One of the most important benefits of forming a corporation or other business entity is the protection of owners and managers from personal liability for acts performed on behalf of the business. Holding a shareholder or officer liable is known as “piercing the corporate veil.” This may occur for acts found to be illegal or grossly negligent. A series of decisions from the Court of International Trade (CIT) and the Federal Circuit Court of Appeals addressed the liability of a corporate president, who was also the sole shareholder, for failure to pay customs duties on imported goods. The Federal Circuit ultimately applied a broad interpretation of the statute in question and held that the corporation and the shareholder may be held jointly and severally liable.
The corporation, Trek Leather, Inc., imported a number of men’s suits during a period of about eight months in 2004. According to U.S. Customs and Border Protection (CBP), Trek Leather’s sole shareholder and president used other corporate entities to purchase materials for foreign manufacturers. The manufacturers used the materials, known as “assists” in federal customs law, to produce the suits that he imported. CBP alleged that he failed to include the cost of these assists in the total price that he reported to customs officials. A lower price meant a lower customs duty.
CBP brought an action against Trek Leather and the shareholder in the CIT for misrepresenting the value of imported goods under 19 U.S.C. § 1592(a). The shareholder argued that he could not be held personally liable because he was not the “importer of record.” The CIT found that the statute applied to him as well as the corporation. It granted CBP’s motion for summary judgment and ruled that Trek Leather and the shareholder were jointly and severally liable for unpaid customs duties and related civil penalties. United States v. Trek Leather, 781 F.Supp.2d 1306 (USCIT 2011).
The question at the heart of the dispute is whether the word “person” in § 1592(a) applies only to the importer of record or has a broader scope. A three-judge panel of the Federal Circuit Court of Appeals reversed the CIT’s order, finding that the only way to hold the shareholder liable along with the corporation would be to pierce the corporate veil. This was something, the court held, that exceeded the scope of § 1592(a) and went against common law protections for shareholders and officers. United States v. Trek Leather, 724 F.3d 1330 (Fed. Cir. 2013).
An en banc panel of the Federal Circuit conducted a rehearing of the case. It reversed the earlier ruling and reinstated the CIT’s order. United States v. Trek Leather, No. 2011-1527, slip op. (Fed. Cir., Sep. 16, 2014). The court held that the statute applied to “persons” involved in importation beyond just the importer of record. The Supreme Court, ruling on a predecessor to § 1592, held that “person” had a broad meaning. United States v. Mescall, 215 U.S. 26 (1909). The Federal Circuit found that other words in the statute also had broad meanings. It held that the shareholder was a “person” within the meaning of the statute, and that his actions were among those that the statute prohibited.
Business law attorney Samuel C. Berger represents New York and New Jersey entrepreneurs and entities, offering fixed-fee legal-service packages for a variety of legal matters. Contact us today online or at (212) 380-8117 to schedule a confidential consultation with a knowledgeable business advocate.
More Blog Posts:
Treasury Department Issues New Guidance for Corporations that Transfer Operations Abroad to Reduce Tax Liability, New York & New Jersey Business Lawyer Blog, October 16, 2014
What Does It Actually Mean to Say a Corporation Is a “Person”? New York & New Jersey Business Lawyer Blog, July 21, 2014
New Jersey Offers Assistance to Small Businesses Selling Goods and Services Internationally, as India Opens Doors to Their Involvement, New York & New Jersey Business Lawyer Blog, February 14, 2013
Photo credit: By Maureen from Buffalo, USA (Flickr) [CC-BY-2.0], via Wikimedia Commons.