US v. Obron Atlantic Corp., Court No. 94-02-00131

• Citation: 18 CIT 771,862 F. Supp. 378
• Decision Date: 25 August 1994
• Docket Number: Slip Op. No. 94-134.,Court No. 94-02-00131
• Parties: UNITED STATES, Plaintiff, v. OBRON ATLANTIC CORP., Defendant.
• Court: U.S. Court of International Trade

862 F. Supp. 378

18 CIT 771

UNITED STATES, Plaintiff, v. OBRON ATLANTIC CORP., Defendant.

Court No. 94-02-00131, Slip Op. No. 94-134.

United States Court of International Trade.

August 25, 1994.

Frank W. Hunger, Asst. Atty. Gen., David M. Cohen, Director, Civ. Div., Commercial Litigation Branch, U.S. Dept. of Justice, Charles F. Beall, Jr., Kathleen L. Bucholtz, U.S. Customs Service, of counsel, Washington, DC, for plaintiff.

Jones, Day, Reavis & Pogue, Stephen J. Squeri and Jerome J. Zaucha, Cleveland, OH, for defendant.

OPINION

CARMAN, Judge:

Plaintiff commenced this action to recover civil penalties and collect customs duties for fraudulent, grossly negligent or negligent violations of 19 U.S.C. § 1592 (1988). Defendant has two motions before the Court. In the first motion, defendant moves to dismiss the amended complaint pursuant to USCIT Rules 5 and 12(b)(1). In its second motion, defendant moves to dismiss Count I of the amended complaint pursuant to USCIT Rules 9(b) and 12(b)(5), and in the alternative, requests the Court to require plaintiff to provide a more definite statement of the facts which support Count I. The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1582 (1988).

BACKGROUND

Customs seeks to impose penalties of up to $1,496,005 against Obron for the misclassification of twenty-eight entries¹ of aluminum paste products entered into the U.S. between June 1987 and December 1988. Complaint (Cmplt.) at ¶ 16. Prior to this time period Obron had protested the classification of these products, but Customs denied the protests. Customs determined that because the aluminum pastes contained benzenoids, they were properly classified under item 402.3600, TSUS, and item 407.1610, TSUS. Cmplt. at ¶¶ 8, 10. Between June 1987 and December 1988, however, Obron imported the merchandise at issue under item 473.8810, TSUS, without stating the pastes contained dutiable benzenoids. From approximately June 1989 until February 1990 Customs investigated the erroneous classifications. During this time Obron provided Customs with information and permitted Customs to interview and take sworn statements of Obron officials and employees.

On September 8, 1992, Customs issued a prepenalty notice to Obron in which it claimed lost revenue of $194,761 and a penalty of $5,388,113. In the notice, Customs identified the tentative culpability level as fraud and provided Obron with seven days in which to respond. Obron responded to the prepenalty notice on September 15, 1992, and made an oral presentation to Customs on October 8, 1992. In its response Obron complained the prepenalty notice inadequately (1) described the subject imports and the details surrounding the entry of the subject imports, and (2) disclosed the material facts which establish the alleged violations as required by its regulations. Obron Sept. 15, 1992 Response at 2.

Customs issued a penalty notice on October 22, 1992 demanding lost revenue of $194,629 and a penalty of $1,496,905. The penalty notice also provided defendant with a seven-day response time within which Obron would have to file any petition for mitigation and remission. The seven-day response period was ultimately extended by two days upon consent of the parties. In its petition for mitigation and remission filed on November 2, 1992, Obron complained Customs failed to comply with its regulations and 19 U.S.C. § 1592(b). After filing its petition, Obron made oral presentations on December 8, 1992 and March 10, 1993, and submitted additional documentation in a December 16, 1992 letter.

Customs informed defendant in a June 28, 1993 letter that a decision had been made regarding its petition and it had seven days within which to file a supplemental petition. Obron filed its supplemental petition for mitigation and remission on July 6, 1993, in which it requested an oral hearing. Customs denied this request in its July 21, 1993 letter and did not address Obron's supplemental petition. Customs' letter also advised defendant that the case was being referred to the U.S. Department of Justice (Justice) unless Customs received a waiver within five days. Customs rejected Obron's August 3 and August 18, 1993 waiver proposals and forwarded the case to Justice.

After a series of agreements between Justice and Obron waiving the statute of limitations concluded, Justice filed its complaint and amended complaint in this Court on February 25 and March 2, 1994, respectively. Justice alleges in its amended complaint that Obron violated 19 U.S.C. § 1592(a) in a negligent, grossly negligent or fraudulent manner.

