Imagine that your company imports products from a supplier in Vietnam and sells them with a competitive margin in the United States. foreign supplier and determines that the origin of your goods is China, causing you to owe pending AD/CVD at rates greater than 100% ad valorem for the past year. Your business simply cannot afford it, even after switching suppliers. Sounds like a good idea to dissolve the company entirely and start from scratch, doesn’t it? – Wait.
Many companies overlook successor liability for importers because the concept is not found in laws, regulations, or Customs and Border Protection (“CBP”) guidelines. Case law has primarily shaped the development of successor liability in this area. Although corporations are generally not liable to the creditors of their predecessors, CBP can impose successor liability in several cases.[i]
The two scenarios where successor liability is most prevalent are (1) in the case of a merger or acquisition, and (2) in the case where the owners of an importing company dissolve the company and form a new importing company with the same operations. In either case, the new or acquired company will be responsible for the AD/CVD of the old or acquired company.
What liability is deferred? – AD/CVD, evasion and civil penalties
CBP is committed to finding successor liability for unpaid AD/CVDs, as well as penalties and other customs liabilities arising from those duties owed. In addition to unpaid AD/CVD, the new company’s liability includes civil penalties for AD/CVD statements, bond requirements, and exposure to interim and final measures in escape investigations. .
- AD/CVD unpaid – AD/CVD enforcement is a priority issue for CBP. In 2019 alone, CBP performed more than 81 AD/CVD commodity import audits and identified $20.3 million in unpaid duties. Liability for such unpaid fees may be transferred to the new company.
- Bond Requirements – CBP is authorized to require a Single Transaction Bond (“STB”) or cash payment in lieu of a continuous bond if CBP has reasonable grounds to believe that a continuous bond would jeopardize revenue related to AD/CVD. CBP may authorize the importer to use a standing bond only after it determines that the importer is in compliance with the anti-dumping/countervailing requirements. This is a powerful tool that CBP uses frequently to prevent the entry of AD/CVD goods.
- Civil penalties – CBP may impose civil penalties under 19 USC § 1592 for acts or omissions that are considered fraud, gross negligence, or negligence when importing goods subject to AD/CVD. Incorrectly declaring an entry as “Type 01” instead of “Type 03” and not declaring AD/CVD is enough to warrant civil penalties. In 2019, CBP imposed monetary penalties totaling more than $69.4 million on imports under 19 USC § 1592 for fraud, gross negligence, or negligence in reporting AD/CVDs.
- Evasion – The Enforce and Protect Act (“EAPA”) gives CBP the authority to investigate whether a company has evaded AD/CVD. By the end of 2020, CBP had initiated over 131 investigations and identified over $600 million in unpaid AD/CVD duties. The EAPA allows CBP to impose interim measures within the first 90 days of an investigation, which include (1) suspending the liquidation of each unliquidated entry, (2) extending the liquidation period of each unliquidated entry; and (3) any other action CBP determines is necessary to safeguard revenue, including requiring a single transaction bond or cash deposit. After an EAPA decision, CBP may suspend liquidation, extend liquidation, and require evaded AD/CVD pursuant to 19 CFR 165.28. Additionally, 19 CFR 165.47 allows CBP to impose civil penalties under authorities other than the EAPA, such as 19 USC § 1592.
Liability of successor as continuation of business
Successor liability for dissolved companies is less transparent than liability for a merger or acquisition. For companies that have been dissolved, the successor importer will be liable for the AD/CVD duty owed by the previous importer if the successor is a “significant continuation” of the business activities of the previous importer. In making this determination, CBP will consider the following factors[ii]and generally finds successor liability when:
- The new company retains the same shareholders, owners, employees, supervisory personnel, production facilities, assets, locations and other means of production[iii],
- The new company imports the same or similar products as the dissolved company[iv],
- The name of the old company is retained by the new company,[v] and
- The same business operations exist and/or the new company presents itself to the public as a continuation of the previous company.[vi]
For example, the Court of United States vs. Sterling Footwear[vii] refused to impose successor liability. The first importing company was liable for $1.6 million in duties and more than $20 million in civil penalties. To avoid the duties, the owner of the first importing company formed a second company to import the same products. The government asked the court to impose liability on the second importing company, but the court refused. The Court recognized that the second importing company had common shareholders, directors/managers, officers, business departments, employees, manufacturers, customers, offices, equipment and telephone numbers, and shared a business address. However, the Court lacked information on whether the second company retained the “predecessor’s production facilities at the same physical location”, produced “the same product”, retained the same assets or presented itself as a continuation of the same company.[viii]
However, the defendants in Sterling Shoes didn’t get away with it. After months of mediation following the court’s erroneous opinion in 2017, the defendants, including the second importing company, were forced to settle and pay part of the civil penalties imposed on the first company. As part of the settlement agreement, the second importing company owed $4,664,580.97 in civil penalties and the owner of both entities was personally liable for more than $2 million in civil penalties.[ix]
Because enforcement of AD/CVD rights is a priority business issue for CBP, the agency has strong incentives to seek successor liability when it believes AD/CVD rights are being evaded. Companies seeking to merge with or acquire other companies with import operations should conduct due diligence reviews of the company’s outstanding duties and its relationship with CBP. Companies with accumulating AD/CVD debt should be warned that corporate dissolution and reform will not nullify duty liability, and CBP is on the lookout for this type of behavior. There are other ways to solve the increased AD/CVD liability.
[i] John H. Matheson, Liability of successor, 96 MIN. L. REV. 371, 381-96 (2011); See REFORMATION (THIRD) OF TORTS: PRODUCT LIABILITY § 12 (1998). (If the transaction is a fraudulent attempt to avoid the liabilities of the predecessor; If the successor expressly or implicitly assumes the obligations of the predecessor; If the transaction is a de facto merger; If the successor is a mere continuation of the predecessor; If the successor is a significant continuation of the business activities of the predecessor (continuation of business exception).)
[ii] See United States vs. Sterling Footwear279 F.Supp.3d 1113, 1140-1145 (Ct Int’l Trade 2017) (“(1) retention of same employees; (2) retention of same management personnel; (3) retention of same production facilities same physical location; (4) production of the same product; (5) retention of the same name; (6) continuity of assets; (7) continuity of general business operations; and (8) whether the successor holds up as the continuation of previous undertaking.”); see also Mozingo vs. Correct Mfg. Body., 752 F.2d 168, 174 (5th Cir. 1985).
[iii] See Taylor J. Phillips, The Common Federal Successor Liability Act and the Foreign Corrupt Practices Act6 WILLIAM & MARY BUSINESS LAW REVIEW 89, 105-107 (2015).
[iv] See Adrienne Braumiller, Purchasing Import and Export Violations: Successor Liability Risk and its Impact on the Bottom LineLAW BRAUMILLER GROUP (2014).
[vii] 279 F.Supp.3d at 1140-1145.
[ix] Ordinance (d United States vs. Sterling Footwear), Court No. 12-00193, Roll No. 150 (August 30, 2019).