HQ 0223648 - Substitution same condition drawback; possession; cooperative marketing association or member of a cooperative marketing association as drawback claimant; agent as drawback claimant; 19 U.S.C. 1313(j)(2); 19 U.S.C. 1313(j)(2)(C)(ii) - United States International Trade Commision Rulings

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HQ 223648

February 9, 1993

DRA-4 CO:R:C:E 223648 C

CATEGORY: DRAWBACK

T.C. Chou
Paramount Citrus Exchange
12233 West Olympic Blvd.
Los Angeles, CA 90064

RE: Substitution same condition drawback; possession; cooperative marketing association or member of a cooperative marketing association as drawback claimant; agent as drawback claimant; 19 U.S.C. 1313(j)(2); 19 U.S.C. 1313(j)(2)(C)(ii)

Dear Mr. Chou:

This responds to the letters of December 16, 1991, and January 2, 1992, submitted by counsel for Paramount Citrus Exchange, Joseph A. Vicario, Jr., Esq., concerning a transaction under the substitution same condition drawback law, 19 U.S.C. 1313(j)(2). The transaction involves the importation of merchandise by a corporate member of an incorporated cooperative marketing association and the exportation of domestic merchandise under the rules of the marketing association. We have reviewed your submission and our response follows. Arguments made by counsel are herein attributed to you as representative of Paramount Citrus Exchange.

FACTS:

Sunkist Growers, Inc. (Sunkist) is a nonprofit cooperative marketing association organized and existing as a corporation under state law. This cooperative marketing association is comprised of various member entities that are independent corporations and partnerships. Sunkist exists to furnish facilities and agencies through which its members's merchandise is marketed, sold, and shipped to buyers in the United States and abroad. Paramount Citrus Exchange (PCE) is what is called a district exchange in the Sunkist system. It too is a non-profit cooperative marketing association organized and existing as a corporation under state law. It is a member of Sunkist and is itself comprised of member companies.

Within the Sunkist system, there are growers who grow and own the oranges; local associations which clean, pack and prepare the growers's oranges for shipment; and district exchanges which market and sell the growers's oranges through the Sunkist system. Growers and local associations enter agreements with both PCE and Sunkist, and PCE enters an agreement with Sunkist. The Sunkist system then is comprised of various independent companies, as above, that function as growers, local associations, and district exchanges. Both Sunkist and PCE act as agents for their members.

The relationship between Sunkist and PCE is governed by two separate agreements. The first is the Cooperative Marketing Agreement which is set forth in Sunkist's articles and by-laws and which encompasses the basic Sunkist system involving the growers, local associations, and district exchanges. The second is a Special Marketing Agreement between only Sunkist and PCE, covering certain imported merchandise. Under the former agreement, Sunkist acts as exclusive sales agent for PCE and performs related functions, such as, in some cases, handling shipping arrangements. Under the latter agreement, Sunkist participated in PCE's purchase and importation of foreign oranges and acted as exclusive sales agent in regard thereto.

The basic scenario involved here is that PCE purchased and imported duty-paid oranges and a grower-member of both PCE and Sunkist exported domestic oranges through the marketing and sales efforts of PCE and Sunkist. Under the Sunkist system, PCE markets the growers's oranges through Sunkist and Sunkist markets and sells the oranges to commercial buyers on behalf of PCE and the growers.

Through counsel, you have argued that Sunkist and PCE are, for the purposes of drawback, a single legal entity, rather than two separate corporations, as they operate under the Cooperative Marketing Agreement. You base this proposition on the relationship that exists between Sunkist and PCE under the agreements. In this way, domestic merchandise that PCE is said to possess can be considered in the possession of Sunkist, and Sunkist can thus qualify for drawback. Under B.F. Goodrich v. United States, Slip Op. 92-68, No. 90-05-00228 (CIT), May 12, 1992, 26 Cust. Bull. No. 24, p. 11 (June 10, 1992), the drawback claimant need possess only the domestic substituted merchandise that is imported. Alternatively, you submit that Sunkist, even if considered a legal entity separate and apart from PCE, has possession of domestic merchandise covered under the marketing agreement by virtue of the acts it performs in relation to such merchandise in fulfilling its marketing, selling, and shipping arrangement functions. You propose that these acts demonstrate sufficient control over the merchandise to meet the possession requirement.

Regarding PCE, you propose that it is entitled to substitution same condition drawback on the basis of its possession of imported and domestic exported merchandise. Again, under B.F. Goodrich, if PCE had possession of only the domestic exported oranges, a basic prima facie case for drawback could be made.

