Court Opinion

ID: 819025
Source: CourtListenerOpinion
Date Created: 2013-02-04 06:03:26.495512+00
Date Added: 2024-06-11T15:37:17.086759
License: Public Domain

Slip Op. 02 - 124

               UNITED STATES COURT OF INTERNATIONAL TRADE

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UNITED STATES OF AMERICA,                     :

                                 Plaintiff, :
                                                  Consolidated
                   v.                         :   Court No. 96-02-00608

YUCHIUS MORALITY COMPANY, LTD. and            :
INTERCARGO INSURANCE COMPANY,
                                      :
                          Defendants.
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                                Opinion & Order

[Upon trial of the violations alleged per
 the Tariff Act of 1930, judgment for the
 plaintiff and the defendant/cross-claimant.]

                                                  Decided: October 18, 2002

     Robert D. McCallum, Jr., Assistant Attorney General; David M.
Cohen, Director, Commercial Litigation Branch, Civil Division, U.S.
Department of Justice (A. David Lafer and Kenneth S. Kessler); and
Office of Associate Chief Counsel, U.S. Customs Service (Annmarie
R. Highsmith), of counsel, for the plaintiff.

     Sharma & Bhandari (Onkar N. Sharma); and S.J. Christine Yang,
of counsel, for defendant Yuchius Morality Company, Ltd.

     Sandler, Travis & Rosenberg and Glad & Ferguson, P.C. (T.
Randolph Ferguson); and John M. Daley, of counsel, for defend-
ant/cross-claimant Intercargo Insurance Company.

              AQUILINO, Judge:        It is time for the court finally to

draw to a close this case brought pursuant to 19 U.S.C. §1592 and

28   U.S.C.    §1582    and   which   consolidates   plaintiff's   complaint

against Yuchius Morality Company, Ltd. for unpaid duties and for

penalties     in   connection    therewith    and    its   complaint   against

Intercargo Insurance Company, as surety for such duties.
Consolidated
Court No. 96-02-00608                                        Page 2

                                 I

          As set forth in the court's slip opinion 99-79, 23 CIT

544 (1999), familiarity with which is presumed, this action has

followed in the aftermath of hundreds of entries from Hong Kong,

China, Taiwan, and Indonesia over a number of years, during which

the U.S. Customs Service came to conclude that they entailed

violations of the Tariff Act of 1930, as amended.   Agency investi-

gation of those entries, and the resultant administrative process,

culminated in commencement of the two cases consolidated herein.

Subsequent to its joinder of issue, defendant Yuchius interposed a

motion for summary judgment on the ground that plaintiff's claims

were time-barred.   The plaintiff countered with a cross-motion for

summary judgment on its claim for the unpaid duties, and defendant

Intercargo moved for summary judgment on its cross-claim "for

exoneration and reimbursement against defendant Yuchius"1.

          Slip opinion 99-79 denied defendant Yuchius's motion and

also that of the other defendant, albeit the latter "without

prejudice to grant upon entry of judgment herein against the surety

and recovery thereon by the plaintiff."     23 CIT at 548, citing

United States v. Almany, 22 CIT 490, 496 (1998).     That opinion

granted plaintiff's cross-motion for recovery of the unpaid duties

and also ordered the parties to trial, primarily on plaintiff's

     1
       The court's jurisdiction over this claim is pursuant to 28
U.S.C. §1583.
Consolidated
Court No. 96-02-00608                                          Page 3

allegations of negligence within the meaning of 19 U.S.C. §1592 on

the part of Yuchius Morality Company, Ltd.

          That defendant did not controvert the statement of the

material facts as to which the plaintiff contended there was no

genuine issue to be tried and that was filed in conjunction with

its cross-motion for summary judgment.   Whereupon those facts were

deemed admitted.   See 23 CIT at 546, citing Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 249-50 (1986); Sweats Fashions, Inc. v.

Pannill Knitting Co., 833 F.2d 1560, 1562 (Fed.Cir. 1987); United

States v. Continental Seafoods, Inc., 11 CIT 768, 773-74, 672

F.Supp. 1481, 1486-87 (1987).   They included the following:

     1. During the five year period encompassing fiscal years
     1988 through 1992, Yuchius made approximately 1,600
     entries with an estimated entered value of $50 million.
     . . .

     2. Yuchius failed to maintain adequate or sufficient
     records to determine the actual price paid or payable for
     the merchandise it imported into the United States during
     fiscal years 1988-1992. . . .

     3. For fiscal year February 1, 1991 through January 31,
     1992, Yuchius . . . undervalued its importations by
     $4,228,896. . . .

     4. Yuchius' $4,228,896 undervaluation for [that] fiscal
     year . . . resulted in a loss of revenue to the Govern-
     ment of approximately $248,125, which Yuchius has since
     remitted to the Government. . . .

     5. For fiscal years 1988-1992, Yuchius' own records show
     that the value of the imported purchases totaled $59,-
     944,282 and that Yuchius declared to Customs that the
     value of that same merchandise was only $49,691,820.
     . . .

                            *    *   *
Consolidated
Court No. 96-02-00608                                       Page 4

     7. Yuchius' undervaluation for the four fiscal years
     beginning February 1, 1989 resulted in a loss of revenue
     to the Government of $576,790, including a loss of duties
     to the United States in the amount of $549,642; harbor
     maintenance fees of $10,224; and merchandise processing
     fees of $16,923. . . .

     8. Yuchius has stipulated that the Government lost
     $539,202 as the result of Yuchius' undervaluations of
     imports. . . .

     9. Yuchius owes the Government $328,665 in outstanding
     duties and fees, representing the difference between the
     total owing from Yuchius' undervaluation of its imports
     during the four fiscal years beginning February 1, 1989
     and the payments already made by Yuchius to the Govern-
     ment. . . .

     10. Yuchius has refused to pay the $328,665 in outstand-
     ing revenue rightfully due to the Government.

23 CIT at 545-46.

          Trial of the remaining issues took place in an expedi-

tious manner.   Subsequent thereto, the parties sought and were

granted a number of extensions of time to continue attempts to sort

out among themselves those issues and/or to prepare and file post-

trial proposed findings of fact and conclusions of law.

