United States v. Yuchius Morality Co.

Slip Op. 02 - 124
UNITED STATES COURT OF INTERNATIONAL TRADE
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UNITED STATES OF AMERICA, :
Plaintiff, :
Consolidated
v. : Court No. 96-02-00608
YUCHIUS MORALITY COMPANY, LTD. and :
INTERCARGO INSURANCE COMPANY,
:
Defendants.
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Opinion & Order
[Upon trial of the violations alleged per
the Tariff Act of 1930, judgment for the
plaintiff and the defendant/cross-claimant.]
Decided: October 18, 2002
Robert D. McCallum, Jr., Assistant Attorney General; David M.
Cohen, Director, Commercial Litigation Branch, Civil Division, U.S.
Department of Justice (A. David Lafer and Kenneth S. Kessler); and
Office of Associate Chief Counsel, U.S. Customs Service (Annmarie
R. Highsmith), of counsel, for the plaintiff.
Sharma & Bhandari (Onkar N. Sharma); and S.J. Christine Yang,
of counsel, for defendant Yuchius Morality Company, Ltd.
Sandler, Travis & Rosenberg and Glad & Ferguson, P.C. (T.
Randolph Ferguson); and John M. Daley, of counsel, for defend-
ant/cross-claimant Intercargo Insurance Company.
AQUILINO, Judge: It is time for the court finally to
draw to a close this case brought pursuant to 19 U.S.C. §1592 and
28 U.S.C. §1582 and which consolidates plaintiff's complaint
against Yuchius Morality Company, Ltd. for unpaid duties and for
penalties in connection therewith and its complaint against
Intercargo Insurance Company, as surety for such duties.
Consolidated
Court No. 96-02-00608 Page 2
I
As set forth in the court's slip opinion 99-79, 23 CIT
544 (1999), familiarity with which is presumed, this action has
followed in the aftermath of hundreds of entries from Hong Kong,
China, Taiwan, and Indonesia over a number of years, during which
the U.S. Customs Service came to conclude that they entailed
violations of the Tariff Act of 1930, as amended. Agency investi-
gation of those entries, and the resultant administrative process,
culminated in commencement of the two cases consolidated herein.
Subsequent to its joinder of issue, defendant Yuchius interposed a
motion for summary judgment on the ground that plaintiff's claims
were time-barred. The plaintiff countered with a cross-motion for
summary judgment on its claim for the unpaid duties, and defendant
Intercargo moved for summary judgment on its cross-claim "for
exoneration and reimbursement against defendant Yuchius"1.
Slip opinion 99-79 denied defendant Yuchius's motion and
also that of the other defendant, albeit the latter "without
prejudice to grant upon entry of judgment herein against the surety
and recovery thereon by the plaintiff." 23 CIT at 548, citing
United States v. Almany, 22 CIT 490, 496 (1998). That opinion
granted plaintiff's cross-motion for recovery of the unpaid duties
and also ordered the parties to trial, primarily on plaintiff's
1
The court's jurisdiction over this claim is pursuant to 28
U.S.C. §1583.
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Court No. 96-02-00608 Page 3
allegations of negligence within the meaning of 19 U.S.C. §1592 on
the part of Yuchius Morality Company, Ltd.
That defendant did not controvert the statement of the
material facts as to which the plaintiff contended there was no
genuine issue to be tried and that was filed in conjunction with
its cross-motion for summary judgment. Whereupon those facts were
deemed admitted. See 23 CIT at 546, citing Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 249-50 (1986); Sweats Fashions, Inc. v.
Pannill Knitting Co., 833 F.2d 1560, 1562 (Fed.Cir. 1987); United
States v. Continental Seafoods, Inc., 11 CIT 768, 773-74, 672
F.Supp. 1481, 1486-87 (1987). They included the following:
1. During the five year period encompassing fiscal years
1988 through 1992, Yuchius made approximately 1,600
entries with an estimated entered value of $50 million.
. . .
2. Yuchius failed to maintain adequate or sufficient
records to determine the actual price paid or payable for
the merchandise it imported into the United States during
fiscal years 1988-1992. . . .
3. For fiscal year February 1, 1991 through January 31,
1992, Yuchius . . . undervalued its importations by
$4,228,896. . . .
4. Yuchius' $4,228,896 undervaluation for [that] fiscal
year . . . resulted in a loss of revenue to the Govern-
ment of approximately $248,125, which Yuchius has since
remitted to the Government. . . .
5. For fiscal years 1988-1992, Yuchius' own records show
that the value of the imported purchases totaled $59,-
944,282 and that Yuchius declared to Customs that the
value of that same merchandise was only $49,691,820.
. . .
* * *
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Court No. 96-02-00608 Page 4
7. Yuchius' undervaluation for the four fiscal years
beginning February 1, 1989 resulted in a loss of revenue
to the Government of $576,790, including a loss of duties
to the United States in the amount of $549,642; harbor
maintenance fees of $10,224; and merchandise processing
fees of $16,923. . . .
8. Yuchius has stipulated that the Government lost
$539,202 as the result of Yuchius' undervaluations of
imports. . . .
9. Yuchius owes the Government $328,665 in outstanding
duties and fees, representing the difference between the
total owing from Yuchius' undervaluation of its imports
during the four fiscal years beginning February 1, 1989
and the payments already made by Yuchius to the Govern-
ment. . . .
10. Yuchius has refused to pay the $328,665 in outstand-
ing revenue rightfully due to the Government.
23 CIT at 545-46.
Trial of the remaining issues took place in an expedi-
tious manner. Subsequent thereto, the parties sought and were
granted a number of extensions of time to continue attempts to sort
out among themselves those issues and/or to prepare and file post-
trial proposed findings of fact and conclusions of law.
