California Apparel News

A Chinese manufacturer sues a Los Angeles apparel importer for unpaid invoices and gets countersued for undervalued LDP shipments.

For more than 15 years, Los Angeles apparel manufacturers Carole Little and Leonard Rabinowitz bought tops, sweaters and dresses from a Hong Kong manufacturer they considered a reliable source.

During most of that time, Little and Rabinowitz, owners of StudioCL,which makes the contemporary brand LinQ, opted to take possession of their merchandise in China, arrange for transportation to the United States, and get the goods through customs and to their warehouse. The procedure is called “free on board,” or FOB.

But a few years ago, StudioCL said in court papers, the company was approached by the manufacturer and a middleman about changing this model. The idea was that the manufacturer and middleman would be responsible for getting the goods to the United States and through customs. Once through customs, the middleman would have the garments delivered to StudioCL’s warehouse. This is called “landed duty paid,” or LDP.

But in a lawsuit wending its way through Los Angeles County Superior Court, StudioCL said it was duped, and the company has refused to pay more than $300,000 owed in apparel invoices.

Court documents maintain that Hong Kong manufacturer Donshen Textile and a middleman greatly undervalued the merchandise in documents given to Los Angeles customs officials. This meant the import duty paid, which is based on a percentage of a shipment’s value, was reduced by as much as 75 percent in some cases, even though StudioCL was paying the higher value, court documents maintain.

“Customs doesn’t like LDP because while it is a legitimate business process, it is also very easy for it to be used in illegitimate ways, such as undervaluing,” said Tom Gould of Tom Gould Customs Consulting.

But Betty Levine, the attorney representing Donshen Textile, said StudioCL is trying to obscure the fact that it doesn’t want to pay its invoices.

“StudioCL has raised a red herring of this LDP/FOB issue to escape liability [to pay the invoices],” she said.

The legal saga, scheduled for trial March 11 in Los Angeles County Superior Court, began in late 2011 when Donshen Textile filed a lawsuit against StudioCL to get the Los Angeles company to pay for $309,000 in purchase orders made in late 2010 and early 2011.

Fighting back

StudioCL filed a cross-complaint, maintaining that Donshen Textile, owned by John Chen, and Savvy Sourcing, owned by Andrew Stein, had been getting StudioCL merchandise through customs using false dollar amounts.

Rabinowitz said this went against assurances from Donshen that everything they were doing was by the book, the apparel executive said in court papers. Rabinowitz had become concerned about LDP shipments after reading that U.S. Customs and Border Protection was cracking down on these kinds of transactions.

To protect himself, according to court filings, he had Donshen include in all his order confirmations that “seller warranties that the subject goods conform to all U.S. laws governing textile and apparel.”

StudioCL said it discovered through documents that a $90,903 invoice was being entered through customs as a $21,995 invoice, court papers said. Savvy Sourcing was identified as the importer of record, and Stein was Savvy’s contact, according to court filings.

The whole issue of shipping goods FOB versus LDP has been a much-talked-about issue for apparel importers.

That’s because in 2009, customs officials launched “Operation Mirage” to deal with a wave of undervalued textiles coming from China. At the time, over half of the transactions that customs examined showed they were being declared at 30 percent to 50 percent of their value. Considering that apparel accounts for 40 percent of all duties collected, the revenue loss was hurting the U.S. government, which annually collects some $30 billion in customs duties.

Witness for the defense

Janet Labuda, who at the time was CBP’s head of apparel and textiles enforcement, talked to a number of trade associations in 2009 and 2010 to warn apparel manufacturers that customs was taking a harder look at LDP orders. She was a frequent guest at meetings set up by trade associations such as the California Fashion Association in Los Angeles.

Labuda retired from customs a little more than two years ago, but in this case she is the chief expert witness for StudioCL.

In court documents, she said that a cashmere and silk sweater dress being sent to StudioCL was invoiced at $37.30 but declared at $5. StudioCL was told the fabric to make these dresses cost $8 a yard, Labuda’s court declaration said.

“I am very confident that Donshen and Savvy were engaged in the type of Chinese ‘duty-paid’ scheme uncovered through ‘Operation Mirage,’” Labuda said in court documents.

Donshen attorney Levine said the court has already found that Donshen has a likelihood of prevailing on its claim because Donshen “has established the probable validity” of its claim.

Donshen is suing StudioCL for $429,457, which includes money owed for the purchase orders as well as interest and attorney fees.

StudioCL is countersuing for $3 million. The company alleges it was unable to fulfill its Fall and Holiday 2011 orders after breaking off business with Donshen in spring 2011 and is trying to recuperate the money it invested in its brand.

Rabinowitz and Little are well-known names in the apparel industry. They first formed California Fashion Industries in 1975 and began producing better sportswear and career wear under such labels as St. Tropez West and various Carole Little–named brands.

The company made headlines in 1993 when three executives tied to the Carole Little clothing concern, which was downsizing its contractors in Glendale, Calif., were murdered.

Karapet Demirdzhyan, the alleged hit man, who lived in Hollywood, was tried and convicted for the murder of sewing contractor Hakop Antonyan, who did business with Carole Little.

Carole Little, a designer and graduate of Los Angeles Trade-Technical College, sold her trademark name but retains the right to use it in certain forms after Chorus Line Corp., a merger between California Fashion Industries and moderate sportswear maker Chorus Line, went bankrupt in 2000. Little and Rabinowitz founded LinQ in 2005.