U.S. v. Washington Intern. Ins. Co.

• Decision Date: 15 November 2001
• Docket Number: No. 97-09-01553.,SLIP OP. 01-132.,97-09-01553.
• Citation: 177 F.Supp.2d 1313
• Parties: UNITED STATES, Plaintiff, v. WASHINGTON INTERNATIONAL INSURANCE CO, surety for N & B Jewelry Corp., Defendant.
• Court: U.S. Court of International Trade

177 F.Supp.2d 1313

UNITED STATES, Plaintiff, v. WASHINGTON INTERNATIONAL INSURANCE CO, surety for N & B Jewelry Corp., Defendant.

SLIP OP. 01-132.

No. 97-09-01553.

United States Court of International Trade.

November 15, 2001.

Robert D. McCallum, Assistant Attorney General, United States Department of Justice; Joseph I. Liebman, Attorney in Charge, International Trade Field Office, Civil Division, Commercial Litigation Branch(Mikki Graves Walser), New York City; Vickie Shaw, Office of the Chief Counsel, United States Customs Service, of counsel, for Plaintiff.

Sandler Travis & Rosenberg, P.A., Gilbert Lee Sandler, Miami, FL (Arthur K. Purcell), Kenneth Wolf for Defendant.

OPINION

BARZILAY, Judge.

I. INTRODUCTION

This case is before the court on cross-motions for summary judgment. Plaintiff ("Customs") commenced this action pursuant to 28 U.S.C. § 1582(2) (1994) to recover unpaid interest from defendant Washington International Insurance Company ("WIIC" or "Washington International"). WIIC acted as surety for N & B Jewelry Corporation's ("N & B") imports between 1985 and 1992. In 1993, N & B filed for Chapter 11 bankruptcy protection. Customs demanded from WIIC duty and interest payments owed on N & B's liquidated entries, alleging that WIIC was jointly and severally liable for these sums. Customs further alleges that because WIIC was dilatory in responding to repeated payment demands, WIIC is responsible for interest in excess of the bond limit on the delinquent duty payments. WIIC counters that it is not liable for any interest beyond the face of the bond because (1) absent its own misconduct, its liability to Customs is limited to the face amount of the bond, (2) Customs' prior debt collection policies and practices did not include assessing and collecting interest from sureties in excess of the bond limits, (3) Customs has failed to prove WIIC's actions were dilatory, and (4) Customs' post-bankruptcy liquidations violated the automatic stay provisions of 11 U.S.C. § 362 (1988).

II. BACKGROUND

On August 7, 1985, N & B and Washington International executed continuous entry bond 108566135. The bond secured N & B up to $200,000 annually and was to remain in full force and effect for one year and in each succeeding annual period until terminated. Between 1987 and 1992, N & B made 331 entries that were secured by the bond. On June 9, 1993, N & B filed a Chapter 11 bankruptcy petition. Customs liquidated the 331 entries between August 30, 1991 and January 6, 1995 and assessed the additional duty owed on the entries.

Between November 1991 and January 1995, Customs issued payment demands on Washington International totaling $9,248,825.91 for the duty and interest owed on N & B's entries. Both N & B and WIIC filed protests against the demands. On February 14, 1997, Customs denied the majority of the protests and, on March 5, 1997, sent a follow-up letter to WIIC demanding payment of $8,495,821.43. By letter dated April 9, 1997, WIIC responded to Customs' demand explaining that the amount demanded far exceeded WIIC's bond liability¹ and asserting that the liquidation of N & B's entries after N & B had filed for Chapter 11 protection was in violation of the automatic stay provisions of 11 U.S.C. § 362. Additionally, WIIC recalculated the amount owed as the "full remaining bond liability on N & B Jewelry entries which were liquidated pre-petition [$454,937.56] plus 1/3 of the surety's maximum liability for potential duty plus interest [$137,334.00] for N & B Jewelry entries which Customs liquidated post-petition" and in an attempt to settle the matter, WIIC tendered a check for $592,271.56. Mem. of Law in Supp. of Def's Mot. for Summ. J. ("Def.'s Br.") at 6.

In a letter dated April 28, 1997, Customs (1) formally rejected WIIC's offer, (2) recalculated the duty and interest allegedly owed to be $1,201,786.20, (3) applied WIIC's $592,271.56 tender to the recalculated amount, and (4) demanded payment of the remaining $609,514.64 balance. On May 13, 1997, WIIC responded to Customs' demand in writing. WIIC explained that the $609,514.64 demanded still far exceeded WIIC's bond liability; however, it offered to tender an additional $267,612.87 to settle the matter and avoid litigation. Due to a clerical error, Customs did not acknowledge receipt of WIIC's payment. On June 23,1997, WIIC resubmitted payment with an accompanying bond liability analysis. WIIC explained that the payment included increased duties plus interest up to the limit of the bonds for the applicable periods and exhausted WIIC's liability for the periods covered by the continuous bond. On June 27, 1997, Customs received WIIC's payment and responded on August 5, 1997, by demanding WIIC pay an additional $259,954.59. On August 13, 1997, WIIC responded to Customs that the additional $259,954.59 demanded was interest in excess of its bond liability and challenged Customs' calculation and apportionment of WIIC's previous payments. WIIC refused to pay the demanded interest and Customs commenced this action.

