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Senator DECONCINI. That poses somewhat of a problem as to this particular legislation.

You have some criticism of specialized courts and you suggest that the district courts should have jurisdiction to handle the suits wherever they may come up. That is the purpose of the Customs Courts-that is, to attempt to channel and specialize so that the law is more unified and not spread out with so many different districts and, ultimately with circuit decisions that may be different as to problems with customs.

Has that occurred to you as being somewhat of a big problem as to uniformity or lack of it?

Mr. OswALD. Mr. Chairman, we are not suggesting the Customs Court not handle customs valuation issues on which they are specialists. But, there are many other trade matters which have traditionally been handled by the district courts which have broad effects in different parts of the country which we would prefer to continue to be handled by district courts and the circuit courts rather than all funneled through the Customs Court, which has built up an excellent experience in terms of customs valuation but not other aspects of trade.

Senator DECONCINI. Presently, the Customs Court has substantial jurisdiction. This bill would expand their jurisdiction. Do you still feel that there are areas where you should have direct access as it relates to customs or trade matters to the district courts?

Mr. OSWALD. It is particularly trade matters, Mr. Chairman. For example, S. 2857 would grant jurisdiction to the Customs Court for handling trade adjustment assistance questions. Those are questions that deal with whether workers have been injured through findings of the government agencies.

We believe that this broadening of actions which would be given to this court would overburden the court and would provide it with jurisdiction in areas in which it has not acted before and which it does not have particular expertise. It is a specialized court that has only nine members on it. While it has handled some of the particular customs valution problems very expeditiously and while there are a number of specific problems in that—one of the earlier witnesses has written some lengthy papers describing some of the problems with that court-I don't believe that it is appropriate at this point to grant them jurisdiction over all trade matters.

Senator DECONCINI. Thank you very much. Mr. Altier?

Mr. ALTIER. You said in your statement that there were some examples of unfair practices of the Customs Service. Could you go through a number of those examples for us?

Mr. Oswald. I made reference to some of the issues that were described in Mr. Gerhart's lengthy article, "Judicial Review of Customs Service Actions” which was published in Law and Policy in International Business. There are other examples I could give you but I think that I am not expert in all of the actions of the Customs Court.

Senator DECONCINI. We thank you very much for your testimony this morning.

Our next witness is Mr. Wayne Jarvis, counsel for St. Paul Fire & Marine Insurance Co., Chicago, Ill.

Mr. Jarvis, we welcome you to the committee.

STATEMENT OF WAYNE JARVIS, ESQ., COUNSEL, ST. PAUL FIRE &

MARINE INSURANCE CO., ACCOMPANIED BY JEFFREY W. SACHS, REGIONAL SURETY COUNSEL, AND WILLIAM C. GUSTAFSON, CUSTOM SURETY BOND UNDERWRITING MANAGER

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Mr. Jarvis. Thank you, Senator. First, I would like to introduce the two gentlemen who are accompanying me today. They are Mr. Bill Gustafson, who is St. Paul's National Customs Bond Underwriting Manager, and Mr. Jeffrey Sachs, National Customs Bond Surety Counsel.

St. Paul Fire & Marine Insurance Co. greatly appreciates your invitation to appear this morning and present its views on the proposed "Customs Courts Act of 1978."

This is particularly true since the insurance industry in general was not given an opportunity to meaningfully participate in the formulation of this bill.

Accordingly, the document we have prepared has been styled as a report, supported by legal authority.

Because our report is limited in scope, my testimony summarizing the report will also be limited.

If there are no objections, I would like to request that a copy of our report be admitted into the record of these proceedings.

Senator DECONCINI. Without objection, your report will be inserted into the record at this time.

[Material follows:]

REPORT BY ST. PAUL FIRE & MARINE INSURANCE Co.

INTRODUCTION

In 1926, St. Paul Mercury Indemnity Company, St. Paul Fire & Marine Insurance Company's ("St. Paul") corporate predecessor, was granted a Certificate of Authority to serve as a federally licensed surety. Since the enactment of the Tariff Act of 1930, St. Paul has acted as surety on bonds relating to the importation of merchandise and required by the laws of the United States or by the Secretary of the Treasury. St. Paul presently acts as surety on approxi. mately 50 percent of all such bonds.