A
The parties' papers finally submitted do contain such
proposed findings and conclusions. In addition, those filed on
behalf of defendant and cross-claimant Intercargo Insurance Company
include a settlement agreement entered into between it and the
plaintiff wherein, among other things, the government
acknowledges and agrees that payment of the Settlement
Amount extinguishes all obligations owed under the
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Court No. 96-02-00608 Page 5
$50,000.00 continuous bond posted by Intercargo for the
benefit of defendant Yuchius Morality Co., Ltd. . . .
and
acquits and forever discharges Intercargo of and from any
and all claims, . . . causes of action, rights, damages,
costs, expenses, compensation, consequential damages,
loss of profits and any other thing whatsoever which the
United States has or could have asserted concerning the
subject matter of the action.2
That agreement specifically excludes plaintiff's "continuing
pursuit of its claims against defendant Yuchius"3, as well as
defendant Intercargo's
continuing pursuit of its cross-claim against cross-
defendant Yuchius . . . or [] seeking recovery from or
taking appropriate action against Yuchius Morality Co.,
Ltd. with respect to any other claims it may have against
that entity.4
Proof of satisfaction of the agreement also has been tendered.5
II
The pretrial order stipulated the following herein
between the plaintiff and defendant Yuchius:
13. The corrected calculation of net lost revenues,
prorated to reflect a reduction for all entries for which
the statute of limitations has now run, is $321,306.
This figure represents the difference between the total
amount of duties for which the statute of limitation has
2
Declaration of John M. Daley re: Relevant Post-Trial
Events, Exhibit A, paras. 4 and 5.
3
Id., para. 7, p. 2.
4
Id., para. 7, pp. 2-3.
5
Compare Declaration of John M. Daley re: Relevant Post-
Trial Events, para. 5 with id., Exhibit B.
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Court No. 96-02-00608 Page 6
not run, $569,431, and the amount of duties Yuchius has
already paid [] $248,227. . . .[6]
14. The parties stipulate that the loss of revenue stip-
ulated to in no. 13, above, has been calculated based
upon the 1395 consumption entries identified on the
attached exhibit list. The parties stipulate to the
authenticity and existence of these entries and agree
that a complete set of copies of the entry documents need
not be introduced or admitted at trial.
Post trial, plaintiff's proposed conclusions of law,
inter alia, are that defendant Yuchius (a) violated 19 U.S.C.
§1592(a) in that (b) it entered merchandise by means of false
statements, documents, acts and/or omissions, (c) that those false
statements, documents, acts and/or omissions were material, (d)
that those shortcomings were due to negligence on its part, and (e)
that it had a duty to declare the true price of the merchandise it
imported into the United States. Defendant Yuchius's six proposed
conclusions of law include the following:
3. At the time of the importations involved in this
case, an importer's failure to maintain adequate
records was not a violation of 19 U.S.C. §1592.
4. Yuchius' second prior disclosure, dated September
28, 1993, was effective. Customs erred in denying
the second prior disclosure for non-payment of
duties. After the amount of lost duties had been
calculated, Customs failed to give Yuchius an oppor-
tunity to tender these duties without the assess-
ment of penalties.
5. Yuchius' first prior disclosure, dated March 24,
1993, was effective. Therefore, if any penalties
6
Stipulations, of course, are salutary, but, in this in-
stance, the parties' numbers do not quite add up.
Consolidated
Court No. 96-02-00608 Page 7
are assessed, the maximum permissible amount is
$642,306, twice the amount of the loss of revenue
in the second disclosure period.
A
The Tariff Act of 1930, in particular as codified as
chapter 4, subtitle III, part III (Ascertainment, Collection, and
Recovery of Duties) of Title 19 of the United States Code has left
little, if anything, to the imaginations of importers into the
United States. For example, the first section of that part, 1481,
spells out at length the required contents for "[a]ll invoices of
merchandise to be imported". Extensive section 1484 stated at the
time of the entries herein that any "importer of record"
(A) shall make entry . . . by filing with the
appropriate customs officer such documentation as is
necessary to enable such officer to determine whether the
merchandise may be released from customs custody; and
(B) shall file . . . with the appropriate customs
officer such other documentation as is necessary to
enable such officer to assess properly the duties on the
merchandise, collect accurate statistics with respect to
the merchandise, and determine whether any other applica-
ble requirement of law (other than a requirement relating
to release from customs custody) is met.
19 U.S.C. §1484(a)(1) (1988). Next section 1485 requires every im-
porter making an entry under the provisions of section 1484 to file
a prescribed declaration under oath regarding the entry. Section
1508 sets forth the required recordkeeping on the part of any
importer and entry filer, while section 1509 codifies the authority
of the Customs Service to investigate the "correctness of any
entry"
Consolidated
Court No. 96-02-00608 Page 8
for determining the liability of any person for duty,
fees and taxes due or duties, fees and taxes which may
be due the United States, for determining liability for
fines and penalties, or for insuring compliance with the
laws of the United States . . ..
19 U.S.C. §1509(a) (1988). See also 19 C.F.R. §141.86 (1988)
(Contents of invoices and general requirements); 19 C.F.R. §162.1a
(1988)(Definitions); 19 C.F.R. §162.1b (1988)(Recordkeeping); 19
C.F.R. §162.1c (1988)(Record retention period); 19 C.F.R. §162.1d
(1988)(Examination of records and witnesses).
In 1978, Congress amended section 592 of the Tariff Act
of 1930 to make negligence in carrying out the foregoing statutory
and administrative entry requirements subject to imposition of a
civil penalty. In establishing the jurisdiction of this Court of
International Trade to try de novo all related issues, the statute
also provides that,
if the monetary penalty is based on negligence, the
United States shall have the burden of proof to establish
the act or omission constituting the violation, and the
alleged violator shall have the burden of proof that the
act or omission did not occur as a result of negligence.
19 U.S.C. §1592(e)(4) (1988). And the governing regulation at the
time of the first entries in question herein stated:
Negligence. A violation is determined to be negli-
gent if it results from an act or acts (of commission or
omission) done through either the failure to exercise the
degree of reasonable care and competence expected from a
person in the same circumstances in ascertaining the
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Court No. 96-02-00608 Page 9
facts or in drawing inferences therefrom, in ascertaining
the offender's obligations under the statute, or in
communicating information so that it may be understood by
the recipient. As a general rule, a violation is
determined to be negligent if it results from the
offender's failure to exercise reasonable care and
competence to ensure that a statement made is correct.
