Honey-Dumping Fraud Case Suffers Setback

CHICAGO (CN) - The U.S. government cannot use a German food importer's American subsidiary to sue it for allegedly avoiding $80 million in customs duties on illegally imported Chinese honey, a federal judge ruled.

A federal grand jury indicted German food conglomerate Alfred L. Wolff Inc. and its corporate subsidiaries in the United States, Germany, Beijing and Hong Kong, last year on charges that they fraudulently dodged nearly $80 million in customs duties on honey imported to the United States from China between 2002 and 2009.

Wolff allegedly conspired to illegally import Chinese honey into America by labeling it as originating in other countries to avoid paying anti-dumping duties.

The Hamburg, Germany-based company appointed a limited-authority corporate representative for the sole purpose of appearing in court to enter a not-guilty plea on behalf of its U.S. subsidiary. Immediately after entering this plea, the government served Wolff's limited-authority representative with summonses for each of the foreign defendants.

In a motion to quash service of summons of the indictment, Wolff argued that the government's method of service did not comply with the Federal Rules of Criminal Procedure.

The government countered that special circumstances necessitated an exception to this rule since Wolff's U.S. subsidiary was essentially an alter ego for the German corporation that "benefited for years from a business model predicated on fraud and corruption upon the U.S. marketplace by, through, and with ALW USA."

If these allegations were correct, the government would be justified in piercing the corporate veil, and serving a corporation through its subsidiary.

But U.S. District Judge Amy St. Eve rejected this reasoning last week and granted the motion to quash.

According to the judgment, the Federal Rules require the government to serve each defendant by delivering a copy of the summons to "an officer, to a managing or general agent, or to another agent appointed or legally authorized to receive service of process."

Typically, "service on a subsidiary does not constitute service on a corporate parent where separate corporate identities are maintained, even if the subsidiary is wholly-owned by the parent," the court added.

"The government's conclusion that the constituent members of the ALW defendants were formed to perpetrate a fraud on the United States is not supported," St. Eve wrote.

Citing precedent, St. Eve said that "piercing the corporate veil under the alter ego theory requires that the corporate structure cause fraud or similar injustice. Effectively, the corporation must be a sham and exist for no other purpose than as a vehicle for fraud."

Numerous facts undermined the government's argument, according to the opinion. "It is uncontested that ALW USA was formed two years before the United States implemented anti-dumping duties on Chinese-origin honey, and thus could not have been formed for the purpose of avoiding those duties, for they did not yet exist," she said.

ALW USA independently financed its operations, conducted its own audits and made its own hiring decisions. Additionally, it "bought and sold a wide range of non-honey food products, none of which have been implicated in this criminal matter or were alleged to be anything other than legitimate," the judgment said.

"Neither the allegations in the indictment nor the substance of the government's filings support a finding regarding ALW Germany, ALW Hong Kong or ALW Beijing's 'control' over ALW USA," St. Eve concluded.

The government must pursue other avenues to serve the foreign defendants in accordance with the United States' Mutual Legal Assistance Treaties with the countries in question.

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