Title: State v. Philip Morris, et al

State: north-carolina

Issuer: North Carolina Supreme Court

Document:

IN THE SUPREME COURT OF NORTH CAROLINA
No. 2A05-4
FILED: 6 NOVEMBER 2009
STATE OF NORTH CAROLINA 
v.
PHILIP MORRIS USA INC.; R.J. REYNOLDS TOBACCO COMPANY; BROWN &
WILLIAMSON TOBACCO CORPORATION, individually and as successor by
merger to The American Tobacco Company; and LORILLARD TOBACCO
COMPANY
Appeal pursuant to N.C.G.S. § 7A-30(2) from the
decision of a divided panel of the Court of Appeals, ___ N.C.
App. ___, 669 S.E.2d 753 (2008), reversing an order and opinion
entered on 17 August 2007 by Judge Ben F. Tennille in Superior
Court, Wake County, and remanding for entry of summary judgment
in defendants’ favor.  On 19 March 2009, the Supreme Court
allowed a petition by plaintiffs State of Maryland and
Commonwealth of Pennsylvania for discretionary review of
additional issues.  Heard in the Supreme Court on 10 September
2009.
Douglas F. Gansler, Attorney General of Maryland, by
Marlene Trestman, Special Assistant to the Attorney
General, pro hac vice, for plaintiff-appellant State of
Maryland Certification Entity; and Thomas W. Corbett,
Jr., Attorney General of Pennsylvania, by Joel M.
Ressler, Chief Deputy Attorney General, pro hac vice,
for plaintiff-appellant Commonwealth of Pennsylvania
Certification Entity. 
Brooks, Pierce, McLendon, Humphrey & Leonard, LLP, by
Jim W. Phillips, Jr. and Charles F. Marshall III, for
defendant-appellees Philip Morris USA Inc., R.J.
Reynolds Tobacco Company, and Lorillard Tobacco
Company; and Smith Moore Leatherwood LLP, by Gregory G.
Holland, for defendant-appellee Philip Morris USA Inc.
K&L Gates LLP, by William G. Scoggin, for the North
Carolina Chamber, amicus curiae.
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NEWBY, Justice.
This case requires us to once again review the National
Tobacco Grower Settlement Trust.  We undertake this review to
determine whether defendant tobacco companies may, pursuant to
the Tax Offset Adjustment provision of the Trust, offset their
financial obligation under the Fair and Equitable Tobacco Reform
Act of 2004 against all payments due the Trust.  We hold that
they may and affirm the Court of Appeals.
I. BACKGROUND
Beginning in 1938 and continuing until the operation of
the Fair and Equitable Tobacco Reform Act of 2004 (FETRA), Pub.
L. No. 108-357, 118 Stat. 1521 (codified at 7 U.S.C. §§ 518 to
519a (2006)), the United States government largely regulated the
production and supply of domestic tobacco through a system of
price supports and quotas.  This system utilized “price supports
[to keep] tobacco prices elevated” and implemented quotas to
curtail the amount of tobacco grown and “confine[] [its]
cultivation . . . to specific tracts of land.”  State v. Philip
Morris USA Inc. (Philip Morris I), 359 N.C. 763, 765, 618 S.E.2d
219, 220 (2005).  The federal government annually adjusted those
quota levels to remain responsive to tobacco companies’ demand
for domestic tobacco.  Id.  In its final years, the system began
collapsing under its own weight.  Id.  The tobacco farmers
toiling under this system experienced shrinking quotas due to a
lessening demand for artificially high-priced domestic tobacco, a
product of the federal price support system.  Id.  Growers in
Maryland and Pennsylvania, however, did not fully experience the
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pressure of this collapse because they had chosen to not
participate in the federal quota system, a choice that allowed
them to grow unlimited quantities of tobacco, without the
attendant federal price supports. 
The tobacco processing industry also experienced
difficulty during the final years of this system.  Every state
and several other American jurisdictions sued defendant tobacco
companies (“Settlors”) during the 1990s.  359 N.C. at 765, 618
S.E.2d at 221.  These various lawsuits sought to “recover
healthcare costs associated with smoking-related illnesses.”  Id. 
To dispose of these claims, Settlors entered into individual
settlement agreements with four states, 359 N.C. at 765 n.2, 618
S.E.2d at 221 n.2, and into the Master Settlement Agreement
(“MSA”) with the remaining forty-six states and the six other
complaining jurisdictions, id. at 765, 618 S.E.2d at 221.  The
MSA was then entered as a consent decree and final judgment in
each of the party jurisdictions.  Id.  
