United States v. Federal Ins. Co., Court No. 82-05-00594.

• Decision Date: 14 March 1985
• Docket Number: Court No. 82-05-00594.
• Citation: 605 F. Supp. 298
• Parties: UNITED STATES of America, Plaintiff, v. FEDERAL INSURANCE COMPANY and Cometals, Inc., Defendants.
• Court: U.S. Court of International Trade

605 F. Supp. 298

UNITED STATES of America, Plaintiff, v. FEDERAL INSURANCE COMPANY and Cometals, Inc., Defendants.

Court No. 82-05-00594.

United States Court of International Trade.

March 14, 1985.

Richard K. Willard, Acting Asst. Atty. Gen., Washington, D.C., Joseph I. Liebman, Atty. in Charge, Intern. Trade Field Office and Barbara M. Epstein, Dept. of Justice, Civil Div. Commercial Litigation Branch, New York City, for plaintiff.

Serko & Simon, New York City, David Serko, Margaret H. Sachter, and George S. Locker, New York City, for defendants.

WATSON, Judge:

The plaintiff brought this action against the importer, (Cometals, Inc.), and the importer's surety, Federal Insurance Company, in order to recover approximately $230,344.12 in import duties, plus interest. It is before the court on the plaintiff's motion for summary judgment, defendants' opposition thereto and their cross motion for summary judgment on their counterclaims for equitable recoupment.¹ There is no dispute as to the facts.

Underlying this action is the plaintiff's failure to obtain payment of import duties, despite Cometal's transmittal of the money owed, to its broker, James Loudon & Co. (Loudon).

In this decision, the Court finds that the plaintiff-government disregarded its own regulations, interpreted a decisive regulation unlawfully, and disregarded the manifest intention of Congress. Thus, sole responsibility for not receiving the duties that are claimed to be owed by the defendants, must be attributed to the plaintiff's malfeasance. In short, the government is equitably estopped from recovering on its claim.

This action has its origin in the importation by Cometals of titanium sponge. As a result of the entry involved Cometals owed approximately $230,344.12 in import duties. Loudon, after receiving the necessary funds from Cometals on or about May 2, 1980, tendered its own uncertified check in the amount of $230,344.12 on May 12, 1980, as payment to the Customs Service for the duties owed by defendant-importer.

On May 29, 1980, however, this check was returned to Customs by the Bank of America because of insufficient funds in Loudon's account. Customs then requested and subsequently received a second check from Loudon on June 12, 1980. This check was also returned by the bank because of insufficient funds. Finally, after the Customs Service's direct demands for payment from Loudon proved futile, it turned to the defendants for payment.

It should also be noted that the government had audited Loudon in October of 1977, and that audit had revealed a severe net worth deficiency. The September, 1977, financial statement, which the government admits it obtained as a result of this audit, showed that Loudon's liabilities exceeded its assets by over $164,000 and that it was responsible for more than $190,000 in overdrafts. Despite this fact, no further audits were conducted by the Customs Service.

Moreover, in late 1979, and early 1980, six of Loudon's uncertified checks covering Cometal's entries were returned to the government because of insufficient funds.² Nevertheless, the government continued to re-deposit those checks or to accept new checks from Loudon.

I

Regulations promulgated by the Customs Service provide a detailed procedure for the payment of duties. See generally, 19 C.F.R. § 24. The tender and acceptance of uncertified checks is governed by 19 C.F.R. § 24.1(3) which reads as follows:

19 C.F.R. § 24.1(3)

(3) An uncertified check drawn by an interested party on a national or state bank or trust company of the United States or a bank in Puerto Rico or any possession of the United States if such checks are acceptable for deposit by a Federal Reserve bank, branch Federal Reserve bank, or other designated depository shall be accepted if there is on file with the district director an entry bond or other bond to secure the payment of the duties, taxes, or other charges, or if a bond has not been filed, the organization or individual drawing and tendering the uncertified check has been approved by the district director to make payment in such manner. In determining whether an uncertified check shall be accepted in the absence of a bond, the district director shall use available credit data obtainable without cost to the Government, such as that furnished by banks, local business firms, better business bureaus, or local credit exchanges, sufficient to satisfy him of the credit standing or reliability of the drawer of the check. emphasis supplied

The government argues that when it accepted the uncertified checks in question from Loudon it was acting in compliance with 19 C.F.R. § 24.1(3). According to the government, as long as there was a bond on file, even if it was a bond posted by the importer, it was acting in accordance with the law.

