off the current litigation.  Overlooking or ignoring unpaid duties and penalties can have unwelcomed and even dire consequences.

After ruling on the motion for summary judgment on April 10, 2013, the case has proceeded.  On July 15 the court granted a joint motion to extend the fact discovery cut-off to October 31 and ordered the parties to file a joint status report proposing further proceedings by November 14, 2013. We will have to wait and see whether further motions for summary judgment are filed later this year, whether the parties potentially settle the case, or if it will proceed to trial.

For assistance with understanding and complying with U.S. Customs laws and  regulations, due diligence support in merger and acquisitions and other strategic alliances, as well as representation before CBP in investigations, civil penalty, and prior disclosure matters, please contact Jon P. Yormick, Attorney and Counsellor at Law, [email protected] or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.928.3474.

Firm’s Mexican Colleague Will Speak to Bar Association in Buffalo

On May 1, Mexican attorney, Enrique Acosta Sáenz, will be in Buffalo  for a presentation at the Bar Association of Erie County, in downtown Buffalo.   Mr. Acosta is the Founding & Managing Partner of Boutique Legal Internacional, an affiliate of the Law Offices of Jon P. Yormick Co. LPA with offices in Buffalo and Cleveland.  Boutique Legal Internacional has offices in Chihuahua and Juarez, Mexico.

“After working with Enrique on client matters for the past 3 years, I am pleased we will have this opportunity to meet with clients, business groups, and other attorneys in the region to learn more about doing business in Mexico,” stated Yormick.  “Mexico is being discovered and ‘re-discovered’ by many companies as a market, strong manufacturing country, and recognized as a growing economy, mentioned as part of the TIMPs – Turkey, Indonesia, Mexico, and Philippines – and the MISTs – Mexico, Indonesia, South Korea, and Turkey,” Yormick added.

Mr. Acosta’s presentation is entitled Minimizing Duties and Taxes: A Mexican Update.  He will discuss strategies companies exporting to Mexico and those operating in Mexico can employ that minimize duty and tax liabilities to successfully compete in this important NAFTA market.

The program is presented by the International Law Committee, as part of the BAEC’s Noontime Lecture Series, but will begin at the special time of 4:00 pm.  The presentation is open to in-house and private practice attorneys, executives and managers of the international business community, and students.  To register, please visit http://bit.ly/112oSEC.

CBP’s New Transfer Pricing Policy Goes into Effect

Last week, a new rule finalized U.S. Customs and Border Protection (“CBP” or “Customs”) went into effect regarding transfer pricing. This marks a new policy for CBP and offers companies involved with related-party sales opportunities for post-importation adjustments to the price of the imported goods.

Historically, CBP allowed post-importation price reductions on the entered value only where the adjustments were made according to a formula in place prior to import and written transfer pricing policies and there was no “control” in the adjustments. Under the new policy, CBP will accept an importer’s use of transaction value in related-party sales if a specific 5-factor test is met, summarized as follows:

  1. A written “Intercompany Transfer Pricing Determination Policy” must be in is in effect prior to importation that takes into account Internal Revenue Code § 482 (Allocation of income and deductions among taxpayers)
  2. The U.S. taxpayer importing company uses its transfer pricing policy in filing its income tax return, and adjustments under the policy are reported in the income tax return;
  3. The transfer pricing policy states specifically how the transfer price and adjustments are determined as to all products covered by the policy;
  4. The company maintains and provides accounting details in its books and financial statements to support the claimed adjustments in the U.S.; and
  5. No other conditions exist that may affect the acceptance of the transfer price by CBP.

If these factors are met and it can be shown that the relationship between the importer and exporter influenced the “price actually paid or payable,” Customs will now allow importers to make both upward and downward post -importation adjustments into account to determine the “transaction value,” used for entry purposes.

Importers are reminded that under this new post-importation adjustment policy, CBP strongly recommends participating in its Reconciliation Prototype Program, although it is not required for use of the new policy.

For companies engaged in a large volume of related-party import transactions, the new transfer pricing policy provides greater opportunities for duty savings and even duty refunds.

