Two recent court cases should prompt all companies, and especially small and medium-sized importers and exporters, to review their business practices with an eye toward reducing potential liability. One dealt with the outcome when one company purchases the assets of another, and the second dealt with determining when U.S. Customs and Border Protection is permitted to seek personal liability from corporate officers in a penalty setting.
In the successor liability case — U.S. v. Adaptive Microsystems, LLC, et al., Slip Op. 133-50, Court No. 12-00122, 2013 WL 1459118 (CIT), 35 ITRD 1373 — a company (New AMS) purchased the assets of the old company (Old AMS) but may end up being liable for a significant penalty because the sale may not have been concluded in a way that eliminated the transfer of liability, or so the Court of International Trade implied.
Old AMS went into receivership, but the assets didn’t fetch enough at auction. So, the receiver sought other options and eventually sold the assets to what became New AMS. The assets were transferred in exchange for the payment price. A number of employees remained in their old positions. A state court oversaw the sale and described it as having been concluded through good-faith negotiations.
Unaware to New AMS — there is nothing in the state court order that made clear whether it was known or considered, at least — was that CBP had imposed a $6.8 million fine for duties and penalties on Old AMS, a claim the state court exonerated New AMS from.
Customs later sued Old AMS, New AMS and others, alleging that New AMS is liable for the penalty. Under Wisconsin state law, the general rule is an asset purchase does not cause the new owner to be liable for the debts of the original owner, a rule that generally applies in most states.
Wisconsin law, however, acknowledges some exceptions:
— When the purchaser directly or indirectly assumes liability.
— When the transaction amounts to a consolidation or merger.
— When the purchaser merely continues the old operation.
— In the case of a fraudulent transfer.
Again, some variation of these exceptions generally apply in most states. The case came before the court on a motion for summary judgment, which meant that as to each cause of action, the court would have to find there are no triable issues of law or fact. The court could not reach that conclusion on all the causes of action pled.
The court ruled in favor of New AMS, finding there was no de facto merger. The court, however, found there are triable issues of fact as to whether New AMS was simply a continuation of the old company. The court acknowledged some commonality of ownership, officers, directors and business operations, but the parties disagreed as to the extent of that commonality.
For example, only one owner from the old company remained, and his interest was quite small (only 2 percent). Just how much influence he had over the operation was an open question, because no evidence appears to have been submitted on this point. As such, the court could not answer whether the overlap in ownership and control was sufficient to find continuation. The court denied the motion on that ground, leaving the parties to seek a resolution or litigate the case further.
A much clearer outcome resulted from U.S. v. Trek Leather Inc. and Harish Shadadpuri, CAFC Case No. 2011-1527 (Fed. Circ. July 30, 2013). The government lost that case because of the charges it presented.
The case involved a penalty assessed against an importer and its sole shareholder/president. The Court of Appeals for the Federal Circuit held that being a corporate officer alone did not mean liability attaches absent fraud. Put another way, the “government failed to assert any duty on Shadadpuri’s part, so there could be no negligence or gross negligence by him and so no penalty liability.”
The appeals court said Shadadpuri “could have been liable for fraud, or as an aider or abettor, or if the government had pierced the corporate veil,” but the government was unsuccessful because it chose not to assert any of those bases for recovery.
Taken together, these cases serve as a reminder: Whether or not liability attaches to a given set of actions will depend greatly on what was done, but also how it was written up. In these cases, the parties argue about what was done and how closely it matches the writings memorializing the events. What you call a set of actions isn’t binding — but what those actions really encompass is.
If you own one of the vast number of small and medium-sized importers and exporters in the U.S., be especially careful to ensure your processes and procedures are proper and complete and are being complied with. Otherwise, the resulting costs can be devastating.
Susan Kohn Ross is an international trade attorney with Mitchell Silberberg & Knupp in Los Angeles. Contact her email@example.com.