III. STANDARD OF REVIEW

Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." USCIT R. 56(c). Moreover, summary judgment is a favored procedural device "`to secure the just, speedy and inexpensive determination of an action.'" Celotex Corp. v. Catrett, 477 U.S. 317, 327, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (quoting FED. R. CIV. P. 1); Sweats Fashions, Inc. v. Pannill Knitting Co., 833 F.2d 1560, 1562 (Fed.Cir. 1987). Whether a disputed fact is material is determined by the substantive law applicable to the issues in the case and whether the finding of that fact might affect the outcome of the suit. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In actions brought by the United States to recover monetary penalties "all issues, including the amount of the penalty, shall be tried de novo." 19 U.S.C. § 1592(e)(1) (1994).

IV. DISCUSSION

1. The surety's liability to Customs is governed by the contractually agreed upon bond limit.

To facilitate the protection of tariff revenue or to "assure compliance with any pertinent law, regulation, or instruction" Customs may require the execution of a bond prior to the importation of merchandise into the United States. 19 C.F.R. § 113.1 (2001). The full extent of Customs' bond requirements are enumerated in 19 C.F.R Part 113, Subparts A-G. In a typical import transaction the importer will secure the Customs bond through a surety. As explained by WIIC, "[t]he surety is compensated to assume reasonable and ascertainable risks, but those risks are controlled in large part by the penal amount of the bond, plus any controlling requirements." Def.'s Br. at 12. The penal amount of the bond is the "bond limit" or "face amount" of the bond and is set by Customs using the regulatory criteria specified in 19 C.F.R. § 113.13.²

In the event that the importer defaults on duties owed on the imported merchandise, Customs will seek payment from the surety that was the signatory to the Customs bond. It is well established law that the scope of the surety's obligations are governed by the covenants in the bond and that the bond must be interpreted in accordance with the statutes and regulations in effect when it was executed. United States v. Kirkpatrick, 9 Wheat. 720, 22 U.S. 720, 732, 6 L.Ed. 199 (1824); United States v. Utex Int'l, 857 F.2d 1408, 1413 (Fed.Cir.1988). Normally, a surety is liable for any duties, fees and interest owed up to the face amount of the surety bond and any further liability for increased payment usually arises in a litigation context.

Where a bond with a penalty is given for the performance of covenants, the recovery must be limited to the penalty, especially in the case of sureties.

. . . . .

Sureties are only bound to the extent of their obligation expressed in their covenants, unless they are themselves guilty of default, or appear and make defense, in which case they become responsible for costs, and, in many cases, for interest by way of damages for the delay of payment.

. . . . .

[T]he interest is added by way of damages for his own default, not as enlarging any degree his liability for the misconduct of the principal.... Interest may be received on the judgment, transit in rem judicatam, but not on the bond.

United States v. Hills, 4 Cliff. 618, 26 F. Cas. 322, 323-324 (C.C.D.Mass.1878) (No. 15369) (citations omitted). The Federal Circuit, based upon Hills and the Supreme Court's decision in United States v. U.S. Fidelity & Guaranty Co., 236 U.S. 512, 35 S.Ct. 298, 59 L.Ed. 696 (1915), has held that this court may exercise its equitable power and award prejudgment interest beyond the face amount of the bond if the surety engaged in dilatory conduct. See also Insurance Co. of North America v. United States, 951 F.2d 1244 (Fed.Cir. 1991); United States v. Reul, 959 F.2d 1572 (Fed.Cir.1992). As stated in Hills,

[s]ureties, if answerable at all for interest beyond the amount of the penalty of the bond given by their principal, can only be held for such an amount as accrued from their own default in unjustly withholding payment after being notified of default of the principal. (Citations omitted).

26 F.Cas. at 323.

Customs argues that WIIC is liable for all of the duty, interest and fees on N & B's liquidated entries. Customs asserts that WIIC is liable for the duties, fees and interest beyond the face amount of the bonds securing the entries because WIIC was delinquent in responding to Customs' payment demands. Customs contends "pursuant to legislative mandate, duties and interest not paid in full within 45 days of liquidation or within 30 days of demand are delinquent and Customs is statutorily required to assess and...