United States v. Spanish Foods, Inc.

Slip Op. 01-14

UNITED STATES COURT OF INTERNATIONAL TRADE

BEFORE: HONORABLE NICHOLAS TSOUCALAS
___________________________________
:
UNITED STATES, :
:
Plaintiff, :
:
v. : Court No. 98-03-00620
:
SPANISH FOODS, INC., et al., :
:
Defendants and :
:
FAUSTO DIAZ-OLIVER, et al., :
:
Third-Party Plaintiffs, :
:
v. :
:
CLAUDIO L. MARTINEZ, :
:
Third-Party Defendant :
___________________________________:

[Plaintiff’s motion for summary judgment is denied; defendants’
cross-motion for summary judgment is denied.]

Stuart E. Schiffer, Acting Assistant Attorney General; David
M. Cohen, Director; Commercial Litigation Branch, Civil Division,
United States Department of Justice (James W. Poirier) for
plaintiff.

Carroll & Associates, P.A. (Linda L. Carroll) for Lilliam S.
Martinez.

Fotopulos & Spridgeon (Thomas E. Fotopulos) for Fausto Diaz-
Oliver.

Collier Shannon Scott, PLLC (Paul C. Rosenthal, John B. Brew
and John M. Herrmann) for Remedios Diaz-Oliver.

Holland & Knight LLP (Gregory Baldwin) for George Mencio, Jr.
Court No. 98-03-00620 Page 2

O R D E R

Defendants Spanish Foods, Inc., Lilliam S. Martinez, Francisco

Hernandez-Perez, Fausto Diaz-Oliver, Remedios Diaz-Oliver and

Vincente Hernandez-Perez (“Defendants”), being sued by the United

States for civil penalties and lost duties for 158 violations of 19

U.S.C. § 1592 on March 27, 1998, had moved for summary judgment

claiming that the Government commenced this action after the

expiration of the five-year statute of limitations provided for in

19 U.S.C. § 1621, and the Government had filed a cross-motion for

summary judgment striking defendants' statute of limitations

defense contending that this action was commenced in a timely

manner. See United States v. Spanish Foods, Inc., 24 CIT ___, 118

F. Supp. 2d 1293 (2000). Both motions have been denied, see id.,

and the trial on the issue was held on January 17 and 18, 2001.

I. Undisputed Facts

Spanish Foods is the United States subsidiary of a Spanish

food producer. See Def.s’ Pre-Trial Mem. (“Def.s’ Mem.”) at 2. In

or around 1990, Spanish Foods entered an agreement with Juan

Antonio Sirvent Selfa, S.A. (“JASS”) to become the exclusive United

States importer of food products exported from Spain by JASS. See

id. Consequently, JASS’ former United States importer, General

Commodities International, Inc. (“GCI”), hired the law firm of

Holland & Knight (“H&K”) to proceed with a suit against JASS for
Court No. 98-03-00620 Page 3

breach of contract. See id.

In the course of the litigation, George Mencio (“Mencio”), a

partner at H&K, subpoenaed and received documents from Spanish

Foods that indicated the presence of a “double invoicing” system

between Spanish Foods and JASS. See id. Mencio contacted Don Zell

(“Zell”), an employee of H&K, and a meeting was arranged between

Mencio, Zell and Benigno Gonzalez (“Gonzalez”), an officer of GCI.

See id. at 2-3. During the meeting, Gonzalez pointed out some

documents and a cover letter referring to these documents and

translated them from Spanish into English for Zell. See id.; Tr.

at 52-53. The documents and the letter suggested that Spanish

Foods and its president, Lilliam Martinez (“Martinez”), were

submitting false invoices to Customs. Pl.’s Pre-Trial Br. (“Pl.’s

Br.”) at 4; Def.s’ Mem. at 3. Mencio and Gonzalez asked Zell to

contact Customs Service (“Customs”) in order to arrange a meeting

between Mencio, Gonzalez and a Customs officer.

Zell called Customs officer Carelli (“Carelli”) on March 24,

1993. During this brief phone conversation, Zell asked Carelli

whether Carelli would be willing to meet an unnamed client of H&K.

