The CIT’s latest penalty decision is another headscratcher.

Call it the Mystery of the Missing Legal Doctrine – a whodunit worthy of Sherlock Holmes and John Watson.  And we’re talking the contemporary Benedict Cumberbatch/Martin Freeman Holmes and Watson. This missing doctrine was in plain sight during the time of Conan Doyle’s Victorian Holmes, and even when Basil Rathbone portrayed the great detective on film during the 1940s. But the doctrine – still on the legal books, basically unchanged in 2015 – seems to be disappearing in 2015.

One can almost hear the sleuths discussing it as Holmes reads the letter he’s received from his American correspondent:

“A missing legal doctrine, Sherlock?” Watson inquires, looking over his colleague’s shoulder at the email scrolling down the screen. “Surely something esoteric that’s maybe just hard to discern?”

“Elementary, John!” Holmes responds. “Perhaps the most elementary rule in American customs law, the one that affords importers the most protection from arbitrary government actions – the rule of finality of liquidation of entries! And it appears to have vanished!”

[Cue intro music and credits; the scene moves to the sandwich shop next to 221B Baker Street, while Holmes pores over a printout].

"It’s all here, John – Customs has one year to liquidate an entry of merchandise, making its final determination as to classification, rate and amount of duty. Once the entry is liquidated, it’s final as to both Customs and the importer. Unless, that is, Customs reliquidates the entry within 90 days, or the importer files a protest within 180 days.”

“No exceptions, then?”

"Just one. Section 592(d) of the Tariff Act says that if revenue was lost by means of a false and material statement or document, or by means of a material omission – which resulted from negligence, gross negligence or fraud – Customs can recoup “withheld duties” going back up to five years. But first Customs has to prove a violation of law, of Section 592(a) of the Tariff Act, occurred.”

"Sounds easy enough to remember. What’s the problem?”

“Well, John, liquidation of an entry is perhaps the most important action an American Customs officer can perform. Back about 25 years ago, however, U.S. Customs decided they were too busy to keep up with all their workload, so they decided to put most liquidations on “bypass” – meaning that most entries liquidated the way the importer presented them, without Customs actually looking at them.”

”Sounds daft!”

“Indeed. Customs decided they’d enforce the law through post-liquidation audits. Customs auditors would find errors in classification or appraisement, and tally up the amount owed.  But the auditors’ grins would turn to frowns when importers reminded them that, without a violation of Section 592, the duties claimed in respect of liquidated entries simply weren’t owed. Customs had changed the way it worked, but the law hadn’t changed. If Customs couldn’t make up a penalty claim, they were out of luck on collecting the duties. “

“Well, Sherlock, negligence doesn’t sound so hard to prove.”

“True enough, but the Customs Modernization Act indicates that if an importer can show it exercised “reasonable care” in making entry, that’s a defense to a penalty claim.”

“So when did the doctrine go missing?”

“It all seems to have come to a head Friday, June 24, 2015, at the Court of International Trade in New York City.”

[Cue flashback sequence; Holmes voiceover].

“The case of United States v. Horizon Products International Inc. was before the Bailey. Horizon had imported hardwood flooring. Some of the flooring had an outer layer which qualified it for duty free treatment. Most of the flooring, however, had an outer layer which attracted an 8% duty rate. Horizon and its Customhouse broker had entered all of the goods under the duty free provision.

“Customs timely liquidated some of the entries with a duty increase, which Horizon paid. But the agency then billed Horizon for a substantial amount of duty in respect of entries that had already been liquidated and made final, and demanded Section 592 penalties as well. Horizon declined to pay those. The case proceeded to Court, the government bringing suit for penalties and withheld duties.

