Neither Bankruptcy nor The Double Jeopardy Clause Bars the Customs Service from Collecting Civil Penalties

In a recent case in the United States Court of International Trade (CIT), United States v. DeBellas Enterprises Inc. and Anthony DeBellas, the Court refused to dismiss the individual defendant, Anthony DeBellas, from a lawsuit instituted to collect a civil penalty under the provisions of section 592 of the Tariff Act of 1930, as amended, 19 USC §1592, although the individual defendant argued that his debt for the penalty was discharged by bankruptcy proceedings and, in any event, the Double Jeopardy Clause of the U.S. Constitution prevented the government from collecting the penalty since the defendant had already pleaded guilty to a criminal violation arising from the same acts. The United States sought a civil penalty in the amount of $1,568,044, plus interest and unpaid duties in the amount of $102,599.86 as well as the cost of the suit, and attorneys' fees.

19 U.S.C. § 1592

Section 592 of the Tariff Act of 1930, as amended, 19 U.S.C. §1592, which has commonly been called the Customs Fraud Statute, prohibits one from making entry of merchandise into the United States by means of false statements or documents or material omissions. The penalties for violating this provision depend upon the level of culpability involved. If it is determined that the violation occurred as a result of simple negligence, the maximum penalty is two times the loss of revenue or 20% of the dutiable value if there is no lost revenue as a result of the violation. The maximum penalty for fraud is the domestic value of the merchandise. Another statute, 18 U.S.C. § 542, makes the type of activity prohibited in 19 U.S.C. §1592 a criminal violation if the necessary criminal intent is present.

It is typical that, when the government alleges a violation of 19 U.S.C. § 1592, it assesses separate penalties against each party who may have culpability in the commission of the violation. Therefore, it is typical of the government to bring an action against the company and against anyone else who the Customs Service determines has any responsibility for the violation, as a result of that person's negligence or fraud. In the DeBellas case, the government determined that Anthony DeBellas and the corporation both had liability in connection with the alleged violations.

COURT FINDS THAT BANKRUPTCY DID NOT DISCHARGE 19 U.S.C. § 1592 PENALTY

Although the Customs Service agreed that the Mr. DeBellas' debt for unpaid duties was discharged by the Bankruptcy Court's order discharging Mr. DeBellas' debts, Customs argued that the penalty assessed against Mr. DeBellas was not discharged. As a result, Mr. DeBellas reopened his bankruptcy case, complaining of Customs' actions. The Bankruptcy Court issued an order that stated that the debt for the penalty was not discharged if it was not based upon "compensating the government for actual pecuniary loss." Mr. DeBellas, then argued to the CIT that the 19 U.S.C. § 1592 claim against him was discharged since the civil penalty under 19 U.S.C. § 1592 was based upon compensating the government for its actual pecuniary loss. The defendant cited a number of cases where the Courts found that such compensation was an element of the penalty assessed under 19 U.S.C. § 1592.

Despite this, the CIT found that compensating the government for its losses was not the essential purpose of the statute. Hence, the Court rejected the defendant's argument that this civil penalty was based upon compensating the government for its losses. Rather, the Court found that Congress's purpose in enacting 19 U.S.C. §1592 was to "encourage the accurate completion of the entry documents upon which Customs must rely to assess duties and administer other customs laws." Senate Report No. 95-778. Further, the sole statutory basis for determining the amount of the penalty is the defendant's conduct not the amount of incidental loss and harm suffered by the government. Since the claim was not based on recovering the government's actual pecuniary loss, but rather on the defendant's conduct, the Court found that the Bankruptcy Court's order discharging the defendant's debts did not preclude the Customs Service from recovering a civil penalty imposed by the Court under 19 U.S.C. §1592.

THE DOUBLE JEOPARDY CLAUSE

The defendant next argued that to the extent that the penalty exceeded the government's actual pecuniary loss, the penalty would violate the Double Jeopardy Clause of the Constitution. The Double Jeopardy Clause of the Constitution essentially provides that one may not be tried for the same crime twice. The defendant's position was that if the penalty exceeded the government's loss, then it was a punishment. Since the Double Jeopardy Clause prohibits multiple criminal punishments for the same offense (as the Supreme Court has ruled) and since the defendant had already been adjudicated guilty of criminal conduct for the acts involved in the civil penalty, the defendant argued that this second attempt to punish him for those acts violated the Double Jeopardy Clause.

