U.S. v. Federal Ins. Co.

• Decision Date: 10 November 1986
• Docket Number: No. 85-2343,85-2343
• Citation: 805 F.2d 1012
• Parties: , 5 Fed. Cir. (T) 16 UNITED STATES, Appellant, v. FEDERAL INSURANCE COMPANY and Cometals, Inc., Appellees. Appeal
• Court: U.S. Court of Appeals — Federal Circuit

Page 1012

805 F.2d 1012

8 ITRD 1421, 5 Fed. Cir. (T) 16

UNITED STATES, Appellant, v. FEDERAL INSURANCE COMPANY and Cometals, Inc., Appellees.

Appeal No. 85-2343.

United States Court of Appeals, Federal Circuit.

Nov. 10, 1986.

Barbara M. Epstein, Commercial Litigation Branch, Dept. of Justice, New York City, argued, for appellant; with her on the brief were Richard K. Willard, Acting Asst. Atty. Gen., David M. Cohen, Director and Joseph I. Liebman, Atty. in Charge, Intern. Trade Field Office.

David Serko, Serko, Simon & Abbey, New York City, argued, for appellees.

Before MARKEY, Chief Judge, NIES and NEWMAN, Circuit Judges.

NIES, Circuit Judge.

The United States appeals the judgment of the United States Court of International Trade in United States v. Federal Insurance Co. and Cometals, Inc., 605 F.Supp. 298 (Ct. Int'l Trade 1985), holding that the government is equitably estopped from collecting certain import duties from an importer, Cometals, Inc., and its surety, Federal Insurance Company. Our jurisdiction over the appeal is found in 28 U.S.C. Sec. 1295(a)(5). We reverse and remand with the direction to enter judgment for the government.

I.

This appeal raises the question of whether the government or an importer bears the risk of non-payment of import duties by a licensed broker who fails to pay over monies the broker received from the importer for payment of duties. On a theory of equitable estoppel the Court of International Trade placed the risk on the government. We disagree. In sum, we reaffirm that a licensed broker is the agent of the importer, not of the government, and that no equitable estoppel can arise against the government in connection with an obligation to pay taxes. We further hold that, in any event, no basis for equitable estoppel exists in this case. Contrary to the trial court's holding, the government violated neither statute nor regulation in accepting an uncertified check from a broker which was secured by a bond given by the importer. The importer and his surety remain liable for duties owed to the government regardless of the malfeasance or misfeasance of a broker. Where the government is aware that a broker is in a precarious financial condition or has mishandled the affairs of importers, the government is obliged to investigate and, in appropriate circumstances, to suspend or revoke the license of such broker. However, the statutory provision regarding supervision of brokers for the protection of importers in general creates no right in an individual importer to be relieved of his outstanding tax obligations, indeed, is irrelevant to his continued liability.

Thus, the Court of International Trade erred, as a matter of law, in holding that the government was equitably estopped from collecting from the importer and its surety the duties owed to the public fisc.

II.

The United States, plaintiff below, brought suit in the United States Court of International Trade to recover unpaid liquidated import duties in the amount of $230,344.12, plus interest, against the importer, Cometals, Inc., and its surety on a bond, Federal Insurance Company.

On May 7, 1980, an entry had been filed at the Port of Los Angeles, California, showing Cometals as importer of record of 715 drums of titanium sponge being exported from China by Japan. This entry had been made on behalf of Cometals by its customhouse broker, James Loudon & Co., Inc., which has since declared bankruptcy.

In connection with this entry, Cometals and Federal Insurance Co. had executed and delivered a general term bond to the Customs Service. Because the bond guaranteed payment of the duties, the imported merchandise was released to Cometals on the date entry was made, prior to the payment of duties. Cometals had, however, wired the amount of the import duties to Loudon's account on or about May 2, 1980. Loudon issued its own uncertified check in the amount of the estimated duties to the Customs Service on May 12, 1980.

The Customs Service accepted Loudon's uncertified check, asserting in this suit that acceptance of that check was required under Customs Regulation 19 C.F.R. Sec. 24.1(3), which states that "an uncertified check drawn by an interested party ... shall be accepted if there is on file ... an entry bond or other bond to secure the payment of duties...." ¹

When Loudon's check was not honored by its bank because of insufficient funds, the Customs Service obtained a second check from Loudon. However, this check was also not paid by the bank. After further attempts to secure payment from Loudon, the Customs Service then turned to the importer and its surety for payment. Upon their refusal, the government instituted suit to collect the unpaid import duties from these parties. In response to the government's complaint, Cometals and its surety asserted "equitable estoppel" as an affirmative defense, as well as a number of counterclaims against the government. ² Ruling on cross-motions for summary judgment, the trial court denied the government's motion and granted appellees' motion, holding that the United States was equitably estopped from recovering on its claim. 605 F.Supp. at 299.

