United States: The Curse Of The Zombie Importer: Defunct Company's CBP Duties And Penalties Haunt Successor

Last Updated: July 24 2013
Article by Gregory S. McCue and Victoria E. Murphy

In a recent decision, the US Court of International Trade (CIT) held that a company that acquired the assets of a bankrupt entity might be held responsible for that entity's $6.8 million in unpaid Customs duties and penalties.  The CIT made this finding even though the state court that approved the acquisition explicitly stated that the acquiring company would not take on the bankrupt entity's liabilities.  While this case turns on an interpretation of Wisconsin state law, the situation presents a valuable reminder that any acquisition of an importing company, or a substantial portion of its assets, should include a thorough pre-acquisition review of import compliance procedures and liabilities.

In the case reviewed by the CIT, the purchasing company, Adaptive MicroSystems, LLC, (New AMS) not only bought the bankrupt Adaptive MicroSystems, (Old AMS), but also hired many of its employees, and then adopted its name.  At the time of the sale, Old AMS already had received a penalty notice from CBP.  The notice contended that Old AMS had misclassified imports of LED panels from Malaysia in import shipments from 2005 to 2010.  The sale of Old AMS to New AMS was approved by a Milwaukee County Circuit Judge in 2011.  The terms of the sale included hiring of many of Old AMS's employees, including Michael Mandler, who was the executive vice president of Old AMS and owned a 15.8 percent stake in the company.  Though the Milwaukee court approved the sale and absolved New AMS of all liability, "whether absolute or contingent, known or unknown," that was or may have been pending against Old AMS, the court did not mention CBP's claim.  After the acquisition, New AMS transferred 400 shares to Mandler, who was executive vice president in the new company as well.  Those 400 shares entitled Mandler to 2% of New AMS's profits, but no voting rights.

CBP filed suit against New AMS in May 2012 in the CIT to collect the unpaid duties.  New AMS sought summary judgment from CIT that it was not liable for Old AMS's unpaid duties or penalties, and also requested that CBP be sanctioned for continuing to pursue the action against New AMS.  New AMS alleged that CIT should grant summary judgment against CBP in accordance with the legal principle of "comity", under which federal courts should defer to the decisions of state courts in certain situations, because the Wisconsin court that approved the sale also absolved New AMS of any of Old AMS's liabilities.  Customs, in turn, argued that there was a legitimate question of fact as to whether the sale of Old AMS to New AMS fit under the "de facto merger" or "mere continuation" exemptions to the general rule of successor liability.  

The CIT ruled against New AMS, finding that there was a legitimate question of fact on the issue.  CIT found no evidence on the record that the Wisconsin court considered CBP's claims at the time of the sale, and noted that the court could not have known that Mr. Mandler would be given an ownership stake in New AMS post-acquisition.  Further, CBP provided evidence that New AMS held itself out to potential customers as the same company as Old AMS, variously representing that it was founded in 1979 and that it has been open for over 30 years.  On the basis of these findings, CIT also denied New AMS's request to sanction CBP for continuing the action, as CIT found that CBP's action was not frivolous or baseless.

The CIT's decision does not mean that New AMS definitely will be liable for the CBP duties and penalties of Old AMS.  The denial of summary judgment means only that the case will be allowed to continue.  However, it seems likely that the executives at AMS (Old and New) did not expect that there would be any potential liability from Old AMS – especially in light of the clear ruling from the Milwaukee court.  Although this case will be decided under Wisconsin law, these sorts of surprises are not unusual.  It is not uncommon for companies to find, after the purchase of a corporation or business, that past errors in US Customs compliance have created a substantial liability.  At times, CBP issues that seem small, especially in the rush prior to an acquisition, can be much larger if examined closely.  CBP generally has up to five years to assess duties and penalties on past import errors, so even if no action is pending (as it was for AMS), a review of past entries before the sale closes is a critical step to assessing liability.  The Adaptive MicroSystems case is a multi-million dollar reminder that Customs due diligence is a necessary part of any merger or acquisition.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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