Justia U.S. 3rd Circuit Court of Appeals Opinion SummariesArticles Posted in International Trade
SIH Partners LLLP v. Commissioner of Internal Revenue
A Controlled Foreign Corporation’s income is not taxable to its domestic shareholders unless the income is distributed to them. CFC shareholders began taking loans either from the CFC or from third-party financial institutions using the CFC’s assets as collateral or having the CFC guarantee the loans to obtain a monetary return on their foreign investment. The Revenue Act of 1962 requires the inclusion in the domestic shareholder’s annual income of any increase in investment in U.S. properties made by a CFC it controls, 26 U.S.C. 956(c)(1)(C), and provides that a CFC shall be considered as holding an obligation of a U.S. person if such CFC is a pledgor or guarantor of such obligations. IRS regulations determine when a CFC’s pledge or guarantee results in the CFC being deemed the holder of the loan, and how much of the “obligation” a CFC pledgor or guarantor is deemed to hold, 26 C.F.R. 1.956-2(c)(1) and 1.956-1(e)(2). Through the SIH family, Appellant owns two CFCs. Another SIH affiliate, SIG, borrowed $1.5 billion from Merrill Lynch in 2007 in a loan guaranteed by over 30 SIH affiliates, including the CFCs that Appellant owns. Although the loan dwarfed the CFCs’ assets (roughly $240 million), Merrill Lynch insisted on having the CFCs guarantee. In 2011, when the CFCs distributed earnings to Appellant, their domestic shareholder, the IRS determined that Appellant should have reported the income at the time the CFCs guaranteed the SIG loan, treating each CFC as if it had made the entire loan directly, though the amount included in Appellant’s income was reduced from the $1.5 billion principal of the loan to the CFCs’ combined “applicable earnings.” This resulted in an additional tax of $378,312,576 to Appellant. The IRS applied the then-applicable 35% rate for ordinary income. The Tax Court and Third Circuit ruled in favor of the IRS, rejecting Appellant’s challenges to the validity of the regulations and the use of the ordinary income tax rate. View "SIH Partners LLLP v. Commissioner of Internal Revenue" on Justia Law
In re: World Imports Ltd
The creditors shipped goods via common carrier from China to World Imports in the U.S. “free on board” at the port of origin. One shipment left Shanghai on May 26, 2013; World took physical possession of the goods in the U.S. on June 21. Other goods were shipped from Xiamen on May 17, May 31, and June 7, 2013, and were accepted in the U.S. within 20 days of the day on which World filed its Chapter 11 petition. The creditors filed Allowance and Payment of Administrative Expense Claims, 11 U.S.C. 503(b)(9), allowable if: the vendor sold ‘goods’ to the debtor; the goods were "received" by the debtor within 20 days before the bankruptcy filing; and the goods were sold in the ordinary course of business. Section 503(b)(9) does not define "received." The Bankruptcy Court rejected an argument that the UCC should govern and looked to the Convention on Contracts for the International Sale of Goods (CISG). The CISG does not define “received,” so the court looked to international commercial terms (Incoterms) incorporated into the CISG. Although no Incoterm defines “received,” the incoterm governing FOB contracts indicates that the risk transfers to the buyer when the seller delivers the goods to the common carrier. The Bankruptcy Court and the district court found that the goods were “constructively received” when shipped and denied the creditors’ motions. The Third Circuit reversed; the word “received” in 11 U.S.C. 503(b)(9) requires physical possession. View "In re: World Imports Ltd" on Justia Law
Customs Fraud Investigations LLC v. Victaulic Co.
