# Hartford Fire Insurance v. United States > United States Court of International Trade · August 13, 2012 · 857 F. Supp. 2d 1356 URL: https://www.frixlaw.com/law-library/cases/820103 ## Case - **Full name:** HARTFORD FIRE INSURANCE COMPANY, Plaintiff, v. UNITED STATES, Defendant - **Court:** United States Court of International Trade - **Decided:** August 13, 2012 - **Citations:** 857 F. Supp. 2d 1356; 34 I.T.R.D. (BNA) 1910; 2012 CIT 107; 2012 Ct. Intl. Trade LEXIS 108; 2012 WL 3291854 - **Precedential status:** Published - **Opinion:** Opinion by Pogue - **Judges:** Pogue - **Cited by:** 5 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/820103 ## Opinion text Slip Op. 12 - 107 UNITED STATES COURT OF INTERNATIONAL TRADE HARTFORD FIRE INSURANCE COMPANY, Plaintiff, Before: Donald C. Pogue, Chief Judge v. Court No. 07-00067 UNITED STATES, Defendant. OPINION [Granting Defendant’s motion to dismiss without prejudice, in part, and with prejudice, in part] Dated: August 13, 2012 Frederic D. Van Arnam, Eric W. Lander, and Helena D. Sullivan, Barnes, Richardson & Colburn, of New York, NY for the Plaintiff. Justin R. Miller, Trial Attorney, International Trade Field Office, Commercial Litigation Branch, Civil Division, U.S. Department of Justice, of New York, NY, for the Defendant. With him on the briefs were Stuart F. Delery, Acting Assistant Attorney General, Barbara S. Williams, Attorney-in-Charge, International Trade Field Office, and Claudia Burke, Assistant Director, Commercial Litigation Branch, Civil Division, U.S. Department of Justice, of Washington, DC. Of counsel on the briefs was Beth C. Brotman, Office of the Assistant Chief Counsel, International Trade Litigation, U.S. Customs and Border Protection. Pogue, Chief Judge: In its Amended Complaint, ECF No. 29, Plaintiff Hartford Fire Insurance Company (“Hartford”) asks the court to void or, in the alternative, to discharge certain bonds securing duties on entries of frozen cooked crawfish tailmeat from the People’s Republic of China (“China”). Defendant U.S. Customs and Border Protection (“Customs”) moves, Court No. 07-00067 Page 2 pursuant to Rule 12(b)(5) of this Court, to dismiss Plaintiff’s Amended Complaint for failure to state a claim. As explained below, the first and second causes of action stated in Plaintiff’s complaint will be dismissed without prejudice for failure to state a claim; the third and fourth causes of action will be dismissed with prejudice because Plaintiff cannot state a claim for relief on the facts of this case. The court has jurisdiction pursuant to 28 U.S.C. § 1581(i) (2006). BACKGROUND This action arises from Sunline Business Solution Corporation’s (“Sunline”) importation into the United States of eight entries of freshwater crawfish tailmeat from Chinese producer Hubei Qianjiang Houho Frozen (the “Hubei entries”), between July 30, 2003, and August 31, 2003. Am. Compl. ¶¶ 2–3. The Hubei entries were subject to an antidumping duty order covering freshwater crawfish tailmeat from China, Am. Compl. ¶ 4, and were permitted to enter following Customs’ approval of eight single entry bonds designating Hartford as the surety. Am. Compl. ¶¶ 7–9. The eight single entry bonds, which secured payment of the antidumping duties, were executed on July 27, 2003; August 6, 2003; August 7, 2003; and August 27, 2003. Am. Compl. ¶ 8 & Court No. 07-00067 Page 3 app. 1. Customs liquidated the Hubei entries, in July 2004 and March 2005, at the 223% country-wide rate for China, pursuant to the Department of Commerce’s final results in the relevant administrative review. Am. Compl. ¶¶ 10–12. Following Sunline’s failure to pay the duties owed, Customs made a demand on Hartford, on June 22, 2005, for payment on the eight single entry bonds. Am. Compl. ¶ 13.1 Hartford asserts that it learned the following facts, on which it premises its challenge to the enforcement of the eight single entry bonds, after receiving the demand for payment from Customs. On or around June 19, 2003, Shanghai Taoen International Trading Co. informed Customs of its belief that crawfish tailmeat from China was being imported illegally into the United States. Am. Compl. ¶ 14. This information led Customs to investigate Sunline, beginning sometime prior to August 15, 2003. Am. Compl. ¶ 15. Following the investigation, on November 25, 2003, two of Sunline’s officers were indicted for importing crawfish tailmeat in violation of U.S. import laws. Am. Compl. ¶ 16. Customs did not, at any time, inform Hartford about its investigation of Sunline. Am. Compl. ¶¶ 20–24. Nor did Commerce inform Hartford that it was returning to Sunline, on August 27, 1 Customs also sought payment from Hartford on a continuous bond securing the entries, Am. Compl. ¶ 13, but Hartford is not challenging enforcement of the continuous bond. Court No. 07-00067 Page 4 2003, and December 19, 2003, cash deposits unrelated to the Hubei entries. Am. Compl. ¶¶ 25–26. STANDARD OF REVIEW When reviewing a motion to dismiss for failure to state a claim, the court “must accept as true the complaint’s undisputed factual allegations and should construe them in a light most favorable to the plaintiff.” Bank of Guam v. United States, 578 F.3d 1318, 1326 (Fed. Cir. 2009) (quoting Cambridge v. United States, 558 F.3d 1331, 1335 (Fed. Cir. 2009)). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). To be plausible, the complaint need not show a probability of plaintiff’s success, but it must evidence more than a mere possibility of a right to relief. Id. at 678. “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. DISCUSSION In its Amended Complaint, Hartford alleges four causes of action, or counts, all of which Customs moves to dismiss for Court No. 07-00067 Page 5 failure to state a claim. In counts one and two, Hartford asserts that the eight single entry bonds are voidable under the common law theory of material misrepresentation. In counts three and four, Hartford claims, in the alternative, that its obligation on the bonds should be discharged in the amount of $270,256.92, the value of cash deposits that Customs, without Hartford’s knowledge, returned to Sunline. The court will first address Hartford’s claims for voidability and then Hartford’s claims for discharge. I. Hartford’s Amended Complaint Fails to State a Claim for Material Misrepresentation A. Material Misrepresentation by Customs A bond is voidable by a surety, “[i]f the [surety or] secondary obligor’s2 assent to the [bond] is induced by a fraudulent or material misrepresentation by the obligee[3] upon which the [surety or] secondary obligor is justified in relying . . . .” Restatement (Third) of Suretyship and Guaranty § 12(1) (1996).4 An obligee’s failure to disclose facts unknown to the 2 An obligor is “[o]ne who binds oneself to another by contract or legal agreement.” The American Heritage Dictionary of the English Language 1212 (4th ed. 2000). 3 An obligee is “[o]ne to whom another is bound by contract or legal agreement.” Id. 4 “This Court has relied upon suretyship law principles explained in the Restatement (Third) of Suretyship and Guaranty in determining the rights and obligations of parties under customs bonds.” United States v. Great Am. Ins. Co. of N.Y., 35 (footnote continued) Court No. 07-00067 Page 6 surety is defined as a material misrepresentation if: (1) such facts “materially increase the risk beyond that which the obligee has reason to believe the [surety] intends to assume”; (2) the obligee “has reason to believe that these facts are unknown to the [surety]”; and (3) the obligee “has a reasonable opportunity to communicate [these facts] to the [surety].” Id. § 12(3); see also United States v. Martinez, 151 F.3d 68, 73 (2d Cir. 1998). In its first cause of action, Hartford asserts a material misrepresentation claim against Customs. In particular, Hartford claims that (1) Customs failed to disclose to Hartford the investigation of Sunline; (2) such failure to disclose materially increased Hartford’s risk on the bonds; and (3) Customs knew or should have known that failure to disclose the information would cause Hartford to assume a level of risk beyond that it intended in issuing the bonds. Am. Compl. ¶¶ 34–35. Customs argues for dismissal of Hartford’s first count on three grounds: (1) Customs could not have made a timely disclosure because it did not become aware of the surety’s identity until after the bonds were executed; (2) Hartford failed to plead its exercise of due diligence and, therefore, cannot claim justifiable reliance on disclosures from Customs; and (3) 4 (footnote continued) CIT __, 791 F. Supp. 2d 1337, 1359–60 (2011) (citing Wash. Int’l Ins. Co. v. United States, 25 CIT 207, 224, 138 F. Supp. 2d 1314, 1330 (2001)). Court No. 07-00067 Page 7 Customs was prohibited by law from disclosing the Sunline investigation. Mem. Supp. Def.’s Mot. to Dismiss at 7–18, ECF No. 63 (“Def.’s Mot. to Dismiss”). We consider in turn each of Customs’ arguments. 1. Customs Had a Timely Opportunity to Disclose Material Facts before the Bonds Became Effective Customs first argues that any lack of disclosure could not have been a material misrepresentation because the bonds were executed without its involvement; therefore, there was no “reasonable opportunity to communicate” with Hartford prior to the execution of the bonds. Def.’s Mot. to Dismiss at 15. Customs argues, in essence, that a customs bond is a contract solely between the importer and the surety, with Customs functioning as a third party beneficiary. See Restatement (Third) of Suretyship and Guaranty § 2(d). Customs’ argument is unpersuasive because, pursuant to its own regulations, bonds must be approved by Customs prior to entry of the merchandise. 19 C.F.R. § 113.11 (2012) (“The port director will determine whether the bond is in proper form and provides adequate security for the transaction(s).”); Antidumping or Countervailing Duties; Acceptance of Cash Deposits; Bonds, or Other Security to Obtain Release of Merchandise; Revision of T.D. 82-56, T.D. 85-145, 19 Customs Bull. 331, 332 (1985) (“[T]he U.S. Customs Service will accept cash deposits, bonds or other security, as specified below, prior to releasing for consumption Court No. 07-00067 Page 8 in the customs territory of the United States merchandise that is or may be subject to the assessment of antidumping or countervailing duties . . . .”). Without Customs’ approval of the bond, merchandise does not enter the United States, no duty is assessed, and no obligation exists for the surety to assume upon default. Thus, Customs’ acceptance of the surety’s offer is necessary to the formation of the surety agreement. See Restatement (Third) of Suretyship and Guarantee § 8 cmt. a (“An offer to become a secondary obligor commonly invites the offeree to accept by advancing money, goods, or services on credit.”). Because Customs’ approval functions as an acceptance necessary to formation of the contract, Customs would have the opportunity at any point prior to approval of the bond to inform the surety of material facts.5 For this reason, Customs may have had an opportunity to disclose information to Hartford prior to approving the bond, and dismissal is not warranted on this ground. 