See Pl.’s Br. at 6-7; Def.s’ Mem. at 3-4. Carelli agreed to the

meeting and, subsequently, Mencio called Carelli setting the

meeting on March 29, 1993, at the premises of H&K. See id.

The meeting on March 29, 1993, was attended by Mencio,
Court No. 98-03-00620 Page 4

Gonzalez, Carelli and Robin Avers, Carelli’s supervisor (“Avers”).

See Pl.’s Br. at 4; Def.s’ Mem. at 3-4. At the meeting, Gonzalez

provided Carelli and Avers with the double invoicing documents and

the cover letter. See id.

II. Standard of Review

The Government asserts that the statute of limitations

contained in 19 U.S.C. § 1621 (1994) must be narrowly construed by

this Court in favor of the Government. In support of this

proposition, the Government relies on Badaracco v. Commissioner of

Internal Revenue, 464 U.S. 386, 398 (1984). The Government

misreads Badaracco and its progeny.

Badaracco addressed the application of section 6501(a) of the

Internal Revenue Code of 1954. The statute established a general

3-year period of limitations “after the return was filed” for the

assessment of federal income taxes. Id. at 388. However, section

6501(c)(1) provided that if there was “a false or fraudulent return

with the intent to evade tax,” the tax then could be assessed “at

any time.” Id. In Badaracco, petitioners conceded that they had

filed fraudulent income tax returns that were later amended in a

non-fraudulent way and additional taxes were paid. See id. The

IRS, however, proceeded to collect penalty funds for the fraud

committed. See id. at 389. The Court in Badaracco held that where

a taxpayer files a false or fraudulent return, but later files a
Court No. 98-03-00620 Page 5

non-fraudulent amendment, a tax may be assessed at any time because

the plain and unambiguous language of section 6501(c)(1) permits

the IRS to assess “at any time” the tax for the year in which the

taxpayer has filed “a false or fraudulent return,” despite any

subsequent disclosure the taxpayer makes. Id. at 399-401. Hence,

Badaracco is not an applicable precedent to the case at bar

because, unlike § 6501(c)(1), no part of 19 U.S.C. § 1621 provides

for bringing an action “at any time.” Additionally, the rationale

of Badaracco relies on cases factually and legally irrelevant to

the case at bar.1 In sum, the rule of statutory construction

articulated by the Badaracco Court--the principle that statutes of

limitations, sought to be applied to bar rights of the government

must be strictly construed in favor of the government--applies only

in the absence of clear congressional intent to bind the government

to the time frame articulated by the statute. See Pacific Coast

Steel Co. v. McLaughlin, 61 F.2d 73 (9th Cir. 1932).

1
Specifically, the Court in Badaracco relied on: (1) Lucas v.
Pilliod Lumber Co., 281 U.S. 245, 249 (1930), which held that the
five-year period of limitations prescribed by section 277 of the
Revenue Act of 1924 did not begin to run either at the time of the
filing of a “tentative return,” or at the time of the filing of a
return not verified by the proper corporate officers because the
Revenue Act of 1918 requires returns of corporations be sworn to as
specified; and (2) E.I. du Pont de Nemours & Co. v. Davis, 264 U.S.
456, 462 (1924), case holding that an action by the Director
General of Railroads to recover for a liability on behalf of the
United States is subject to no time limitation if the only
provision prescribing a period of limitation refers to “carriers”
and the Director, representing the United States, cannot be
qualified as a “carrier.”
Court No. 98-03-00620 Page 6

The statute at issue provides that “[n]o suit or action to

recover . . . any pecuniary penalty or forfeiture of property

accruing under the customs laws shall be instituted unless such

suit or action is commenced within five years . . . .” 19 U.S.C.

§ 1621 (emphasis supplied). Considering that the right to an

action for a penalty or forfeiture under the Customs Law belongs

exclusively to Customs, the statutory language unambiguously

reveals clear congressional intent to bind the government to the

five-year limitation period. Therefore, the rule of strict

construction [of the statute] in favor of the government delineated

in Badaracco is inapplicable to the case at bar.

