One of the primary and completely legitimate purposes of incorporating is to limit or eliminate the personal liability of corporate principals and employees. Under New York state law, corporate veil piercing principles or legal entity disregarding principles involve several factor analysis. Piercing the corporate veil requires a showing that: (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury. Morris v. New York State Dep’t of Taxation & Fin., 82 N.Y.2d 135, 141, 623 N.E.2d 1157, 1160–61 (1993). So fraud automatically pierces corporate veil, it is given. What about negligence? Well, the negligence must equate to abuse of the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that party. Id. In one case, New York’s Appellate court declined to pierce corporate veil in a negligence claim finding no “fraud or wrong.” Mistrulli v. McFinnigan, Inc., 39 A.D.3d 606, 607, 834 N.Y.S.2d 271, 272 (2d Dept. 2007). This means that negligence, would not automatically serve as an entitlement to corporate veil piercing in New York state courts.
Same great state of New York, but different court – Court of International Trade – suggested that in customs law, this may not be the case. Just under two years ago, in LawCustoms publication Customs Business is Personal we discussed piercing of a corporate veil in the context of U.S. v. Treck Leather, which held defendant-officer Mr. Shadadpuri personally liable for gross negligence while introducing merchandise into the commerce of United States under 19 U.S.C. § 1592(a). On October 12, 2017, Court of International Trade in U.S. v. Sterling Footwear solidified U.S. v. Treck Leather piercing to all levels of culpability, including negligence:
Read together, Panama Hats and Trek Leather demonstrate that one who misclassifies merchandise (or causes merchandise to be misclassified) in a document prepared for the purpose of entering goods which that person causes to be shipped to, and unloaded at, a U.S. port, fall within the ambit of the term “introduce.” (emphasis supplied)
It should be said that Sterling defendants was a closely held legal entities, controlling almost entirely or entirely by a natural person defendant. Also, like Trek Leather, Sterling is also a gross negligence case. But this should not be an impediment because just over a month earlier, in United States v. Deladiep, Inc. (CIT, Aug 23, 2017), Court of International Trade pierced the corporate veil on negligence basis:
As the owner, president, and sole corporate officer of Deladiep, Inc., Mr. Delatorre was personally involved in introducing the imported magnets into the commerce of the United States and also subject to liability under Section 1592. * * * Thus, Defendants are jointly and severally liable for negligent violations of Section 1592. Id. at fn. 25.
In May 2017, also at the footnote level, Court of International Trade stamped out “personal involvement” prong in Sec. 592:
Section 1592 applies to “person[s].” 19 U.S.C. § 1592(a)(1)(A). ITS, the importer of record, is a “person” for purposes of § 1592. See 19 U.S.C. § 1401(d) (“The word “person” includes partnerships, associations, and corporations.”). Mr. Lorza, who was personally involved in introducing the imported sugar into the commerce of the United States,” Pl.’s SOF ¶¶ 1, 11, is also a “person” * * * United States v. Int’l Trading Servs., LLC, 222 F. Supp. 3d 1325, 1333 (Ct. Int’l Trade 2017)
Above statements of law suggests applicability of 19 U.S.C. § 1592 violations to individuals, at a negligence level, even if that individual acted in a corporate capacity. To take this further, if a corporate employee (no explicit owner domination inquiry as in New York state) negligently misclassifies entry (i.e. personally involved), then s/he would be liable under 19 U.S.C. § 1592. Prior to Trek-Deladiep-Int’l Trading Servs trilogy, one could argue that individuals were not importers of record, and at most were aiding and abetting, which would not be a basis for negligence liability pursuant to United States v. Hitachi Am., Ltd., 172 F.3d 1319 (Fed. Cir. 1999) (reversing CIT on negligence aiding and abetting theory for 19 U.S.C. § 1952(a) because negligence implies no knowledge). But, the world changes and so does the interpretation of the law.