Hartford Fire Insurance v. United States

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 Ҥ 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