19 C.F.R. pt. 171, App. B(B)(1) (1988), quoted with approval in
United States v. Hitachi America, Ltd., 21 CIT 373, 380, 964 F.-
Supp. 344, 355-56 (1997), aff'd in part, rev'd in part on another
ground, 172 F.3d 1319 (Fed.Cir. 1999).
The primary stated position of defendant Yuchius post
trial is that while
this case shows that Yuchius' record-keeping was inade-
quate to support the valuation of its entries, . . . it
does not show acts or omissions constituting violations
of 19 U.S.C. §1592(a)(1). During the trial in this
action the plaintiff added nothing to establish such acts
or omissions.7
The defendant accepts the above-quoted definition of negligence in
arguing that its conduct be compared to that of a "reasonable man"
in the same circumstances.8 On its part, the plaintiff eschews any
claim for a recordkeeping penalty, which did not exist by the time
of the last entry herein, rather
Yuchius' failure to maintain records to substantiate the
prices it claimed to have paid for its merchandise on a
per entry basis (records that would have contradicted its
own accounting records) clearly reinforces its negligent
attitude toward its Customs obligations. Its lack of
7
Proposed Findings of Fact and Conclusions of Law of De-
fendant Yuchius Morality Co., Ltd. [hereinafter referred to as
"Post-Trial Submission of Defendant Yuchius"], p. 8.
8
See id.Consolidated
Court No. 96-02-00608 Page 10
records, no doubt, also contributed to its inability to
report the true price of its merchandise.9
B
Clearly, the record now at bar does not lend support to
the above-stated position of defendant Yuchius that the trial added
nothing to the acts and omissions alleged by the plaintiff to have
amounted to violation(s) of section 1592. At a minimum, it
contributed to the undersigned, sole juror's understanding of
them.10
(1)
Supplementing the evidence adduced before trial and
referred to hereinabove, the plaintiff called to the witness stand
a Customs Senior Import Specialist at Los Angeles International
Airport who had been a member of the Import Specialist Enforcement
Team ("ISET") and the Service's Assistant Field Director of the
Customs Regulatory Audit Division ("RAD"), Long Beach, California
Field Office. Their interest in Yuchius imports was kindled by an
anonymous informant's letter. See Plaintiff's Exhibit 34, p.
020054. On-site investigation was commenced by the ISET member and
a RAD auditor. It consisted of interview(s) of the importer and
9
Plaintiff's Proposed Findings of Fact and Conclusions of
Law [hereinafter referred to as "Plaintiff's Post-Trial Submis-
sion"], p. 20, n. 2.
10
The transcripts of the trial over three days in January,
the 19th, 20th and 21st, have been numbered separately by the
court reporters, ergo "Tr." references herein must bear a par-
ticular day's numerical prefix, e.g., 21 Tr.
Consolidated
Court No. 96-02-00608 Page 11
examination of the Yuchius books and records, initially for the
year February 1, 1991 to January 31, 1992. The audit was then
expanded to cover five fiscal years, 1988 through 1992. Those
books and records were found to be inadequate for determination of
the actual prices paid or payable for all the merchandise imported.
They did indicate a total value of almost 60 million dollars,
somewhat less than $50 million of which had been reported to
Customs. Those figures were derived by the Service's audit,
essentially from tax forms and the general ledger, since individual
import invoices and other related documents proved inadequate to
the task. See, e.g., 20 Tr., pp. 38, 51.
Defense counsel did not present in open court the
president and prime-mover of Yuchius Morality Company or anyone
else with direct, relevant knowledge of the transactions at issue.11
Rather, a certified public accountant brought in by the company
after Customs had commenced its investigation was called upon to
testify. He explained that he and his staff worked some four
hundred hours attempting to "reconcile . . . the Customs dollar
amount and Yuchius Morality Ltd.'s dollar amount." 19 Tr., p. 113.
That is, Service auditors and he agreed upon a plan of recapitula-
tion and then proceeded on a year-by-year basis to compare company
11
The appearance and testimony at trial of an erstwhile Yu-
chius underling added nothing of moment. See generally 20 Tr.,
pp. 167-80.
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Court No. 96-02-00608 Page 12
general ledger purchases with the values reported to Customs upon
entry. See id. at 114-15, 119.
There is no evidence on the record that, as the business
of defendant Yuchius expanded, the company made greater effort to
properly and fully account for its transactions. After Customs had
commenced its investigation, the defendant tendered $5,138 to cover
a variance that had been detected, but it took the position that
other questionable entries were attributable to commissions, train-
ing, and technical assistance. Selling commissions, however, had
to be included in the price actually paid or payable for imported
merchandise. See 19 U.S.C. §1401a(b)(1)(B) (1988). Buying commis-
sions, on the other hand, need not have been, but it had to have
been demonstrated that there was a bona fide agency relationship
and that the commissions were in fact buying commissions. See,
e.g., Rosenthal-Netter, Inc. v. United States, 12 CIT 77, 78, 679
F.Supp. 21, 23, aff'd, 861 F.2d 261 (Fed.Cir. 1988). To establish
the excludability of the latter kind of commission, an importer has
been required to show that "none of the commission inures to the
benefit of the manufacturer." Moss Mfg. Co. v. United States, 13
CIT 420, 426, 714 F.Supp. 1223, 1229 (1989), aff'd, 896 F.2d 535(Fed.Cir. 1990), quoting J.C. Penney Purchasing Corp. v. United
States, 80 Cust.Ct. 84, 97, C.D. 4741, 451 F.Supp. 973, 984 (1978).
