U.S. v. Pan Pacific Textile Group, Inc.

• Decision Date: 26 August 2005
• Docket Number: Court No. 01-01022.,Slip Op. 05-107.
• Citation: 395 F.Supp.2d 1244
• Parties: UNITED STATES, Plaintiff, v. PAN PACIFIC TEXTILE GROUP, INC., Aviat Sportif, Inc., Budget Transport, Inc., Prime International Agency, Billion Sales, Ever Power Corp., American Contractors Indemnity Company, and Thomas Man Chung Tao, and Stephen Shen Yu Juang, Defendants.
• Court: U.S. Court of International Trade

395 F.Supp.2d 1244

UNITED STATES, Plaintiff, v. PAN PACIFIC TEXTILE GROUP, INC., Aviat Sportif, Inc., Budget Transport, Inc., Prime International Agency, Billion Sales, Ever Power Corp., American Contractors Indemnity Company, and Thomas Man Chung Tao, and Stephen Shen Yu Juang, Defendants.

Slip Op. 05-107.

Court No. 01-01022.

United States Court of International Trade.

August 26, 2005.

Peter D. Keisler, Assistant Attorney General; David M. Cohen, Director, Commercial Litigation Branch, Civil Division, U.S. Department of Justice (Patricia M. McCarthy and Michael D. Panzera); Annmarie R. Highsmith, Senior Attorney, Office of Associate Chief Counsel, U.S. Customs and Border Protection, U.S. Department of Homeland Security, for plaintiff.

John Weber, New York City, for defendants Thomas Man Chung Tao, Pan Pacific Textile Group, Inc., and Aviat Sportif, Inc.

OPINION

GOLDBERG, Senior Judge:

This case involves an action by plaintiff the United States (specifically, the United States Customs Service¹ ("Customs")) against defendants Pan Pacific Textile Group, Inc. ("Pan Pacific"), Aviat Sportif, Inc. ("Aviat Sportif"), Budget Transport, Inc., Prime International Agency, Billion Sales, Ever Power Corp., American Contractors Indemnity Company ("ACIC"),² Thomas Man Chung Tao ("Tao"), and Stephen Yu Juang ("Juang"),³ regarding 68 unlawful entries of track suits imported from the People's Republic of China ("China") into the United States. Customs moves for partial summary judgment against Tao, Pan Pacific, and Aviat Sportif (collectively, "defendants") pursuant to USCIT Rule 56, seeking the recovery of (1) unpaid duties under 19 U.S.C. § 1592(d) based on alternative theories of fraud, gross negligence, or negligence and (2) a civil penalty under 19 U.S.C. § 1592(b) based on alternative theories of gross negligence or negligence. Defendants also move for partial summary judgment pursuant to USCIT Rule 56, contending that Customs cannot prove scienter for purposes of establishing liability for a civil penalty under a fraud theory. The Court has consolidated these motions for purposes of this opinion.

I. BACKGROUND

In accordance with USCIT Rule 56(d), the Court begins with a recitation of the relevant facts which appear to be without substantial controversy. During the events at issue in this case, Tao was an importer dealing almost exclusively in tracksuits manufactured in China. PPFUF ¶ 2. To do business in the United States, Tao acted through two companies, Pan Pacific and Aviat Sportif, which were owned and controlled by Tao. PPFUF ¶ 2. In 1993, Tao and his companies engaged the freight forwarding services of Juang, who operated several companies providing cargo transportation between the United States and China. PPFUF ¶ 12. Later that same year, Juang proposed to expand the scope of the services he provided to Tao. PPFUF ¶ 12. Juang offered to provide both freight forwarding and customs clearance services on Tao's shipments, although he was not a licensed customs broker.⁴ PPFUF ¶ 12. Tao accepted Juang's offer, and signed a power of attorney allowing Juang to conduct customs entry transactions on behalf of Tao and his companies. PPFUF ¶ 14. Tao (or one of his companies) remained the importer of record for approximately one year after Juang began performing customs clearance services. PPFUF ¶ 15.

Upon acquiring these new customs clearance responsibilities, Juang began submitting entry documents to Customs that misdescribed the tracksuits as plastic bags and wooden patio furniture — classifications which carried lesser duty rates⁵ and were not subject to quota restrictions.⁶ PPFUF ¶¶ 17, 19. He also undervalued the merchandise to further reduce the duties assessed by Customs. PPFUF ¶¶ 17, 19. Juang profited from this scheme by continuing to charge Tao according to the proper duty rate. PPFUF ¶ 20. To support his charges to Tao, Juang supplemented his invoices with accurate entry documents that were never in fact submitted to Customs. PPFUF ¶ 21.

In 1994, Juang approached Tao with an alternate business arrangement (the "flat fee scheme"). PPFUF ¶ 29. Juang claimed that Tao had been "paying too much duty" and proposed that Tao pay a flat fee per shipping container that would include all of the costs of shipment, including both freight forwarding and customs duties. PPFUF ¶ 29. Further, Juang claimed that Tao would no longer need to separately purchase quota visas. PPFUF ¶ 31. Juang suggested that he could instead accomplish this task through a personal connection and include it in his package of services to Tao. PPFUF ¶ 32. As part of this arrangement, Juang proposed that he would become the importer of record, although Tao would continue to ultimately receive the goods. PPFUF ¶ 31. For all of his services under the flat fee scheme, Juang offered to charge a fee that was less than the duties Tao would have otherwise paid. PPFUF ¶ 29.