5 Customs argues in its Reply Brief that formation of the bond contract occurs prior to entry of merchandise because 19 C.F.R. § 113.26(b) makes the effective date of the bond the date of the transaction, as listed on Customs Form 301. Def.’s Reply Mem. Supp. Mot. to Dismiss at 11, ECF No. 85 (“Def.’s Reply Br.”). However, the effective date of the bond instrument is not the same as formation. The effective date tells Customs that a bond offer is outstanding and invites Customs acceptance by entering the goods, thereby creating the obligation that is the subject matter of the bond. Court No. 07-00067 Page 9 2. Hartford’s Failure to Plead Due Diligence Does Not Undermine Its Material Misrepresentation Claim In its second argument for dismissing the first cause of action, Customs argues that Hartford has failed to plead exercise of due diligence in issuing the bonds to Sunline. Customs contends that because Hartford has not pled any facts relating to its due diligence, it cannot claim that Customs had reason to believe Hartford was unaware of the relevant facts relating to the investigation of Sunline. The Restatement notes that “[f]or purposes of subsection (3), whether the obligee has reason to believe that . . . such facts are unknown to the secondary obligor, shall be determined in light of the obligee’s reasonable beliefs as to . . . the secondary obligor’s ability to obtain knowledge of such facts independently in the exercise of ordinary care.” Restatement (Third) of Suretyship and Guaranty § 12(4). Furthermore, “the surety bears the burden of making inquiries and informing itself of the relevant state of affairs of the party for whose conduct it has assumed responsibility,” Cam-Ful Indus., Inc. v. Fid. & Deposit Co. of Md., 922 F.2d 156, 162 (2d Cir. 1991) (quoting State v. Peerless Ins. Co., 492 N.E.2d 779, 780 (N.Y. 1986)), and “[t]he policy behind surety bonds is not to protect a surety from its own laziness or poorly considered decision,” id. However, considering the facts pled in the light most Court No. 07-00067 Page 10 favorable to the plaintiff, Bank of Guam, 578 F.3d at 1326, Hartford’s claim that it was unaware of the investigation and that Customs should have known it was unaware is plausible. In this case, Hartford has pled — and Customs has not disputed — that the investigation of Sunline was confidential. Taken in the light most favorable to Hartford, the confidential nature of the investigation suggests both that Hartford was unaware of the investigation and that Customs had reason to know that the investigation was unknown to Hartford. Thus, Hartford’s pleading on this issue is plausible and dismissal is not warranted on this ground.6 3. Hartford’s Right to Disclosure of the Sunline Investigation under a Material Misrepresentation Theory is Preempted by Statute In its final argument in favor of dismissing the first cause of action, Customs contends that it was prohibited by law from revealing the existence of the Sunline investigation to Hartford. To support its contention, Customs cites case law concerning both the Freedom of Information Act (“FOIA”) and the law enforcement investigatory privilege. Def.’s Mot. to Dismiss at 9–12. Hartford responds that neither FOIA, nor the law enforcement investigatory privilege, can be used as a shield in 6 The court does not determine whether Hartford exercised due diligence in issuing the single entry bonds to Sunline. The court’s finding is limited to the narrow question of whether the facts as pled state a plausible claim for relief. Court No. 07-00067 Page 11 this case. Pl.’s Resp. to Def.’s Mot. to Dismiss at 14–18, ECF No. 70 (“Pl.’s Resp. Br.”). If Customs is prohibited from disclosing the investigation or permitted to withhold the relevant information, then dismissal may be appropriate. If Customs’ disclosure is prohibited by law, then a material misrepresentation claim premised on such a disclosure would be foreclosed as a matter of law because Custom’s would have no reasonable opportunity to communicate material facts. Restatement (Third) of Suretyship and Guaranty § 12(3)(c). Furthermore, if Custom’s had a right to withhold relevant information, which preempts Hartford’s right to disclosure under the common law, then there would be no cause of action for material misrepresentation. Accordingly, we will consider first the law enforcement investigatory privilege and then FOIA. Hartford is correct that the law enforcement investigatory privilege is inapplicable in this case. The law enforcement investigatory privilege is a judge-made evidentiary