Imagine your company imports from a vendor in Vietnam and sells them at a competitive margin in the U.S. Business is so-so until the Department of Commerce conducts an Antidumping or Countervailing Duty ("AD/CVD") review that encompasses your company or its foreign vendor and determines the origin of your goods to be China, which causes you to owe backlogged AD/CVD at rates over 100% ad valorem for the past year. Your company simply cannot afford this even after switching vendors. It sounds like a good idea to dissolve the company entirely and start from scratch, right? - Wait.
Many companies overlook successor liability for importers because the concept is not found in the statutes, regulations, or Customs and Border Protection ("CBP") guidance. Caselaw has primarily shaped the development of successor liability in this arena. Although companies are generally not liable to the creditors of their predecessors, CBP can impose successor liability in several instances.1
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 owners of an importing company dissolve the company and form a new importing company with the same operations. In both instances, the new or acquired company will be liable for the AD/CVD of the former or acquired company.
What Liability Carries Over? - AD/CVD, Evasion & Civil Penalties
CBP is determined to find successor liability for unpaid AD/CVD, as well as penalties and other Customs obligations arising from those owed duties. In addition to the unpaid AD/CVD, the liability that carries over to the new company includes civil penalties for AD/CVD declarations, bonding requirements, and exposure to interim and final measures in evasion investigations.
- Unpaid AD/CVD - Enforcement of AD/CVD is a priority issue for CBP. In 2019 alone, CBP conducted over 81 audits of imports of AD/CVD goods and identified $20.3 million in unpaid duties. Liability for these unpaid duties can carry over 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 a reasonable belief that a continuous bond would place the revenue in jeopardy in relation to AD/CVD. CBP may allow the importer to use a continuous bond only after CBP determines that the importer is in compliance with AD/CVD requirements. This is a powerful tool that CBP frequently uses to prevent entry of AD/CVD merchandise.
- Civil Penalties - CBP can issue civil penalties under 19 U.S.C. § 1592 for acts or omissions that are considered fraud, gross negligence, or negligence when importing AD/CVD subject goods. Incorrectly declaring an entry as "Type 01" instead of "Type 03" and failing to declare AD/CVD is enough to warrant civil penalties. In 2019, CBP issued monetary penalties totaling over $69.4 million on imports under the authority of 19 U.S.C. § 1592 for fraud, gross negligence, or negligence in reporting AD/CVD.
- 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 launched 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 period for liquidating each unliquidated entry, and (3) any other measures as CBP determines are necessary to protect the revenue, including requiring a single transaction bond or cash deposit. After an EAPA determination, CBP can suspend liquidation, extend liquidation, and demand the evaded AD/CVD pursuant to 19 CFR 165.28. Further, 19 CFR 165.47 allows CBP to issue civil penalties under authorities other than the EAPA, such as 19 U.S.C. § 1592.
Successor Liability as a Continuation of the Enterprise
Successor liability relating to dissolved companies is less transparent than liability as part of a merger or acquisition. For companies that were dissolved, the successor importer will be liable for the AD/CVD owed by the prior importer if the successor is a "significant continuation" of the prior importer's business operations. When making this determination, CBP will consider the following factors2, and usually finds successor liability where:
- The new company retains of the same stockholders, ownership, employees, supervisory personnel, production facilities, assets, locations, and other means of production3,
- The new company is importing the same or similar products as the dissolved company4,
- The prior company's business name is retained by the new company,5 and
- The same business operations exist and/or the new company holds itself out to the public as a continuation of the previous corporation.6
For example, the Court in United States v. Sterling Footwear7 declined to impose successor liability. The first importing company was liable for $1.6 million in duties and over $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 requested that the Court impose liability on the second importing company, but the Court declined. The Court acknowledged that the second importing company had common shareholders, directors/managers, officers, business departments, employees, manufacturers, customers, company suites, equipment, and telephone numbers, and shared a business address. However, the Court lacked information regarding whether the second company retained the predecessor's "production facilities in the same physical location," produced "the same product," retained the same assets, or held itself out as a continuation of the same company.8
However, the Defendants in Sterling Footwear did not get off the hook. After months of mediation following the Court's slip opinion in 2017, the Defendants, including the second importing company, were pressured to settle and pay a portion of the civil penalties that were assessed against 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 over $2 million in civil penalties.9
Because AD/CVD enforcement is a priority trade issue for CBP, the agency is highly motivated to find successor liability where it believes AD/CVD is being evaded. Companies seeking to merge with or acquire other companies with importing operations should perform due diligence reviews of the company's unpaid duties and relationship with CBP. Companies with stacking AD/CVD debt should be forewarned that dissolving and reforming the company will not cancel the liability for the duties, and CBP is on the lookout for this kind of behavior. There are other avenues to resolve mounting AD/CVD liability. Concerned importers should contact the Braumiller Law Group for details on how it can mitigate AD/CVD liability and other CBP requirements, like STBs, and should contact counsel immediately upon notice of an evasion investigation.
1. John H. Matheson, Successor Liability, 96 MINN. L. REV. 371, 381-96 (2011); See RESTATEMENT (THIRD) OF TORTS: PRODUCTS LIABILITY § 12 (1998). (If the transaction is a fraudulent effort to avoid liabilities of the predecessor; If the successor expressly or impliedly 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 predecessor's business operations (continuation of enterprise exception).)
2. See United States v. Sterling Footwear, 279 F.Supp.3d 1113, 1140-1145 (Ct Int'l Trade 2017) ("(1) retention of the same employees; (2) retention of the same supervisory personnel; (3) retention of the same production facilities in the 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 itself out as the continuation of the previous enterprise."); see also Mozingo v. Correct Mfg. Corp., 752 F.2d 168, 174 (5th Cir. 1985).
3. See Taylor J. Phillips, The Federal Common Law of Successor Liability and the Foreign Corrupt Practices Act, 6 WILLIAM & MARY BUSINESS LAW REVIEW 89, 105-107 (2015).
4. See Adrienne Braumiller, Buying Import & Export Violations: Successor Liability Risk & Its Impact on the Bottom-line, BRAUMILLER LAW GROUP (2014).
6. Matheson at 396.
7. 279 F.Supp.3d at 1140-1145.
9. Order (re United States v. Sterling Footwear), Court No. 12-00193, Docket No. 150 (August 30, 2019).
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