In this case, the amounts claimed to be commissions had
not been listed on the original entry invoices, and they added up
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Court No. 96-02-00608 Page 13
to a significant sum. See 19 Tr., pp. 53, 62-63. Customs
requested substantiation of them, which defendant Yuchius did not
provide. See id. at 47, 49-50. The company did not produce any
agency agreement. See id. at 49-50. Furthermore, the amounts
claimed were in excess of 70 percent, and, according to the
testimony of the ISET member, normal buying commissions are in the
range of five to ten percent. See id. at 48, 54, 64. Defendant
Yuchius was likewise unable to verify the claimed $586,000 cost of
its furniture assembly area, which, according to Customs, was
rudimentary and may not have been worth more than twenty thousand
dollars. See id. at 37-39. When asked about the technical-
assistance and third-party-commission claims, the ISET member
responded that he found them to be identical,
which I thought to be unusual that the assembly plant,
which was an unrelated issue, the assembly plant,
training and so on, would exactly to the dollar equal
the third party buying commission. I also thought that
five hundred eighty-six thousand dollars to pay for
technical services to train their men to do such a basic
task was totally out of line. I felt that any untrained
person maybe with five or ten minute explanation could do
that task.
Id. at 50. Defendant Yuchius similarly had no receipts for the
claimed deductible training expenses, which the company president
claimed he kept in his head. See id. at 42-43. None of the ad-
justments claimed to be nondutiable could be verified against the
actual import entries for which they were claimed. See id. at 52-
64.
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Court No. 96-02-00608 Page 14
(2)
Keeping transactions in one's head may be possible, at
least so long as no one else demands an accounting thereof, but it
is not possible for this court on the record developed in this case
to find that such an approach by defendant Yuchius was the kind of
care contemplated by 19 U.S.C. §1484(a)(1), supra. That is, it was
to be expected that some sixty million dollars worth of entries
would give rise to questions and that the answers thereto would
require verification. That such confirmation was not even feasible
with the intervention of outside accountants and lawyers on both
sides is perhaps the best indication of negligence. Indeed, the
court finds that defendant Yuchius's failure to ensure that its
entries were correct was at least the result of negligence on its
part, constituting a violation of 19 U.S.C. §1592. The court
further finds that that failure was material to the orderly and
proper assessment and collection of duties by the Customs Service.
III
Part of Yuchius's defense has been that it sought to make
prior disclosures under the Tariff Act and that it was "whipsawed"
by the Service's changing position in regard thereto and the
outright rejection of a second attempted such disclosure. See
Post-Trial Submission of Defendant Yuchius, pp. 9-12. The maximum
civil penalty for violations of the statute due to negligence is
(A) the lesser of--
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Court No. 96-02-00608 Page 15
(i) the domestic value of the merchandise,
or
(ii) two times the lawful duties, taxes, and
fees of which the United States is or may be
deprived . . ..
19 U.S.C. §1592(c)(3). However,
[i]f the person concerned discloses the circumstances of
a violation of subsection (a) of this section before, or
without knowledge of, the commencement of a formal in-
vestigation of such violation, with respect to such
violation, merchandise shall not be seized and any
monetary penalty to be assessed under subsection (c) of
this section shall not exceed--
* * *
(B) if such violation resulted from negligence
. . . , the interest (computed from the date of liquida-
tion at the prevailing rate of interest applied under
section 6621 of Title 26) on the amount of lawful duties,
taxes, and fees of which the United States is or may be
deprived so long as such person tenders the unpaid amount
of the lawful duties, taxes, and fees at the time of
disclosure, or within 30 days (or such longer period as
the Customs Service may provide) after notice by the
Customs Service of its calculation of such unpaid amount.
The person asserting lack of knowledge of the commence-
ment of a formal investigation has the burden of proof in
establishing such lack of knowledge. For purposes of
this section, a formal investigation of a violation is
considered to be commenced with regard to the disclosing
party and the disclosed information on the date recorded
in writing by the Customs Service as the date on which
facts and circumstances were discovered or information
was received which caused the Customs Service to believe
that a possibility of a violation of subsection (a) of
this section existed.
19 U.S.C. §1592(c)(4).
A
To address first the issue of prior disclosure under this
section 1592(c)(4), defendant Yuchius claims that it
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Court No. 96-02-00608 Page 16
did not tender lost duties when it submitted PD2 to
Customs on September 28, 1993, because the amount of any
lost duties was at that point unclear. When Yuchius
submitted PD2, Yuchius believed that the difference
between the booked cost of its foreign purchases and the
entered value was not dutiable, because this difference
consisted of commissions and payments for training and
technical assistance. Also, at that time, Yuchius'
ability to calculate the lost revenues was hampered by
shortcomings in its record-keeping practices.12
Whatever the veracity of this position, neither the
statute on its face nor the evidence adduced at trial in connection
therewith counsels the relief defendant Yuchius seeks. Upon
meeting with the company's president and also its senior vice-
president, the ISET member came to conclude that there was not
acceptable support for the discrepancies at issue, and Yuchius was
informed that an enforcement proceeding would likely commence
against it. RAD thereupon produced a preliminary report on April
12, 1993, documenting undervaluation for 1992 and calculating the
loss of revenues at $242,987. The report states that the importer
had agreed to pay this amount and also to disclose for four other
years. As indicated above, Yuchius took the position that most of
the discrepancy between booked foreign purchase costs and value
12
Post-Trial Submission of Defendant Yuchius, pp. 9-10.
The reference "PD2" is to a second claimed attempt by the com-
pany at prior disclosure.
The first such attempt occurred on March 24, 1993, claiming
a discrepancy in the amount of $5,138 for fiscal year 1991. See
Plaintiff's Exhibit 4, pp. 010003-06.
This six-digit pagination of plaintiff's exhibits is the
result of its usage of a Bates® automatic numbering machine.
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Court No. 96-02-00608 Page 17
declared on entries was due to commissions, technical assistance,
and training. See Plaintiff's Exhibit 15, p. 011303. However,
Customs informed the company that such "cost difference" was
dutiable and that the duties owed for 1991 were $248,125 (which
figure included the $5,138). See id. at 011304. Yuchius then made
six payments to Customs, totalling $242,987. See id. at 11342-43.
RAD issued its final report for that fiscal year and stated that
the Service's audit had been expanded to cover the other fiscal
years 1989 through 1993. See id. at 011304. Yuchius then admitted
that it had failed to disclose $8,916,794 during that period, but
reiterated its belief at the times of the entries that that total
cost difference was not dutiable. See id.Customs completed its audit in October 1993, by which
time the period of limitations had run as to the fiscal year 1988.