The basis for the defendant's argument could be found in a 1989 Supreme Court opinion, United States v. Halper. In the Halper case, in determining whether the Double Jeopardy Clause was implicated when a civil penalty was assessed against a person who had been subject to criminal prosecution, the Court concentrated on whether the "civil" sanction served the goals of punishment, rather than served a remedial purpose. If the civil penalty was so grossly disproportionate to the harm caused as to constitute punishment (a criminal sanction), the Court in Halper ruled that the Double Jeopardy Clause would prevent the imposition of the civil penalty where there had been a criminal prosecution for the same acts. This was, in essence, the defendant's argument in the case before the CIT.

However, the CIT noted that the United States Supreme Court in a December 1997 case, Hudson v. United States, rejected the analysis employed by the Court in the Halper case and reaffirmed the traditional test for evaluating whether a civil penalty might place a defendant in double jeopardy. The Supreme Court ruled that courts should first look at whether Congress, in establishing the penalty, indicated either a preference for a civil or a criminal sanction. Second, even if Congress intended a penalty to be civil, the Court must examine whether the purpose and effect are such that the penalty is actually a criminal punishment. To make this determination the courts must look at a number of factors: whether the sanction imposed by the statute:

1. involves "affirmative disability or restraint";
2. whether the sanction has been historically regarded as a punishment;
3. whether the sanction comes into play only on a finding of "scienter" (scienter means knowingly. It signifies guilty knowledge);
4. whether its operation will promote the traditional aims of punishment-retribution and deterrence;
5. whether the behavior to which it applies is already a crime;
6. "whether an alternative purpose to which it may rationally be connected is assignable for it"; and
7. whether the sanction appears excessive in relation to the alternative purpose assigned.

The Supreme Court also noted that only the clearest proof will suffice to override legislative intent and transform what has been denominated a civil remedy into a criminal penalty. The Supreme Court held it was wrong in the Halper case for concentrating on only one factor - whether the sanction appeared excessive in relation to its nonpunitive purposes - to determine whether the Double Jeopardy Clause was implicated when a civil penalty is assessed.

When the CIT examined 19 U.S.C. §1592 in light of the above mentioned factors, it determined that the Double Jeopardy Clause was not implicated.

1. First, the statute itself expressly states that is a civil penalty. The CIT then found that the statute is also civil in purpose and effect. The CIT noted that the statute does not contemplate the imposition of an "affirmative disability or restraint," such as prison or probation.
2. Secondly, the only sanction authorized by 19 U.S.C. §1592 is a monetary payment, which the Court found has never been viewed as a punishment.
3. Third, the Court noted that a finding of "scienter" is not required for the statute to come into play. As mentioned above, a penalty may be imposed for mere negligence. However, if a penalty were imposed for fraud, "scienter" would come into play, but the Court found that this one factor is not sufficient to create a violation of the Double Jeopardy Clause if other factors indicate that the penalty is civil in nature.
4. The CIT conceded that in connection with the fourth factor, 19 U.S.C. § 1592 does deter others in engaging in prohibited conduct. However, the CIT stated that the Supreme Court found that deterrence may serve civil as well as criminal goals. In the present case, the CIT found that the penalty deterred importers from making entry by material false statements or documents and encouraged the accurate completion of an entry documents upon which Customs must rely to assess duties and administer other Customs' laws. The CIT noted that this promotes the trade economic and foreign policies of the United States and furthers the stability and predictability of international commerce. Hence, it has more than a deterrent and retribution component.
5. Finally, although the conduct for which a civil penalty may be imposed under 19 USC §1592 might also give rise to the criminal prosecution, the CIT noted that the Supreme Court itself has held that this fact is insufficient to render money penalties criminally punitive.
6. The CIT did not address the last two factors set forth in the Hudson case.

As a consequence, the CIT found that the Double Jeopardy Clause did not prevent the imposition of the civil penalty under 19 U.S.C. § 1592.

This is an important case because this is the first case to examine 19 U.S.C. §1592 under the standards established in the Hudson case. It demonstrates that it will be more difficult for defendants to avoid civil sanctions under this standard than it had been under the Halper case.

There is a saying about being unable to avoid death and taxes. Perhaps, 19 U.S.C. § 1592 penalties should be substituted for taxes. In the DeBellas case, Mr. DeBellas was able to avoid paying his duty bill, but not the civil penalties.

*article courtesy of Martin J. Ward, an attorney with the law firm of Leahy & Ward, LLP.