Before accepting Juang's proposal, Tao questioned how Juang could make a profit while offering such a reduced flat fee. PPFUF ¶ 33. Tao consulted with Myron Rosenbach ("Rosenbach"), an acquaintance experienced in importing from Asia into the United States, seeking an explanation. Memorandum in Support of Defendants Pan Pacific Textile Group Inc., Aviat Sportif Inc., and Thomas Man Chung Tao's Motion for Summary Judgment Pursuant to Rule 56 of the Court of International Trade ("Defs.' Mot.") at 8. Rosenbach indicated that it was possible for an importer to reduce duties owed by calculating the duty based on production cost rather than invoice value, and he provided Tao with a copy of a letter from a Customs attorney that supported this theory. Defs.' Mot., Ex. C (Deposition of Myron Rosenbach) ("Rosenbach Dep.") at 133-35. This letter had been sent to Rosenbach as a general update on customs law, and was not intended for Tao, or written with any knowledge of his situation. Rosenbach Dep. at 135-36. Two days after this conversation, Tao agreed to the flat fee arrangement, including the designation of Juang as the importer of record. PPFUF ¶ 37. Although Tao stated that he assumed that duties would be calculated based on production costs, Tao never provided these costs to Juang. Pl.'s Mot., App. E (Deposition of Thomas Man-Chung Tao) at 255, 276.

After Tao agreed to the flat fee arrangement, Juang continued to enter Tao's tracksuits as plastic bags and patio furniture, although he stopped providing Tao with falsified entry documents as support for his invoices. PPFUF ¶ 47. Tao stated that he thought it was not necessary for him to maintain copies of his entry records, since he was no longer the importer of record. PPFUF ¶ 41. Tao also told his supplier, Singmay Industrial, Ltd., that it should no longer purchase quota visas, indicating that Juang would take care of this under the new flat fee scheme. PPFUF ¶ 43. Tao stated that, while he perceived a shift in responsibilities once Juang became the importer of record, he still considered himself to be the owner of the merchandise. PPFUF ¶ 41. To that end, Tao's companies continued to place the orders for the merchandise, and received the goods directly from Juang's companies after they cleared customs. PPFUF ¶ 41. Tao's company, Pan Pacific, also remained the ultimate consignee. PPFUF ¶ 41.

On or about November 26, 1996, Customs Special Agents began investigating Juang, initially for suspected involvement in the smuggling of Chinese medicine. Pl.'s Mot. at 7. On February 26, 1997, Customs searched the premises occupied by Juang's companies. Pl.'s Mot., App. A (Declaration of David J. Peters) ¶ 5. Records uncovered during the search revealed that, from late 1993 to early 1997, Juang entered tracksuits for Tao, Pan Pacific, and Aviat Sportif. Pl.'s Mot., App. B (Declaration of Marcia A. Brown) ("Brown Decl.") ¶ 9. Investigators then searched the premises of Pan Pacific and Aviat Sportif and concluded from the records recovered that Tao's payments to Juang were below the duties that would have been assessed based on the value stated on the commercial invoices. Brown Decl. ¶ 13. They also discovered that quota visas had not been obtained and associated charges had not been paid. Brown Decl. ¶ 12. As a result of these discoveries, Tao and Juang were criminally prosecuted for conspiracy to smuggle merchandise into the United States. Pl.'s Mot. at 8. Tao was acquitted, United States v. Tao, CR-98-571-RAP (C.D.Ca.1999), while Juang pled guilty, agreeing to pay $1.4 million in restitution, United States v. Juang, 98-CR-96-ALL (C.D.Ca.2001).

On November 21, 2001, Customs filed the instant civil action pursuant to 19 U.S.C. § 1592. Defs.' Mot., Ex. D (Complaint) ("Compl.") ¶ 1. In its complaint, Customs sought unpaid duties and a civil penalty for 68 entries of merchandise, including 34 that were at issue in the criminal trial. Compl. ¶¶ 1, 15; Pl.'s Mot. at 9. These entries were made between September 21, 1995 and January 20, 1997, under the flat fee scheme.⁷ PPFUF ¶ 1. Customs set the total domestic value of these goods at $26,051,129, and claimed that $2,034,159.80 in duties remained unpaid.⁸ Compl. ¶¶ 22, 28. In its complaint, Customs sought the recovery of both unpaid duties and a civil penalty under the three alternative theories of liability recognized by 19 U.S.C. § 1592 (i.e., fraud, gross negligence, or negligence). Compl. ¶¶ 28, 31, 34, 37, 40, 43, 44. Under a theory of fraud liability, Customs sought the full amount of unpaid duties, as well as a $26,051,129 civil penalty. Compl. ¶ ¶ 28, 37. Alternatively, Customs sought $241,351 in unpaid duties⁹ and a $956,406 civil penalty under a gross negligence theory or a $482,703 civil penalty under a negligence theory. Compl. ¶¶ 31, 34, 38, 40.

On October 31, 2002, defendants moved for summary judgment on four separate grounds, all of which were denied by this Court. United States v. Pan Pac. Textile Group, Inc., 27 CIT ___, 276 F.Supp.2d 1316 (2003). The instant motions for partial...