                                A

          The parties' papers finally submitted do contain such

proposed findings and conclusions.    In addition, those filed on

behalf of defendant and cross-claimant Intercargo Insurance Company

include a settlement agreement entered into between it and the

plaintiff wherein, among other things, the government

     acknowledges and agrees that payment of the Settlement
     Amount extinguishes all obligations owed under the
Consolidated
Court No. 96-02-00608                                                  Page 5

       $50,000.00 continuous bond posted by Intercargo for the
       benefit of defendant Yuchius Morality Co., Ltd. . . .
and
       acquits and forever discharges Intercargo of and from any
       and all claims, . . . causes of action, rights, damages,
       costs, expenses, compensation, consequential damages,
       loss of profits and any other thing whatsoever which the
       United States has or could have asserted concerning the
       subject matter of the action.2

That       agreement   specifically     excludes   plaintiff's   "continuing

pursuit of its claims against defendant Yuchius"3, as well as

defendant Intercargo's

       continuing pursuit of its cross-claim against cross-
       defendant Yuchius . . . or [] seeking recovery from or
       taking appropriate action against Yuchius Morality Co.,
       Ltd. with respect to any other claims it may have against
       that entity.4

Proof of satisfaction of the agreement also has been tendered.5

                                        II

               The   pretrial   order   stipulated   the   following   herein

between the plaintiff and defendant Yuchius:

       13. The corrected calculation of net lost revenues,
       prorated to reflect a reduction for all entries for which
       the statute of limitations has now run, is $321,306.
       This figure represents the difference between the total
       amount of duties for which the statute of limitation has

       2
       Declaration of John M. Daley re: Relevant Post-Trial
Events, Exhibit A, paras. 4 and 5.
       3
           Id., para. 7, p. 2.
       4
           Id., para. 7, pp. 2-3.
       5
       Compare Declaration of John M. Daley re: Relevant Post-
Trial Events, para. 5 with id., Exhibit B.
Consolidated
Court No. 96-02-00608                                        Page 6

     not run, $569,431, and the amount of duties Yuchius has
     already paid [] $248,227. . . .[6]

     14. The parties stipulate that the loss of revenue stip-
     ulated to in no. 13, above, has been calculated based
     upon the 1395 consumption entries identified on the
     attached exhibit list.    The parties stipulate to the
     authenticity and existence of these entries and agree
     that a complete set of copies of the entry documents need
     not be introduced or admitted at trial.

           Post trial, plaintiff's proposed conclusions of law,

inter alia, are that defendant Yuchius (a) violated 19 U.S.C.

§1592(a) in that (b) it entered merchandise by means of false

statements, documents, acts and/or omissions, (c) that those false

statements, documents, acts and/or omissions were material, (d)

that those shortcomings were due to negligence on its part, and (e)

that it had a duty to declare the true price of the merchandise it

imported into the United States.   Defendant Yuchius's six proposed

conclusions of law include the following:

     3.   At the time of the importations involved in this
          case, an importer's failure to maintain adequate
          records was not a violation of 19 U.S.C. §1592.

     4.   Yuchius' second prior disclosure, dated September
          28, 1993, was effective. Customs erred in denying
          the second prior disclosure for non-payment of
          duties. After the amount of lost duties had been
          calculated, Customs failed to give Yuchius an oppor-
          tunity to tender these duties without the assess-
          ment of penalties.

     5.   Yuchius' first prior disclosure, dated March 24,
          1993, was effective. Therefore, if any penalties

     6
       Stipulations, of course, are salutary, but, in this in-
stance, the parties' numbers do not quite add up.
Consolidated
Court No. 96-02-00608                                        Page 7

         are assessed, the maximum permissible amount is
         $642,306, twice the amount of the loss of revenue
         in the second disclosure period.

                                 A

          The Tariff Act of 1930, in particular as codified as

chapter 4, subtitle III, part III (Ascertainment, Collection, and

Recovery of Duties) of Title 19 of the United States Code has left

little, if anything, to the imaginations of importers into the

United States.   For example, the first section of that part, 1481,

spells out at length the required contents for "[a]ll invoices of

merchandise to be imported".   Extensive section 1484 stated at the

time of the entries herein that any "importer of record"

          (A) shall make entry . . . by filing with the
     appropriate customs officer such documentation as is
     necessary to enable such officer to determine whether the
     merchandise may be released from customs custody; and

          (B) shall file . . . with the appropriate customs
     officer such other documentation as is necessary to
     enable such officer to assess properly the duties on the
     merchandise, collect accurate statistics with respect to
     the merchandise, and determine whether any other applica-
     ble requirement of law (other than a requirement relating
     to release from customs custody) is met.

19 U.S.C. §1484(a)(1) (1988). Next section 1485 requires every im-

porter making an entry under the provisions of section 1484 to file

a prescribed declaration under oath regarding the entry.   Section

1508 sets forth the required recordkeeping on the part of any

importer and entry filer, while section 1509 codifies the authority

of the Customs Service to investigate the "correctness of any

entry"
Consolidated
Court No. 96-02-00608                                       Page 8

     for determining the liability of any person for duty,
     fees and taxes due or duties, fees and taxes which may
     be due the United States, for determining liability for
     fines and penalties, or for insuring compliance with the
     laws of the United States . . ..

19 U.S.C. §1509(a) (1988).     See also 19 C.F.R. §141.86 (1988)

(Contents of invoices and general requirements); 19 C.F.R. §162.1a

(1988)(Definitions); 19 C.F.R. §162.1b (1988)(Recordkeeping); 19

C.F.R. §162.1c (1988)(Record retention period); 19 C.F.R. §162.1d

(1988)(Examination of records and witnesses).

          In 1978, Congress amended section 592 of the Tariff Act

of 1930 to make negligence in carrying out the foregoing statutory

and administrative entry requirements subject to imposition of a

civil penalty.   In establishing the jurisdiction of this Court of

International Trade to try de novo all related issues, the statute

also provides that,

     if the monetary penalty is based on negligence, the
     United States shall have the burden of proof to establish
     the act or omission constituting the violation, and the
     alleged violator shall have the burden of proof that the
     act or omission did not occur as a result of negligence.

19 U.S.C. §1592(e)(4) (1988). And the governing regulation at the

time of the first entries in question herein stated:

          Negligence. A violation is determined to be negli-
     gent if it results from an act or acts (of commission or
     omission) done through either the failure to exercise the
     degree of reasonable care and competence expected from a
     person in the same circumstances in ascertaining the
Consolidated
Court No. 96-02-00608                                        Page 9

     facts or in drawing inferences therefrom, in ascertaining
     the offender's obligations under the statute, or in
     communicating information so that it may be understood by
     the recipient.     As a general rule, a violation is
     determined to be negligent if it results from the
     offender's failure to exercise reasonable care and
     competence to ensure that a statement made is correct.