Your arguments were submitted prior to the Court of International Trade's decision in B.F. Goodrich. Since possession of imported merchandise, in the aftermath of B.F. Goodrich, is no longer an issue, we will focus only on the possession of domestic oranges that are exported.

ISSUES:

1. Does Sunkist, as exclusive marketing and sales agent, have possession of the domestic oranges that are exported?

2. Does PCE, as a district exchange in the Sunkist system and marketing agent for its grower and local association members, have possession of the domestic exported oranges?

3. Are the imported and domestic exported oranges fungible?

LAW AND ANALYSIS:

For the purposes of the following discussion regarding the eligibility of the proposed transactions for drawback under 19 U.S.C. 1313(j)(2), Issues 1 and 2, above, we assume that the imported and domestic merchandise in question can be shown to be fungible. Issue 3 concerning fungibility is addressed hereinbelow, starting on page seven.

Under 19 U.S.C. 1313(j)(2), a drawback claimant must show that the exported merchandise:

(1) is fungible with the imported merchandise;

(2) was not used in the United States during the three years prior to exportation, beginning with the date the imported merchandise was imported;

(3) is in the same condition at the time of exportation as was the imported merchandise at the time of importation; and

(4) was in the possession of the claimant during the period between the relevant importation and exportation.

Regarding (4) above, while it has long been Customs interpretation of the statute to require the drawback claimant to possess both the imported and the domestic substituted merchandise, now, since B.F. Goodrich, the possession requirement is fulfilled if the drawback claimant possessed only the domestic substituted merchandise that is exported. Also, it must have paid the duty on the imported merchandise that is designated for drawback.

ISSUE 1: Does Sunkist, as exclusive marketing and sales agent, have possession, for drawback purposes, of the domestic substituted oranges that are exported?

You presented two arguments for the proposition that Sunkist possesses, for drawback purposes, the domestic substituted oranges. First, you proposed that Sunkist, by virtue of its relationship with PCE in the Sunkist cooperative marketing association, could be said to possess oranges that PCE possessed. You argued that the cooperative marketing association could be considered in the nature of a partnership for drawback purposes and, thus, possession by one "partner" is possession by another. Alternatively, you argued that Sunkist demonstrates possession of oranges possessed by PCE by virtue of its authority and control over the oranges as it fulfills its function as exclusive marketing and sales agent for PCE.

Regarding the first proposition, we find it unacceptable. Both Sunkist and PCE are nonprofit cooperative marketing associations. PCE is a member of the Sunkist system. It is not disputed that Sunkist and PCE are separate and independent corporate entities. In Customs Service Decision (C.S.D.) 82-71, Customs held that a relationship that in substance, but not in name, is a partnership is sufficient to satisfy the use requirement of 19 U.S.C. 1313(b), substitution manufacturing drawback, where one partner uses imported merchandise and another partner uses domestic merchandise of the same kind and quality (in the production of the same article). Here, however, neither in name nor substance has a partnership relationship been created. In fact, section 11 of the Special Marketing Agreement unequivocally states that Sunkist "shall be at all times an independent contractor . . . [and] [n]othing herein contained shall be construed so as to create a partnership or joint venture between the parties." Although Sunkist's articles and by-laws do not contain a similar provision, it is nonetheless clear that this incorporated association of member corporations and partnerships is not itself a partnership. Contrarily, Sunkist's relationship with PCE, and its other members, is in the nature of agent to principal. In this regard, section 9.2 of Sunkist's by- laws provides that "[e]ach Local Association and District Exchange designates and appoints [Sunkist] as its agent and the agent of its Growers in all matters concerning the marketing of its fresh fruit, and the processing and marketing of its products fruit. Full power and authority are conferred upon [Sunkist] as such agent to conduct its marketing activities in such manner as it, in its sole discretion, determines to be for the best interests of all of its members." Thus, contrary to your assertion, there is no basis to apply the principle of C.S.D. 82- 71 to the facts here. Consequently, we conclude that Sunkist does not possess oranges that PCE possesses by virtue of the relationship of these separate corporate entities within the marketing association.

Regarding the latter proposition, above, we find it unacceptable. With respect to exports of domestic merchandise to Japan, it is stated that Sunkist charters the vessels and is responsible for arranging the unloading of them in Japan. With respect to all other export shipments, Sunkist executes the sales contract on behalf of its principal, whether PCE or another district exchange member company, and in only some cases acts as exporter. Any possession or physical control (of the oranges) Sunkist may have in performing these functions is limited to its role as facilitator of the export shipment under the agreements. It performs these functions as agent for PCE and the growers. Further, the oranges never become the property of Sunkist. Based on these facts, we cannot conclude that Sunkist has possession, for drawback purposes, of the domestic oranges that are exported.