III. Contentions of the Parties

Section 1621 of Title 19 provides that the statute of

limitations begins to run at “the time when the alleged offense was

discovered . . . .” 19 U.S.C. § 1621 (emphasis supplied).

The Government reads 19 U.S.C. § 1621 jointly with 19 U.S.C.

§ 1592 (1994), the statute providing that a fraudulent violation

must be comprised of two elements: (1) “the entry of . . .

merchandise into the United States by means of a material false

statement;” and (2) “knowledge that the statement was false.”

Pl.’s Br. at 8-9. The Government, therefore, concludes that the

statute of limitations did not begin to run until Customs
Court No. 98-03-00620 Page 7

discovered the presence of both elements in the violation. See id.

at 9-10. The Government, however, offers no explanation to what it

considers to be a “discovery.” The Government only asserts the

following: (1) the presence of a “mere suspicion” does not amount

to discovery, see id. at 11-15; (2) principles of “constructive

discovery” or “constructive notice” are inconsistent with the plain

reading of 19 U.S.C. § 1621, see id. at 11-14; and (3) an offense

cannot be deemed to be discovered until Customs “actually

discovers” the offense. See Tr. at 18. The Government connotes

that the discovery occurs when Customs has enough incriminating

evidence to do any of the following: (1) open a Customs

investigation case; or (2) obtain a search warrant; or (3) file a

complaint in court. See generally, Tr. (Pl.’s questioning of

witnesses Avers and Carelli).

Therefore, the Government maintains that discovery occurred on

April 6, 1993, when “Customs officially determined that there was

sufficient evidence to suspect that . . . entries had been made

fraudulently to warrant opening of a formal investigation.” Pl.’s

Br. at 10-11. Alternatively, the Government suggests that, if

principles of constructive notice are applicable, discovery

occurred on March 29, 1993. See id. at 15; Tr. at 37-38.

Defendants assert that discovery occurred and the statute of

limitations began to run at the moment when Customs was given
Court No. 98-03-00620 Page 8

enough substantive information by a reliable source to be able to

discover all other evidence through the means available to Customs,

including computerized searches. See Tr. at 22-23, 28-30; see also

Def.s’ Mem. at 5, citing to Unites States v. Spanish Foods, Inc.

(“Spanish Foods”), 24 CIT ___, 118 F. Supp. 2d 1293 (2000).

Defendants maintain that under the “discovery rule” articulated in

Spanish Foods, the statute of limitations began to run upon the

March 24, 1993, phone call from Zell to Carelli because during the

conversation Customs was given enough substantive information. See

Tr. at 27.

IV. Analysis

A. Constructive Notice

The Government asserts that “constructive notice,” that is,

notice of a possibility of a wrongful act, is inconsistent with the

plain meaning of 19 U.S.C. § 1621. See Pl.’s Br. at 11.

Constructive notice is defined as “information or knowledge of

a fact [that] . . . could have [been] discovered. . . by proper

diligence [if the party was in] . . . such situation [that] . . .

cast upon [the party] the duty of inquiring . . . .” BLACK’S LAW

DICTIONARY (6th ed.) at 1062. Nothing in this definition conflicts

with the requirement of section 1621 of Title 19 that the statute

of limitations is to begin to run at “the time when the alleged

offense was discovered.” 19 U.S.C. § 1621. Conversely, possession
Court No. 98-03-00620 Page 9

of a proper type of evidence casts the duty of inquiring. See,

e.g., United States v. Nussbaum, 24 CIT ___, 94 F. Supp. 2d 1343

(2000). Therefore, the Government’s contention (that is, the

contention that the statute of limitations began to run on April 6,

1993, when Customs was “actually” rather than “constructively” on

notice because “Customs officially determined that there was

sufficient evidence to suspect that . . . entries had been made

fraudulently to warrant opening of a formal investigation,” Pl.’s

Br. at 10-11) lacks merit.2

B. Discovery Rule

Citing to Spanish Foods, Defendants, in turn, maintain that

under the “discovery rule,” the statute of limitations began to run

2
Moreover, such reading eliminates the entire purpose of and
logic behind the statute of limitations.

At common law there was no fixed time for the bringing of
an action. Personal actions were merely confined to the
joint lifetimes of the parties. The Statute of
Limitations was enacted to afford protection to
defendants against defending stale claims after a
reasonable period of time had elapsed during which a
person of ordinary diligence would bring an action. The
statutes embody an important policy of giving repose to
human affairs. The primary consideration underlying such
legislation is undoubtedly one of fairness to the
defendant.

