CIT Finds Footwear Importer Liable for Misclassification; Owner's 'Trek Leather' Culpability Still to Be Decided

Sterling Footwear is liable for gross negligence related to unpaid customs duties due to misclassification on hundreds of footwear entries, the Court of International Trade ruled in a Oct. 12 decision. CIT Judge Mark Barnett specifically avoided a decision on the liability of Sterling's CEO and majority shareholder, Alex Ng. The Justice Department sought a summary judgment on Ng's culpability but because some of the facts involved remain in dispute, Barnett didn't decide that issue.

At issue were 337 footwear entries classified as HTS subheading 6402.91.40 between 2007 and 2009 through the Los Angles/Long Beach Seaport. Sterling described the footwear as “rubber tennis shoes” but the items were in fact “athletic shoes, slip on shoes, boots, and other styles of shoes that had uppers made up of [] canvas, leather, plastic, or combinations of materials, and in most cases had foxing or foxing-like bands,” the CIT said. CBP in 2009 issued a penalty letter to the company and met with Sterling representatives over four entries. While Sterling agreed to file post-entry amendments, it did not, prompting the agency to review all of the company's entries. CBP subsequently sought $1.66 million from Sterling through pre-penalty notices.

The DOJ filed suit in 2012 after CBP recovered $100,000 from Sterling's surety but nothing from Sterling. "The undisputed facts demonstrate that Sterling knew the style and composition of its footwear," as "Sterling designed that footwear and set manufacturing specifications," the court said. Additionally, "Sterling consistently instructed its brokers to enter footwear pursuant to HTSUS 6402.91.40, without regard to the styles of footwear being imported and, thus, without regard for whether that was the correct tariff provision," it said. The government "demonstrated Sterling’s gross negligence by a preponderance of the evidence," the court said.

Still undecided, though, is how to treat Ng. The government argued that Ng is personally liable based on precedent set by the Trek Leather decision that found a corporate employee liable for customs violations (see 1506090070). While it's clear "Ng played a role in causing Sterling’s footwear to be shipped to" the U.S., a summary judgment is "inappropriate" due to "conflicting evidence regarding Ng’s role in determining the tariff provision pursuant to which Sterling’s footwear would be entered," it said. Ng testified that he played no role in determining classification, which conflicts with testimony from other employees and other evidence. "Because Ng’s role in introducing the subject merchandise is disputed, the court does not reach Parties’ arguments regarding his culpability, or lack thereof," the court said in a footnote.

Also still to be decided is the liability of Sterling's successor company, Ng Branding, the CIT said. There's not evidence present to show Ng Branding purchased Sterling, obtained its assets or to what extent financial affairs between the two overlapped, Barnett said. "In the absence of undisputed evidence that a purchase or transfer of assets occurred, and that Ng Branding carried on the same business as Sterling, the court cannot, at this time, hold Ng Branding liable as Sterling’s successor pursuant to the 'mere continuation' exception."

Given the gross negligence finding for Sterling, the company must pay about $1.5 million in unpaid duties, CIT said. "At this stage of the proceedings, the presence of disputed facts precludes any finding as to Ng’s or Ng Branding’s joint and several liability for those duties," it said. The court also deferred a penalty decision "until all liable parties (whose conduct is relevant to the inquiry) have been identified," it said.

(U.S. v. Sterling Footwear, Inc., Slip Op. 17-141, CIT # 12-00193, dated 10/12/17, Judge Barnett)

(Attorneys: Mikki Cottet for plaintiff U.S. government; Thomas Fasel of Fasel Law for defendants Sterling Footwear Inc., et al.)