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Tri-State Hospital Supply Corp. v. United States

July 6, 2007


The opinion of the court was delivered by: Henry H. Kennedy, Jr. United States District Judge


Tri-State Hospital Supply Corporation ("Tri-State") brings this action against the United States under the Federal Tort Claims Act ("FTCA"), 28 U.S.C. §§ 1346(b), 2671 et seq., alleging that the United States Customs Service ("Customs") and the Department of Justice ("DOJ") (collectively "Government") subjected it to a malicious prosecution and abuse of process in connection with their six-year investigation of Tri-State for its alleged violations of United States customs laws and the imposition of civil penalties on Tri-State for such alleged violations. Tri-State seeks to recover $3.2 million in damages, the attorneys' fees it incurred defending itself against the Government's actions.

Before the court is the Government's motion for summary judgment. Upon consideration of the motion, the opposition thereto, and the summary-judgment record, the court concludes that the motion must be granted.


A. Criminal Investigation

Tri-State is a privately-owned corporation in Howell, Michigan, that sells hospital supplies throughout the United States. In the early 1980s, it began importing surgical instruments from suppliers in Pakistan. The surgical instruments entered the United States at the Port of Detroit, where Tri-State often engaged the services of a licensed customs broker, LEP International, Inc., to complete the required customs entry forms. The forms require the importer to list "the price actually paid or payable" for goods entering the country. 19 U.S.C. § 1401a(b)(1). Although Tri-State paid the invoice price for the imported goods, it subsequently received "rebates" from its Pakistani suppliers. On the customs entry forms, however, Tri-State declared the price that was reflected on the invoices accompanying the imported supplies. As a result, it overstated the price it ultimately paid for the supplies after taking into account the subsequent rebates. The supplies were not subject to duty, however. Thus, the United States lost no revenue as a result of the inflated invoices.

In early 1994, Tri-State became the subject of civil and criminal investigations for allegedly submitting false invoices to Customs. Customs officials in Washington, D.C., had received information regarding currency transactions by three individuals in Virginia which appeared to have been structured to avoid currency reporting requirements, and which may have indicated money laundering was taking place. These individuals had transmitted money to various other individuals in Pakistan as well as to four U.S. importers of surgical instruments, including Tri-State.*fn1

On March 28, 1994, Customs officials executed a search warrant at Tri-State's Michigan headquarters, seizing evidence relating to the value of surgical instruments imported from Pakistan, and subsequently sought the indictment of Tri-State and two of its executives for criminal customs fraud. Both the United States Attorney for the Eastern District of Michigan and the United States Attorney for the Eastern District of Virginia declined to prosecute.

B. Customs Proceeding

United States law requires importers to file true and accurate invoices with Customs. See 19 U.S.C. §§ 1481, 1485. The Government may seek to collect civil penalties for fraudulent, grossly negligent or negligent violations of the duty to file accurate invoices under 19 U.S.C. § 1592, which is the principal enforcement mechanism of the customs laws for false invoicing. The relevant portions of § 1592 provide:

(1) General rule

Without regard to whether the United States is or may be deprived of all or a portion of any lawful duty thereby, no person, by fraud, gross negligence, or negligence--(A) may enter, introduce, or attempt to enter or introduce any merchandise into the commerce of the United States by means of--

(i) any document or electronically transmitted data or information, written or oral statement, or act which is material and false, or

(ii) any omission which is material, or

(B) may aid or abet any other person to violate subparagraph (A).

19 U.S.C.§ 1592(a) (1995).*fn2

Following the decisions of the United States Attorneys not to prosecute Tri-State criminally, Customs began to issue a series of civil penalty notices against Tri-State for violations of customs laws, alleging that Tri-State had fraudulently overstated the prices it had paid for imported surgical instruments and that it had engaged in an international money laundering scheme. Customs officials issued Tri-State a pre-penalty notice in October 1995, indicating that Customs was contemplating the issuance of a claim for $9,484,597 in civil penalties for alleged overstatement of values on 203 items. In February 1996, Customs issued an amended pre-penalty notice seeking $5.8 million in penalties. A penalty notice for $5.8 million was then issued in March 1996. An amended penalty notice was issued in April 1996, again imposing the $5.8 million penalty.