It concluded that Yuchius had not maintained sufficient records to
determine the actual price paid on an entry-by-entry basis. There
had been a failure to identify the undervaluations by entry number,
port of entry, date of entry. Total undervaluation was found to be
$10,252,462.00. However, the Service only reported loss of
revenues for the four fiscal years beginning February 1, 1989,
namely $569,431.
The second attempt at prior disclosure occurred on
September 28, 1993, whereupon Customs examined the related imports.
See Plaintiff's Exhibit 15, p. 011322. Defendant Yuchius now
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Court No. 96-02-00608 Page 18
argues that the reason it failed to submit any duties owed is that
continuing negotiations through January 30, 1996 gave it the im-
pression that the deadline for tendering them had been extended by
Customs. See Post-Trial Submission of Defendant Yuchius, p. 5,
para. 14.
ISET agreed with the Service auditors that Yuchius had
not made a proper disclosure of all the circumstances of its
imports and advised that the September 1993 attempted prior dis-
closure was not valid. See Plaintiff's Exhibit 15, p. 011296.
Customs thereafter issued Yuchius a prepenalty notice, demanding
duties in the amount of $328,665 and indicating that it was
considering a $1,153,580 penalty, twice the calculated loss of
revenues. See Plaintiff's Exhibit 17; Defendant Yuchius Exhibit 5.
The Service also issued a demand for duties and fees. The company
submitted a response, claiming that there had been double-counting
of an accrual for 1992 and arguing that its undervaluation was the
result of poor recordkeeping, in essence, a mistake of fact or
clerical error. See Defendant Yuchius Exhibit 6; 19 Tr., pp. 91-
92. Yuchius requested an extension of time for tender but did not
receive one. A formal penalty notice issued on June 13, 1995,
plaintiff's exhibit 23. Yuchius petitioned for relief, offering to
remit the lost revenues. See Plaintiff's Exhibit 24. The district
office forwarded the petition to Customs Headquarters for final
decision, and on January 26, 1996, it provided Yuchius with a draft
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Court No. 96-02-00608 Page 19
of its decision, which indicated denial of the petition. The
stated reason was that, although Headquarters believed that,
contrary to the port director's determination, the circumstances of
the violation had been disclosed to the best of the company's
knowledge, Yuchius had not tendered the outstanding duties owed, as
required by the prior-disclosure regulations. See Defendant
Yuchius Exhibit 4, pp. 3-4. The draft also noted that because the
statute of limitations was set to expire with respect to some
entries, the matter would be referred immediately to the Department
of Justice for collection.
Yuchius offered to enter into an agreement with Customs,
waiving any time defense for the entries which was about to ma-
terialize and providing that the company pay the loss of revenues
and an interest-based penalty only. See Plaintiff's Exhibit 27.
On January 30, 1996, one day before the period of limitation was to
expire, Yuchius refused to provide the waiver13, and therefore, on
that same day, Customs formally determined that the attempted prior
disclosure was not valid for failure to tender the duties owed.
See Plaintiff's Exhibit 30.
That denial was pursuant to 19 C.F.R. §162.74(h) (1996),
which required that a person disclosing the circumstances of a
violation tender any actual loss of duties at the time of disclos-
ure or within 30 days after Service notification of its calculation
13
See Plaintiff's Exhibit 28, p. 011399.
Consolidated
Court No. 96-02-00608 Page 20
of the actual loss. Defendant Yuchius claims it could not have
made such tender at the time of its second attempted disclosure to
Customs on September 28, 1993 because it believed that the com-
missions and payments for training and technical assistance were
not dutiable and that, when it was notified of the actual amount by
the Service, the prepenalty notice had already been issued. See
Post-Trial Submission of Defendant Yuchius, pp. 9-10. Of course,
the company has acknowledged that the very reason why the amount
owed was difficult or impossible to calculate was its own inade-
quate recordkeeping. Nonetheless, it argues now that
[t]endering the lost revenues . . . --even if Yuchius and
Customs had reached an agreement as to their amount--
would not have perfected the prior disclosure. By the
time Customs Headquarters concluded that PD2 was substan-
tially complete after all, it was too late to tender the
duties.
Id. at 12.
In its second attempted prior disclosure, the company
admitted failing to account for some $8,916,794. The final audit
report dated October 14, 199414 set forth the total as $10,252,462,
the prepenalty notice was dated February 16, 199515, and on January
26, 1996, Yuchius was negotiating an interest-based penalty only
with Customs but refused to provide the limitations waiver one day
before the statute was to run, and still the outstanding duties had
not been tendered. See Defendant Yuchius Exhibit 10.
14
See Defendant Yuchius Exhibit 13.
15
See Defendant Yuchius Exhibit 5.
Consolidated
Court No. 96-02-00608 Page 21
There was no requirement under 19 C.F.R. §162.74(h)(1996)
that the tender of the duties be tied to an importer's belief that
disclosure would be effective. Indeed, the obligation to pay
duties exists independent of any penalty imposed. See United
States v. Blum, 858 F.2d 1566 (Fed.Cir. 1988). See also TIE
Communications, Inc. v. United States, 18 CIT 358 (1994); United
States v. Snuggles, 20 CIT 1057, 937 F.Supp. 923 (1996). Defendant
Yuchius's position that it was "whipsawed" by the decision of the
port director, later overruled by Customs Headquarters, regarding
the adequacy of the disclosure of the circumstances of the
violation does not obviate tender. The requirement is clear and
unambiguous. If the company believed that Customs was wrong about
the adequacy of the disclosure of the circumstances, it could have
and should have paid the duties and continued to pursue its
position. It claims to have deferred tender for a good reason,
namely, that if it paid an amount which was later determined to be
greater than necessary, refusal of the Service to refund would not
have been a protestable decision. While the law on the point may
be uncertain16, tender of duties is still required to qualify for
prior-disclosure treatment. Defendant Yuchius cannot take the
position that it believed that the amounts for commissions and
technical and training expenses were not dutiable, and delayed
16
See, e.g., Bridalane Fashions, Inc. v. United States, 22
CIT 1064, 32 F.Supp.2d 466 (1998).