Flanagan v. Mount Eden Gen. Hosp., 24 N.Y.2d 427, 429 (1969)
(internal citations and quotations omitted).

If the Government is allowed to wait and sit on its rights,
the Government would not need a single day of the five-year
limitation period offered by 19 U.S.C. § 1621.
Court No. 98-03-00620 Page 10

on March 24, 1993, the day of the phone call from Zell to Carelli.

See Tr. at 27. Defendants assert that on March 24, 1993, Customs

received enough reliable substantive information to be able to

discover all other evidence through the means available to Customs,

including computerized searches. See id. at 32-33, 502.

The court in Spanish Foods noted the following:

Courts have construed the first clause of § 1621 to
embrace the discovery rule in fraud cases, which tolls
the limitations period until the time the fraud is
discovered. Thus, under the discovery rule the statute of
limitations is tolled until the date when the plaintiff
first learns of the fraud or is sufficiently on notice as
to the possibility of fraud to discover its existence
with the exercise of due diligence.

24 CIT at ___, 118 F. Supp. 2d at 1297 (internal citations and

quotations omitted, emphasis supplied).

Spanish Foods did not, however, specify what constitutes being

“sufficiently on notice” for the purpose of the discovery of fraud.

The state of being sufficiently on notice for the purpose of the

discovery of fraud has been defined by case law to mean the state

at which a party comes to obtain knowledge of the fraud or such

information on the basis of which the fraud could be detected with

reasonable diligence.3 See, e.g., Urland v. Merrell-Dow

3
Defendants try to offer a test used by the Sixth, Eighth and
Ninth Circuits, see Post-Trial Br. of Remedios Diaz-Oliver (“R.
Diaz-Oliver’s Br.”) at 18-20 (citing to United States v.
$515,060.42 in United States Currency, 152 F.3d 491 (6th Cir. 1998);
United States v. 318 South Third Street, Minneapolis Minnesota, 988
Court No. 98-03-00620 Page 11

Pharmaceuticals, Inc., 822 F.2d 1268 (3rd Cir. 1987), Rosner v.

Codata Corp., 917 F. Supp. 1009 (S.D.N.Y. 1996), Augusta Bank &

Trust v. Broomfield, 643 P.2d 100 (Kan. 1982), Salem Sand & Gravel

Co. v. Salem, 492 P.2d 271 (Ore. 1971). “Reasonable diligence,” in

turn, means “[a] fair, proper and due degree of care and activity,

measured with reference to the particular circumstances; such

diligence, care, or attention as might be expected from a man of

ordinary prudence and activity.”4 BLACK’S LAW DICTIONARY (6th ed.) at

457.

As the Government correctly points out, “reasonable diligence”

does not imply the duty to investigate mere suspicions. See Pl.’s

Br. at 12-13. Suspicion is defined as “[t]he apprehension of

something without proof or upon slight evidence . . . .” BLACK’S LAW

DICTIONARY (6th ed.) at 1447 (emphasis supplied). Therefore, the

issue is when Customs came in possession of information or

F.2d 822 (8th Cir. 1993); United States v. James Daniel Good
Property, 971 F.2d 1376 (9th Cir. 1992), accord Fausto Diaz-Oliver’s
Post-Trial Mem. (“F. Diaz-Oliver Mem.”) at 19-21, according to
which the discovery occurs when the government possesses “the means
to discover” the alleged wrong. There is nothing in the test used
by the Sixth, Eighth and Ninth Circuits that invalidates,
mitigates, or contradicts the traditional requirement that the
fraud should be detectable with reasonable diligence.
4
The definition of “due diligence” is “[s]uch a measure of
prudence . . . as is properly to be expected from, and ordinarily
exercised by, a reasonable and prudent man under the particular
circumstances . . . .”; compare “extraordinary diligence” and
“great diligence.” BLACK’S LAW DICTIONARY (6th ed.) at 457.
Court No. 98-03-00620 Page 12

knowledge of facts that: (1) amounted to more than a mere

suspicion; and (2) could have led a man of ordinary prudence to

learn of the fraud or the possibility of fraud under the particular

circumstances.

