'Unreasonable' to Wait 8 Years to Demand Customs Bond Payment, CIT Rules

The Court of International Trade on March 18 said that the U.S. waited too long to send surety firm Aegis Security Insurance Co. a bill for an unpaid customs bond on Chinese garlic imports that entered in 2004. Judge Stephen Vaden said that the government's eight-year delay in demanding the payment from Aegis "was unreasonable and a breach of contract." The court said the delay broke the "reasonable time requirement" -- an "implied contractual term."

In making the decision, Vaden also held that the six-year statute of limitations on customs bonds runs from the date CBP issues a bill and not the date of liquidation, as Aegis claimed. This interpretation also conflicts with a prior CIT ruling on this question. Vaden also said that the surety's "impairment of suretyship" defense fails since the surety could have made a timely claim from its reinsurer.

The decision centers Commerce's former practice of allowing new exporters of goods subject to antidumping and countervailing duties to post bonds instead of paying cash deposits when undergoing new shipper reviews. Vaden dubbed the practice a "congressional experiment gone awry," since the program let exporters evade duty payments by making large entries under bonds then "disappearing without paying the duties owed." Congress agreed, seeing as amended the provisions out of the statute in 2015.

Aegis issued the bond at issue in the case, a continuous bond for exporter Linyi Sanshan Import & Export Co., in 2002. Under the bond, Linyi Sanshan brought in its garlic entries from China, then disappeared before paying the bill. The entries deemed liquidated in 2006 and sat untouched until CBP made a demand for payment on the bond from the importer in 2014, then Aegis in 2015.

In all, the importer made three claims as to why it didn't need to pay: the statute of limitations passed, CBP violated the "implied contractual requirement in the bond that demand for payment occur in a reasonable amount of time" and CBP's actions amounted to an "impairment of suretyship."

Assessing the first claim, Vaden reviewed the two statutes governing the time limit for recovery of customs bonds. The first, 28 U.S.C. 2414(a), sets a six-year limit on government actions for money damages based on any contract. The second, 19 U.S.C. 1505(b), says the cause of action for the government to sue on a customs bond starts 30 days after the issuance of the bill for such payment. The U.S. said this 30-day window doesn't open until the government sends a bill, while Aegis said the entire collection system centers on liquidation.

Vaden agreed with the U.S., noting that the text of the statute "links the time duties become due with the billing date, not the liquidation date." Likening the bond to a "credit card bill or utility bill, where the amount due is established on purchase and the customer is given a later date by which to pay, the duties described here aren't due immediately when they are established. A prior version of the law made payment due 15 days after liquidation, making the change in language linking payment to the issuance of a bill the proper reading, the court found.

This ruling stands in direct contrast with a September 2023 decision from the trade court, which said that the six-year statute of limitations on customs bond collections starts at the date of liquidation and not the date CBP demands payment of the bond (see 2308220054). Vaden noted this in a footnote, writing that his "statutory interpretation" differs from the prior decision, but that the "ultimate result" is the same.

While the suit was found to be timely, the court said the delay in issuing the payment demand was "unreasonable." The court noted that contracts with a "demand requirement and no express limitation on the time for demand" have an implied requirement that the demand be made in a "reasonable time." This requirement is indeed a contractual term and not an "equitable defense," the court said. This term shields parties' expectations and are "especially important in adhesion contracts," like customs bonds, where the parties have no chance "to negotiate a time limit for demand." In addition, the government conceded at oral argument that the "reasonableness requirement exists and applies here," Vaden noted.

The court said that there's "no bright-line rule for what constitutes a reasonable time to make demand." Linking the payment demand time to the statute of limitations is "not universally recognized and may have fallen out of favor," Vaden noted. Another standard suggests that the reasonableness of the timing depends on "expectations." Either way, Vaden found eight years to be too late for a proper payment demand.

The U.S. said that eight years was reasonable since that's when CBP learned from the Commerce Department that the entries were deemed liquidated. The court rejected this claim, holding that the "question is not whether Commerce or Customs as individual agencies unreasonably delayed making demand; the question is whether the Government collectively did.”

Lastly, Aegis said that the late payment demand fundamentally alters the risks imposed on it under the bond. Vaden first noted that Aegis has the burden of showing it suffered a material increase in risk. The court said that even viewing the facts "in the light most favorable to Aegis," the company can't show it suffered a material uptick in risk. While Aegis said the delay hurts its ability to recover from its reinsurer, the court found that the reinsurer in question, Lincoln General, was still paying claims in 2015. "If policyholders across the nation are expected to make a timely claim with their insurers, so too is Aegis," the court said.

(United States v. Aegis Security Insurance Co., Slip Op. 24-33, CIT # 20-03628, dated 03/18/24; Judge: Stephen Vaden; Attorneys: Beverly Farrell for plaintiff U.S. government; T. Randolph Ferguson of Sandler Travis for defendant Aegis Security Insurance; Gilbert Sandler of Sandler Travis for amicus curiae the Customs Surety Coalition; Michael Coursey of Kelley Drye for amici curiae led by Adee Honey Farms)