Consolidated
Court No. 96-02-00608 Page 22
paying in the hope of substantiating its view, because it never had
support for that position, and has not proven otherwise herein.
The company may have believed that Customs negotiations
with it meant that tender could wait, but it has produced no
evidence or testimony in support thereof. On the contrary, it was
reaffirmed at the trial that the Service "always take[s] the
money." 19 Tr., p. 80. Moreover, there is no evidence that
acceptance of the monies paid thus far constituted a waiver or an
attempt to mislead Yuchius about the status of prior disclosure.
There is also no evidence that there was an extension granted
pursuant to 19 C.F.R. §162.74(h). Finally, the company did not
actually disclose the circumstances of its violation(s) until after
Customs had begun an investigation. While the Service may have
been willing to proceed on the basis of a prior disclosure,
accompanied by appropriate tender, technically, the period had
passed for Yuchius to qualify therefor.
B
Congress has chosen to adopt only maximums, as opposed to
prescribing precise penalties, for proven violations under 19
U.S.C. §1592 and has left any imposition thereof to the exclusive
jurisdiction of the Court of International Trade. And the court
has understood the purpose of this approach essentially to be
remedial rather than punitive. E.g., United States v. Gordon, 10
Consolidated
Court No. 96-02-00608 Page 23
CIT 292, 297, 634 F.Supp. 409, 415-16 (1986). Moreover, the court
has compiled an exhaustive list of considerations that might apply
in a given case, including a defendant's good faith effort to
comply with the statute, a defendant's degree of culpability, a
defendant's history of previous violations, the public interest in
ensuring compliance with the law, the nature and circumstances of
the violation(s) at issue, a defendant's ability to pay, the po-
tential impact of a penalty on a defendant's ability to continue in
business, that a penalty not be shocking to the conscience, the
economic benefit of the violation(s) to a defendant, the degree of
harm to the public, and the value of vindicating agency authority.
See United States v. Complex Machine Works Co., 23 CIT 942, 949-50,
83 F.Supp.2d 1307, 1314-15 (1999).
Agency authority may be down this list, but that circum-
location cannot be interpreted to mean that it is not a paramount
consideration and concern of this court. Indeed, the multifarious
tasks and enormous responsibilities of the U.S. Customs Service are
much too daunting to permit the lack of reasonable care cum
negligence reflected by the record in this case to go without
correction. Perhaps, the extended administrative process, and then
this case itself, have already had a remedial impact upon defendant
Yuchius and its principals. None of them, however, presented him-
or herself herein for closer court scrutiny on this issue.
Instead, they have relied upon their privilege to have accountants
Consolidated
Court No. 96-02-00608 Page 24
and attorneys do their reckoning. And the latter have carried out
their assignments admirably. Counsel have not sought to deny the
undeniable, rather to minimize the damage that emanates therefrom.
They have sought to portray their client(s) as unsophisticated, not
well-educated, too busy to have kept complete and proper track of
all that matters to Customs.17 They understand (and have stipulat-
ed) that the Service is still owed duties in the amount of
$321,306.00 plus interest thereon. Whereupon, they propose that,
if any penalties are assessed, the maximum permissible
amount is $642,306, twice the amount of the loss of
revenue in the second disclosure period.
Post-Trial Submission of Defendant Yuchius, p. 8, para. 5.
On its part, the plaintiff continues to "seek the maximum
penalty of two times the lawful duties that the United States was
deprived"18, which it computed in the pretrial order to be $569,-
431.00 x 2 = $1,116,454.0019. While both sides appear to continue
to have difficulty with their arithmetic, the logic and analysis in
support of their respective positions are clear enough. Both rely
on the factors of the Complex Machine Works case, supra, albeit to
divergent final penalty amounts.
17
While these insinuations may all be true, the court is
required to remind the defendant that none of them can be the
basis of an acceptable defense.
18
Plaintiff's Post-Trial Submission, p. 20.
19
Pre-Trial Order, p. 6.
Consolidated
Court No. 96-02-00608 Page 25
Taking those considerations into account, and comparing
them with the specific facts of this case, the court concludes that
the maximum penalty multiplier should apply -- but only to the net
lost revenues stipulated by the parties, supra, $321,306, equals a
penalty of $642,612.00 that the government of the United States of
America should collect from defendant Yuchius. While the company's
disclosure of the circumstances of some of its violations may have
been "substantially complete and effective"20, as Customs Head-
quarters came to conclude, the record developed herein as a whole
still counsels a penalty of this magnitude.
IV
As set forth hereinabove, defendant Intercargo Insurance
Company has already settled its obligation to the plaintiff under
its bond. Whereupon it cross-claims herein against co-defendant
Yuchius for the amount thereof, plus interest thereon from the date
of payment, as well as reasonable attorney's fees and costs and
expenses for pretrial preparation, trial participation, and pre-
sentation of the cross-claim.21
A
Cross-claimant Intercargo presses two paths to recovery,
to wit, its indemnity agreement with Yuchius, and implied contract
20
Defendant Yuchius Exhibit 4, p. 3.
21
The court notes in passing that its jurisdiction over
this claim has not been extinguished by the cross-claimant's
settlement with the plaintiff. See, e.g., Nishimatsu Constr.
Co. v. Houston Nat'l Bank, 515 F.2d 1200, 1204 and n. 2 (5th Cir.
1975).
Consolidated
Court No. 96-02-00608 Page 26
between principal and surety. According to the agreement produced
at trial as exhibit INT-5, Yuchius Morality Company, Ltd. did
bind itself, it successors and assigns, to indemnify and
save [Intercargo Insurance] Company harmless . . . and on
demand to pay it any and all claims, demands, loss and
damages of every nature and kind, and on demand to pay it
all legal and other costs, counsel fees and expenses
directly or indirectly, which the Company shall at any
time sustain by reason or in consequence of such surety-
ship, or any renewal, extension, modification or continu-
ation thereof, or Consent of Surety or additional surety-
ship, . . . whether before or after legal proceedings by
or against the Company, and without notice thereof to the
undersigned [Yuchius].