19 C.F.R. pt. 171, App. B(B)(1)    (1988), quoted with approval in

United States v. Hitachi America, Ltd., 21 CIT 373, 380, 964 F.-

Supp. 344, 355-56 (1997), aff'd in part, rev'd in part on another

ground, 172 F.3d 1319 (Fed.Cir. 1999).

            The primary stated position of defendant Yuchius post

trial is that while

     this case shows that Yuchius' record-keeping was inade-
     quate to support the valuation of its entries, . . . it
     does not show acts or omissions constituting violations
     of 19 U.S.C. §1592(a)(1).     During the trial in this
     action the plaintiff added nothing to establish such acts
     or omissions.7

The defendant accepts the above-quoted definition of negligence in

arguing that its conduct be compared to that of a "reasonable man"

in the same circumstances.8   On its part, the plaintiff eschews any

claim for a recordkeeping penalty, which did not exist by the time

of the last entry herein, rather

     Yuchius' failure to maintain records to substantiate the
     prices it claimed to have paid for its merchandise on a
     per entry basis (records that would have contradicted its
     own accounting records) clearly reinforces its negligent
     attitude toward its Customs obligations. Its lack of

     7
       Proposed Findings of Fact and Conclusions of Law of De-
fendant Yuchius Morality Co., Ltd. [hereinafter referred to as
"Post-Trial Submission of Defendant Yuchius"], p. 8.
     8
         See id.
Consolidated
Court No. 96-02-00608                                            Page 10

     records, no doubt, also contributed to its inability to
     report the true price of its merchandise.9

                                   B

          Clearly, the record now at bar does not lend support to

the above-stated position of defendant Yuchius that the trial added

nothing to the acts and omissions alleged by the plaintiff to have

amounted to violation(s) of section 1592.             At a minimum, it

contributed to the undersigned, sole juror's understanding of

them.10

                                  (1)

          Supplementing    the   evidence   adduced   before   trial   and

referred to hereinabove, the plaintiff called to the witness stand

a Customs Senior Import Specialist at Los Angeles International

Airport who had been a member of the Import Specialist Enforcement

Team ("ISET") and the Service's Assistant Field Director of the

Customs Regulatory Audit Division ("RAD"), Long Beach, California

Field Office.    Their interest in Yuchius imports was kindled by an

anonymous informant's letter.          See Plaintiff's Exhibit 34, p.

020054. On-site investigation was commenced by the ISET member and

a RAD auditor.    It consisted of interview(s) of the importer and

     9
       Plaintiff's Proposed Findings of Fact and Conclusions of
Law [hereinafter referred to as "Plaintiff's Post-Trial Submis-
sion"], p. 20, n. 2.
     10
       The transcripts of the trial over three days in January,
the 19th, 20th and 21st, have been numbered separately by the
court reporters, ergo "Tr." references herein must bear a par-
ticular day's numerical prefix, e.g., 21 Tr.
Consolidated
Court No. 96-02-00608                                               Page 11

examination of the Yuchius books and records, initially for the

year February 1, 1991 to January 31, 1992.            The audit was then

expanded to cover five fiscal years, 1988 through 1992.               Those

books and records were found to be inadequate for determination of

the actual prices paid or payable for all the merchandise imported.

They did indicate a total value of almost 60 million dollars,

somewhat less than $50 million of which had been reported to

Customs.     Those figures were derived by the Service's audit,

essentially from tax forms and the general ledger, since individual

import invoices and other related documents proved inadequate to

the task.    See, e.g., 20 Tr., pp. 38, 51.

            Defense   counsel   did   not   present   in   open   court   the

president and prime-mover of Yuchius Morality Company or anyone

else with direct, relevant knowledge of the transactions at issue.11

Rather, a certified public accountant brought in by the company

after Customs had commenced its investigation was called upon to

testify.    He explained that he and his staff worked some four

hundred hours attempting to "reconcile . . . the Customs dollar

amount and Yuchius Morality Ltd.'s dollar amount." 19 Tr., p. 113.

That is, Service auditors and he agreed upon a plan of recapitula-

tion and then proceeded on a year-by-year basis to compare company

     11
       The appearance and testimony at trial of an erstwhile Yu-
chius underling added nothing of moment. See generally 20 Tr.,
pp. 167-80.
Consolidated
Court No. 96-02-00608                                        Page 12

general ledger purchases with the values reported to Customs upon

entry.   See id. at 114-15, 119.

           There is no evidence on the record that, as the business

of defendant Yuchius expanded, the company made greater effort to

properly and fully account for its transactions. After Customs had

commenced its investigation, the defendant tendered $5,138 to cover

a variance that had been detected, but it took the position that

other questionable entries were attributable to commissions, train-

ing, and technical assistance.     Selling commissions, however, had

to be included in the price actually paid or payable for imported

merchandise. See 19 U.S.C. §1401a(b)(1)(B) (1988). Buying commis-

sions, on the other hand, need not have been, but it had to have

been demonstrated that there was a bona fide agency relationship

and that the commissions were in fact buying commissions.       See,

e.g., Rosenthal-Netter, Inc. v. United States, 12 CIT 77, 78, 679

F.Supp. 21, 23, aff'd, 861 F.2d 261 (Fed.Cir. 1988).     To establish

the excludability of the latter kind of commission, an importer has

been required to show that "none of the commission inures to the

benefit of the manufacturer."      Moss Mfg. Co. v. United States, 13

CIT 420, 426, 714 F.Supp. 1223, 1229 (1989), aff'd, 896 F.2d 535

(Fed.Cir. 1990), quoting J.C. Penney Purchasing Corp. v. United

States, 80 Cust.Ct. 84, 97, C.D. 4741, 451 F.Supp. 973, 984 (1978).