For the reasons stated below, this Court finds that Customs

received information or knowledge of such facts at the meeting that

took place on March 29, 1993.

C. Defendants’ Evidence With Regard to the March 24, 1993,
Phone Call

The evidence presented by Defendants in support of their

position falls into two categories: (1) evidence of reliability of

the information Customs has received on March 24, 1993, as a result

of the phone call between Zell and Carelli; and (2) evidence of

sufficiency of this information. The Court addresses each set of

evidence in turn.

1. The Information Conveyed to Customs on March 24,
1993, Did Not Amount To Anything But a Mere
Suspicion

Defendants allege that Customs considered the content of the

phone call reliable because of the following: (1) Zell introduced
Court No. 98-03-00620 Page 13

himself to Carelli as an ex-federal law enforcement officer; (2)

Zell stated that he was employed by H&K, a reputable law firm, and

the information was to be produced by a client of H&K; (3) Carelli,

a Customs agent with a busy schedule, agreed to take time to attend

the meeting at H&K and, therefore, to spend one hour on the road;

(4) Avers, who had a very substantial set of responsibilities and,

consequently, a very busy schedule, see Tr. at 194-98, agreed to

accompany Carelli and spent the total of approximately three and a

half hours riding to and attending the meeting; and (5) Avers

notified her supervisor of her plans to attend the meeting. See

Tr. 28-30. Defendants conclude that the aforesaid actions

indicated that: (1) Customs had to and actually did allocate the

phone call from Zell extreme importance; and (2) such extreme

importance demonstrates that the information allegedly conveyed

during the phone call felt out of realm of suspicion and into the

realm of reliable evidence which cast upon Customs the duty of

inquiry. See id.

This Court is not convinced. First, Zell testified that he

did not remember specifying to Carelli the exact places of his

prior employ in his capacity as a law enforcement officer. See Tr.

at 63. There was no evidence presented showing that either Carelli

or Avers conducted any check of Zell’s credibility and/or

background. Customs could doubt or even ignore Zell’s statement
Court No. 98-03-00620 Page 14

that he was an ex-federal law enforcement officer and, therefore,

consider the information given by Zell as trustworthy or as

questionable as if it were coming from any “tipster.”5

Next, both Carelli and Avers testified that although the fact

that the phone call was coming from and the documents were to be

supplied by a reputable law firm like H&K was a factor that

prompted them to attend the meeting, see Tr. at 157, 202-03, 215-

16, they both testified that they did not know what information

they were to receive at the meeting. See id. Indeed, an

invitation from a reputable law firm does not necessarily guarantee

that the information the firm offers is reputable. A law firm

operating on behalf of its client may be propelled to act by less

than righteous motives frequent in litigious process. The value of

the information, therefore, may be inadvently misrepresented or

unduly enhanced. Carelli and Avers would have been indeed

5
Defendants assert that Zell had to sound credible to Carelli
because of the following: (1) Zell was recently hired by H&K; (2)
Zell wanted to seize the opportunity to show H&K that Zell “could
do something;” and (3) Zell made an extra effort to get Carelli’s
attention. See Tr. at 28. While it is not the position of this
Court to ascertain or question either Zell’s usefulness to H&K in
other assignments or Zell’s level of zeal in his execution of those
assignments, the Court does not share Defendants’ confidence that
Zell’s earnest desire to instill credibility necessarily translated
into Carelli’s belief that the caller was credible. Indeed, Zell
testified that Carelli “indicated that he would want to come out
and see for himself the documents,” Tr. at. 66 (emphasis supplied),
a statement certainly not indicating solid reliance on the part of
Carelli.
Court No. 98-03-00620 Page 15

justified in doubting the reliability of the information even if

they did not doubt the reliability of the source. Accord Tr. at

216. Considering that both Carelli and Avers testified that they

were going to the meeting “in the blind,” see Tr. at 157, 207, this

Court has no reason to find that either Carelli or Avers allocated

extreme importance to the information received on March 24, 1993.