CFI, comprised of former insiders from the pipe fitting industry, brought a False Claims Act qui tam action against Victaulic, a global manufacturer and distributor of pipe fittings. The complaint alleged that Victaulic, for many years, imported millions of pounds of improperly marked pipe fittings without disclosing that the fittings are improperly marked, thereby avoiding paying marking duties. CFI alleged that Victaulic imported approximately 83 million pounds of fittings from overseas, 2003-2013, and a miniscule fraction of Victaulic’s fittings for sale in the U.S. bear any indication of their foreign origin, with an even smaller percentage bearing country of origin markings required by 19 U.S.C. 1304. The district court dismissed with prejudice, rejecting Victaulic’s jurisdictional argument that CFI’s complaint was based primarily on publicly available information, but finding that it failed to cross the threshold from possible to plausible. The court stated that it believed the FCA’s reverse false claims provision did not cover failure to pay marking duties, but declined to rule on those grounds because the complaint was based on legal conclusions unsupportable by the facts alleged. The Third Circuit vacated. Failure to pay marking duties may give rise to reverse false claims liability. CFI’s complaint contains enough reference to hard facts, combined with other allegations and an expert’s declaration, to allege a plausible course of conduct by Victaulic to which liability would attach. View "Customs Fraud Investigations LLC v. Victaulic Co." on Justia Law
United States v. Georgiou
From 2004-2008, Georgiou and co-conspirators engaged in a stock fraud scheme resulting in more than $55 million in actual losses. The scheme centered on four stocks, all quoted on the OTC Bulletin Board or the Pink OTC Markets Inc. The conspirators opened brokerage accounts in Canada, the Bahamas, and Turks and Caicos, which they used to trade stocks, artificially inflating prices. They were able to sell their shares at inflated prices and used the shares as collateral to fraudulently borrow millions of dollars from Bahamas brokerage firms. In 2006, Waltzer, a co-conspirator, began cooperating in an FBI sting operation. A jury convicted Georgiou of conspiracy, securities fraud, and wire fraud. The district court sentenced him to 300 months’ imprisonment, ordered him to pay restitution of $55,823,398, ordered a special assessment of $900, and subjected Georgiou to forfeiture of $26,000,000. The Third Circuit affirmed, rejecting an argument that the securities and wire fraud convictions were improperly based upon the extraterritorial application of United States law. The securities were issued by U.S. companies through U.S. market makers acting as intermediaries for foreign entities. The court also rejected claims of Brady and Jencks Act violations and of error on evidentiary and sentencing issues. View "United States v. Georgiou" on Justia Law
Control Screening LLC v. Technological Application & Prod. Co.
CS manufactures and sells X-ray and metal detection devices for use in public facilities around the world. Tecapro is a private, state-owned company that was formed by the Vietnamese government to advanced technologies into the Vietnamese market. In 2010, Tecapro purchased 28 customized AutoClear X-ray machines from CS for $1,021,156. The contract provides that disputes shall be settled at International Arbitration Center of European countries for claim in the suing party’s country under the rule of the Center. Tecapro initiated arbitration proceedings in Belgium in November 2010. In December 2010, CS notified Tecapro of its intention to commence arbitration proceedings in New Jersey. In January 2011, CS filed its petition to compel arbitration in New Jersey and enjoin Tecapro from proceeding with arbitration in Belgium. The district court concluded that it had subject matter jurisdiction under the U.N.Convention on the Recognition and Enforcement of Foreign Arbitral Awards, that it had personal jurisdiction over Tecapro, and that Tecapro could have sought to arbitrate in Vietnam and CS in New Jersey. The latter is what happened, so “the arbitration shall proceed in New Jersey.” After determining that it had jurisdiction under the Federal Arbitration Act, 9 U.S.C. 1, the Third Circuit affirmed. View "Control Screening LLC v. Technological Application & Prod. Co." on Justia Law
Mabey Bridge & Shore, Inc. v. Schoch
The Pennsylvania Steel Products Procurement Act,73 Pa. Cons. Stat. 1881-1887, prohibits the use of temporary bridges made out of foreignsteel on public works projects. The district court rejected a claim that the law was preempted by the Buy America Act, 23 U.S.C. 313, and that it violated the Commerce Clause, Contract Clause, and Equal Protection Clause. The Third Circuit affirmed. The federal Act contemplates more restrictive state laws. The state law was authorized by Congress, is rational, and did not, at its enactment, impair plaintiff's existing contracts. View "Mabey Bridge & Shore, Inc. v. Schoch" on Justia Law
Sullivan v. DB Inv., Inc.