In addition to settling the pending lawsuits, the MSA
imposed certain obligations on Settlors to reduce public demand
for tobacco products.  As the high cost of managing smoking-
related health problems was the basis for the lawsuits settled by
the MSA, Settlors were required to engage in various advertising
efforts aimed at reducing the consumption of tobacco.  359 N.C.
at 765 n.3, 618 S.E.2d at 221 n.3.  All parties involved
understood and indeed hoped that Settlors’ efforts would lead to
a decreased demand for tobacco.  Id. at 765, 618 S.E.2d at 221. 
However, the parties also comprehended that a decrease in the
-4-
  The Grower States are Alabama, Florida, Georgia, Indiana,
1
Kentucky, Maryland, Missouri, North Carolina, Ohio, Pennsylvania,
South Carolina, Tennessee, Virginia, and West Virginia.
  The Trust was amended by order of the Business Court
2
entered on 6 April 2004 approving an amendment agreed to by the
parties following mediated settlement negotiations.  That
amendment does not affect our analysis in this case, and all
references to the Trust are to the original 19 July 1999
document.
demand for tobacco would adversely affect the economies of
tobacco producing states (“Grower States”)  and the individual
1
tobacco growers.  Id.  To remedy this situation, the MSA required
Settlors to “meet with the political leadership of the [Grower
States]” to create a method by which to mitigate these
potentially harsh financial consequences.  Id.  
The method resulting from negotiations between Grower
States and Settlors was the National Tobacco Grower Settlement
Trust (“the Trust”).   Under the Trust, Grower States released
2
Settlors from any claims Grower States might “bring for economic
damages suffered as a result of the MSA.”  Id. at 766, 618 S.E.2d
at 221.  In exchange, Settlors agreed “to spend approximately
$5.15 billion on economic assistance.”  Id. at 765, 618 S.E.2d at
221.  More specifically, Settlors agreed to make scheduled
payments to the Trust each year, beginning in 1999 and ending in
2010.  National Tobacco Grower Settlement Trust at A-1 to A-2
(July 19, 1999) [hereinafter Trust Agreement].  The amount of
Settlors’ scheduled base payments could be increased or decreased
by certain adjustment provisions contained in the Trust.  Philip
Morris I, 359 N.C. at 767, 618 S.E.2d at 222 (citing Trust
-5-
Agreement at A-1 to A-16).  It is one of these adjustment
provisions that is at issue in this appeal. 
The source of the controversy is the Tax Offset
Adjustment (“TOA”) provision of the Trust.  Trust Agreement at A-
5 to A-11.  Because the parties “kn[ew] federal and state
governments might take additional measures to aid tobacco
farmers,” Philip Morris I, 359 N.C. at 767, 618 S.E.2d at 222,
the TOA provision was designed to prevent a situation in which
Settlors were simultaneously providing aid to tobacco growers
under both the Trust and a governmental obligation.  The TOA
provision of the Trust reads in pertinent part:
Tax Offset Adjustment.  Except as expressly
provided below, the amounts to be paid by the
Settlors in each of the years 1999 through
and including 2010 shall also be reduced upon
the occurrence of any change in a law or
regulation or other governmental provision
that leads to a new, or an increase in an
existing, federal or state excise tax on
Cigarettes, or any other tax, fee,
assessment, or financial obligation of any
kind . . . imposed by any governmental
authority (“Governmental Obligation”) . . .
on the Settlors, to the extent that all or
any portion of such Governmental Obligation
is used to provide:
(i)
direct payments to Tobacco
Growers or Tobacco Quota
Owners;
(ii)
direct or indirect
payments, grants or loans
under any program designed
in whole or in part for
the benefit of Tobacco
Growers, Tobacco Quota
Owners or organizations
representing Tobacco
Growers or Tobacco Quota
Owners (including without
limitation the
stabilization
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cooperatives, the Farm
Bureau or the Commodity
Credit Corporation);
(iii)
payments, grants or loans
to Grower States to
administer programs
designed in whole or in
part to benefit Tobacco
Growers, Tobacco Quota
Owners or organizations
representing Tobacco
Growers or Tobacco Quota
Owners (including without
limitation the
stabilization
cooperatives, the Farm[]
Bureau or the Commodity
Credit Corporation); or
(iv)
payments, grants or loans
to any individual,
organization, or Grower
State for use in
activities which are
designed in whole or in
part to obtain commitments
from, or provide
compensation to, Tobacco
Growers or Tobacco Quota
Owners to eliminate
tobacco production.