           In this case, the amounts claimed to be commissions had

not been listed on the original entry invoices, and they added up
Consolidated
Court No. 96-02-00608                                              Page 13

to a significant sum.       See 19 Tr., pp. 53, 62-63.             Customs

requested substantiation of them, which defendant Yuchius did not

provide.   See id. at 47, 49-50.     The company did not produce any

agency agreement.     See id. at 49-50.     Furthermore, the amounts

claimed were in excess of 70 percent, and, according to the

testimony of the ISET member, normal buying commissions are in the

range of five to ten percent.      See id. at 48, 54, 64.     Defendant

Yuchius was likewise unable to verify the claimed $586,000 cost of

its furniture assembly area, which, according to Customs, was

rudimentary and may not have been worth more than twenty thousand

dollars.     See id. at 37-39.     When asked about the technical-

assistance   and   third-party-commission   claims,   the   ISET   member

responded that he found them to be identical,

      which I thought to be unusual that the assembly plant,
      which was an unrelated issue, the assembly plant,
      training and so on, would exactly to the dollar equal
      the third party buying commission. I also thought that
      five hundred eighty-six thousand dollars to pay for
      technical services to train their men to do such a basic
      task was totally out of line. I felt that any untrained
      person maybe with five or ten minute explanation could do
      that task.

Id. at 50. Defendant Yuchius similarly had no receipts for the

claimed deductible training expenses, which the company president

claimed he kept in his head.     See id. at 42-43.     None of the ad-

justments claimed to be nondutiable could be verified against the

actual import entries for which they were claimed.      See id. at 52-

64.
Consolidated
Court No. 96-02-00608                                       Page 14

                               (2)

          Keeping transactions in one's head may be possible, at

least so long as no one else demands an accounting thereof, but it

is not possible for this court on the record developed in this case

to find that such an approach by defendant Yuchius was the kind of

care contemplated by 19 U.S.C. §1484(a)(1), supra. That is, it was

to be expected that some sixty million dollars worth of entries

would give rise to questions and that the answers thereto would

require verification. That such confirmation was not even feasible

with the intervention of outside accountants and lawyers on both

sides is perhaps the best indication of negligence.     Indeed, the

court finds that defendant Yuchius's failure to ensure that its

entries were correct was at least the result of negligence on its

part, constituting a violation of 19 U.S.C. §1592.       The court

further finds that that failure was material to the orderly and

proper assessment and collection of duties by the Customs Service.

                               III

          Part of Yuchius's defense has been that it sought to make

prior disclosures under the Tariff Act and that it was "whipsawed"

by the Service's changing position in regard thereto and the

outright rejection of a second attempted such disclosure.       See

Post-Trial Submission of Defendant Yuchius, pp. 9-12.   The maximum

civil penalty for violations of the statute due to negligence is

     (A) the lesser of--
Consolidated
Court No. 96-02-00608                                       Page 15

               (i) the domestic value of the merchandise,
          or

            (ii) two times the lawful duties, taxes, and
          fees of which the United States is or may be
          deprived . . ..

19 U.S.C. §1592(c)(3).    However,

     [i]f the person concerned discloses the circumstances of
     a violation of subsection (a) of this section before, or
     without knowledge of, the commencement of a formal in-
     vestigation of such violation, with respect to such
     violation, merchandise shall not be seized and any
     monetary penalty to be assessed under subsection (c) of
     this section shall not exceed--

                              *      *   *

          (B) if such violation resulted from negligence
     . . . , the interest (computed from the date of liquida-
     tion at the prevailing rate of interest applied under
     section 6621 of Title 26) on the amount of lawful duties,
     taxes, and fees of which the United States is or may be
     deprived so long as such person tenders the unpaid amount
     of the lawful duties, taxes, and fees at the time of
     disclosure, or within 30 days (or such longer period as
     the Customs Service may provide) after notice by the
     Customs Service of its calculation of such unpaid amount.

     The person asserting lack of knowledge of the commence-
     ment of a formal investigation has the burden of proof in
     establishing such lack of knowledge. For purposes of
     this section, a formal investigation of a violation is
     considered to be commenced with regard to the disclosing
     party and the disclosed information on the date recorded
     in writing by the Customs Service as the date on which
     facts and circumstances were discovered or information
     was received which caused the Customs Service to believe
     that a possibility of a violation of subsection (a) of
     this section existed.

19 U.S.C. §1592(c)(4).

                                     A

          To address first the issue of prior disclosure under this

section 1592(c)(4), defendant Yuchius claims that it
Consolidated
Court No. 96-02-00608                                       Page 16

     did not tender lost duties when it submitted PD2 to
     Customs on September 28, 1993, because the amount of any
     lost duties was at that point unclear.     When Yuchius
     submitted PD2, Yuchius believed that the difference
     between the booked cost of its foreign purchases and the
     entered value was not dutiable, because this difference
     consisted of commissions and payments for training and
     technical assistance.    Also, at that time, Yuchius'
     ability to calculate the lost revenues was hampered by
     shortcomings in its record-keeping practices.12

            Whatever the veracity of this position, neither the

statute on its face nor the evidence adduced at trial in connection

therewith counsels the relief defendant Yuchius seeks.        Upon

meeting with the company's president and also its senior vice-

president, the ISET member came to conclude that there was not

acceptable support for the discrepancies at issue, and Yuchius was

informed that an enforcement proceeding would likely commence

against it.    RAD thereupon produced a preliminary report on April

12, 1993, documenting undervaluation for 1992 and calculating the

loss of revenues at $242,987.    The report states that the importer

had agreed to pay this amount and also to disclose for four other

years.    As indicated above, Yuchius took the position that most of

the discrepancy between booked foreign purchase costs and value

     12
       Post-Trial Submission of Defendant Yuchius, pp. 9-10.
The reference "PD2" is to a second claimed attempt by the com-
pany at prior disclosure.

     The first such attempt occurred on March 24, 1993, claiming
a discrepancy in the amount of $5,138 for fiscal year 1991. See
Plaintiff's Exhibit 4, pp. 010003-06.

     This six-digit pagination of plaintiff's exhibits is the
result of its usage of a Bates® automatic numbering machine.
Consolidated
Court No. 96-02-00608                                              Page 17

declared on entries was due to commissions, technical assistance,

and training.     See Plaintiff's Exhibit 15, p. 011303.          However,

Customs informed the     company that such "cost difference" was

dutiable and that the duties owed for 1991 were $248,125 (which

figure included the $5,138).   See id. at 011304.      Yuchius then made

six payments to Customs, totalling $242,987.        See id. at 11342-43.

