US v. Modes, Inc.

Decision Date09 October 1992
Docket NumberCourt No. 89-04-00206.
PartiesUNITED STATES of America, Plaintiff, v. MODES, INC. & Jaikishan C. Budhrani, Defendants.
CourtU.S. Court of International Trade

COPYRIGHT MATERIAL OMITTED

Stuart M. Gerson, Asst. Atty. Gen., David M. Cohen, Director, Commercial Litigation Branch, Civil Div., U.S. Dept. of Justice, Velta A. Melnbrencis, Asst. Director, Michael S. Kane, Washington, D.C., for plaintiff.

Golden, Potts, Boeckman & Wilson, Claude R. Wilson, Jr., Dallas, Tex., for defendants.

OPINION AND ORDER

NEWMAN, Senior Judge:

Introduction

This is an action brought by the Government to collect a civil penalty from defendants pursuant to 19 U.S.C. § 1592 (1988). The Government moves for partial summary judgment on the issue of liability for intentional falsification of invoices in connection with defendants' importations of Taiwanese jewelry. In the alternative, the Government moves for partial summary judgment on a theory of grossly negligent or negligent violations of § 1592.

Defendants oppose the Government's motion and cross-move for summary judgment on the merits and raise the statute of limitations as an affirmative defense concerning certain entries.

The court has jurisdiction over this action pursuant to 28 U.S.C. § 1582 (1988).

Undisputed Facts

Defendant Modes, Inc. is a closely held corporation headquartered in Dallas, Texas initially created for the purpose of importing tailored clothing from Hong Kong. From 1984 to 1985 defendant Jaikishan C. Budhrani was Vice-President of Modes.

Commencing in January 1984, Modes imported "twist beads" from Itai International Co., Ltd. and Ralone Co., Ltd., Taiwanese export companies operated by Mr. Chester Chou. In accordance with an arrangement entered into between Budhrani and Chou "a month or two" after the initial entry the jewelry, on or around January 11, 1984, purchases of jewelry from the Chou companies took place under two separate invoices.

The first invoice, which accompanied the merchandise, was filed with the United States Customs Service ("Customs"). That invoice, however, stated a lower price than was actually agreed upon between the parties and ultimately paid for the jewelry. For each transaction, Modes cut a check to the exporter in the amount of the first invoice.

The second invoice for the true price of the goods was then sent by the exporter directly to Modes. This second invoice was neither filed with nor disclosed to Customs. Modes then cut a second check to the exporter in the amount of the outstanding balance of the shipment, i.e., the difference between the price terms appearing on the two invoices. This double-invoicing arrangement continued from January to November of 1984.

It appears that Budhrani agreed to Chou's double-invoicing scheme because it was a necessary business accommodation to his supplier's efforts to evade Taiwanese income taxes and because the goods were duty-free. Budhrani admitted in his deposition that he knew that the double invoicing scheme was illegal. Dep. at 46, Appendix at 110.

In November 1984, Budhrani learned that Customs had initiated an investigation into the double invoicing scheme. Shortly thereafter, Budhrani discovered that his false invoices adversely impacted calculations under the Generalized System of Preferences ("GSP") when he sought the advice of counsel in connection with the pending investigation. Budhrani thereafter discontinued the double-invoicing arrangement with Chou.

Discussion
I.

As a threshold matter, a motion for summary judgment is appropriate where there is no genuine issue of material fact requiring a trial and the moving party is entitled to judgment in its favor as a matter of law. USCIT R. 56(d); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, 477 U.S. 242, 250, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986); Mingus Constructors, Inc. v. United States, 812 F.2d 1387, 1390 (Fed.Cir.1987).

The court concludes that, on the issue of liability, partial summary judgment in favor of the Government is appropriate in this case, since the undisputed facts show that Budhrani intentionally submitted false invoices to Customs when entering the goods, deceiving the Government as to their true purchase price, and that such invoices were fraudulent and material in violation of § 1592. Defendants' affirmative defense of the statute of limitations is rejected.

II.

On the cross-motions pursuant to CIT Rule 56 and the evidentiary and other submissions of the parties in support thereof, the court must determine whether an issue of material fact has been raised as to preclude summary judgment. This determination will be resolved by reference to the substantive law of the case, which is the statute itself, as supplemented by reasonable regulatory interpretations by Customs. See Anderson, 477 U.S. at 248, 106 S.Ct. at 2510.