Plaintiffs alleged that De Beers coordinated worldwide sales of diamonds by executing agreements with competitors, setting production limits, restricting resale within regions, and directing marketing, and was able to control quantity and prices by regimenting sales to preferred wholesalers. Plaintiffs claimed violations of antitrust, consumer protection, and unjust enrichment laws, and unfair business practices and false advertising. De Beers initially refused to appear, asserting lack of personal jurisdiction, but entered into a settlement with indirect purchasers that included a stipulated injunction. De Beers agreed to jurisdiction for the purpose of fulfilling terms of the settlement and enforcement of the injunction. The district court entered an order, approving the settlement and certifying a class of Indirect Purchasers in order to distribute the settlement fund and enforce the injunction. De Beers then entered into an agreement with direct purchasers that paralleled the Indirect Purchaser Settlement. The Third Circuit remanded the certification of two nationwide settlement classes as inconsistent with the predominance inquiry mandated by FRCP 23(b)(3), but, on rehearing, vacated its order. The court then affirmed the class certifications, rejecting a claim that the court was required to ensure that each class member possesses a colorable legal claim. The settlement was fair, reasonable, and adequate. View "Sullivan v. DB Inv., Inc." on Justia Law
Animal Science Prods. Inc. v. China Minmetals Corp.
Plaintiffs, domestic purchasers of magnesite, alleged that defendants, Chinese exporters, engaged in a conspiracy to fix the price of magnesite in violation of the Clayton Act, 15 U.S.C. 4, 16, predicated on alleged violation of the Sherman Act, 15 U.S.C. 1. The district court dismissed, holding that it lacked subject matter jurisdiction under the Foreign Trade Antitrust Improvements Act, 15 U.S.C. 6a. The Third Circuit vacated. FTAIA states that the Sherman Act "shall not apply to conduct involving trade or commerce . . . with foreign nations" with two exceptions. The Sherman Act does apply if defendants were involved in "import trade or import commerce" or if defendants' "conduct has a direct, substantial, and reasonably foreseeable effect" on domestic commerce, import commerce, or certain export commerce and that conduct "gives rise" to a Sherman Act claim. FTAIA imposes a substantive merits limitation, not a jurisdictional bar. On remand, if the court addresses the "import trade" exception, it must assess whether plaintiffs adequately allege that defendants' conduct is directed at a U.S. import market and not solely whether defendants physically imported goods. If the court assesses the "effects exception" it must determine whether the alleged domestic effect would have been evident to a reasonable person making practical business judgments.
Merck & Co, Inc. v. United States
The company wished to use cash reserves from subsidiaries in Ireland for activities such as stock repurchase. Foreign income is not taxable in the U.S. when earned, but is taxed if invested in U.S. property, 26 U.S.C. 951-965, including debt obligations of U.S. companies. To obtain use of the funds, the company entered into a 20-year interest rate swap. The IRS notice then in effect provided that, upon sale of one "leg" of a swap, the lump sum exchanged for the right to receive revenues over the remaining life of the swap, should not be recognized as income all at once, but should be accounted for over the life of the swap. Parties are now required to treat all such payments as loans. In 2004, the IRS assessed deficiencies of $472,870,042, characterizing the transactions as immediately-taxable loans, not sales. The district court agreed. The Third Circuit affirmed. The former notice did not apply because the transactions were loans. The parties structured the transactions expecting to recover principal; involvement of a third-party bank did not preclude characterization as a loan. Disparate treatment is not ordinarily considered a defense to tax liability.
In Re: Application of Chevron
After first filing claims in a U.S. district court, inhabitants of eastern Ecuador filed suit in their country, alleging that the company contaminated the area and caused residents' health problems. The company, attempting to establish fraud and collusion in the proceedings, sought discovery from the plaintiffs' attorney for use in that litigation, in criminal proceedings in Ecuador, and in arbitration initiated against the Republic of Ecuador with the United Nations. The district court granted discovery under 28 U.S.C. 1782, which provides that the court of the district in which a person is found may order him to give testimony or to produce a document or thing for use in a proceeding in a foreign tribunal, unless the disclosure would violate a legal privilege. The court concluded that attorney-client privilege had been waived because documentary film-makers had been allowed intimate access to proceedings involving the environmental litigation. The Third Circuit reversed in part, holding that the public disclosure of certain communications did not lead to "subject matter waiver" of attorney-client privilege for communications that were covered by the privilege. The court remanded for consideration of whether certain communications are discoverable pursuant to the crime-fraud exception to the attorney-client privilege.