The amount of the Governmental
Obligation used for any of the purposes set
forth above shall be the “Grower Governmental
Obligation.”
In the event of such a Governmental
Obligation, the amount otherwise required to
be paid by each Settlor each year (after
taking account of all adjustments or
reductions hereunder) shall be reduced by an
amount equal to the product of the amount of
such Governmental Obligation paid in
connection with Cigarettes manufactured by
the Settlor (or tobacco or tobacco products
used by the Settlor to manufacture
Cigarettes) for the same year multiplied by
the ratio of the Grower Governmental
Obligation divided by the amount of the
Governmental Obligation, which reduction
amount may be carried forward to subsequent
years as necessary to ensure full credit to
-7-
the Settlor.  If the Governmental Obligation
results from a law or regulation or other
governmental provision adopted by a Grower
State, or by a political subdivision within
such Grower State, the amount that a Settlor
may reduce its payment to the Trust in any
one year shall not exceed the product of the
amount the Settlor otherwise would have paid
to the Trust in that year in the absence of
the Tax Offset Adjustment multiplied by the
allocation percentage for the pertinent
Grower State set forth in Section 1.03.
Trust Agreement at A-5 to A-7.  
As the parties anticipated, Congress, by enacting
FETRA, placed on Settlors a financial obligation that would allow
reduction of their payments to the Trust under the TOA provision. 
FETRA ended the federal price support and quota system in the
United States tobacco market.  As we explained in Philip Morris
I, FETRA “terminated the price control/quota system for U.S.
tobacco beginning with the 2005 tobacco crop.”  359 N.C. at 769,
618 S.E.2d at 223.  To accomplish this, Congress instructed the
“U.S. Secretary of Agriculture to offer tobacco farmers annual
payments during each of fiscal years 2005 through 2014 in
exchange for ending marketing quotas and related price supports.” 
Id. at 770, 618 S.E.2d at 223 (citing FETRA §§ 622 to 623).  The
funding for these payments is provided by “[q]uarterly
assessments against tobacco manufacturers and importers,” a group
that includes Settlors.  Id. at 770, 618 S.E.2d at 223-24. 
Moreover, “FETRA payments to tobacco farmers between 2005 and
2014 will approach $9.6 billion.”  Id. at 769, 618 S.E.2d at 223
(citation omitted).  As the Court of Appeals correctly noted, “It
is undisputed that the amounts Settlors are required to pay to
tobacco farmers under FETRA exceeds” Settlors’ remaining
-8-
obligation to the Trust.  State v. Philip Morris USA Inc., __
N.C. App. __, __, 669 S.E.2d 753, 755 (2008).       
In Philip Morris I, this Court examined the TOA
provision of the Trust in light of Congress’s enactment of FETRA
in order to determine exactly when Settlors could offset their
obligation under FETRA against amounts due the Trust.  There,
Settlors claimed that the enactment of FETRA imposed a financial
obligation on them, requiring application of the TOA provision
and relieving Settlors of their duty to the Trust immediately
“upon the occurrence of [the] change in . . . law.”  Trust
Agreement at A-5.  The Trustee claimed, however, that Settlors
were not entitled to cease payments to the Trust until Settlors
actually started making payments under FETRA.  The Trustee stated
that the change in law was only the first step leading to the
later application of the TOA provision.  To support this
contention, the Trustee pointed to the entire TOA provision,
which states in pertinent part:
In the event of such a Governmental
Obligation, the amount otherwise required to
be paid by each Settlor each year . . . shall
be reduced by an amount equal to the product
of the amount of such Governmental Obligation
paid in connection with Cigarettes
manufactured by the Settlor . . . for the
same year multiplied by the ratio of the
Grower Governmental Obligation divided by the
amount of the Governmental Obligation, which
reduction amount may be carried forward to
subsequent years as necessary to ensure full
credit to the Settlor.
Id. at A-7 (emphasis added).  This language, the Trustee
explained, requires, inter alia, the amount of the Governmental
Obligation “paid” to be known before the amount by which Settlors
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may reduce their payments under the TOA provision can be
determined.