RAD issued its final report for that fiscal year and stated that

the Service's audit had been expanded to cover the other fiscal

years 1989 through 1993.   See id. at 011304.      Yuchius then admitted

that it had failed to disclose $8,916,794 during that period, but

reiterated its belief at the times of the entries that that total

cost difference was not dutiable.       See id.

          Customs completed its audit in October 1993, by which

time the period of limitations had run as to the fiscal year 1988.

It concluded that Yuchius had not maintained sufficient records to

determine the actual price paid on an entry-by-entry basis.          There

had been a failure to identify the undervaluations by entry number,

port of entry, date of entry. Total undervaluation was found to be

$10,252,462.00.     However,   the   Service    only   reported   loss   of

revenues for the four fiscal years beginning February 1, 1989,

namely $569,431.

          The   second   attempt   at   prior   disclosure   occurred    on

September 28, 1993, whereupon Customs examined the related imports.

See Plaintiff's Exhibit 15, p. 011322.            Defendant Yuchius now
Consolidated
Court No. 96-02-00608                                      Page 18

argues that the reason it failed to submit any duties owed is that

continuing negotiations through January 30, 1996 gave it the im-

pression that the deadline for tendering them had been extended by

Customs. See Post-Trial Submission of Defendant Yuchius, p. 5,

para. 14.

            ISET agreed with the Service auditors that Yuchius had

not made a proper disclosure of all the circumstances of its

imports and advised that the September 1993 attempted prior dis-

closure was not valid.     See Plaintiff's Exhibit 15, p. 011296.

Customs thereafter issued Yuchius a prepenalty notice, demanding

duties in the amount of $328,665 and indicating that it was

considering a $1,153,580 penalty, twice the calculated loss of

revenues. See Plaintiff's Exhibit 17; Defendant Yuchius Exhibit 5.

The Service also issued a demand for duties and fees.   The company

submitted a response, claiming that there had been double-counting

of an accrual for 1992 and arguing that its undervaluation was the

result of poor recordkeeping, in essence, a mistake of fact or

clerical error.   See Defendant Yuchius Exhibit 6; 19 Tr., pp. 91-

92.   Yuchius requested an extension of time for tender but did not

receive one.    A formal penalty notice issued on June 13, 1995,

plaintiff's exhibit 23. Yuchius petitioned for relief, offering to

remit the lost revenues.   See Plaintiff's Exhibit 24. The district

office forwarded the petition to Customs Headquarters for final

decision, and on January 26, 1996, it provided Yuchius with a draft
Consolidated
Court No. 96-02-00608                                               Page 19

of its decision, which indicated denial of the petition.               The

stated    reason   was   that,   although   Headquarters   believed   that,

contrary to the port director's determination, the circumstances of

the violation had been disclosed to the best of the company's

knowledge, Yuchius had not tendered the outstanding duties owed, as

required    by   the   prior-disclosure     regulations.    See   Defendant

Yuchius Exhibit 4, pp. 3-4.       The draft also noted that because the

statute of limitations was set to expire with respect to some

entries, the matter would be referred immediately to the Department

of Justice for collection.

            Yuchius offered to enter into an agreement with Customs,

waiving any time defense for the entries which was about to ma-

terialize and providing that the company pay the loss of revenues

and an interest-based penalty only.          See Plaintiff's Exhibit 27.

On January 30, 1996, one day before the period of limitation was to

expire, Yuchius refused to provide the waiver13, and therefore, on

that same day, Customs formally determined that the attempted prior

disclosure was not valid for failure to tender the duties owed.

See Plaintiff's Exhibit 30.

            That denial was pursuant to 19 C.F.R. §162.74(h) (1996),

which required that a person disclosing the circumstances of a

violation tender any actual loss of duties at the time of disclos-

ure or within 30 days after Service notification of its calculation

     13
          See Plaintiff's Exhibit 28, p. 011399.
Consolidated
Court No. 96-02-00608                                         Page 20

of the actual loss.     Defendant Yuchius claims it could not have

made such tender at the time of its second attempted disclosure to

Customs on September 28, 1993 because it believed that the com-

missions and payments for training and technical assistance were

not dutiable and that, when it was notified of the actual amount by

the Service, the prepenalty notice had already been issued.       See

Post-Trial Submission of Defendant Yuchius, pp. 9-10.      Of course,

the company has acknowledged that the very reason why the amount

owed was difficult or impossible to calculate was its own inade-

quate recordkeeping.    Nonetheless, it argues now that

     [t]endering the lost revenues . . . --even if Yuchius and
     Customs had reached an agreement as to their amount--
     would not have perfected the prior disclosure. By the
     time Customs Headquarters concluded that PD2 was substan-
     tially complete after all, it was too late to tender the
     duties.

Id. at 12.

            In its second attempted prior disclosure, the company

admitted failing to account for some $8,916,794.    The final audit

report dated October 14, 199414 set forth the total as $10,252,462,

the prepenalty notice was dated February 16, 199515, and on January

26, 1996, Yuchius was negotiating an interest-based penalty only

with Customs but refused to provide the limitations waiver one day

before the statute was to run, and still the outstanding duties had

not been tendered.     See Defendant Yuchius Exhibit 10.

     14
          See Defendant Yuchius Exhibit 13.
     15
          See Defendant Yuchius Exhibit 5.
Consolidated
Court No. 96-02-00608                                               Page 21

            There was no requirement under 19 C.F.R. §162.74(h)(1996)

that the tender of the duties be tied to an importer's belief that

disclosure would be effective.           Indeed, the obligation to pay

duties exists independent of any penalty imposed.              See United

States v. Blum, 858 F.2d 1566 (Fed.Cir. 1988).              See also TIE

Communications, Inc. v. United States, 18 CIT 358 (1994); United

States v. Snuggles, 20 CIT 1057, 937 F.Supp. 923 (1996). Defendant

Yuchius's position that it was "whipsawed" by the decision of the

port director, later overruled by Customs Headquarters, regarding

the   adequacy   of   the   disclosure   of   the   circumstances   of   the

violation does not obviate tender.         The requirement is clear and

unambiguous.     If the company believed that Customs was wrong about

the adequacy of the disclosure of the circumstances, it could have

and should have paid the duties and continued to pursue its

position.    It claims to have deferred tender for a good reason,

namely, that if it paid an amount which was later determined to be

greater than necessary, refusal of the Service to refund would not

have been a protestable decision.        While the law on the point may

be uncertain16, tender of duties is still required to qualify for

prior-disclosure treatment.        Defendant Yuchius cannot take the

position that it believed that the amounts for commissions and

technical and training expenses were not dutiable, and delayed

      16
       See, e.g., Bridalane Fashions, Inc. v. United States, 22
CIT 1064, 32 F.Supp.2d 466 (1998).
Consolidated
Court No. 96-02-00608                                      Page 22

paying in the hope of substantiating its view, because it never had

support for that position, and has not proven otherwise herein.

