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Schagrin v. LDR Industries, LLC.

United States District Court, N.D. Illinois, Eastern Division

May 23, 2018

Roger B. Schagrin and Roger B. Schagrin, PC, doing business as Schagrin Associates, Plaintiffs,
v.
LDR Industries, LLC; GB Holdings, Inc.; Larry Greenspon and Dennis Greenspon, Defendants.

          MEMORANDUM OPINION AND ORDER

          HONORABLE THOMAS M. DURKIN UNITED STATES DISTRICT JUDGE

         Defendants manufacture and import steel pipe from China. Relators, Roger Schagrin and his law firm, allege that Defendants misclassify the pipe in order to avoid paying certain customs duties. Relators claim that this works a fraud against the federal government in violation of the False Claims Act. Defendants have moved to dismiss for lack of subject matter jurisdiction and for failure to state a claim pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), respectively. R. 44. For the following reasons, that motion is granted and the case is dismissed.

         Background

         In international trade, products are sometimes imported to the United States and sold for less than their normal value. This practice is referred to as “dumping, ” and can hurt domestic companies who sell the same product at normal value. Similarly, some imports are able to be sold at less than normal value because of foreign government subsidies. The federal government can counter these practices with “anti-dumping” and “countervailing” customs duties, respectively.

         According to Relators, around November 2007 the federal government imposed such duties on “circular welded pipe” (i.e., steel pipe of various specifications for use in plumbing, among other uses) imported from China. R. 1 ¶¶ 1, 27. These duties amount to at least 30% and sometimes as much as 620%. Id. ¶ 27. After these duties were imposed, steel pipe imports from China decreased from 748, 181 tons in 2007 to only 2, 813 tons in 2009, representing only 0.6% of consumption in the United States. Id. ¶ 30. The duty regulations exclude “pipe suitable for use in boilers [and] superheaters, ” among other exceptions. Id. ¶ 2.

         Defendant LDR Industries LLC, headquartered in Chicago, has imported steel pipe from China “since at least 2010.” Id. ¶ 3. It sells steel pipe and related products to retail stores around the country including Home Depot. Id. ¶ 13. LDR owns companies in Taiwan and China that manufacture the pipe and prepare it for export to the United States. Id. Defendant GB Holdings, Inc. is the sole member of LDR, and has its headquarters at the same Chicago address as LDR. Id. ¶ 14. GB Holdings is owned by defendants Larry and Dennis Greenspon, who are also LDR's managers. Id. ¶ 15.

         Relator Schagrin is an attorney experienced in the steel pipe industry and related matters of international trade. Id. ¶¶ 10-11. In 2010, Schagrin visited a Home Depot store and noticed LDR pipe imported from China. Id. ¶ 31. Based on his experience with the steel pipe industry he surmised that this pipe did not fall into any of the exceptions to the duty regulations, and was the same type of pipe LDR imported from China prior to implementation of the duty regulations. Id. ¶¶ 31-36. He also surmised that LDR had not paid the duties because the prices were too low. Id. ¶ 37. Schagrin alleges that these conclusions would have been obvious to anyone with sufficient knowledge of the industry and regulations. Id. ¶ 38.

         Schagrin reported his suspicions to the United States Customs and Border Protection Agency (“U.S. Customs”) in 2012. Id. ¶ 43. U.S. Customs investigated and determined that LDR had misclassified its imported pipe in order to avoid paying duties. Id. ¶ 44. Relators allege that U.S. Customs “billed” LDR for unpaid duties in the amount of $6.7 million, which was later reduced to $4.85 million, covering pipe shipments in 2011 and 2012. Id. Relators also allege that U.S. Customs “continues to investigate the matter.” Id.

         Largely due to the penalties imposed by U.S. Customs, LDR declared bankruptcy on September 2, 2014. U.S. Customs filed a proof of claim in that proceeding on February 3, 2015. Defendants have attached that proof of claim (and its amendments) to their motion to dismiss. According to those documents, U.S.

         Customs claims the following:

The loss of revenue of $14, 376, 139.08 was a result of incorrect classification in which LDR Industries, LLC underpaid Customs duties on entries from November 2007 to September 2012.
The penalty is being assessed for $38, 813, 848.70 due to the findings that the entries were filed with incorrect classification with no rate and/or lower rates of dumping countervailing duties. The penalty also includes entries to anti-dumping and countervailing. These findings are the result of the penalty pursuant to 19 U.S.C. § 1592.

R. 45-4 at 8; R. 45-5 at 8; 45-6 at 10. Additionally, in the initial proof of claim although not in subsequent amendments), U.S. Customs stated that LDR “paid dumping deposit rate of 3.39% for entries imported from Korea; however, it turned out that the merchandise came from China and the rate for dumping and countervailing should have been at 68.24% and 39.01%.” R. 45-4 at 10.

         Relators did not file a proof of claim in LDR's bankruptcy proceedings. Relators ...


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