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Tire Importer Says US Failed to Clear Pleading Requirements in $5.7 Million Customs Penalty Suit

The U.S. articulated a theory of fraud but did not "plead fraud with particularity" in its case against importer Katana Racing seeking over $5.7 million in unpaid safeguard duties on Chinese tires, Katana argued in a renewed motion to dismiss at the Court of International Trade. Again seeking to dispatch of the case following the U.S. Court of Appeals for the Federal Circuit's remand kicking the matter back to the trade court, the importer said the govenrment's case did not touch on the "who, what, when, where, and how of the alleged fraud" as required by the Supreme Court in making a pleading, particularly one for fraud (United States v. Katana Racing, CIT # 19-00125).

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Katana's motion to dismiss invoked the Supreme Court's rulings in Twombley and Iqbal regarding pleading requirements to claim that the U.S. did not sufficiently allege a violation of 19 U.S.C. Section 1592(a), the statute on customs penalties. Under these two opinions, the high court "underlined the necessity of providing detailed factual allegations that suggest a defendant’s intent, rather than relying on mere conclusory statements." Here, the U.S. failed to state its claims in a way that renders them plausible, the brief said.

The customs violations stem from 386 entries of tires between 2009 and 2012 for which duties hadn't been paid. Katana said the entries were the result of identity theft, with suppliers or individuals falsely declaring Katana as the importer of record. Following the imposition of safeguard duties on tires from China, Katana says it was persuaded by Chinese suppliers to enter into a delivered duty paid contract. Katana theorized that it had been the victim of fraud and notified CBP via a voluntary prior disclosure.

The importer was eventually hit with a $5.7 million bill for the unpaid duties. Though the company waived the statute of limitations for the duties on the basis that it would be part of an administrative proceeding with CBP, the proceeding never came. The trade court said the importer properly then revoked its waiver of the statute of limitations, dismissing the suit for lack of jurisdiction (see 2203280047). The appellate court reversed this finding on the grounds that the statute of limitations is not a jurisdictional time limit but instead provides an affirmative defense that can be waived (see 2308030034).

The Federal Circuit noted, however, that Katana still can claim that the statue of limitations waiver was void as part of an affirmative argument that the U.S. failed to state a claim. In its renewed motion to dismiss, Katana argued that the case should be dismissed for failure to state a claim, though it added in the alternative, that summary judgment for the company can be issued on the grounds that the government "improperly induced Katana's third waiver of the statute of limitations."

Katana argued that it waived the statute of limitations on the grounds that it would be able to make a presentation to CBP "showing it had not violated" the law. "Katana’s reliance was reasonable," the brief said. "However, Customs’ subsequent refusal to allow a presentation shows the prior promise to have been false and unfulfilled. This deceit renders the third waiver void." The importer said various factors justified its reliance on CBP's promise, including the the length of time during which CBP "exercised forbearance in collecting the duties" and assurances in the law.

The importer clarified that its primary take on the situation is that it needs to be dismissed due to the government's failure to state a claim. "While the Complaint alleges undervaluation of merchandise, it does not identify specific acts or omissions that demonstrate Katana’s knowledge of, or complicity in, the alleged undervaluation scheme," and thus fails according to Twombley and Iqbal. "The complaint does not detail Katana’s intent or knowledge concerning the underreporting of duties," the brief said. "While the Government may have detailed that an underreporting itself occurred, without alleging with particularity how Katana knew of, or intended, the underreporting," it doesn't articulate the "why" and "how" of the activity.