The Court finds that the government's interpretation of 19 C.F.R. § 24.1(3) violates three sections of the law which are in pari materia; 19 U.S.C. § 66, 19 U.S.C. § 1641(d) and 19 U.S.C. § 1648.

19 U.S.C. § 66 requires that all regulations prescribed by the Secretary of the Treasury relating to the collection of duties from importation must not be inconsistent with the law.

§ 66. Rules and forms prescribed by Secretary

The Secretary of the Treasury shall prescribe forms of entries, oaths, bonds, and other papers, and rules and regulations not inconsistent with law, to be used in carrying out the provisions of law relating to raising revenue from imports, or to warehousing, and shall give such directions to customs officers and prescribe such rules and forms to be observed by them as may be necessary for the proper execution of the law. emphasis supplied

19 U.S.C. § 1641 deals with the regulation of brokers. When enacting 19 U.S.C. § 1641(d) Congress expressly stated that the Secretary of the Treasury shall promulgate rules and regulations regarding Customs brokers to protect both importers and the revenue of the United States. 19 U.S.C. § 1641(d) reads as follows:

19 U.S.C. § 1641 Customhouse brokers (d) Regulations by Secretary. The Secretary of the Treasury shall prescribe such rules and regulations as he may deem necessary to protect importers and the revenue of the United States, and to carry out the provisions of this section, including rules and regulations requiring the keeping of books, accounts, and records by customhouse brokers, and the inspection thereof, and of their papers, documents, and correspondence by, and the furnishing by them of information relating to their business to, any duly accredited agent of the United States. emphasis supplied

This Court deems the word "shall" contained within 19 U.S.C. § 1641(d) to be imperative in nature. Although Congress gave the Secretary certain discretion in how he promulgates regulations concerning the relationship between brokers, importers and the revenue of the United States, this Court finds that the Secretary must, when promulgating such regulations, adhere to Congress's directive that these regulations protect both the importers and the revenue of the United States.

If there remained any doubt as to why Congress used the word "shall" in 19 U.S.C. § 1641(d), the legislative history of the 1935 amendment to 19 U.S.C. § 1641(d) that added the language "to protect importers," makes it clear that Congress intended that the word "shall" be given its common imperative meaning. The overwhelming impact of this legislative history justifies the following extended quotation:

While the large importers are more or less familiar with customs procedure the great majority of importers are solely dependent upon the honesty and the competency of their customs brokers to protect their interests. Even in the case of large importers, however, due to the specialized nature of customs procedure, great reliance must be placed upon their brokers for proper entry of merchandise.

In view of the fact that these customhouse brokers are quasi officers of the Treasury and that by licensing them the Treasury holds out to importers that it has investigated their character and represents to such importers that they are capable and honest in their conduct of their customs business, and in view of the large opportunities for profitable fraud open to dishonest persons who, from the very nature of things, occasionally succeed in obtaining licenses as customhouse brokers despite the strictest possible investigation by the Treasury of their character and qualifications, it is essential that the Department have wide discretion in dealing with these brokers and that the Secretary of the Treasury, therefore, be given broad powers to supervise and regulate their activities. Under existing law his powers in these respects are very limited, and it is the purpose of the present amendments to broaden the Secretary's powers so that he can in the future more effectively cope with frauds practiced by customhouse brokers on both importers and the revenues of the United States.

Although the great majority of these brokers are entirely above reproach in the conduct of their business, the corrupt practices of a few, unhampered by adequate statutory provisions for supervision, have proved a grave menace to importers and customs revenue alike. The present amendments are designed to remedy this situation. They will give to the Secretary of the Treasury the power to regulate the conduct of the business of customhouse brokers in such a manner that the opportunity for fraudulent practices will be reduced to an absolute minimum. emphasis supplied

S.Rep. No. 1170, 74th Cong., 1st Sess., 3 (1935).

It is thus clear that Congress was extremely concerned with the victimization of importers by brokers and required that the Secretary prescribe regulations protecting both importers and the revenue of the United States from possible frauds by brokers.

19 U.S.C. § 1648³ granted the Customs Service broad authority to promulgate regulations regarding the payment of Customs duties...