          The company may have believed that Customs negotiations

with it meant that tender could wait, but it has produced no

evidence or testimony in support thereof.   On the contrary, it was

reaffirmed at the trial that the Service "always take[s] the

money."   19 Tr., p. 80.    Moreover, there is no evidence that

acceptance of the monies paid thus far constituted a waiver or an

attempt to mislead Yuchius about the status of prior disclosure.

There is also no evidence that there was an extension granted

pursuant to 19 C.F.R. §162.74(h).     Finally, the company did not

actually disclose the circumstances of its violation(s) until after

Customs had begun an investigation.    While the Service may have

been willing to proceed on the basis of a prior disclosure,

accompanied by appropriate tender, technically, the period had

passed for Yuchius to qualify therefor.

                                 B

          Congress has chosen to adopt only maximums, as opposed to

prescribing precise penalties, for proven violations under 19

U.S.C. §1592 and has left any imposition thereof to the exclusive

jurisdiction of the Court of International Trade.    And the court

has understood the purpose of this approach essentially to be

remedial rather than punitive.   E.g., United States v. Gordon, 10
Consolidated
Court No. 96-02-00608                                                 Page 23

CIT 292, 297, 634 F.Supp. 409, 415-16 (1986).        Moreover, the court

has compiled an exhaustive list of considerations that might apply

in a given case, including a defendant's good faith effort to

comply with the statute, a defendant's degree of culpability, a

defendant's history of previous violations, the public interest in

ensuring compliance with the law, the nature and circumstances of

the violation(s) at issue, a defendant's ability to pay, the po-

tential impact of a penalty on a defendant's ability to continue in

business, that a penalty not be shocking to the conscience, the

economic benefit of the violation(s) to a defendant, the degree of

harm to the public, and the value of vindicating agency authority.

See United States v. Complex Machine Works Co., 23 CIT 942, 949-50,

83 F.Supp.2d 1307, 1314-15 (1999).

           Agency authority may be down this list, but that circum-

location cannot be interpreted to mean that it is not a paramount

consideration and concern of this court.        Indeed, the multifarious

tasks and enormous responsibilities of the U.S. Customs Service are

much too daunting to permit the lack of reasonable care cum

negligence reflected by the record in this case to go without

correction. Perhaps, the extended administrative process, and then

this case itself, have already had a remedial impact upon defendant

Yuchius and its principals.      None of them, however, presented him-

or   herself   herein   for   closer   court   scrutiny   on   this   issue.

Instead, they have relied upon their privilege to have accountants
Consolidated
Court No. 96-02-00608                                          Page 24

and attorneys do their reckoning.      And the latter have carried out

their assignments admirably.       Counsel have not sought to deny the

undeniable, rather to minimize the damage that emanates therefrom.

They have sought to portray their client(s) as unsophisticated, not

well-educated, too busy to have kept complete and proper track of

all that matters to Customs.17     They understand (and have stipulat-

ed) that the Service is still owed duties in the amount of

$321,306.00 plus interest thereon.      Whereupon, they propose that,

     if any penalties are assessed, the maximum permissible
     amount is $642,306, twice the amount of the loss of
     revenue in the second disclosure period.

Post-Trial Submission of Defendant Yuchius, p. 8, para. 5.

            On its part, the plaintiff continues to "seek the maximum

penalty of two times the lawful duties that the United States was

deprived"18, which it computed in the pretrial order to be $569,-

431.00 x 2 = $1,116,454.0019.      While both sides appear to continue

to have difficulty with their arithmetic, the logic and analysis in

support of their respective positions are clear enough.      Both rely

on the factors of the Complex Machine Works case, supra, albeit to

divergent final penalty amounts.

     17
       While these insinuations may all be true, the court is
required to remind the defendant that none of them can be the
basis of an acceptable defense.
     18
          Plaintiff's Post-Trial Submission, p. 20.
     19
          Pre-Trial Order, p. 6.
Consolidated
Court No. 96-02-00608                                       Page 25

            Taking those considerations into account, and comparing

them with the specific facts of this case, the court concludes that

the maximum penalty multiplier should apply -- but only to the net

lost revenues stipulated by the parties, supra, $321,306, equals a

penalty of $642,612.00 that the government of the United States of

America should collect from defendant Yuchius. While the company's

disclosure of the circumstances of some of its violations may have

been "substantially complete and effective"20, as Customs Head-

quarters came to conclude, the record developed herein as a whole

still counsels a penalty of this magnitude.

                                  IV

            As set forth hereinabove, defendant Intercargo Insurance

Company has already settled its obligation to the plaintiff under

its bond.     Whereupon it cross-claims herein against co-defendant

Yuchius for the amount thereof, plus interest thereon from the date

of payment, as well as reasonable attorney's fees and costs and

expenses for pretrial preparation, trial participation, and pre-

sentation of the cross-claim.21

                                  A

            Cross-claimant Intercargo presses two paths to recovery,

to wit, its indemnity agreement with Yuchius, and implied contract

     20
          Defendant Yuchius Exhibit 4, p. 3.
     21
       The court notes in passing that its jurisdiction over
this claim has not been extinguished by the cross-claimant's
settlement with the plaintiff. See, e.g., Nishimatsu Constr.
Co. v. Houston Nat'l Bank, 515 F.2d 1200, 1204 and n. 2 (5th Cir.
1975).
Consolidated
Court No. 96-02-00608                                                  Page 26

between principal and surety.      According to the agreement produced

at trial as exhibit INT-5, Yuchius Morality Company, Ltd. did

     bind itself, it successors and assigns, to indemnify and
     save [Intercargo Insurance] Company harmless . . . and on
     demand to pay it any and all claims, demands, loss and
     damages of every nature and kind, and on demand to pay it
     all legal and other costs, counsel fees and expenses
     directly or indirectly, which the Company shall at any
     time sustain by reason or in consequence of such surety-
     ship, or any renewal, extension, modification or continu-
     ation thereof, or Consent of Surety or additional surety-
     ship, . . . whether before or after legal proceedings by
     or against the Company, and without notice thereof to the
     undersigned [Yuchius].