Finally, while Carelli and Avers did acknowledge that

attending a meeting at a location other than Customs was a rare

practice, they both stated that such practice nonetheless took

place, in spite of busy schedules of both officers.6 See Tr. at

143-44, 212-13. Different people have different approaches and

modes in which they execute their duties. Defendants offered no

evidence showing that the three and a half hours field trip was

entirely incompatible with Carelli or Avers’ working pattern.

Accordingly, this Court finds it hard to fathom why the field trip

or Avers’ act of notifying her supervisor about her anticipated

absence, see Tr. at 209-10, 236, is categorized by Defendants as an

extraordinary conduct.

In sum, the actions of Zell, Carelli and Avers that Defendants

claim to be evidence supporting the reliability of the information

6
Avers testified that she occasionally accompanied Carelli on
field trips. See Tr. at. 143-44.
Court No. 98-03-00620 Page 16

conveyed during the March 24, 1993, phone call verifies only the

fact that Customs officers hoped that the field trip would not be

in vain. While the aforesaid actions indicate the presence of

suspicion on the part of Customs, none of these actions indicates

that Customs was propelled to attend the March 29, 1993, meeting by

receipt of what could be qualified as reliable information. See

BLACK’S LAW DICTIONARY (6th ed.) at 1447.

2. It Is Unlikely That the Information Conveyed to
Customs on March 24, 1993, Was Sufficient

Defendants allege that the content of the March 24, 1993,

phone call provided Customs with sufficient evidence because: (1)

Zell furnished Carelli with the names of Spanish Foods and

Martinez, see Tr. at 29, 485, 494-95;7 and (2) the names of Spanish

7
One of the Defendants, Fausto Diaz-Oliver (“F. Diaz-
Oliver”), asserts that the notes that Carelli took during the March
29, 1993, meeting were actually taken by Carelli during the phone
call on March 24, 1993. See F. Diaz-Oliver Mem. at 17-18. F.
Diaz-Oliver points out that the name of Lilliam Martinez was
misspelled by Carelli as “Lillian,” using a traditional spelling.
F. Diaz-Oliver deduces that the misspelling indicates that the
notes were taken by Carelli prior to Carelli’s opportunity to
examine the documents that had on their face the name of Lilliam
Martinez and were presented by Gonzalez during the March 29, 1993,
meeting. F. Diaz-Oliver concludes that this fact verifies that on
March 24, 1993, Carelli was furnished with all the information
reflected in Carelli’s notes, including the name of Spanish Foods,
Martinez, and the term “double invoicing.”

This Court is not convinced. Zell testified that during his
meeting with Mencio and Gonzalez he took down the name of Martinez.
See Tr. at 54, 68. In addition, Defendants assert that Carelli did
Court No. 98-03-00620 Page 17

Foods or Martinez gave Customs enough information to detect

fraudulent transactions through the use of Customs’ ACS and TECS

computer queries. See id. at 502.

A TECS computer query allows a researcher to determine whether

the importer is subject to Customs’ ongoing investigations.8 See

Tr. at 106, 227. Upon a proper submission, an ACS computer query

could lead a researcher to the entry documents filed by the

importer, prices declared, the identity of the product lines

imported and the names of exporters. See Tr. at 108-10, 112, 228.

An ACS query, however, does not provide the information whether

fraud was committed or if a double invoicing system was used in

particular. See id. at 134-35, 236-37. Had Carelli submitted the

name of Spanish Foods for an ACS query, he would have received over

350 entries without any information on which ones of those entries,

if any, were fraudulent. See id. at 118-19.

not examine the documents presented by Gonzalez until after the
meeting. See R. Diaz-Oliver’s Br. at 25. Had Zell actually given
the name of Martinez to Carelli, he would have every reason to
spell the unusual name. Conversely, there would have been no
reason to provide Carelli with the correct spelling of Martinez’
first name if Carelli were handed the documents at the time he was
taking his notes.