CONTENTIONS OF THE PARTIES

Defendant filed two motions with the Court. In its first motion, defendant contends this action must be dismissed because plaintiff denied Obron its due process rights to notice and hearing by failing to comply with 19 U.S.C. § 1592(b)'s administrative procedure requirements. In particular, Obron complains plaintiff failed to (1) disclose the material facts establishing the alleged violations in the prepenalty and penalty notices, (2) provide a reasonable opportunity to contest the violations alleged in the prepenalty and penalty notices, (3) rule on Obron's supplemental petition, and (4) allow a supplemental oral hearing. According to defendant, this Court lacks subject matter jurisdiction because compliance with § 1592(b)'s procedures is a predicate for the initiation of § 1592 penalty actions in this Court.

Obron argues in its second motion that the Court must dismiss Count I of the amended complaint pursuant to USCIT Rule 9(b) for failure to allege fraud with the particularity required, and pursuant to USCIT Rule 12(b)(5) for failure to allege the basic elements required to support a § 1592 fraud claim. Defendant claims plaintiff is required to allege Obron intentionally and knowingly made false statements. In the alternative, defendant contends the Court should require plaintiff to provide a more definite statement of the circumstances supporting its allegations of fraud.

Plaintiff argues the Court should not dismiss this action because Customs fully complied with its regulations and the relevant statutes. Plaintiff maintains the prepenalty and penalty notices unambiguously allege Obron falsely described the subject entries by failing to indicate the aluminum pastes contained dutiable benzenoids. According to plaintiff, this information is enough to establish a violation of § 1592. Furthermore, plaintiff claims Customs provided Obron with a reasonable time within which to respond to the prepenalty and penalty notices. Plaintiff contends Customs properly referred the case to Justice because the statute of limitations was about to expire with respect to certain entries. As Customs can no longer rule on outstanding petitions once it refers a matter to Justice, plaintiff argues Customs properly decided not to respond to Obron's supplemental petition and request for additional oral argument. Moreover, plaintiff claims Obron had more than sufficient opportunity to respond to the prepenalty and penalty notices.

With respect to defendant's second motion which attacks Count I of plaintiff's complaint, plaintiff maintains Count I should not be dismissed because it alleges facts sufficient to meet the standard establishing civil fraud. While plaintiff concedes Count I does not contain a specific averment that Obron "knowingly" made the false statement on the entry forms, it contends the omission is irrelevant. Moreover, plaintiff argues Count I satisfies USCIT Rule 9(b)'s particularity requirement because it sets forth the time, place and contents of the false representations.

DISCUSSION

A. Administrative Due Process

The Court first addresses Obron's contention that Customs violated 19 U.S.C. § 1592(b)(1)(A)(iv), (b)(2), by failing to disclose the material facts establishing the fraudulent violations alleged in the prepenalty and penalty notices. The Court is not persuaded by Obron's argument. Both the prepenalty and penalty notices provide the following:

Obron Atlantic Corporation entered or introduced and/or attempted to enter or introduce and/or aided and abetted the entry or introduction and/or attempted entry or introduction of the above described merchandise by means of material false documents, statements, acts and/or omissions. The above described merchandise, containing the solvent naphtha, was improperly entered misdescribed as "Metallic Aluminum Pigments," item 473.8810 TSUSA, dutiable at 3.1%, and as "Other Non-Lead Pigments," item 473.8820 TSUSA, dutiable at 3.1%, when in fact, the product should have been entered described as Alkylbenzenes and Polyalkylbenzenes, item 402.3600 TSUSA at a duty rate of 17.3%. The failure by Obron to properly describe the merchandise resulted in the misclassification of the merchandise.

Prepenalty Notice dated Sept. 8, 1992, Exhibit A; Notice of Penalty dated Oct. 22, 1992, Exhibit A. The above-quoted statement provides Obron with more than enough information for it to form a response in its defense. Moreover, Obron was already aware of the material facts as demonstrated by the fact that it was Obron which brought the misclassifications of imports to Customs' attention. The Court, therefore, holds Customs did not fail to disclose in either the prepenalty or penalty notices the material facts supporting its allegations of fraud.

Obron next argues Customs violated 19 U.S.C. § 1592 by not providing it "a reasonable opportunity to make representations, both oral and written, as to why a claim for monetary penalty should not be issued in the amount stated." 19 U.S.C. § 1592(b)(1)(A)(vii). Customs is guided in the application of this requirement by 19 C.F.R. § 162.78 (1992), which provides the time period within which the defendant must respond to a prepenalty notice. The relevant language of this regulation is as follows:

(a) Time within which to respond. Unless a shorter period is specified in the prepenalty

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