                               *    *     *

          The undersigned [Yuchius] hereby agrees to indemnify
     the Company for any and all expenses, costs and attor-
     ney's fees incurred by the Company in the event that the
     Company is compelled to exercise any of its available
     remedies to ensure compliance with the terms and condi-
     tions of the bond.

On its face, this agreement binds Yuchius to indemnify its surety

in this matter.

           Moreover,   the   Restatement      (Third)      of   Suretyship   and

Guaranty   §22(1)(b)   indicates   that       there   is   an   obligation    to

reimburse a secondary obligor when it makes a settlement with the

obligee that discharges the principal obligor, in whole or in part,

with the respect to the underlying obligation.                    This court's

granting of partial summary judgment to the plaintiff for unpaid

duties covered by the Intercargo bond, and the subsequent penalty

trial, established that the time for satisfaction of the obligation

had arrived.   See Restatement (Third) of Suretyship and Guaranty
Consolidated
Court No. 96-02-00608                                                Page 27

§22(2). Defendant Yuchius claims that the settlement was premature

in the absence of court disposition of its defenses herein.              Cf.

id., §24.      It also claims that

       the question of the payment of lost duties became
       intertwined with Customs' penalty demands from the very
       outset, and that Yuchius has not been able to resolve one
       question without also resolving the other. Under these
       circumstances, it is premature to conclude that Yuchius
       has breached its duty of performance to Intercargo, and
       thus exoneration would not be appropriate under Section
       21(2) of the Restatement.

Post-Trial Submission of Defendant Yuchius, p. 27.

              Of course, defendant/cross-claimant Intercargo has al-

ready incurred the expenses of the trial (and the settlement).

Hence, its       cross-claim   is   not   now   premature.   While   section

24(1)(e) of the Restatement does set forth a defense to a demand

for reimbursement when, at the time of a settlement of a secondary

obligation, the secondary obligor had notice of a defense of the

principal obligor to the underlying obligation22, the surety takes

the position that this court's slip opinion 99-79 dismissed any

such defense of defendant Yuchius even before the trial.             As for

the trial, the defendant/cross-claimant has pointed to the other

       22
            Cf. Restatement (Third) of Suretyship and Guaranty §24-
(3):

            Notwithstanding subsection (1)(e), if the secondary
       obligor gives the principal obligor notice of the
       obligee's claim and an opportunity to defend against it,
       the principal obligor may not assert, as a defense to its
       duty to reimburse the secondary obligor, any defense to
       the underlying obligation that was available to the
       secondary obligor as a defense to the secondary
       obligation.
Consolidated
Court No. 96-02-00608                                                     Page 28

parties' difficulties, even failures, to match entries covered by

its bond with duties owed. Notwithstanding this systemic shortcom-

ing of the record, the surety still presses its settlement now as

a "reasonable business decision". Post-Trial Brief by Defendant and

Cross-Claimant Intercargo, p. 11.               Given the facts and circum-

stances adduced herein23, this court cannot disagree.

            Defendant Yuchius contends that the defendant surety's

defense of this action was voluntary.               The court cannot concur.

The failure-to-match defense asserted by Intercargo was hardly

volitional, nor does the record reflect inadequate or improper

evaluation of the liabilities in the case prior to any tender.

Defendant Yuchius also takes the position that the efforts of the

defendant/cross-claimant's           counsel    were    duplicative,    but   this

assertion also cannot stand in the light of their aforesaid,

original defense and their extensive cross-examination of govern-

ment witnesses.        See 19 Tr., pp. 80-141; 20 Tr., pp. 101-34.

Unlike the case cited by defendant Yuchius in support of its

position, Sentry Ins. Co. v. Davison Fuel & Dock Co., 60 Ohio

App.2d    248,   396   N.E.2d    1071     (1978),      defendant/cross-claimant

Intercargo's counsel did not agree that the principal's counsel was

competent   to   represent      it   in   all   phases    of   this   litigation,

including those inherently tied to the bond. Clearly, the decision

     23
       For example, at the time of its settlement for the $50,-
000 face value of its bond, the surety was still confronted with
a Customs demand for $67,844.44. See Intercargo Proposed Find-
ings of Fact and Conclusions of Law, p. 2. Cf. Exhibit INT-1.
Consolidated
Court No. 96-02-00608                                      Page 29

in regard thereto was within the surety's discretion, and this

court cannot find that the resultant approach was out of order.

          Defendant Yuchius is of the view that exoneration of its

surety would not be appropriate in the absence of an attempt to

collect from the principal and of a showing that the remedy at law

is inadequate, and that remittance to defendant/cross-claimant

Intercargo is not the appropriate form of relief.   It argues that

the case, Milwaukie Constr. Co. v. Glen Falls Ins. Co., 367 F.2d

964 (9th Cir. 1966), cited by the surety, is inappropriate as the

exoneration remedy referred to therein was granted in circumstances

where that surety did not know what the final amount would be and

so did not have an adequate remedy at law, and in the circumstances

where there was an impending threat of the principal's absconding.

However, that case is not limited to such circumstances, to wit:

     ". . . The doctrine in such cases rests on the simple
     right, as between the principal and surety, that the
     surety has to be protected by the principal; a surety is
     awarded exoneration in order that mischief and circuity
     of action may be avoided; he is not obligated to make
     inroads into his own resources when the loss in the end
     must fall on the principal.

          It is not essential that the claim of the surety for
     relief should depend on the fact that he will incur
     irreparable injury; nor must he show any fraudulent
     disposition of property, or the presence of a wrongful
     purpose, or special reason for fearing loss; and the
     insolvency of his surety will not preclude him from
     maintaining the bill."
Consolidated
Court No. 96-02-00608                                              Page 30

367 F.2d at 966, reciting 72 C.J.S., Principal and Surety §303

(1951).   And also quoting Judge Learned Hand's opinion in Admiral

Oriental Line v. United States, 86 F.2d 201, 204 (2d Cir. 1936),

in equity

     the rule is otherwise; before paying the debt a surety
     may call upon the principal to exonerate him by discharg-
     ing it . . ..

367 F.2d at 967.    See also Morley Constr. Co. v. Maryland Casualty

Co., 90 F.2d 976 (8th Cir. 1937).

