Wisconsin Company Liable for Bankrupt Predecessor's $6.8 Million in Customs Penalties, says CIT
The Court of International Trade ruled that a Wisconsin company may be liable for $6.8 million in unpaid customs duties and related penalties because of its acquisition of the bankrupt entity that committed the alleged violations. Adaptive MicroSystems argued that its earlier acquisition of a company bearing the same name did not make it liable to respond to a penalty notice issued by CBP for the violations. At the time of the sale, the Wisconsin court that authorized the transaction said AMS wouldn’t assume its predecessor’s liabilities. CIT said it wouldn’t follow the Wisconsin court’s instruction, because the state court may have not known all of the facts, and ruled that AMS qualified for an exception to successor liability protections because a corporate officer and part owner of its predecessor also was an officer and part owner of AMS.
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The original Adaptive MicroSystems and parent company Advanced MicroSystems Holdings were put in receivership in 2011. At the time the companies entered receivership, Thomas Mandler owned 15.8 percent of Adaptive MicroSystems Holdings.
Less than a month after the companies entered receivership, CBP began a Section 592 penalty action against AMS for allegedly unpaid duties. According to CBP, the company intentionally or negligently misclassified imports of light emitting diodes from Malaysia under duty-free tariff provisions between 2005 and 2010. After receiving no response from the companies or their receiver, CBP issued a penalty notice demanding payment of about $6.8 million.
The company was then bought from its receiver by a newly formed entity called AMS Acquisition, which presumably had been formed for the sole purpose of acquiring the bankrupt AMS. The court-approved sale authorized transfer of most of AMS’ assets, and in return AMS Acquisition would have to hire a substantial number of the old company’s employees. One of those employees was Thomas Mandler, who assumed a corporate officer position in the new company. After that, AMS Acquisition assumed the name of the predecessor company, Adaptive MicroSystems.
When it approved the sale, the Wisconsin court did not mention the fate of CBP’s penalty action. It did, however, approve a provision exonerating AMS Acquisition from all liability, “whether absolute or contingent, known or unknown” that may have been pending against the old company. It also said the sale transferred the assets “free and clear of all security interest, liens, claims, encumbrances, or interests of any kind or nature.”
After the sale, the new AMS transferred 400 shares of stock to Thomas Mandler.
CBP filed suit to collect the penalties in May 2012. AMS then moved for CIT judgment that it is not liable for the penalty notice issued by CBP against the old AMS. The company also said CBP should be sanctioned for filing and continuing to pursue the action.
AMS argued that CIT should, in the interest of comity, recognize the state court’s order freeing the new AMS from liability, including for the unpaid duties and penalties. CIT said it would not do so, because the state court didn’t acknowledge CBP’s penalty notice in the sales proceeding, and may not have been aware of it. The state court furthermore wouldn’t have known about the company giving Thomas Mandler a stake in its ownership, since it happened after the sale was completed.
CIT said Wisconsin law has several exceptions to its prohibition on liability accruing to successors after the sale of a company. One of these is when the transaction amounts to a merger, and another is when the new company is a “mere continuation” of the old one. CIT ruled in favor of the new AMS on the first point, finding that the transaction involved the transfer of cash, not shares, and so was not a merger.
But the court said the new AMS may be a continuation of its predecessor company. Despite having a different owner and set of directors from the old company, “a reasonable jury could find that Mr. Mandler’s ownership share and influence on New AMS’s board — coupled with the otherwise substantial overlap between Old AMS and New AMS — outweighs his non-voting status and the lack of shared directors in defining New AMS’s corporate identity,” the court said.
CIT also denied AMS’ effort to sanction CBP for continuing the action “despite conclusive proof that New [AMS] bears no liability in this lawsuit and [Customs’] claims against it are baseless.” Contrary to AMS’ claims, CBP’s action is not frivolous, the court said. CBP provided evidence that AMS itself holds itself out to be the same company as its predecessor, the court said, saying AMS has variously represented that it has been open for over 30 years and was founded in 1979. Furthermore, during CBP’s investigation the new company’s owner said there was no common ownership with the predecessor, even though he knew about Thomas Mandler’s situation, the court said.
(United States v. Adaptive Microsystems, LLC, Slip Op. 13-50, dated 04/10/13, Judge Tsoucalas)
(Attorneys: Stuart Delery for plaintiff U.S. government, David Peterson of Reinhart Boerner for defendant Adaptive Microsystems, LLC)