Accordingly, St. Paul has a direct and demonstrable interest in the proposed legislation, and submits the following report embodying its comments and recommendations.

SURETY PROTESTS-EXISTING LAW

The surety is a stepchild in the Customs administrative and judicial process. Although jointly and severally liable for the obligations of its principals, the surety is frequently considered as primarily liable by the Customs Service. Available remedies against a delinquent importer include suspending or revoking the importer's special permit for the immediate delivery of merchandise (19 CFR § 142.7(b)) or instituting a collection action in the District Court. However, in order to avoid the trouble, expense and delay attending these procedures, Regional Financial Management officials continuously pressure sureties to pay, well before a demonstrable breach of a bond condition has occurred. In many instances, Customs officials ignore the delinquent importer and threaten to recommend suspension or revocation of the surety's Certificate of Authority to write Customs bonds unless payment is received. Exhibit A (attached) is a letter from the Director of Financial Management for Customs Region VII which amply demonstrates this point.

Customs assessments are subject to challenge either by filing protests under Section 514 of the Tariff Act of 1930 (19 USC § 1514) or petitions under Section 172 et seq. of the Customs Regulations (19 CFR § 172, et seq.). When liquidated damages are jointly assessed against the principal and his sureties under authority of Section 623 of the Tariff Act of 1930 (19 USC § 1623), the provisions of Section 172.1 of the Customs Regulations become operative:

"S 172.1 Notice of liquidated damages incurred and right to petition for relief

(a) NOTICE OF LIQUIDATED DAMAGES INCURRED.—When there is a failure to meet the conditions of any bond posted with Customs, the principal shall be notified in writing of any liability for liquidated damages incurred by him and a demand shall be made for payment. The sureties on such bond shall also be advised in writing, at the same time as the principal, of the liability for liquidated damages incurred by the principal.

(b) NOTICE OF RIGHTS TO PETITION FOR RELIEF.—The notice shall also inform the principal and his sureties on the bond that application may be made for relief from payment of liquidated damages under section 623(c), Tariff Act of 1930, as amended (19 U.S.C. 1623 (c)), or any other applicable statute authoriz ng the cancellation of any bond or of any bond charge that may have been made against such bond.” (19 CFR 172.1)

Therefore, when liquidated damages are assessed against a bond, the principal and surety enjoy equal rights under Section 172.1 to receive notice and to administratively challenge contemplated assessments. This is not the case, however, when liability for payment of delinquent liquidated duties is assessed against the bond, and the filing of a protest is the surety's appropriate remedy.

Two issues are central to the surety's right to protest-standing and timeliness. Sureties have standing to file protests

The proposed language of Section 602(a) of the Bill erroneously implies that sureties do not presently enjoy the right to protest. Although sureties are not included among the persons legislatively authorized to file protests (19 USC $ 1534 (0) (1)), their right to do so has long been judicially recognized by the Customs Court on the basis of the equitable doctrine of subrogation.

Fidelity and Casualty Company of New York v. United States, 28 CCR 103, C.D. 1394 (1952) is the case most frequently cited for the proposition that a Customs bond surety is a proper party to file a protest. The Fidelity case concerned a petition for remission of additional duties under the old Section 489 of the Tariff Act of 1930. Because the importer of record had been out of business for a number of years, Fidelity, as surety, filed a petition seeking the remission of increased duties assessed upon liquidation. In preliminary disposing of the government's Motion to Dismiss for want of standing, the court observed :

“One of the oldest doctrines is the rule of subrogation. Insofar as sureties are concerned, the rule is

Not only is a surety subrogated to the rights and remedies of the creditor, but he is also subrogated to such rights and remedies, as the principal has in connection with the debt, which will afford him a means of reimbursement;

* (C.J., p. 771) In the instant case, the petitioner, the surety company, succeeded to the rights of its principal, the importer. Succeeding to said principal's rights the surety also succeeds to the principal's means of enforcing such rights. By statute (8 489, supra) the importer had a right of action against the United States by petition duly filed for remission of sums assessed as additional duties. Therefore, the surety has a right to maintain such an action." (28 CCR at 107-08) *

The recent decision of Walker International Corp. v. United States, C.A.D. 1190 (1977), which cites Fidelity, points up the uncertain legal position of a Customs bond surety, and some of the difficulties it may experience:

“No motion was made by the surety companies under Fed. R. Civ. P. 24(a) to intervene in the motion for rehearing or, under Fed. R. Civ. P. 25 (c), to be substituted for or joined with Walker for purposes of the motion for rehearing. They were not parties for purposes of the statute in effect at the time of the involved entries. Wilmington Shipping Co. v. United States, 52 Cust. Ct. 650, 654–55. A.R.D. 175 (1964), aff'd, 52 CCPA 76, C.A.C. 861 1965) ; United States v. Reedy Forwarding Co., 25 Cust. Ct. 469, 471. Reap. Dec. 7919 (1950). Not having paid any portion of the involved duties of the principal, they obviously were not subrogees. See Fidelity & Casualty Co. v. United States, 28 Cust. 103, C.D. 1394 (1962).” (Customs Bulletin & De

cisions, Vol. 11, No. 22, p. 31). Customs financial procedures prevent sureties from filing timely protests

Any analysis of the difficulties experienced by sureties attempting to participate in the Customs administrative process must also include a review of existing laws and regulations which establish limitation periods for the filing of protests.

*Nonetheless, Fidelity did not prevail on the merits.

Section 514(b) of the Tariff Act of 1930 provides :

“(2) A protest of a decision, order or finding described in subsection (a) of this section shall be filed with such Customs officer within 90 days after but not before

(A) notice of liquidation or reliquidation, or,

(B) in circumstances where subparagraph (A) is inapplicable, the

date of the decision as to which protest is made.” (19 USC § 1514 (B)) The directives of Section 514 (b) are then expanded upon by Section 174.12 of the Customs Regulations, which provides in pertinant part:

“(e) Time of Filing. Protests shall be filed in accordance with Section 514, the Tariff Act of 1930, as amended (19 USC § 1514), within 90 days after either :

(1) the date of notice of liquidation or reliquidation in accordance with sections 159.9 or 159.10 of this chapter ; or

(2) the date of the decision, involving neither a liquidation or reliquidation, as to which the protest is made (e.g., the date of an exaction, the date of written notice excluding merchandise from entry or delivery under any provision of the Customs laws, or the date of a refusal to reliquidate under section 520 (C) (1) of the Tariff Act of 1930, as

amended).” (19 CFR § 174.12 ) Untimeliness is the paramount problem encountered by a surety attempting to file a protest. The “Formal Demand” Computer printout is normally the first “notice" received by a surety that Customs has asserted a claim against a “delinquent” bond principal. At the earliest, that “Formal Demand” on the surety is not issued until 90 days following liquidation.

Under existing financial procedures, Customs bills the principal for increased or additional duties on the date of liquidation. Two follow-up bills are subsequently sent to the principal at 30-day intervals. On an indeterminate date after the third billing, Customs issues an initial “Formal Demand" computer point-out to the surety. That demand bears a “1” designation in the right hand margin. Print-outs issued in subsequent months bear “2”, “3” and “3*” designations. The surety is considered "delinquent” when the print-out reaches the “3*” stage on the 120th day.

Apparently, there are no fixed procedures governing the timing of surety billings, and a cut-off date which occurs during the last week of the month is randomly selected. Occasionally, the cut-off date does not occur until the first week of the succeeding month. The printed “issuance date” on the initial demand is normally one week after the "cut-off" date. The “Formal Demand” is prepared from data submitted by Regional Financial Management to the Customs computer bank in Silver Spring, Maryland. This input requires normal processing time, and other computer issuances—including billings for deferred taxes, reimbursable services, and even Customs personnel payroll-take precedence over surety billings. In the words of one Custom Regional IX Financial Management official, surety billings are not “a high priority item.” Because of delays attributable to collating and mailing the computer print-outs, sureties do not receive the "Formal Demand" until two to four weeks after the date of issuance.

The end result is that sureties are time-barred to protest most assessments by the time the initial “Formal Demand” is issued, much less received. Copies of several recent demands, which are attached as Exhibits B, C and D, illustrate the problem. Although well aware that its own financial procedures preclude the surety from filing timely protests, Customs inexplicably refuses to accept as timely, protests filed under Section 514 (b) (2) (B) (19 U.S.C. § 1514 (6) (2) (B)). Repeated efforts by St. Paul to file timely protests, either by characterizing the initial “Formal Demand" as a charge or by the payment of the assessment as an exaction within the jurisdiction of the Secretary of the Treasury (8 514(a) (3)), have been fruitless.