[The foregoing should not be construed as recognition of possession in PCE. That matter is discussed under Issue 2, below.]

ISSUE 2: Does PCE, as a district exchange in the Sunkist system, have possession, for drawback purposes, of the domestic substituted oranges that are exported?

It is clear that PCE has legal title to the oranges it purchased and imported. However, the focus, under the rule of B.F. Goodrich, is on the domestic substituted oranges that are exported. PCE paid duties on the imports and thereby is in accord with B.F. Goodrich in that respect. Thus, the critical issue on the facts here is whether or not PCE had possession for drawback purposes of the domestic substituted oranges that were exported.

By letter of June 15, 1992, you submitted a separate agreement between Paramount Citrus Association (PCA), a member- grower, and PCE that purports to transfer title in the oranges from the grower, PCA, to PCE upon delivery of the oranges to the packing premises of Paramount Citrus Packing Company (PCPC), located at either Visalia, CA or McFarland, CA. PCA and PCPC are separate limited partnerships that are members of PCE and of Sunkist. Cited as consideration for the transfer of title is the payment of proceeds (by PCE to PCA) realized from the sale of oranges in accordance with the rules and regulations of Sunkist.

Under the cooperative marketing scheme, there is no sale of the oranges by the growers to the district exchange. Title to the oranges is not passed from the growers to the district exchanges or to Sunkist by sale or otherwise. Title remains in the growers. The district exchanges and Sunkist act as agents for the grower-principals. Consequently, this separate agreement appears to depart from, and be inconsistent with, what has been established in the documents that comprise the agreement (cooperative marketing agreement, articles and by-laws of Sunkist and PCE, applicable state law). To accept it at face value would be to accept that the Sunkist marketing system operates one way, in accordance with the various governing documents, while, at the same time, PCA and PCE are operating in another way, departing from the established Sunkist system under the terms of the separate agreement. Thus, this alteration of the marketing scheme appears narrowly tailored to accomplish a single purpose. It appears to us to be a technical manipulation designed solely to create an atmosphere for drawback. As such, we conclude that it is ineffective to create conditions requisite for drawback recovery.

Another question regarding the separate agreement is whether or not the consideration cited is sufficient. Under the cooperative marketing agreement, PCA is obligated to turn its fruit over to PCPC for cleaning, packing, and ultimate distribution. This is the performance required of PCA under the agreement. PCE's performance under the agreement is to perform various functions, including the payment of sales proceeds to PCA upon sale of PCA's fruit through the Sunkist system. These are contractual performance obligations that pre-exist the separate agreement. Yet, the separate agreement cites the payment of sales proceeds to PCA in accordance with the rules of Sunkist as consideration for PCA's performance (under the separate agreement) of transfering title in the oranges to PCE. This performance by PCE under the separate agreement is the same performance already required of PCE under the marketing agreement. It is well known that a promise to perform an act that the promisor is already obligated to perfrom is insufficient consideration for an additional performance by the promisee. Anthony Tile & Marble Co. v. H.L. Coble Constr. Co., 193 S.E. 2d 338, 341 (1972) (see Dobbins v. City Bond & Mortgage Co., 124 S.W. 2d 1111, 1116 (1938); see also 17A Am Jur 2d, Contracts, section 138, and Williston on Contracts, Vol. 1, section 130). Consequently, we believe that the separate agreement is infirm on the grounds of insufficient consideration to support PCA's transfer of title.

While it is enough to conclude that the separate agreement is an impermissible manipulation designed to create an atmosphere for drawback, another impediment to PCE's case for drawback eligibility is the fact that PCE never takes possession of the domestic substituted oranges. Possession is in PCPC at the Visalia and McFarland packing sites. These entities (PCE and PCPC) are separate and independent legal entities. PCPC is a packing company that cleans and packs the oranges it receives from the growers (who, under the marketing scheme, own the oranges). PCE is merely a cooperative marketing association that never possesses the oranges it markets as agent for its members (who are also members of Sunkist). On the facts of this case, we see no reason to expand upon the precedents. Our conclusion is that PCE does not have physical possession of the domestic oranges that PCPC receives from the growers.

In summary, we conclude that the separate agreement between PCA and PCE fails to fulfill the possession requirement for drawback purposes. Its attempt to transfer legal title is an impermissible manipulation to create a climate for drawback. We believe that it fails anyway for want of sufficient consideration. Finally, PCE never physically possesses the domestic exported oranges.