“The government charged Horizon with negligence. But the company contested that, claiming that it had exercised ‘reasonable care’ by relying on the classification advice of a Customhouse broker. The government demanded summary judgment, but Judge Leo Gordon said no, there were triable issues of material facts concerning whether Horizon had been negligent. He bound the case over for trial, saying –

[Guest star Jeremy Irons voicing Judge Leo Gordon]:

“The Government would like the court to infer that all the responsibility for the erroneous entries rests on the shoulders of Horizon, but the court could just as easily infer that the customs broker shares a portion (if not all) of the responsibility. Customs brokers, after all, have statutory and regulatory responsibilities to classify merchandise correctly. E.g., 19 C.F.R. § 111.29 (requiring customs brokers to “exercise due diligence . . . in preparing or assisting in the preparation and filing of records relating to any customs business matter”); see also 19 C.F.R. § 152.11 (“Merchandise shall be classified in accordance with the [HTSUS] . . . .”); 19 U.S.C. § 1641(d) (allowing Customs to penalize a broker who “has violated any provision of any law enforced by [Customs] or the rules or regulations issued under any such provision”); United States v. Santos, 36 CIT ___, ___, 883 F. Supp. 2d 1322, 1327-30 (2012) (sustaining as reasonable a § 1641 penalty on a motion for default judgment against broker who allegedly misclassified imported goods).

“Drawing all reasonable inferences in Horizon’s favor, the court determines that genuine issues remain about whether Horizon exercised reasonable care in making its entries. Accordingly, the Government’s request for summary judgment on this issue is denied.”

 “Well, Sherlock” Watson interjected, “it would appear that the judge made the correct decision. If there are questions about whether Horizon was negligent – or its broker – then trial would appear to be appropriate!”

“True, Watson – except for what went before.”

 “What’s that?!”

 "The judge granted summary judgment against Horizon for the duties!”

 [Again, Jeremy Irons, voicing Judge Gordon]:        

"Horizon concedes that it misclassified the entries at issue in this action and that it is therefore liable to the Government for $70,254 in unpaid duties. Def.’s Resp. at 16; 19 U.S.C. § 1592(d) (“[I]f the United States has been deprived of lawful duties, taxes, or fees as a result of a violation of [§ 1592(a)], the Customs Service shall require that such lawful duties, taxes, and fees be restored, whether or not a monetary penalty is assessed.”). Accordingly, the court will order Horizon to pay the Government $70,254 in unpaid duties.”


[Holmes and Watson, back at the Baker Street flat]:

 “You see the problem, Watson?”

 “I’m not sure, Sherlock.”

“Horizon had not admitted to negligence, and thus had not admitted to a violation of Section 592 of the Tariff Act! The Court is going to hold a trial to determine if Horizon was negligent. Yet, the Court has already held Horizon liable for the duties!"

“But the duties are only recoverable if the United States was deprived of them as a result of a violation of §1592(a), and the Court has not yet decided whether there was a violation of that statute, or who, if anyone, was the violator! It’s going to hold a trial on that issue!”

 “But Sherlock, the Court said that Horizon had conceded that it was liable to the Government for unpaid duties . . .   .”

“No, Watson, Horizon conceded that the goods were misclassified, not that it had violated Section 592 of the Tariff Act – that remains to be seen, as the Court itself admits! The finding that the duties were owing was the Court’s!”

“But Sherlock, what if the Court holds a trial and finds that Horizon did exercise “reasonable care” – then there would be no basis to find a violation by Horizon!”

“And therefore no basis to collect the withheld duties! Exactly, John!”

“So the doctrine of finality of liquidation – “

"Seems to have vanished, John! Vanished in that courthouse on July 24, 2015! The Court seems to have uncoupled Customs’ ability to overcome finality of liquidation from the requirement to prove a violation of Section 592(a)!”

[Mrs. Stubbs, Holmes’ landlady, appears at the doorway with a serving of tea]

“I’m told you boys are wrestling with the disappearance of an American legal doctrine! I thought you might want some tea!”

“Thank you, Mrs. Stubbs” says Sherlock. “Very thoughtful!”

“Why don’t the Americans just take it up with their courts, then? Why call in British detectives?!”

“That’s the problem. It appears the Americans’ courts are complicit in the disappearance!”

[Closing credits. Resolving this disappearance must wait for another day, and perhaps another court. But importers across the United States should be very worried.]