Article

Note: Under applicable U.S. Customs regulations, importers are required to post important entry bonds permitting the U.S. Bureau of Customs & Border Protection (Customs) to demand payment from the Surety issuing the bond in the event that the importer has failed to make any required payment. Commercial importers typically post continuous bonds rather than single entry bonds.

As a result of certain directives and amendments to its regulations by Customs regarding importation of shrimp products, Suretys for importers required them "to post large amounts of collateral with the surety to satisfy current and impending bond sufficiency determinations by Customs." Concerned, National Fisheries Institute, Inc. (Association), a non profit trade association, brought an action against Customs and moved for a preliminary injunction to preclude application of this directive in determining the sufficiency of the bond during the pendancy of the action. Association claimed that the interpretation caused substantial economic harm. Among other things, Suretys required importers to post LCs in the amount of the bond which, it was alleged, "hinders plaintiffs' ability to finance their business efficiently. In this regard, plaintiffs describe a scenario they refer to as 'stacking,' arguing that, absent preliminary injunctive relief, their credit will remain encumbered until final liquidation of all entries covered by the new continuous bonds, and that as time goes on, plaintiffs will remain liable under multiple bonds at the same time. (citation omitted) Plaintiffs contend that the continuous and increasing burdens on their credit availability will impede severely the operation of their businesses and ultimately will force them out of the business of importing shrimp." Eight importers presented evidence and urged the court to infer the same conclusion for the other 19 members of the Association.

The United States Court of International Trade, Timothy C. Stanceu, J., granted Association's motion, concluding that limited preliminary injunctive relief was appropriate for the eight claimants who presented evidence, but not for the other members of Association who did not. The court ordered US Customs to reassess the continuous bonds with lower limits and report to the court.

Specifically, the court found significant economic harm, and noted that the "[e]ffect on cash flow resulting from posting collateral to secure irrevocable letters of credit led some plaintiffs to forgo opportunities to supply, develop, and market new products." The court also held that "[t]he liabilities that are secured by plaintiffs' current bonds will extend until liquidation of all entries is final. The date on which final liquidation of those entries will occur is not known. The letters of credit supporting plaintiffs' current bonds will not be extinguished until after final liquidation. If Customs continues to apply the new bond formulas in calculating future bond demand, plaintiffs likely will suffer an additional reduction to their borrowing capacities as a result of securing new letters of credit. Two of the eight plaintiffs that introduced evidence have already suffered such an additional reduction in their borrowing capacities in order to secure new bonds that were issued in the spring of 2006. Such new letters of credit, the liability of which will not be extinguished until some future date, will further deplete plaintiffs' credit and cause plaintiffs significant economic harm."

Regarding irreparable harm, the court noted:

the cumulative effects of two successive rounds of bond determinations based on the rigid application of the formulas, and the upcoming third round of bond determinations that will occur over the next several months. The burden imposed by an importer's outstanding letters of credit, which resulted from the application of the formula with little or no adjustment during the previous rounds of bond determination, affects negatively the financial condition of that importer. The adverse effects will continue and are all but certain to become exacerbated upon the next round of bond determinations, during which the effect of the letters of credit, by weakening the plaintiff-importer's financial condition, may compromise the ability of that plaintiff-importer to qualify for a lower bond determination.

Additionally, the court found that "[b]ased on the facts established by the administrative record, i.e., that each surety required an irrevocable letter of credit from plaintiffs who obtained new continuous bonds in 2005 and 2006, the court infers that there is a strong likelihood that sureties similarly will require additional collateral in the future. The facts established on the de novo record also support the inference that sureties will require up to 100 percent security for any new or extended continuous bonds, as they have to date. Specifically, the testimony of witnesses for two plaintiffs relating to the requirements imposed on plaintiffs seeking new term bonds corroborates the finding that sureties typically require 100 percent collateral in the situations occasioned by the new bonding requirements. The record also establishes that lending institutions typically reduce credit limits by amounts equal to, or nearly equal to, the amount of a letter of credit used to secure a bond."

[JEB/hah]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.