Therefore, if the misspelling verifies anything, it verifies
that more likely than not Carelli was not given the name of
Martinez during the March 24, 1993, phone call.
8
Spanish Foods had no TECS record on March 24, 1993.
Court No. 98-03-00620 Page 18

Defendants are implying that Carelli could determine that the

type of fraud was double invoicing. See Tr. at 128-29. Because

there are numerous violations of Customs Law and Carelli would have

no means to know what to search for, this Court cannot embrace

Defendants’ broad proposition.

Carelli’s research would have been narrower and, therefore,

could possibly have been conducted had Carelli known that: (1) the

violation in issue was double invoicing; and (2) either the name of

the product line fraudulently exported or the name of the exporter

selling the product in issue to Spanish Foods.

Defendants acknowledge that during the March 24, 1993, phone

call, Zell did not identify the name of the product line in issue

or the exporter to Carelli. See Pl.’s Br. at 7. Defendants,

however, claim that: (1) Zell mentioned to Carelli that the

violation in issue was double invoicing;9 and (2) Carelli,

therefore, could identify the fraudulent transactions even without

knowing the line of the product or the name of the exporter, merely

by comparing the prices submitted by Spanish Foods on every product

9
Zell testified that he conveyed to Carelli that he, Zell, has
“read” documents (meaning had the documents translated to him) that
“looked to be duplicate invoices for different amounts of money,
with a cover letter explaining how to use those documents, that one
[of those duplicates] could be used to submit to Customs.” Tr. at
65.
Court No. 98-03-00620 Page 19

of each entry to those submitted by other companies on the products

analogous to those imported by Spanish Foods.10 See Tr. at 228-30.

In view of the fact that there were over 350 ACS entries by Spanish

Foods, this Court is hesitant to hold that this monumental task is

“such a measure of prudence . . . as is properly to be expected

from, and ordinarily exercised by, a reasonable and prudent man

under the particular circumstances . . . .” BLACK’S LAW DICTIONARY

(6th ed.) at 457; accord Pl.’s Post-Trial Br. at 13-18 (pointing

out that there is no evidence that such massive investigation was

ever done, or is feasible, or could be successful); compare R.

Diaz-Oliver’s Br. at 24 (alleging that the reasonableness of the

task is irrelevant to the issue of the discovery of fraud).

Moreover, the Court finds it unlikely that during the March

24, 1993, phone call Zell did indicate to Carelli that the

violation in issue was double invoicing. The pertinent evidence is

as follows: (1) Zell’s time sheet shows a March 24, 1993, entry

reading that Zell “confer[ed] with U[nited] S[tates] Customs

special agent Frank Carelli regarding assistance by Customs,” see

Def.s’ Mem., Ex. 5 at 2-3; and (2) Zell’s time sheet shows a March

29, 1993, entry reading that Zell attended a “meet[ing] with

10
Defendants point out that Carelli eventually did this type
of comparison. See Tr. at 529. Defendants, however, fail to
observe that the comparison actually executed by Carelli was made
upon the information pointing out the wrongful transactions in
order to prove the fraud rather than to detect it.
Court No. 98-03-00620 Page 20

U[nited] S[tates] Customs special agents and attend[ed] debriefing

of client regarding double invoicing scheme by JASS . . . .”11 See

id. at 3 (emphasis supplied).

While different people have different approaches and modes in

which they execute their duties, each person tends to execute

similar duties in a similar fashion. Compare Martinez’ Post-Trial

Br. at 8 (failing to observe this fact and attempting to justify

the inconsistency by stating that the entries are intended to be

brief descriptions rather than diary type entries). It is

11
In addition, there are the following facts: (1) Zell’s
testimony reveals that Zell is not absolutely sure whether he used
the precise term “double invoicing,” see Tr. at 66; and (2)
Carelli, in turn, testified that he did not remember Zell using the
term “double invoicing,” see Tr. at 104.