privilege that permits the government to withhold certain evidence related to law enforcement investigations from discovery. See Dellwood Farms, Inc. v. Cargill, Inc., 128 F.3d 1122, 1125 (7th Cir. 1997). Permitting the government to exercise this privilege is within the sound discretion of the trial court. Id. (“The balancing of that need — the need of the Court No. 07-00067 Page 12 litigant who is seeking privileged investigative materials — against the harm to the government if the privilege is lifted is a particularistic and judgmental task.”). As a discretionary, judge-fashioned, evidentiary privilege, the law enforcement investigatory privilege has, at best, limited application outside the realm of discovery. In a case such as this, Customs cannot shield itself with a privilege so limited in scope, particularly when the exercise of the privilege is not Customs’ prerogative but the special province of the court. On the other hand, Hartford is mistaken when it argues that FOIA is inapplicable to this case. FOIA is a comprehensive statute governing the rules of agency disclosure; therefore, as this case centers on Customs’ obligation to disclose, FOIA cannot be avoided. See 5 U.S.C. § 552 (2006); see also Ctr. for Nat’l Sec. Studies v. U.S. Dep’t of Justice, 331 F.3d 918, 936–37 (D.C. Cir. 2003) (holding the common law right of access to public records preempted by FOIA). FOIA establishes a three-part disclosure requirement for all federal agencies: § 552(a)(1)7 requires federal agencies 7 19 U.S.C. § 552(a)(1) reads: Each agency shall separately state and currently publish in the Federal Register for the guidance of the public — (A) descriptions of its central and field organization and the established places at which, the employees (and in the case of a uniformed (footnote continued) Court No. 07-00067 Page 13 to proactively disclose certain information through publication in the Federal Register; § 552(a)(2)8 requires federal agencies 7 (footnote continued) service, the members) from whom, and the methods whereby, the public may obtain information, make submittals or requests, or obtain decisions; (B) statements of the general course and method by which its functions are channeled and determined, including the nature and requirements of all formal and informal procedures available; (C) rules of procedure, descriptions of forms available or the places at which forms may be obtained, and instructions as to the scope and contents of all papers, reports, or examinations; (D) substantive rules of general applicability adopted as authorized by law, and statements of general policy or interpretations of general applicability formulated and adopted by the agency; and (E) each amendment, revision, or repeal of the foregoing. 8 19 U.S.C. § 552(a)(2) reads: Each agency, in accordance with published rules, shall make available for public inspection and copying — (A) final opinions, including concurring and dissenting opinions, as well as orders, made in the adjudication of cases; (B) those statements of policy and interpretations which have been adopted by the agency and are not published in the Federal Register; (C) administrative staff manuals and instructions to staff that affect a member of the public; (D) copies of all records, regardless of form or format, which have been released to any person under paragraph (3) and which, because of the nature of their subject matter, the agency determines have become or are likely to become the subject of subsequent requests for substantially the same records; and (E) a general index of the records referred to under subparagraph (D); unless the materials are promptly published and copies (footnote continued) Court No. 07-00067 Page 14 to make certain information available for public inspection and copying; and § 552(a)(3)9 requires federal agencies to disclose all records not covered under § 552(a)(1) & (2) upon request. FOIA also sets out exemptions in § 552(b) that are applicable to all disclosures made pursuant to § 552(a). Particularly relevant in this case is the § 552(b)(7)(A) exemption for “records or information compiled for law enforcement purposes . . . [that] could reasonably be expected to interfere with enforcement proceedings,” and the § 552(c)(1)10 limitations on when an investigation qualifies for a § 552(b)(7)(A) exemption. 8 (footnote continued) offered for sale. 9 5 U.S.C. § 552(a)(3)(A) reads: Except with respect to the records made available under paragraphs (1) and (2) of this subsection, and except as provided in subparagraph (E), each agency, upon any request for records which (i) reasonably describes such records and (ii) is made in accordance with published rules stating the time, place, fees (if any), and procedures to be followed, shall make the records promptly available to any person. 