United States v. Aegis Sec. Ins. Co., Slip Op. 18–29

• Decision Date: 26 March 2018
• Docket Number: Slip Op. 18–29,Consol. Court No. 11–00388
• Citation: 301 F.Supp.3d 1359
• Parties: UNITED STATES, Plaintiff, v. AEGIS SECURITY INSURANCE COMPANY, Defendant, and Tricots Liesse 1983, Inc., Third–Party Defendant.
• Court: U.S. Court of International Trade

301 F.Supp.3d 1359

UNITED STATES, Plaintiff,

v. AEGIS SECURITY INSURANCE COMPANY, Defendant,andTricots Liesse 1983, Inc., Third–Party Defendant.

Slip Op. 18–29

Consol. Court No. 11–00388

United States Court of International Trade.

Dated: March 26, 2018

Chad A. Readler, Acting Assistant Attorney General, for plaintiff. With him on the brief were Jeanne E. Davidson, Director, Patricia M. McCarthy, Assistant Director, and Stephen C. Tosini, Senior Trial Counsel, Department of Justice, Civil Division, Commercial Litigation Branch, of Washington, DC. Of counsel on the brief was Matthew C. Landreth, Office of the Assistant Chief Counsel, U.S. Customs and Border Protection, of Buffalo, NY.

Frances Hadfield and John Brew, Crowell & Moring LLP, of New York, NY, for third-party defendant.

OPINION

Eaton, Judge:

One case, in this consolidated action, was brought by plaintiff the United States ("plaintiff" or the "Government") against Tricots Liesse 1983, Inc. ("third-party defendant" or "Tricots") to recover civil penalties and unpaid duties pursuant to 19 U.S.C. § 1592(c) and 19 U.S.C. § 1592(d) (2012).¹ See Compl., Court No. 16–00066, ECF No. 2 ("Court No. 16–00066 Compl."). Plaintiff commenced this case as Court No. 16–00066 on April 25, 2016. Court No. 16–00066 Compl. On August 3, 2016, it was consolidated with another case brought by plaintiff against Aegis Security Insurance Company ("Aegis") (Court No. 11–00388) that contests similar issues.² See Order dated Aug. 3, 2016, ECF No. 68.

Before the court is Tricots' motion to dismiss plaintiff's complaint in Court No. 16–00066, pursuant to USCIT Rules 12(b)(1) and 12(b)(6), on the grounds that (1) the court lacks subject matter jurisdiction because United States Customs and Border Protection ("Customs") failed to exhaust its administrative remedies that, the company argues, are prerequisites for the initiation of penalty claims under 19 U.S.C. § 1592(e) and duty claims under § 1592(d) ; or (2) for the same reasons, plaintiff has failed to state a claim upon which relief can be granted. See Tricots' Mem. Supp. Mot. Dismiss, ECF No. 77 ("Tricots' Br."); Tricots' Reply Pl.'s Resp. Mot. Dismiss, ECF No. 84 ("Tricots' Reply"). Plaintiff opposes the motion. See Pl.'s Opp'n Tricots' Mot. Dismiss and Cross Mot. Partial Summ. J., ECF No. 89 ("Pl.'s Br."). Aegis has not filed a response to Tricots' motion to dismiss.

Since both Tricots and the Government have presented, and the court has relied on, extra-pleading material to support their claims with respect to the exhaustion of administrative remedies issue, Tricots' motion has been converted into one for summary judgment. USCIT R. 12(d). Because Customs failed to exhaust its administrative remedies and thus failed to perfect its penalty claim, Tricots' motion for summary judgment is granted in part, and the court awards summary judgment in favor of Tricots on plaintiff's penalty claim.

BACKGROUND

Tricots is a manufacturer and exporter of circular knitted fabric that is located in Montreal, Quebec, Canada. Tricots' Br. Ex. B, at 1, 2. Tricots purchases yarn and other raw materials from both North American Free Trade Agreement ("NAFTA")³ territory suppliers, and non-NAFTA territory suppliers. All of Tricots' knit fabrics are manufactured in its plant in Montreal. Fabrics produced by Tricots are then shipped to U.S. apparel manufacturers. Tricots' Br. Ex. J, at 1, 4. Between November 9, 2005 and December 23, 2008, Tricots claimed, on its entry papers, that the yarn used to produce certain entries of its fabric originated from NAFTA territories, and therefore, that they were eligible for duty-free treatment under NAFTA Rules of Origin. Court No. 16–00066 Compl. ¶¶ 3, 4; Tricots' Br. Ex. A, B, D. As a result, approximately eight hundred seventy-five of the entries were liquidated duty free and free of the merchandise processing fee ("MPF")⁴ on May 5, 2010. Johnson Decl., ECF No. 89–10, ¶ 18.

Following liquidation, on May 28, 2010, Tricots sought prior disclosure treatment under 19 U.S.C. § 1592(c)(4) or (c)(5),⁵ and notified Customs that several entries of knitted fabric were incorrectly declared as eligible for duty-free treatment as NAFTA-originating goods. Tricots' Br. Ex. B, at 2; see also Tricots' Br. Ex. I. Tricots stated, however, that the entries, nonetheless, qualified for duty-free treatment under the NAFTA Tariff Preference Level ("TPL") Quota Program.⁶ Tricots' Br. Ex. B, at 1.