            In   this   case,   to   avoid   the   circuity   referred   to,

indemnification is appropriate.        The debt has matured, the surety

has paid out funds in settlement, and therefore defendant Yuchius's

arguments relating to the exoneration remedy are not apposite.

See, e.g., United States v. Almany, 22 CIT 490 (1998).            See also

Borey v. Nat'l Union Fire Ins. Co., 934 F.2d 30 (2d Cir. 1991).

            Defendant Yuchius further argues that the form of relief

requested by Intercargo is not contemplated by the Restatement

(Third) of Suretyship and Guaranty §21(2), Comment (k), which

states:

     . . . The relief granted, when exoneration or quia timet
     rights are asserted, depends on the facts of the particu-
     lar case. . . . Among the courses open to the court are
     to direct performance by the principal obligor, to
     require that a sum certain due the obligee by the
     principal obligor be paid into court for the obligee, or
     to require that the principal obligor give the secondary
     obligor adequate security for its ultimate reimbursement.

However, since the amount at issue herein is now a sum certain, it

would serve no purpose to require payment into court of monies or
Consolidated
Court No. 96-02-00608                                               Page 31

to furnish security.        Judgment should simply be entered on behalf

of defendant/cross-claimant Intercargo Insurance Company directly.

                                      B

             The Restatement (Third) of Suretyship and Guaranty §23(1)

envisions a principal obligor's reimbursement of a secondary obli-

gor for the "reasonable cost of performing the secondary obliga-

tion, including incidental expenses". Here, the surety claims that

the $13,146.30 requested is a reasonable sum spent in its defense

of the claims against defendant Yuchius prior to the trial, and it

also seeks reimbursement for trial preparation, the subsequent

conduct thereof, and the reasonable fees and expenses incurred in

pursuing its cross-claim. Comment (a) to the Restatement's section

23(1) states that the duty to reimburse a secondary obligor encom-

passes incidental expenses, which "may include reasonable attor-

neys'     fees   incurred   in   conjunction   with   performance   of   the

secondary obligation".

                                     (1)

             As this court, contrary to the claim of defendant Yu-

chius, does not find Intercargo's defense to have been "voluntary",

attorney's fees of $13,146.30 incurred up to the date of trial24 are

clearly recoverable, as are such fees engendered by the govern-

ment's trial itself.

     24
           See Exhibit INT-4.
Consolidated
Court No. 96-02-00608                                       Page 32

                               (2)

          With regard to recovery of attorney's fees and expenses

in pursuit of the cross-claim, cases that have allowed them have

relied upon the language of any indemnity agreement.    See, e.g.,

John Burr v. Alexander Lichtenheim, 190 Conn. 351, 460 A.2d. 1290

(1983). In the matter at bar, that agreement's reference to indem-

nification for "any and all expenses, costs and attorney's fees

incurred by the Company in the event that the Company is compelled

to exercise any of its available remedies to ensure compliance" is

sufficiently broad25, and the court therefore finds such fees and

expenses to be recoverable by cross-claimant Intercargo.

          Where, as here, there is such an agreement, case law does

require that it was reasonably necessary for a surety to have

incurred attorney's fees and expenses.   E.g., Fallon Elec. Co. v.

The Cincinnati Ins. Co., 121 F.3d 125 (3d Cir. 1997).      See also

Sentry Ins. Co. v. Davison Fuel & Dock Co., supra.      And this

court so finds on the record developed.26

                                V

          The plaintiff seeks prejudgment interest from February

16, 1995 on the $321,306 in lost revenues.   Defendant Yuchius has

     25
       The same can be said of the agreement in Sentry Ins. Co.
v. Davison Fuel & Dock Co., 60 Ohio App.2d 248, 396 N.E.2d 1071
(1978), upon which defendant Yuchius attempts to rely.
     26
       Of course, before any award thereof, defendant/cross-
claimant Intercargo must serve and file a detailed accounting,
which will be subject to examination by defendant Yuchius. Cf.
Sentry Ins. Co. v. Davison Fuel & Dock Co., supra note 25.
Consolidated
Court No. 96-02-00608                                                  Page 33

admitted that it owes the plaintiff lost duties since at least

September 28, 1993.      See Plaintiff's Exhibit 13, p. 011214.             The

duties were demanded on February 16, 1995. See Plaintiff's Exhibit

17, p. 011352.

             Award of such interest is within the equitable powers of

the court.    See, e.g., United States v. Imperial Food Imports, 834

F.2d 1013, 1016 (Fed.Cir. 1987); Rheem Metalurgica S.A. v. United

States, 21 CIT 963, 966, 978 F.Supp. 333, 336, aff'd, 160 F.3d 1357

(Fed.Cir. 1998); United States v. Utex Int'l Inc., 11 CIT 325, 329,

659 F.Supp. 250, 254 (1987), rev'd on other grounds, 857 F.2d 1408

(Fed.Cir. 1988); United States v. Goodman, 6 CIT 132, 139-140, 572

F.Supp. 1284, 1289 (1983). That is, it is appropriate to reimburse

the   government   for   what   has   been   essentially   a   loan    to   the

defendant. E.g., United States v. Imperial Food Imports, 834 F.2d

at 1016; United States v. Goodman, 6 CIT at 140. See also Wallace

Beerie & Co. v. United States, 12 CIT 103, 107 (1988).                In this

case, there has been no unreasonable delay on the part of the

government.     Whereupon, the plaintiff should recover prejudgment

interest from defendant Yuchius since February 16, 1995.

                                      VI

             The parties are hereby directed to settle and submit

within 30 days hereof a proposed final judgment in conformity with

this opinion, which represents the court's findings of facts and

conclusions of law, awarding (a) the plaintiff lost revenues and
Consolidated
Court No. 96-02-00608                                      Page 34

prejudgment interest thereon, as well as the penalty for the proven

negligence of defendant Yuchius Morality Company, Ltd., and (b)

defendant/cross-claimant Intercargo Insurance Company the amount of

its bond plus the reasonable fees and expenses of its attorneys and

costs incurred before trial, as well as interest thereon and such

reasonable fees and expenses as may have been incurred since that

time and which have been set forth in an application therefor duly

served and filed within the aforesaid 30-day period in conformity

with the CIT Rules.

           So ordered.

Decided:   New York, New York
           October 18, 2002

                                              Judge