10 5 U.S.C. § 552(c)(1) reads: Whenever a request is made which involves access to records described in subsection (b)(7)(A) and (A) the investigation or proceeding involves a possible violation of criminal law; and (B) there is reason to believe that (i) the subject of the investigation or proceeding is not aware of its pendency, and (ii) disclosure of the existence of the records could reasonably be expected to interfere with enforcement proceedings, the agency may, during only such time as that circumstance continues, treat the records as not subject to the requirements of this section. Court No. 07-00067 Page 15 Thus, the FOIA disclosure scheme is comprehensive: a limited category of records must be proactively disclosed; a second, limited category of records must be available for public inspection; and all other records are to be available upon request unless exempted from disclosure. Furthermore, all exemptions to the disclosure regime are statutorily enumerated. Because FOIA establishes a comprehensive statutory framework for disclosure of agency records, when it conflicts with existing common law rights to disclosure, such rights are preempted. See Ctr. for Nat’l Sec. Studies, 331 F.3d at 936–37. In Center for National Security Studies, plaintiffs argued that a common law right of access to public records required the Department of Justice to disclose the names of detainees arrested in the wake of the September 11th attacks and their attorneys. Id. at 936. The Court of Appeals for the District of Columbia Circuit acknowledged that the Supreme Court had recognized a common law right of access to public records. Id. (citing Nixon v. Warner Commc’ns, Inc., 435 U.S. 589, 597 (1978)). However, as early as Nixon, the Supreme Court also recognized that the common law right could be abrogated by statute. Nixon, 435 U.S. at 602–06. Thus, the D.C. Circuit concluded that with FOIA “Congress has provided a carefully calibrated statutory scheme, balancing the benefits and harms of disclosure. That scheme preempts any preexisting common law right.” Ctr. for Nat’l Sec. Court No. 07-00067 Page 16 Studies, 331 F.3d at 937; see also United States v. El-Sayegh, 131 F.3d 158, 163 (D.C. Cir. 1997) (“The appropriate device [for access to the record] is a Freedom of Information Act request addressed to the relevant agency.”). The D.C. Circuit’s decision in Center for National Security Studies instructs our analysis here. Hartford is invoking a common law right to disclosure through its material misrepresentation claim. Though it is not the same common law right of access that the D.C. Circuit discussed in Center for National Security Studies, for its claim to stand, Hartford must have a right to disclosure of the information. But, insofar as Hartford seeks disclosure of Customs’ law enforcement investigation of Sunline, its common law right is preempted by FOIA. As a law enforcement investigation, the Customs investigation of Sunline is decidedly within the purview of FOIA. As the D.C. Circuit noted in Center for National Security Studies, “[i]n enacting the [5 U.S.C. § 552(b)(7)(A)] exemption, ‘Congress recognized that law enforcement agencies had legitimate needs to keep certain records confidential, lest the agencies be hindered in their investigations.’” 331 F.3d at 926 (quoting NLRB v. Robbins Tire & Rubber Co., 437 U.S. 214, 224 (1978)). As Customs was investigating Sunline for violation of U.S. import laws, any record of the investigation falls squarely within the Court No. 07-00067 Page 17 § 552(a)(3) provision for disclosure upon request and is potentially barred from disclosure by § 552(b)(7)(A).11 Furthermore, with regard to law enforcement investigations, FOIA creates a presumption of confidentiality, thereby foreclosing prior common law disclosure obligations. FOIA presumes that an agency may withhold information about a law enforcement investigation unless and until a request for disclosure is made and such request is determined not to fall within the § 552(b)(7)(A) exception. Therefore, it cannot coexist with the common law’s obligation to affirmatively disclose material facts, insofar as material facts include information regarding law enforcement investigations. Where a statute conflicts with the common law, the statute controls. See City of Milwaukee v. Ill. and Mich., 451 U.S. 304, 314 (1981) (“Federal common law is a ‘necessary expedient,’ and when Congress addresses a question previously governed by a decision rested on federal common law the need for such an unusual exercise of lawmaking by federal courts disappears.” (citation omitted)). 11 The court is not in a position to decide if Customs must disclose the investigation of Sunline pursuant to § 552(a)(3) or whether the investigation would be excepted from disclosure under § 552(b)(7)(A). It is irrelevant in this case because no request was ever made. In order for Hartford’s claim to succeed, Customs must have had an obligation to disclose the investigation — which Hartford claims Customs had under a theory of material misrepresentation — but any such obligation, on the facts of this case, is preempted by the disclosure requirements of FOIA. Court No. 07-00067 Page 18 This does not mean that sureties are foreclosed from bringing all material misrepresentation claims against the government due to the disclosure rules of FOIA. Rather, our holding is limited to the facts pled in this case. Here, the disclosure sought by Hartford — the existence of a law enforcement investigation — is one clearly contemplated under the statutory structure of FOIA, reserved to the request procedures of § 552(a)(3), and possibly subject to exception pursuant to § 552(b)(7)(A).12 Therefore, any common law right Hartford may have to disclosure of Custom’s law enforcement investigation under the theory of material misrepresentation is preempted by FOIA. The court makes no decision regarding material misrepresentation claims premised on other facts. 