Importers are required to file true and accurate invoices with Customs. See 19 U.S.C. §§ 1481, 1485. Section 1485 provides, inter alia, that persons making an entry of goods must file a declaration under oath that the prices set forth in an invoice are true. Where it has been established that false invoices have been filed, the Government may seek to collect civil penalties for fraudulent, grossly negligent or negligent violations of the statute under § 1592, which is the principal enforcement mechanism of the customs laws for false invoicing. The relevant portions of § 1592 provide:

§ 1592. Penalties for fraud, gross negligence and negligence
(a) Prohibition.
(1) General rule. — Without regard to whether the United States is or may be deprived of all or a portion of any lawful duty thereby, no person, by fraud, gross negligence, or negligence —
(A) may enter, introduce, or attempt to enter or introduce any merchandise into the commerce of the United States by means of —
(i) any document, written or oral statement, or act which is material and false, or
(ii) any omission which is material, or
(B) may aid or abet any other person to violate subparagraph (A).

Resolution of the cross-motions for summary judgment requires, therefore, that the court determine: (1) whether the false statements were fraudulently made; (2) if so, whether the fraudulent statements were material; and (3) to what extent the entries were made by means of the false invoices.

A. Fraud

There is no genuine issue of fact that in connection with making entries of its jewelry, Modes submitted to Customs invoices containing false purchase prices that had a material bearing on the valuation of the goods. The Government asserts that here defendants' false invoices meet the most stringent level of culpability under § 1592, viz., they were fraudulent in that defendants concededly entered the goods under intentionally false statements concerning purchase prices.

However, in support of their position that the invoices while concededly false were not "fraudulent," defendants cite a regulation promulgated by Customs in 1984. That regulation specifically sets forth Customs' definition of fraud for purposes of § 1592:

(3) Fraud. A violation is determined to be fraudulent if it results from an act or acts (of commission or omission) deliberately done with intent to defraud the revenue or to otherwise violate the laws of the United States, as established by clear and convincing evidence.

19 C.F.R. Pt. 171, App. B(B)(3) (1984). The court agrees with defendants that Customs' 1984 definition of fraud, as defined its regulation, is controlling as to defendants' liability for fraud in the relevant time period involved in this case. By predicating liability for fraud on clear and convincing evidence of specific forms of defendant's intent — "defraud the revenue," or the more broadly based intent, "to otherwise violate the laws of the United States" — Customs assumed a burden of proof under its regulation of more than simply showing that defendants presented to Customs an intentionally false document. "Intent" as to consequences was made by the regulation the sine qua non of a fraudulent violation under the statute.1

Defendants' liability for fraud under the first formulation of intent — to defraud the revenue — may be quickly disposed of as a matter of fact. The jewelry in question was accorded duty-free treatment under the Generalized System of Preferences ("GSP") established under the Trade Act of 1974. Pub.L. 93-618, Title V, § 501 et seq., Jan. 3, 1975, 88 Stat. 2066, codified as amended at 19 U.S.C. § 2461 et seq., (1988). Notwithstanding the duty-free status of the goods at the time of the entries in question, the Government contends that false price terms on the invoices were material to an intent to defraud the revenue since pricing and valuation formed the basis of data upon which the Treasury Department relied in determining eligibility for duty-free treatment under GSP of goods such as that imported by defendant.

The substance of the Government's argument that Budhrani intended to defraud the revenues is that a statistical distortion resulting from undervaluation of duty-free imports tends to prolong eligibility for duty-free GSP treatment beyond the time at which such treatment would terminate if the true prices, and hence valuations, were reported. Thus, according to the Government, defendants, in essence, intended to defraud the Government of potential future revenues. Under this rationale, even though defendants' understatement of price on the invoices had no immediate revenue impact on the duty-free entries, the false invoices were material to loss of revenues from future dutiable entries of merchandise from Taiwan under the same tariff classification.

Defendants argue that there is nothing before the court to contradict their showing that Budhrani was unaware of the GSP prior to being informed of the program during the Customs investigation in November 1984; and at the least,...

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