On December 1, 2010, for the purpose of "complet[ing] the prior disclosure" and "provid[ing] information concerning the amount of [MPF] which would have been due had the entry been made correctly," Tricots supplemented its May 28, 2010 letter with a second letter that calculated the fees owed on its imports under the TPL program as being $44,683.35. Tricots' Br. Ex. D, at 2. Following this letter, Customs notified Tricots' counsel that it had reviewed the company's submission, and although Tricots had accounted for the MPF that was due, the company had "not accounted for the Duty due," and, moreover, that "[Customs'] policy is that if a company has failed to present Certificates of Eligibility by the time of final liquidation, this precludes that company from receiving the duty preference under TPL."⁷ Tricots' Br. Ex. F, at 2. Following a subsequent telephone conversation⁸ between a Customs official and Tricots' counsel concerning "Customs' interpretation of the statute requiring the payment of duties," both parties determined that Tricots should submit a "written position paper" on the issue to Customs, which it did on January 5, 2011.⁹ Tricots' Br. Ex. F, at 2. No further action was taken by either party until May 23, 2011, when Customs sent a letter to Tricots notifying the company that after "carefully review[ing Tricots'] correspondence, the information [Tricots'] office provided, and each of the entries at issue," Customs had concluded that Tricots owed $2,249,196.04 in lost revenue, representing $2,206,596.05 in unpaid duties and $42,599.99 in unpaid fees. Tricots' Br. Ex. E. No explanation regarding Tricots' arguments in the written position paper was given. See Tricots' Br. Ex. E. The letter also notified Tricots that, following its deposit of the full amount owed, the company could seek review of Customs' calculations pursuant to 19 C.F.R. § 162.74(c). Tricots was given until June 24, 2011 to tender the amount, which for Customs, would perfect the prior disclosure.¹⁰ Tricots' Br. Ex. E; 19 U.S.C. § 1592(c)(4), (5).

As Customs had previously notified Tricots' counsel, Customs decided that the subject entries were not eligible for duty-free treatment under the TPL program because, pursuant to Customs Directive 3550–085, Tricots was required to submit its TPL Certificates of Eligibility prior to the May 5, 2010 final liquidation of the entries. According to Customs, Tricots did not submit the Certificates of Eligibility prior to the May 5, 2010 final liquidation or take other steps to preserve eligibility.¹¹ Tricots' Br. Ex E, at 2; see also Johnson Decl. Ex. 9 ("Thus, an importer whose entries are eligible for TPL treatment but does not file the certificates at entry may 1) submit the certificates any time before final liquidation; 2) file a protest within 90 days of liquidation; 3) request extension of liquidation.").

On June 22, 2011, Tricots submitted its first offer in compromise pursuant to 19 U.S.C. § 1617 and tendered $85,199.98, representing twice the amount of the unpaid MPFs it claimed were due on the entries. Tricots' Br. Ex. F, at 8.¹² In response, on December 7, 2011, Customs sent a letter stating that Tricots' entries did not qualify for prior disclosure treatment under 19 U.S.C. § 1592(c)(4) or (5) because the company "did not tender the total amount owed by [June 24, 2011]" and therefore did not "perfect its prior disclosure." Tricots' Br. Ex. I.

Subsequently, on February 16, 2012, pursuant to § 1592(b)(1)(A), Customs issued a pre-penalty notice to Tricots (the "Pre–Penalty Notice"), alleging that Tricots negligently entered goods into the United States without paying duties, and notified Tricots that Customs was "contemplating" a $2,249,196.04 monetary penalty. Tricots' Br. Ex. G; see 19 U.S.C. § 1592(b)(1)(A). The Pre–Penalty Notice also included a demand for the outstanding duties and MPFs, totaling another $2,249,196.04, resulting in a total demand of $4,498,392.08. Tricots' Br. Ex. G; see 19 U.S.C. § 1592(d).

On April 16, 2012, Tricots submitted a written response to Customs' Pre–Penalty Notice claiming that, because a "valid prior disclosure was filed," Tricots was only responsible for $42,599.99 in unpaid MPFs. Tricots' Br. Ex. H, at 12. Notwithstanding the Pre–Penalty Notice's statement that Tricots "ha[s] the right to make an oral ... presentation within 30 days of the date of this notice as to why a claim for monetary penalty should not be issued in the amount proposed or that the loss of duties is less than the amount demanded," the record does not contain any evidence that Tricots requested a face-to-face meeting with Customs prior to the issuance of the written penalty claim. See Tricots' Br. Ex. G, H.

On May 3, 2013, a representative¹³ of Tricots participated in a telephone conversation with Customs' Acting Director for Trade Policy and Programs. Leonard Decl., ECF No. 89–15 ¶ 8; Labuda Decl., ECF No. 88 ¶ 12. During the telephone call, the Tricots representative explained that Customs "should accept [Tricots'] offer in compromise because there was no loss of revenue." Labuda Decl. ¶ 12; see also Leonard Decl. ¶ 10 ("During the course of our communications and conversations, [the Tricots representative], on behalf of Tricots, sought to inform and influence senior [Customs] staff ... about the penalty that [Customs] initially proposed against Tricots, and the penalty that [Customs] later issued to Tricots ....").

Thereafter, Customs sent a letter dated May 9, 2013, to Tricots that (1) again informed the company that,...