If the surety can somehow manage to do so, Customs will accept a surety protest filed within 90 days after “notice” of liquidation under Section 514 (b) (2) (a) (19 U.S.C. § 1514 (6) (2) (a)). Unfortunately, sureties do not receive notice of liquidations other than the “Formal Demand.” Sureties do not receive equal notice of liquidations

Notice is a prerequisite to a valid liquidation. Section 505 of the Tariff Act of 1930 states that notice of liquidation shall be given in the form and manner prescribed by the Secretary of the Treasury (19 U.S.C. $ 1505). Section 159.9(b) of the Customs Regulations provides :

“(b) Posting of bulletin notice. The bulletin notice of liquidation shall be posted for the information of importers in a conspicuous place in the Customhouse at the port of entry (or Customs station, when the entries listed were filed at the Customs station outside the limits of a port of entry), or shall be lodged at some other suitable place in the Customhouse in such a manner that it can readily be located and consulted by all interested persons, who shall be directed to that place by a notice maintained in a conspicuous place in the Customhouse stating where notices of liquidation of entries are to be found.” (19 CFR § 159.9(b)) Although the regulation indicates that its purpose is to enable "interested persons" to consult the posted notice, that notice does not disclose the name of the surety on the liquidated entry, or even provide a surety code identification number. A "courtesy” notice of liquidation is sent to the importer of record, but not to the surety who is jointly and severally liable for the payment of liquidated duties.

Under the proposed bonding structure of the new Customs concept system, the posting of bulletin notices of liquidation at the Customhouse may no longer be required. The date of the monthly billing statement issued to each importer/ broker will be the date of liquidation for those entries indicated as liquidated on the statement. The provisions of the proposed bonding structure dealing with delinquent accounts also indicate that the date of an initial demand on surety will not coincide with liquidation.

The law is well settled that when notice of liquidation is not given in accordance with the mandatory requirements established by Section 505 of the Tariff Act of 1930 (19 U.S.C. 1505), the liquidation is null and void, and the time for filing protests to contest the liquidation is tolled. As the court stated in Commonwealth Oil Refining Co., Inc. v. United States, 60 CCPA 162, C.A.D. 1105, (1973):

“Where Notice of Liquidation has not been given in accordance with the requirements of Customs regulations prescribed by the Secretary of the Treasury in conformance with 8 505 of the Tariff Act of 1930, the liquidation is incomplete and the 60-day period specified in 8 514 of the Tariff Act of 1930 does not begin to run. U.S. v. Astra Bentwood Furniture Co., 28 CCPA 205

C.A.D. 147 (1940).” (60 CCPA at 164) In Jennings v. United States, 63 CCR 313, C. D. 3914 (1969), plaintiff contested a value advance on an entry made at the Port of Seattle, claiming in its protest that, inter aliu, liquidation of the subject entry was illegal, null and void, because Notice of Appraisement was not given as required by Section 501 of the Tariff Act of 1930. (19 U.S.C. § 1501). Section 501 provides in pertinent part:

“(a) The collector shall give written notice of appraisement to the consignee, his agent or his attorney if :

(1) the appraised value is higher than the entered value, or

(2) a change in the classification of the merchandise results from the appraisers determination of value, or

(3) in any case, if a consignee, his agent or his attorney requests such notice of writing before appraisement, setting forth a substantial

reason for requesting the notice. The actual notice read:

Roy E. Jennings, Jr.,
162 Trinidad Drive,
c/o J. E. Steeb & Co., Inc.,
20 Colman Building,

Seattle, WN.
The entry listed the name and address of the importer of record as:

Roy E. Jennings, Jr.,
162 Trinidad Drive,
Tiburon, California,

c/o J. E. Steeb & Co., Inc. (63 CCR at 314-15). The court held that the appraisement and subsequent liquidation were void, found the protest to be timely, and remanded the case to the Customs Court for determination of the correct value.

In M. Dublin v. United States, 2 CCR 14, C.D. 77 (1937), the typewritten name of the importer on the bulletin notice of liquidation was partly illegible. The court held that the notice was insufficient under Article 741(g) of the Customs Regulations of 1923, since it did not apprise him of the liquidation, and it

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