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Breaking The Rules

From the Blog of Phyllis G. Pollack.

Mediations, like everything else in life, come in all shapes, sizes and colors. No two are the same or are ever alike. Usually, though, most of them will follow a similar pattern such that the principles of mediation will be applicable.

But, every once in awhile, there is that mediation that breaks the mold. I had one of those the other day. I think I may have violated one or more mediation rules – I did not exactly follow the book – but in doing so, I am pretty sure I helped the parties move forward towards resolution. However, I strongly recommend that no one adopts my “mediation” technique.

By way of background, my husband is a Customs attorney; he represents importers who become involved in disputes with U.S. Customs and Border Protection (“Customs” or “CBP”) over importations. I have learned a little of Customs law practice through osmosis.

On to my mediation. Plaintiff – I will call him John – purchases close outs of apparel and then resells them to retailers. All of his transactions are domestic or local. At a certain point in the past, he met Jane who offered to and did, in fact, find deals for him. She “worked” with him for a year or so.

Then, according to John, unbeknownst to John, Jane located 5 containers of apparel abroad, manufactured in China. They were a “good deal” according to the freight forwarder who turned her onto the shipment. But to complete this deal, she needed to import the goods and so hired a customs broker. According to John, Jane, without John’s knowledge, signed a Customs Power of Attorney with ABC Customs Broker (not its real name) using John’s name and tax identification number.

Pursuant to the executed power of attorney, ABC Customs Broker filed the entry documents for the 5 containers which were then entered into the United States. But, Jane never received the containers nor did John even though he was listed as the consignee on the entry documents. Rather, the containers were delivered to others in New York City who then sold the merchandise! (This fact was determined in subsequent telephone calls by John.)

In truth, this was a case of “identity theft” – the freight forwarder convinced Jane to use John as the “importer of record” in order to import the merchandise for the benefit of other persons who did not want their names to appear anywhere. While this is often done in connection with importations of counterfeit merchandise (that is, if it is seized, Customs naturally goes after the victim of the identify theft since he is listed as the “importer of record” or “consignee”), it is unclear what the motivation was in this case.

The problem arose because Customs then notified the California State Board of Equalization (“BOE”) that these 5 containers had been imported. So, BOE sent John, as the importer, a notice that it was assessing a use tax on the value of the merchandise.

When John confronted Jane, she claimed to know nothing about it and that she, too, was a victim. When she refused to pay the use tax assessment, John sued her.

So. . . they showed up for mediation on my doorstep. After reading the briefs, I could not get a grasp of the facts as they made no sense. (The above description is based on the facts learned during the mediation.) At mediation, I asked both counsel and the parties for more details, and they were unable to provide them: they, too, were in the dark. So, I asked counsel to show me the Customs power of attorney and the Customs entry documents (i.e. Form7501) so I could try to make sense of what had transpired. The documents shed some light but not completely. So. . . with everyone’s permission, I asked my husband to look at the Customs documents and enlighten us. He opined that an identity theft had occurred and that the freight forwarder had pulled a fast one. The goods had, indeed, been delivered elsewhere in the U.S.

Again, with everyone’s consent, I invited him into the joint session. He discussed with both counsel and parties that they needed to obtain complete copies of all of the documents from the customs broker to figure out all of the details of the identity theft.

He, too, was at a loss to understand why the BOE would be assessing a use tax since normally importations are exempt. As a use tax is normally charged on items for personal use brought into California from elsewhere, none of us could figure out why the BOE would think 5 containers of apparel would be for personal use. So, he suggested that once the parties obtained all of the Customs documents, they go to the BOE asking it to cancel the tax based on it being a matter of “identity theft.” Alternatively, he suggested that John simply provide his reseller’s permit number to the BOE which should cause the assessment to be cancelled. It was opined that perhaps the BOE assessed the use tax against John since he had not provided his re-seller’s permit number at the time of the importation.

The parties were very grateful for the advice as it provided a way to resolve the matter: to obtain a cancellation of the use tax assessment either based on John’s reseller’s permit number or identity theft.

But, this showed me several things: (1) one needs to know all of the facts before one can figure out what are the issues; (2) in order to figure out what are the issues, one may need expert advice or help from strange places; and (3) one cannot even begin to resolve a matter until one accomplishes steps 1 and 2.

In short, this lawsuit was unnecessary. Instead of John suing Jane, both of them should be working together to figure out exactly what happened, arrive at the conclusion that it was an “identify theft” and tackle it in that light vis-à-vis BOE. But, not knowing all the facts, they misidentified the issue and took a fortuitous wrong turn that led them to an unorthodox mediation that will hopefully lead to resolving the tax issue!

. . .Just something to think about.


Phyllis Pollack

Phyllis Pollack with PGP Mediation uses a facilitative, interest-based approach. Her preferred mediation style is facilitative in the belief that the best and most durable resolutions are those achieved by the parties themselves. The parties generally know the business issues and priorities, personalities and obstacles to a successful resolution as… MORE >

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