Tax advisors and companies needing assistance with this new Customs transfer pricing policy and any other U.S. Customs issues can contact Jon Yormick, [email protected] or calling Toll Free (Canada & U.S.), +1.866.967.6425, or +1.216.928.3474.

 

BIS Proposes Changes to Export Administration Regulations

The US Department of Commerce’s Bureau of Industry and Security (BIS) has proposed new rules affecting exporters of goods from the US. The proposed rules will expand the existing list of “red flags” to watch for when exporting to foreign countries, and will provide a procedure for exporters to follow in order to receive a safe harbor from liability.

The proposed rules will also change the definition of “knowledge” with regard to an exporter’s awareness of license requirements and circumstances relating to exporting. The new “knowledge” definition, which includes a “reasonable person” standard, will make it easier to impute knowledge of the circumstances surrounding the export of goods onto the exporter. The proposed rules will expand the current list of “red flags” from 12 to 23. The list of red flags gives guidance to exporters so that they may avoid exporting in a manner which violates US export regulations or to parties who violate such regulations. Current red flags include vague dates of delivery, abnormal shipping routes, a freight forwarding firm being a final destination, or a customer having minimal background in the particular business. Exporters seeking guidance from BIS’s current list of “red flags” can review them online at http://www.bis.doc.gov.

Under the proposed rules, exporters can avoid having “knowledge” charged to them if they comply with the safe harbor provision. The safe harbor procedures set forth in the proposed rules are voluntary. However, in order to receive protection under the safe harbor provision, exporters must follow the procedures set forth by the proposed rules.

To qualify for the safe harbor, exporters must “comply with any item and/or destination-based license requirements and other notification or review requirements.” Exporters must also verify whether persons they are dealing with “are subject to a denial order or to certain sanctions,” or appear on any of BIS’s restricted lists. Finally, exporters must follow guidelines in order to identify and resolve “red flags” pursuant to BIS’s list. Exporters and other members of the general public may comment on this proposed rule until December 15, 2004 at the Federal eRulemaking Portal: http://www.regulations.gov.

Disclosure: This Customs and Trade Alert is provided for informational purposes only and is not intended to serve as or provide legal advice relating to a particular matter. Should you have specific questions regarding a legal matter, please contact Jon P. Yormick, Esq. or Laura A. Papay, Esq., YORMICK & Associates, Co., L.P.A., t: +1.216.928.3474, f: +1.216.566.0857, e-mail: [email protected] or [email protected]

CBP Releases IPR Seizure Statistics

The U.S. Customs and Border Protection (CBP) has announced 2004 statistics for seizures of goods that infringe upon intellectual property rights (IPR). The statistics show that apparel was seized most frequently by border officials followed by cigarettes, consumer electronics and toys/electronic games. The statistics also show that goods from China accounted for most of the IPR seizures, followed by South Africa, Russia, Hong Kong, and Vietnam.

These seizure statistics serve as a reminder to companies that there are additional steps that should be taken to protect their IP in addition to their domestic registration. For years, industries have been losing much of their profitability and competitiveness because of unfair trade practices such as the infringement upon copyrights, trademarks, trade names, patents, and other intellectual property rights.

In order to help protect companies from such practices, Customs has procedures to help stop the importation of merchandise that infringes upon protected intellectual properties. These procedures include, among other things, the ability of companies to record their IP with Customs and the ability of patent holders to obtain surveys of infringing importers. Importers wanting to determine whether or not the goods they wish to import infringe upon a registered property right can also protect themselves by requesting a ruling from Customs.

Companies interested in protecting their IP rights should consider recording them with the CBP.

Disclosure: This Customs and Trade Alert is provided for informational purposes only and is not intended to serve as or provide legal advice relating to a particular matter. Should you have specific questions regarding a legal matter, please contact Jon P. Yormick, Esq. or Kim K. Alabasi, Esq., YORMICK & Associates, Co., L.P.A., t: +1.216.928.3474, f: +1.216.566.0857, e-mail:[email protected] or [email protected].

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