Defendants assert that Zell’s testimony is particularly
trustworthy as testimony against interest because Zell’s testimony
is likely to deprive Gonzalez, a client of Zell’s employer, H&K,
from moiety if it is established that it was Zell and not Gonzalez
who was the source of the information that could lead the
Government to recover penalty. See R. Diaz-Oliver’s Br. at 5.
The logic of this argument is not entirely clear to the Court.
While a possible desire of Zell to claim the moiety personally or
the emotional forces behind the relationship between Zell, his
employer and the employer’s client are not the subject to be taken
by the Court, it is apparent that neither Zell nor Gonzalez are to
receive any moiety if the Government is to be defeated in this
case. Additionally, if the Government is to be defeated, Gonzalez
will lose the opportunity to see Spanish Foods (the ex-business
partner of GCI, Gonzalez’ employer, who switched from GCI to JASS)
brought to justice and properly punished. This Court has no
knowledge whether the ability to claim the moiety is more important
to Gonzalez than seeing the Government prevail. Therefore, it is
speculative to suggest that Zell is willing to accommodate the
financial but not emotional motives of Gonzalez.
Court No. 98-03-00620 Page 21

undisputed that the subject of the meeting that took place on March

29, 1993, was the double invoicing. It is equally undisputed that

the meeting was a debriefing of Gonzalez, an H&K client, and that

Gonzalez conveyed the name of JASS and the information about the

double invoicing to Carelli and Avers. Zell’s March 29, 1993,

entry properly reflects all of these identities and events. See

Def.s’ Mem., Ex. 5 at 3. Conversely, Zell’s March 24, 1993, entry,

while diligently identifying Carelli, omits any reference to a

“double invoicing” scheme in the fashion of Zell’s March 29, 1993,

entry. In fact, in his March 24, 1993, entry Zell referred to

“assistance by Customs.” Id.

This leads the Court to conclude that on March 24, 1993, Zell,

more likely than not, merely alerted Carelli to the general fact of

a possible violation. Assuming so, the information given by Zell

provided Carelli with insufficient knowledge to conduct an ACS

search and determine the presence of fraud in the entries declared

by Spanish Foods.12

12
One of the defendants, Remedios R. Diaz-Oliver (“R. Diaz-
Oliver”), points out that because the name of Spanish Foods was not
present in Zell’s March 29, 1993, entry while it is undisputed that
Spanish Foods was discussed during the March 29, 1993, meeting, the
fact of presence or omission of a term or a name is not
representative of the subjects discussed. See R. Diaz-Oliver’s Br.
at 6-7. R. Diaz-Oliver fails to observe that these similar
omissions are consistent actions, unlike Zell’s inconsistent
entries about the “double invoicing.”

In addition, R. Diaz-Oliver notes that “Carelli himself
Court No. 98-03-00620 Page 22

V. CONCLUSION

This Court concludes that Customs did not learn of the fraud

or was not sufficiently on notice as to the possibility of fraud to

discover its existence with the exercise of due diligence on March

24, 1993, the day of Zell’s phone call to Carelli. Customs,

however, was put sufficiently on notice as to the possibility of

fraud on March 29, 1993, when Gonzalez provided Carelli and Avers

with the double invoicing documents and the cover letter.

concedes that in March 24, 1993[,] telephone call, Mr. Zell stated
that the issue involved double invoicing.” Id. at 8 (citing to Tr.
at 377). Carelli, however, did not concede exactly that. Carelli
merely conceded recalling that he stated in his deposition that he
“assumed [the prospect information] was about double invoicing.”
Tr. at 377 (emphasis supplied). This assumption hardly lends
support to Defendants’ claim that Customs received either
sufficient or reliable evidence that amounted to anything more than
a mere suspicion.
Court No. 01-0003 Page 24
23

Therefore, the action in issue, commenced prior to the expiration

of the five-year limitation period posed by 19 U.S.C. § 1621, was

commenced in a timely fashion. Based on the foregoing, it is

hereby

ORDERED that parties proceed with the litigation on merits.

______________________________
NICHOLAS TSOUCALAS
SENIOR JUDGE

DATED: February 2, 2001
New York, New York