12 In this regard, the Court of Appeals for the Fifth Circuit’s decision in St. Paul Fire and Marine Insurance Co. v. Commodity Credit Corp., 646 F.2d 1064 (5th Cir. 1981), is distinguishable from the facts of this case. St. Paul Fire and Marine concerned bonds issued by the plaintiffs as assurance on a line of credit given by the Community Credit Corporation (“CCC”), a federal government agency, to the United Farmer’s Marketing Association (“UFMA”). Id. at 1066–67. One of the bonds, issued in January 1964, followed a shortage of funds by UFMA in December 1963 that was known to CCC but not to the sureties. Id. at 1068–70. The Fifth Circuit held that the plaintiffs were released from liability on the January 1964 bond because CCC knew of the December 1963 shortage by UFMA and did not inform plaintiffs prior to issuance of the 1964 bond. Id. at 1074–75. While the Fifth Circuit released plaintiffs from liability on a material misrepresentation theory, unlike in this case the material fact to be disclosed was not the existence of a law enforcement investigation; therefore, the facts in St. Paul Fire and Marine do not raise the same FOIA preemption issues that are relevant in this case. Court No. 07-00067 Page 19 In lieu of disclosing the investigation itself, Hartford argues that Customs could have met its common law obligation to avoid material misrepresentation by rejecting the bonds and requiring cash deposits from Sunline for the Hubei entries. Hartford’s theory rests on Customs’ discretionary capacity to accept a cash deposit in lieu of a bond. See 19 C.F.R. § 113.40(a) (2012) (“In lieu of sureties on any bond required or authorized by any law, regulation, or instruction . . . the port director is authorized to accept United States money, United States bonds (except for savings bonds), United States certificates of indebtedness, Treasury notes, or Treasury bills in an amount equal to the amount of the bond.”); see also Section 623(e) of the Tariff Act of 1930, as amended, 19 U.S.C. § 1623(e) (2006).13 However, Hartford has failed to adequately plead this alternative theory. When reviewing agency action pursuant to its 28 U.S.C. § 1581(i) jurisdiction, the court will “hold unlawful and set aside agency action, findings, and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2) (2006); see Gilda Indus., Inc. v. United States, 622 F.3d 1358, 1363 (Fed. Cir. 2010); Candle Artisans v. U.S. Int’l Trade Comm’n, 29 13 All subsequent citations to the Tariff Act of 1930, as amended, are to Title 19 of the U.S. Code, 2006 edition. Court No. 07-00067 Page 20 CIT 145, 149, 362 F. Supp. 2d 1352, 1355 (2005). As the action Hartford wishes to challenge — the decision to accept the bond rather than a cash deposit — is a discretionary decision by the agency,14 Hartford must show, at a minimum, that such decision was an abuse of discretion. Therefore, in order to survive a motion to dismiss for failure to state a claim, Hartford must plead a plausible allegation that Customs’ decision was an abuse of discretion. Because Hartford has not pled a plausible claim for abuse of discretion, the first cause of action cannot be sustained on the basis of Hartford’s alternative theory. However, when appropriate, a dismissal pursuant to Rule 12(b)(5) will be made without prejudice, thereby permitting the plaintiff to file an amended complaint. See Totes-Isotoner Corp. v. United States, 32 CIT 739, 750–51, 569 F. Supp. 2d 1315, 1328 (2008). Therefore, the first cause of action is dismissed without prejudice. If Plaintiff’s complaint is not so amended within thirty (30) days of this opinion, the dismissal will become final. 14 Actions “committed to agency discretion by law” are beyond the scope of judicial review under the Administrative Procedures Act. 5 U.S.C. § 701(a)(2) (2006); Citizens to Pres. Overton Park, Inc. v. Volpe, 401 U.S. 402, 410 (1971). The court does not decide whether the action challenged here does or does not fall within the purview of 5 U.S.C. § 701(a)(2). Court No. 07-00067 Page 21 B. Material Misrepresentation by Sunline In its second cause of action, Hartford asserts fraudulent and material misrepresentation by Sunline. According to the Restatement (Third) of Suretyship and Guaranty § 12(2): If the [surety’s] assent to the secondary obligation is induced by a fraudulent or material misrepresentation by either the principal obligor or a third person upon which the secondary obligor is justified in relying, the secondary obligation is voidable by the secondary obligor unless the obligee, in good faith and without reason to know of the misrepresentation, gives value or relies materially on the secondary obligation. However, Hartford has failed to plead facts sufficient to render plausible a claim of fraudulent or material misrepresentation by Sunline. Iqbal, 556 U.S. at 678. In the Amended Complaint, Hartford asserts only that “[t]hrough means of fraudulent and material misrepresentation, Sunline induced Hartford . . . to issue the single entry