* * *
The undersigned [Yuchius] hereby agrees to indemnify
the Company for any and all expenses, costs and attor-
ney's fees incurred by the Company in the event that the
Company is compelled to exercise any of its available
remedies to ensure compliance with the terms and condi-
tions of the bond.
On its face, this agreement binds Yuchius to indemnify its surety
in this matter.
Moreover, the Restatement (Third) of Suretyship and
Guaranty §22(1)(b) indicates that there is an obligation to
reimburse a secondary obligor when it makes a settlement with the
obligee that discharges the principal obligor, in whole or in part,
with the respect to the underlying obligation. This court's
granting of partial summary judgment to the plaintiff for unpaid
duties covered by the Intercargo bond, and the subsequent penalty
trial, established that the time for satisfaction of the obligation
had arrived. See Restatement (Third) of Suretyship and Guaranty
Consolidated
Court No. 96-02-00608 Page 27
§22(2). Defendant Yuchius claims that the settlement was premature
in the absence of court disposition of its defenses herein. Cf.
id., §24. It also claims that
the question of the payment of lost duties became
intertwined with Customs' penalty demands from the very
outset, and that Yuchius has not been able to resolve one
question without also resolving the other. Under these
circumstances, it is premature to conclude that Yuchius
has breached its duty of performance to Intercargo, and
thus exoneration would not be appropriate under Section
21(2) of the Restatement.
Post-Trial Submission of Defendant Yuchius, p. 27.
Of course, defendant/cross-claimant Intercargo has al-
ready incurred the expenses of the trial (and the settlement).
Hence, its cross-claim is not now premature. While section
24(1)(e) of the Restatement does set forth a defense to a demand
for reimbursement when, at the time of a settlement of a secondary
obligation, the secondary obligor had notice of a defense of the
principal obligor to the underlying obligation22, the surety takes
the position that this court's slip opinion 99-79 dismissed any
such defense of defendant Yuchius even before the trial. As for
the trial, the defendant/cross-claimant has pointed to the other
22
Cf. Restatement (Third) of Suretyship and Guaranty §24-
(3):
Notwithstanding subsection (1)(e), if the secondary
obligor gives the principal obligor notice of the
obligee's claim and an opportunity to defend against it,
the principal obligor may not assert, as a defense to its
duty to reimburse the secondary obligor, any defense to
the underlying obligation that was available to the
secondary obligor as a defense to the secondary
obligation.
Consolidated
Court No. 96-02-00608 Page 28
parties' difficulties, even failures, to match entries covered by
its bond with duties owed. Notwithstanding this systemic shortcom-
ing of the record, the surety still presses its settlement now as
a "reasonable business decision". Post-Trial Brief by Defendant and
Cross-Claimant Intercargo, p. 11. Given the facts and circum-
stances adduced herein23, this court cannot disagree.
Defendant Yuchius contends that the defendant surety's
defense of this action was voluntary. The court cannot concur.
The failure-to-match defense asserted by Intercargo was hardly
volitional, nor does the record reflect inadequate or improper
evaluation of the liabilities in the case prior to any tender.
Defendant Yuchius also takes the position that the efforts of the
defendant/cross-claimant's counsel were duplicative, but this
assertion also cannot stand in the light of their aforesaid,
original defense and their extensive cross-examination of govern-
ment witnesses. See 19 Tr., pp. 80-141; 20 Tr., pp. 101-34.
Unlike the case cited by defendant Yuchius in support of its
position, Sentry Ins. Co. v. Davison Fuel & Dock Co., 60 Ohio
App.2d 248, 396 N.E.2d 1071 (1978), defendant/cross-claimant
Intercargo's counsel did not agree that the principal's counsel was
competent to represent it in all phases of this litigation,
including those inherently tied to the bond. Clearly, the decision
23
For example, at the time of its settlement for the $50,-
000 face value of its bond, the surety was still confronted with
a Customs demand for $67,844.44. See Intercargo Proposed Find-
ings of Fact and Conclusions of Law, p. 2. Cf. Exhibit INT-1.
Consolidated
Court No. 96-02-00608 Page 29
in regard thereto was within the surety's discretion, and this
court cannot find that the resultant approach was out of order.
Defendant Yuchius is of the view that exoneration of its
surety would not be appropriate in the absence of an attempt to
collect from the principal and of a showing that the remedy at law
is inadequate, and that remittance to defendant/cross-claimant
Intercargo is not the appropriate form of relief. It argues that
the case, Milwaukie Constr. Co. v. Glen Falls Ins. Co., 367 F.2d
964 (9th Cir. 1966), cited by the surety, is inappropriate as the
exoneration remedy referred to therein was granted in circumstances
where that surety did not know what the final amount would be and
so did not have an adequate remedy at law, and in the circumstances
where there was an impending threat of the principal's absconding.
However, that case is not limited to such circumstances, to wit:
". . . The doctrine in such cases rests on the simple
right, as between the principal and surety, that the
surety has to be protected by the principal; a surety is
awarded exoneration in order that mischief and circuity
of action may be avoided; he is not obligated to make
inroads into his own resources when the loss in the end
must fall on the principal.
It is not essential that the claim of the surety for
relief should depend on the fact that he will incur
irreparable injury; nor must he show any fraudulent
disposition of property, or the presence of a wrongful
purpose, or special reason for fearing loss; and the
insolvency of his surety will not preclude him from
maintaining the bill."
Consolidated
Court No. 96-02-00608 Page 30
367 F.2d at 966, reciting 72 C.J.S., Principal and Surety §303
(1951). And also quoting Judge Learned Hand's opinion in Admiral
Oriental Line v. United States, 86 F.2d 201, 204 (2d Cir. 1936),
in equity
the rule is otherwise; before paying the debt a surety
may call upon the principal to exonerate him by discharg-
ing it . . ..
367 F.2d at 967. See also Morley Constr. Co. v. Maryland Casualty
Co., 90 F.2d 976 (8th Cir. 1937).