In June 1996, Tri-State's counsel met with Customs officials in Washington, D.C., to present Tri-State's position regarding the penalties. Tri-State's counsel argued that Tri-State had not engaged in a fraudulent scheme and reasonably had relied on its custom broker's advice in reporting the prices of the surgical supplies. Customs was not swayed by Tri-State's explanation and, in July 1996, issued a final penalty notice advising Tri-State that it was responsible for $3,187,719 in penalties for failing to disclose the rebates and true value of the objects imported.

When Tri-State refused to pay the penalty, Customs referred the matter to the DOJ for the collection of civil penalties.

On April 28, 1997, DOJ brought suit against Tri-State, on behalf of Customs, in the U.S. Court of International Trade ("CIT"). At trial, Tri-State moved for judgment as a matter of law on two of the three counts, and DOJ dismissed its fraud claim against Tri-State. The CIT subsequently granted Tri-State's motion for judgment as a matter of law on the gross negligence count, finding "[no] evidence which rises to the level of willful or wanton conduct." Pl.'s Ex. 1 at 755 (CIT Trial Tr.). At the close of trial, a verdict was returned in Tri-State's favor on the sole remaining negligence count.

C. Tri-State's Action against United States

Tri-State filed the instant action in June 2000, alleging that: (1) the Government engaged in malicious prosecution because it lacked probable cause to issue penalty notices against Tri-State or to sue Tri-State for collection of those penalties in the CIT, and that Customs officials knowingly violated their own regulations by seeking to impose civil penalties (Count I ); and (2) the Government engaged in abuse of process in connection with the penalty notices and enforcement trial (Count II ).

Believing that it was jurisdictionally barred from awarding the relief sought by Tri-State because the FTCA does not expressly waive the sovereign immunity of the United States from liability for attorneys' fees, this court dismissed this action. Tri-State Hosp. Supply Corp. v. United States, 142 F. Supp. 2d 93, 103 (D.D.C. 2001) (Tri-State I). On appeal, the D.C. Circuit reversed, holding that attorneys' fees qua damages were recoverable against the United States for abuse of process and malicious prosecution if "the law of the place" where the tort occurred so provides, Tri-State Hospital Supply Corp. v. United States, 341 F.3d 571, 572 (D.C. Cir. 2003) (Tri-State II), and remanded this action for resolution of Tri-State's claims on their merits.


A. Choice of Law under the FTCA

The FTCA provides a limited waiver of the government's sovereign immunity, granting federal district courts jurisdiction over a certain category of claims for which the United States has rendered itself liable. Fed. Deposit Ins. Co. v. Meyer, 510 U.S. 471, 477 (1994). To be actionable under the FTCA, a claim must be:

(1) against the United States, (2) for money damages, . . . (3) for injury or loss of property, or personal injury or death (4) caused by the negligent or wrongful act or omission of any employee of the Government (5) while acting within the scope of his office or employment, (6) under circumstances where the United States, if a private person, would be liable to the claimant in accordance with the law of the place where the act or omission occurred. 28 U.S.C. § 1346(b). Section 1346's reference to the " 'law of the place' means law of the State - the source of substantive liability under the FTCA." Meyer, 510 U.S. at 478. Thus, state law establishes the elements of a particular tort cause of action that is otherwise actionable under the FTCA. Tri-State II, 341 F.3d at 576.

1. Applicable Conflicts Law

A threshold question here, then, is which "place" provides the law that governs TriState's FTCA claim, a question that must be answered by determining which jurisdiction's conflicts law applies. The Government contends that the conflicts law of Michigan should apply while Tri-State contends that the applicable conflicts law is that of the District of Columbia.

To determine which law should be applied, the court must first decide "where the act or omission occurred," and then apply that jurisdiction's "whole law," including its conflicts law, to the facts of this case. Richards v. United States, 369 U.S. 1, 10--11 (1962); Hitchcock v. United States, 665 F.2d 354, 359 (D.C. Cir. 1981). A prerequisite to deciding where the act or omission occurred is determining "which was the relevant act or omission." Hitchcock, 665 F.2d at 359 (emphasis added). In Hitchcock, the plaintiffs, a career Foreign Service Officer who had been assigned a post in Buenos Aires Argentina, and his wife, filed suit against the United States under the FTCA after the wife became paralyzed following the administration of a rabies immunization vaccine to her by a government nurse in Virginia. In determining the place where the relevant act occurred, the court reasoned that the failure by the nurse to warn of the risks of the vaccine was due to low supervision and direction, which was ultimately attributable to the failure of State Department officials in the District of ...

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