The Court of International Trade based its holding essentially on the following determinations:

(1) As a matter of law, the United States can be equitably estopped from recovering import duties if it commits affirmative misconduct.

(2) The government committed affirmative misconduct in this case by accepting an uncertified check from a customhouse broker which was secured by the bond of the importer. Customs Regulation 19 C.F.R. Sec. 24.1(3), which requires acceptance of an uncertified check which is secured by a bond, must be interpreted to require that the customhouse broker file its own bond to secure payment of the broker's uncertified check. The interpretation by the Customs Service of 19 C.F.R. Sec. 24.1(3) is contrary (per the court) to congressional intent and to three statutory provisions: 19 U.S.C. Sec. 66 (regulations must be consistent with law), 19 U.S.C. Sec. 1641(d) (Secretary shall prescribe regulations for the licensing of brokers as he may deem necessary to protect importers and the revenue of the United States), and 19 U.S.C. Sec. 1648 (Secretary shall prescribe regulations for receiving uncertified checks in payment of duties).

(3) The government also committed affirmative misconduct by the "loose enforcement of 19 C.F.R. Sec. 111.27," with respect to auditing of brokers, and by not following up on a 1977 audit of Loudon, which showed a "severe net worth deficiency."

The trial court noted in connection with the last point that Loudon's September 1977 financial statement, obtained as a result of an audit, showed that Loudon's liabilities exceeded its assets by over $164,000.00 and that Loudon had been responsible for more than $190,000.00 in overdrafts. In late 1979 and early 1980, six of Loudon's checks covering Cometals' entries were originally not paid by Loudon's bank because of insufficient funds, but all except the last, which was for the duties of this case, were paid on resubmission. Despite these warning signs since 1977, the government made no further audit of Loudon. It continued to accept Loudon's uncertified checks where the duties were guaranteed by a bond.

The trial court concluded that, in its view, the government "disregarded its own regulations, interpreted a decisive regulation unlawfully, and disregarded the manifest intention of Congress" and, thus, was equitably estopped from recovery on its claim. 605 F.Supp. at 299. The court acknowledged that "the opinion in Air-Sea Brokers v. United States, 66 C.C.P.A. 64, C.A.D. 1222, 596 F.2d 1008 (1979) held that equitable estoppel is not available in cases involving the collection of duties on imports." It distinguished Air-Sea Brokers from this case on the ground that the earlier decision did not involve the agency's breach of a regulation or statute, as did the case at hand, but rather "milder and more ambiguous" conduct by government employees. Id. at 304. The court also noted the decision of the Supreme Court in Heckler v. Community Health Services of Crawford, 467 U.S. 51, 104 S.Ct. 2218, 2224, 81 L.Ed.2d 42 (1984), which implies that the government could be estopped although on a more stringent standard than a private litigant.

Relying on the violations it perceived, the court opined that the reasons for generally denying estoppel against the government could not justify the government's misconduct in failing to protect the importer and the public revenue. Thus, the suit by the government was not in the public interest. To uphold the government would encourage the government in its disobedience of the law. Under these circumstances, the government had "no right to resist the just effect of equitable estoppel." Id. at 305.

III.

In Air-Sea Brokers, the Court of Customs and Patent Appeals, a predecessor of this court whose decisions are binding precedent (South Corp. v. United States, 690 F.2d 1368, 1370-71, 215 USPQ 657, 657-58 (1982)), held without equivocation:

Accordingly, we hold that equitable estoppel, even if available in cases involving the Government in its proprietary capacity, is not available against the Government in cases involving the collection or refund of duties on imports.

596 F.2d at 1011. In reaching its decision, our predecessor relied on Automobile Club of Michigan v. Commissioner, 353 U.S. 180, 183, 77 S.Ct. 707, 709, 1 L.Ed.2d 746 (1957) in which the Supreme Court stated, in connection with a tax claim, that "[t]he doctrine of equitable estoppel is not a bar to the correction by the Commissioner of a mistake of law."

Contrary to the analysis of the trial court, the decision in Air-Sea Brokers was not dependent on the "milder and more ambiguous" nature of the conduct of a particular government employee in contrast to the breach of the statute or regulation by the Secretary's wrongful interpretation of his...