bonds covering the Hubei entries.” Am. Compl. ¶ 44. Such a “formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555. As in a recent case before the Court of Appeals for the Federal Circuit, in this case Hartford has asserted a troubling result but no particular facts to explain why that result occurred. Cf. Sioux Honey Ass’n. v. Hartford Fire Ins. Co., 672 F.3d 1041, 1062–64 (Fed. Cir. 2012). In Sioux Honey, the plaintiff claimed that Customs failed to take statutory and regulatory actions resulting in uncollected duties. Id. at 1063. Court No. 07-00067 Page 22 The complaint contained a factual allegation that Commerce had not collected $723 million in duties under the four challenged antidumping orders, but “contain[ed] no facts indicating that the conduct alleged . . . actually occurred and caused the duties to be uncollected and undistributed.” Id. The Court of Appeals found that this conclusory allegation — $723 million in uncollected duties must mean Customs had failed to fulfill its obligations — was possible but fell short of the Twombly requirement of plausibility, because plausibility requires the plaintiff to plead some specific facts that draw a connection between the alleged wrongdoing and the harm. Id. at 1063–64 (“In providing so few facts in support of their allegations, Plaintiffs have done nothing to separate the conduct alleged . . . from a whole host of other possible alternatives.”). Similarly, Hartford’s statement that it was unaware of any investigation or fraudulent behavior by Sunline, though possible, is not enough to support a plausible claim of fraudulent or material misrepresentation. Without pleading any facts regarding the relationship or negotiations between Sunline and Hartford, Hartford has failed to make a plausible case that its ignorance was Sunline’s responsibility, let alone due to behavior amounting to fraudulent or material misrepresentation. However, as with the first cause of action, dismissal is without prejudice, and Hartford may amend the complaint. Again, if Court No. 07-00067 Page 23 Plaintiff’s complaint is not so amended within thirty (30) days of this opinion, the dismissal will become final. II. Hartford Cannot State a Claim for Impairment of Suretyship or Equitable Subrogation on the Facts of this Case A. Impairment of Suretyship/Pro Tanto Discharge Hartford’s third cause of action is for impairment of suretyship or pro tanto discharge. The Restatement describes impairment of suretyship as “[a]n act that increases the secondary obligor’s risk of loss by increasing its potential cost of performance or decreasing its potential ability to cause the principal obligor to bear the cost of performance . . . .” Restatement (Third) of Suretyship and Guaranty § 37(1). When an impairment of suretyship occurs, the surety may be discharged from its obligation in an amount equal to the loss suffered by the surety. Id. § 37 cmt. f. Hartford argues that by returning cash deposits totaling $270,256.92 to Sunline, Customs impaired collateral that Hartford could have applied to the debt owed on the bonds. Hartford’s claim is barred by sovereign immunity. Claims against the United States may be barred by sovereign immunity unless there exists “a clear statement from the United States waiving sovereign immunity . . . together with a claim falling within the terms of the waiver.” Dolan v. U.S. Postal Serv., 546 U.S. 481, 498 (2006) (quoting United States v. White Mountain Apache Tribe, 537 U.S. 465, 472 (2003) (internal Court No. 07-00067 Page 24 quotation marks omitted)). In Lumbermens Mutual Casualty Co. v. United States, 654 F.3d 1305 (Fed. Cir. 2011), the Court of Appeals for the Federal Circuit held that the government had not waived sovereign immunity for implied-in-law contract claims such as impairment of suretyship. In Lumbermens, the plaintiff brought an impairment of suretyship claim in the Court of Federal Claims pursuant to the Tucker Act, 28 U.S.C. § 1491. Id. at 1307. The Court of Appeals recognized that, while impairment of suretyship originated as a defense, state law had evolved to accommodate such an affirmative cause of action, which “stems not from an equitable assignment of rights (like equitable subrogation), but rather is based on an implied-in-law contract theory – i.e., a recovery in the nature of quantum meruit or quantum valebant.” Id. at 1314–15. Although the Tucker Act addresses “‘implied contract[s],’ the Supreme Court has long held that the scope of the Tucker Act’s waiver of sovereign immunity ‘extends only to contracts either express or implied in fact, and not to claims on contracts implied in law.’” Id. at 1316 (quoting Hercules Inc. v. United States, 516 U.S. 417, 423 (1996)). Since impairment of suretyship was determined to be an implied-in-law contract claim, the Court of Appeals held that the Court of Federal Claims lacked subject matter jurisdiction over that claim. Id. at 1317 (“Thus, because Lumbermens’ impairment of suretyship/pro tanto discharge Court No. 07-00067 Page 25 claim is based on a noncontractual state law cause of action, or at most an implied-in-law contract theory, we hold that the Claims Court lacked jurisdiction to consider Lumbermens’ claim.”). Hartford argues that limitations on the waiver of sovereign