ISSUE 3: Are the domestic and imported oranges fungible?

The final issue pertains to the question of fungibility. You propose that the imported and domestic exported oranges are fungible and thus substitutable on the basis of type for type, grade for grade, and size for size.

The particular type of orange involved is the Valencia orange. You state that both the imported and domestic exported Valencia oranges are either U.S. Grade 1 or Grade 2, according to the regulatory standards of the United States Department of Agriculture (USDA). In this regard, you cited 7 C.F.R. 51.1085 - 51.1139, the subpart of part 51 of the USDA regulations pertaining to U.S. standards for oranges from California and Arizona (sections 51.1085-51.1109 in the 1992 regulations). These regulations do not consider size in determining grades. Therefore, you presented a description of the imported and domestic exported oranges according to size. This description, set forth in your initial submission, dated December 16, 1991, was modified in your letter of June 15, 1992. Such letter corrected the sizes of the domestic oranges, changing them from a size range to an average diameter, and correctly set forth which domestic oranges would be substituted for which imported oranges. The imported oranges are designated as having the following sizes: 56, 64, 75, 88, 100, and 113. The domestic exported oranges are designated as having the following sizes: 56, 72, 88, and 113. Your letter set them forth as follows:

Imported Oranges Exported Oranges

56 3.23-3.66" 56 3.30" (Ave.)
64 3.07-3.50" 56 3.30"
75 2.91-3.35" 72 3.04"
88 2.80-3.19" 88 2.84"
100 2.68-3.03" 88 2.84"
113 2.56-2.91" 113 2.60"
You indicate that the above sizes for the domestic exported oranges come from standards applicable to California and Arizona oranges. You claim that these are size standards issued by the U.S. Department of Agriculture and administered by the Valencia Orange Administrative Committee, whose members are appointed by the Secretary of Agriculture. You reported that the sizes for the imported oranges come from the standards applicable to Moroccan oranges. Mr. Vicario stated that these are European Community standards.

You assert that domestic oranges with sizes set forth above are fungible with, and thus substitutable for, imported oranges with sizes set forth above, as follows: size 56 domestic for size 56 imported; size 56 domestic for size 64 imported; size 72 for size 75; size 88 for size 88; size 88 for size 100; and size 113 for size 113. In this regard, you submitted affidavits (from representatives of a commercial retail supplier of oranges and the Valencia Orange Administrative Committee) attesting that delivery of the domestic oranges as outlined in the above table would make "good delivery" in the place of imported oranges as outlined in the above table and that the domestic oranges above are "comparable/interchangeable" with the imported oranges as above.

Based on the foregoing, we conclude that Valencia oranges falling within the same USDA grade and shown to be within the size ranges as above are fungible. On the facts of this case, this determination does not benefit PCE, since it is not eligible for drawback for other reasons; nor does it benefit PCA, since PCA did not pay duties on the imported designated merchandise, a requirement under B.F Goodrich.

HOLDINGS:

ISSUE 1:

Sunkist Growers, Inc. does not qualify for substitution same condition drawback under 19 U.S.C. 1313(j)(2). On the facts of this case, Sunkist and Paramount Citrus Exchange (PCE) cannot be considered a single legal entity for drawback purposes. Both are separate and independent corporations. Possession for drawback purposes by the latter is not possession also by the former. Further, Sunkist, although exclusive sales and marketing agent for the domestic exported oranges, does not possess such oranges for drawback purposes; it neither owns nor physically possesses the oranges.

ISSUE 2:

PCE does not qualify for drawback under 19 U.S.C. 1313(j)(2). PCE, a corporation, and Paramount Citrus Packing Company, an independent limited partnership, cannot be considered a single legal entity for drawback purposes. Both are separate and independent legal entities. Possession, for drawback purposes, by the latter is not possession by the former. PCE, although agent for the growers who own the domestic exported oranges, does not meet the possession requirement since it does not physically possess the oranges. Further, its separate agreement with a member-grower purporting to transfer title in the oranges to PCE - an agreement failing for want of sufficient consideration - is an impermissible manipulation solely designed to create a climate for drawback.

ISSUE 3:

Valencia oranges of the same USDA grade are fungible where substitution will be made on a grade for grade and size for size basis, as set forth within the discussion under Issue 3, above.

If you have any questions concerning this ruling, please contact this office (William G. Rosoff, Chief, Entry Rulings Branch/566-5856).

Sincerely,

John Durant, Director

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