In this case, to avoid the circuity referred to,
indemnification is appropriate. The debt has matured, the surety
has paid out funds in settlement, and therefore defendant Yuchius's
arguments relating to the exoneration remedy are not apposite.
See, e.g., United States v. Almany, 22 CIT 490 (1998). See also
Borey v. Nat'l Union Fire Ins. Co., 934 F.2d 30 (2d Cir. 1991).
Defendant Yuchius further argues that the form of relief
requested by Intercargo is not contemplated by the Restatement
(Third) of Suretyship and Guaranty §21(2), Comment (k), which
states:
. . . The relief granted, when exoneration or quia timet
rights are asserted, depends on the facts of the particu-
lar case. . . . Among the courses open to the court are
to direct performance by the principal obligor, to
require that a sum certain due the obligee by the
principal obligor be paid into court for the obligee, or
to require that the principal obligor give the secondary
obligor adequate security for its ultimate reimbursement.
However, since the amount at issue herein is now a sum certain, it
would serve no purpose to require payment into court of monies or
Consolidated
Court No. 96-02-00608 Page 31
to furnish security. Judgment should simply be entered on behalf
of defendant/cross-claimant Intercargo Insurance Company directly.
B
The Restatement (Third) of Suretyship and Guaranty §23(1)
envisions a principal obligor's reimbursement of a secondary obli-
gor for the "reasonable cost of performing the secondary obliga-
tion, including incidental expenses". Here, the surety claims that
the $13,146.30 requested is a reasonable sum spent in its defense
of the claims against defendant Yuchius prior to the trial, and it
also seeks reimbursement for trial preparation, the subsequent
conduct thereof, and the reasonable fees and expenses incurred in
pursuing its cross-claim. Comment (a) to the Restatement's section
23(1) states that the duty to reimburse a secondary obligor encom-
passes incidental expenses, which "may include reasonable attor-
neys' fees incurred in conjunction with performance of the
secondary obligation".
(1)
As this court, contrary to the claim of defendant Yu-
chius, does not find Intercargo's defense to have been "voluntary",
attorney's fees of $13,146.30 incurred up to the date of trial24 are
clearly recoverable, as are such fees engendered by the govern-
ment's trial itself.
24
See Exhibit INT-4.
Consolidated
Court No. 96-02-00608 Page 32
(2)
With regard to recovery of attorney's fees and expenses
in pursuit of the cross-claim, cases that have allowed them have
relied upon the language of any indemnity agreement. See, e.g.,
John Burr v. Alexander Lichtenheim, 190 Conn. 351, 460 A.2d. 1290
(1983). In the matter at bar, that agreement's reference to indem-
nification for "any and all expenses, costs and attorney's fees
incurred by the Company in the event that the Company is compelled
to exercise any of its available remedies to ensure compliance" is
sufficiently broad25, and the court therefore finds such fees and
expenses to be recoverable by cross-claimant Intercargo.
Where, as here, there is such an agreement, case law does
require that it was reasonably necessary for a surety to have
incurred attorney's fees and expenses. E.g., Fallon Elec. Co. v.
The Cincinnati Ins. Co., 121 F.3d 125 (3d Cir. 1997). See also
Sentry Ins. Co. v. Davison Fuel & Dock Co., supra. And this
court so finds on the record developed.26
V
The plaintiff seeks prejudgment interest from February
16, 1995 on the $321,306 in lost revenues. Defendant Yuchius has
25
The same can be said of the agreement in Sentry Ins. Co.
v. Davison Fuel & Dock Co., 60 Ohio App.2d 248, 396 N.E.2d 1071(1978), upon which defendant Yuchius attempts to rely.
26
Of course, before any award thereof, defendant/cross-
claimant Intercargo must serve and file a detailed accounting,
which will be subject to examination by defendant Yuchius. Cf.
Sentry Ins. Co. v. Davison Fuel & Dock Co., supra note 25.
Consolidated
Court No. 96-02-00608 Page 33
admitted that it owes the plaintiff lost duties since at least
September 28, 1993. See Plaintiff's Exhibit 13, p. 011214. The
duties were demanded on February 16, 1995. See Plaintiff's Exhibit
17, p. 011352.
Award of such interest is within the equitable powers of
the court. See, e.g., United States v. Imperial Food Imports, 834
F.2d 1013, 1016 (Fed.Cir. 1987); Rheem Metalurgica S.A. v. United
States, 21 CIT 963, 966, 978 F.Supp. 333, 336, aff'd, 160 F.3d 1357(Fed.Cir. 1998); United States v. Utex Int'l Inc., 11 CIT 325, 329,
659 F.Supp. 250, 254 (1987), rev'd on other grounds, 857 F.2d 1408(Fed.Cir. 1988); United States v. Goodman, 6 CIT 132, 139-140, 572
F.Supp. 1284, 1289 (1983). That is, it is appropriate to reimburse
the government for what has been essentially a loan to the
defendant. E.g., United States v. Imperial Food Imports, 834 F.2d
at 1016; United States v. Goodman, 6 CIT at 140. See also Wallace
Beerie & Co. v. United States, 12 CIT 103, 107 (1988). In this
case, there has been no unreasonable delay on the part of the
government. Whereupon, the plaintiff should recover prejudgment
interest from defendant Yuchius since February 16, 1995.
VI
The parties are hereby directed to settle and submit
within 30 days hereof a proposed final judgment in conformity with
this opinion, which represents the court's findings of facts and
conclusions of law, awarding (a) the plaintiff lost revenues and
Consolidated
Court No. 96-02-00608 Page 34
prejudgment interest thereon, as well as the penalty for the proven
negligence of defendant Yuchius Morality Company, Ltd., and (b)
defendant/cross-claimant Intercargo Insurance Company the amount of
its bond plus the reasonable fees and expenses of its attorneys and
costs incurred before trial, as well as interest thereon and such
reasonable fees and expenses as may have been incurred since that
time and which have been set forth in an application therefor duly
served and filed within the aforesaid 30-day period in conformity
with the CIT Rules.
So ordered.
Decided: New York, New York
October 18, 2002
Judge