Bankruptcy Protections Don't Apply to Section 592 Penalty Cases on Importers, CIT Says
Chapter 11 bankruptcy does not protect importers from Section 592 penalty claims filed by the government at the Court of International Trade, CIT said in a decision issued Aug. 10. While judicial claims are generally paused during bankruptcy to give the debtor a chance to repay debts or reorganize, Section 592 penalty claims are exempt from those protections because they are meant to protect public welfare and serve a public policy purpose, CIT said.
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Rupari Food Services, a Florida company that imported crawfish and sold it to restaurants in the U.S., was the subject of the penalty claim at issue in the case. Rupari in 1998 allegedly misdeclared its Chinese crawfish tail meat as originating in Thailand, presumably to evade an antidumping duty order issued the previous year. CBP eventually issued a penalty notice against Rupari seeking $2,784,636.18 for fraudulent violations of 19 USC 1592. In 2011, with the penalty purportedly unpaid, the government filed suit at CIT. Rupari and the government were in settlement negotiations when Rupari filed for Chapter 11 bankruptcy protection in April 2017.
The purpose of Chapter 11 bankruptcy is to allow a debtor to negotiate a plan with its creditors for repayment or reorganization so that its debts can be paid. The filing of a bankruptcy petition results in an “automatic stay” of all claims in court against the debtor. That includes monetary claims by the government, which would provide an unfair advantage over private party claims against a bankrupt company. But government claims are exempt from the stay if they are related to public policy or promote public safety or welfare.
CIT found that the exemption applies to Section 592 penalties. The main purpose of Section 592 is not to protect the government’s revenue, but to “encourage accurate completion of the entry documents upon which Customs must rely to assess duties and administer other customs laws,” CIT said. Penalties are applicable whether or not the government has been “deprived of all or a portion of any lawful duty, tax or fee,” the court noted. Though the exemption does not cover government attempts to enforce monetary judgments, judgment in favor of a Section 592 penalty serves “only to fix the amount of the penalty in this action, not to execute a judgment,” CIT said. “Insofar as the Government seeks only the entry of a money judgment, its action is exempt from the automatic stay … and shall proceed accordingly.”
(U.S. v. Rupari Food Servs., Inc., Slip Op. 17-104, CIT # 10-00119, dated 08/10/17, Judge Katzmann)
(Attorneys: Mikki Cottet for plaintiff U.S. government; Lawrence Friedman of Barnes Richardson for defendant Rupari Food Services, Inc.)