immunity under either the Tucker Act or the Administrative Procedures Act (“APA”)15 are inapplicable here because 28 U.S.C. § 1581 effectuates its own waiver of sovereign immunity. See Humane Soc’y of the U.S. v. Clinton, 236 F.3d 1320, 1328 (Fed. Cir. 2001) (concluding that “§ 1581 not only states the jurisdictional grant to the Court of International Trade, but also provides a waiver of sovereign immunity over the specified classes of cases”). While Hartford is correct that the applicable waiver of sovereign immunity is to be found in 28 U.S.C. § 1581, the court is hard pressed to find that § 1581 waives affirmative suits for impairment of suretyship. As the Court of Appeals noted in Humane Society, § 1581 waives sovereign immunity “over the specified classes of cases” contained therein. Id. The Court of Appeals has held that this court has jurisdiction in this case pursuant to 28 U.S.C. § 1581(i), Hartford Fire Ins. v. United States, 648 F.3d 1371 15 Customs argues that the waiver of sovereign immunity in a 28 U.S.C. § 1581(i) case is found in the APA, and that the limited waiver of sovereign immunity in the APA cannot be read to waive sovereign immunity in this case. Def.’s Mot. to Dismiss at 21–22. Court No. 07-00067 Page 26 (Fed. Cir. 2011), but this is not the same as holding that sovereign immunity has been waived for all claims asserted.16 Rather, Hartford is now arguing that 28 U.S.C. § 1581, which grants jurisdiction and waives sovereign immunity for suits brought pursuant to the tariff and trade laws, waives sovereign immunity for a state common law claim sounding in contract that is not waived by the Tucker Act. Construing the § 1581 waiver of sovereign immunity strictly in favor of the United States, United States v. Idaho ex rel. Director, Idaho Dep’t of Water Res., 508 U.S. 1, 6–7 (1993) (quoting Ardestani v. INS, 502 U.S. 129, 137 (1991)), § 1581 should not be read to waive sovereign immunity for a claim that is barred in other contexts. This is particularly true where, as here, an impairment of suretyship claim is not one specifically contemplated under the trade laws and, therefore, under § 1581. A claim for impairment of suretyship is more at home in the context of the Tucker Act — where Congress waived sovereign immunity for contract suits against the federal government — but the Court of Appeals has held that affirmative impairment of suretyship claims are specifically excluded from that waiver. To permit such a claim under § 1581 would be an overbroad reading of the § 1581 waiver of sovereign immunity, and the courts “should 16 Nor was the question of sovereign immunity before the Court of Appeals when it decided the jurisdictional question in this case. Court No. 07-00067 Page 27 not take it upon ourselves to extend the waiver beyond that which Congress intended.” Smith v. United States, 507 U.S. 197, 203 (1993) (quoting United States v. Kubrick, 444 U.S. 111, 117–18 (1979)). Therefore, the impairment of suretyship claim must be dismissed.17 B. Equitable Subrogation or Setoff In its final cause of action, Hartford asserts that any liability it owes on the bonds should be offset by the amount of the cash deposits returned to Sunline. Customs styles this claim as one for common law equitable subrogation, while Hartford in its response brief portrays the claim as one for setoff pursuant to 19 C.F.R. § 24.72 (2012). However styled, Hartford’s claim must fail because it can neither setoff nor subrogate funds that are no longer in the possession of Customs. Wash. Int’l Ins. Co. v. United States, 25 CIT 207, 227, 138 F. Supp. 2d 1314, 1333 (2001) (“In order for the court to compel setoff, Customs must be in possession of excess cash deposits or other form of collateral posted by the insolvent principal.”). Customs no longer possesses any money owed to Sunline because the cash deposits in question were returned. Implicitly recognizing this fact, Hartford argues that 17 The court does not reach the issue of whether Hartford may raise impairment of suretyship as a defense to a collection action instituted by Customs for recovery on the bonds. Court No. 07-00067 Page 28 it should receive a setoff because Customs did not timely inform Hartford either that Sunline was a bad credit risk or that Customs was returning the cash deposits. However, this line of argument is not a claim for equitable subrogation or setoff; it is a reiteration of Hartford’s claim for impairment of suretyship. As discussed above, an affirmative claim for impairment of suretyship must be dismissed as barred by sovereign immunity but may remain open to Hartford as a defense to the enforcement action on the bond. CONCLUSION In light of the foregoing analysis, and consistent with this opinion: the first and second causes of action are dismissed without prejudice, and the third and fourth causes of action are dismissed with prejudice. Plaintiff has until September 12, 2012 to submit an amended complaint. If Plaintiff’s complaint is not amended by that date, the court will enter a final judgment of dismissal. It is SO ORDERED. /s/ Donald C. Pogue Donald C. Pogue, Chief Judge Dated: August 13, 2012 New York, New York --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/820103. Public record. Not legal advice.