This Court, after examining the language of the Trust
and FETRA, decided that the Trustee’s construction of the
language of the TOA provision embodied the intent of the parties
at the time the Trust was executed.  Despite the tension created
by the TOA provision’s express timing statement that “the amounts
to be paid by the Settlors . . . shall . . . be reduced upon the
occurrence of any change in a law,” id. at A-5 (emphasis added),
we concluded that reading these words alone to determine the
timing of the offset failed to give other words in the TOA
provision their ordinary meaning.  359 N.C. at 775, 618 S.E.2d at
227.  The TOA provision clearly explained that Settlors must know
the amount they had paid pursuant to a Governmental Obligation
before they can determine the amount by which to reduce their
payments to the Trust.  Id. at 775-76, 618 S.E.2d at 227. 
Finally, using the Trust’s purpose to buttress our construction
of the conflicting language found in the TOA provision, we said
that applying the TOA provision before Settlors began making
payments under FETRA could result in a scenario in which all
Settlors made no payments, either under FETRA or the Trust, and
all Tobacco Growers and Tobacco Quota Owners received no
benefits, either from FETRA or the Trustee.  Id. at 779-80, 618
S.E.2d at 229.  Thus, we concluded that the TOA provision was not
intended to create a gap in payments and could be applied not
when FETRA was signed into law, but when Settlors have “actually
assume[d] the burden of FETRA.”  Id. at 781, 618 S.E.2d at 230. 
-10-
Following our decision, Settlors continued funding the Trust
until they began making required payments under FETRA.  At the
time Settlors ceased funding the Trust and began paying FETRA
assessments, Settlors had paid nearly $2.7 billion to the Trust,
with nearly $25 million of that sum being paid to Maryland and
Pennsylvania. 
The Maryland Certification Entity and the Pennsylvania
Certification Entity (“the States”) recognized that FETRA was
unlikely to provide benefits to their tobacco growers who were
covered by the Trust because those growers had not participated
in the federal quota and price support system.  The measure
originally introduced in the House of Representatives provided no
benefits to the States’ growers.  As the legislation creating
FETRA moved through the political process, the bill underwent
several revisions.  The Senate amended the bill on 15 July 2004
to allow “Tobacco Community Economic Development Grants” of $20
million to Maryland and $14 million to Pennsylvania.  Tobacco
Market Transition Act of 2004, S. Amend. 3563, amending S. Amend.
3562 to H.R. 4520, 108th Cong. § 380O(c)(1), (2) (2004).  The
bill signed into law by the President on 22 October 2004,
however, did not include those Grants.  As a result, on 17
December 2004, the States moved to clarify or modify the Trust so
they would continue receiving payments from the Trust for the
benefit of their growers.  The States supplemented their motion
with a Statement of Claim For Continued Payments on 24 June 2005.
The States made two arguments in the Business Court. 
First, the States claimed that they were entitled to continued
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benefits from the Trust because none of Settlors’ financial
obligation under FETRA was being used to benefit their growers. 
Second, the States claimed that if the Trust allowed Settlors to
discontinue payments to the Trust, then the Trust should be
modified to require continued payments for the benefit of growers
in the States.  In support of their modification argument, the
States claimed that the parties did not anticipate a situation in
which Congress benefitted some tobacco growers and not others. 
Settlors responded that their payment obligations under FETRA
extinguished their obligation to fund the Trust.  In granting
summary judgment, the Business Court agreed with the States that
the Trust, in light of its stated purpose to benefit tobacco
farmers, requires Settlors to continue making payments to the
Trust for the benefit of the States.  
The Court of Appeals disagreed with the Business
Court’s reading of the Trust.  Basing its opinion on this Court’s
decision in Philip Morris I and on the plain language of the
Trust, the Court of Appeals held that the TOA provision allows
Settlors to offset the payments made under FETRA against
Settlors’ obligation to the Trust.  State v. Philip Morris USA
Inc., __ N.C. App. at __, 669 S.E.2d at 757.  Relying on a
dissenting opinion filed at the Court of Appeals, the States
appealed as of right to this Court on the issue of whether
Settlors are required to continue making payments to the Trust
for the benefit of the States.  This Court allowed discretionary
review on the issue of equitable modification of the Trust and
-12-
the derivative issue of what evidence could be considered in
determining the propriety of any equitable modification.  
II. ANALYSIS
As in Philip Morris I, this is a case of contract
interpretation, and our review is de novo.  Philip Morris I, 359
N.C. at 773, 618 S.E.2d at 225 (citation omitted).
Further, in our first opinion in this case, we set out
the principles of contract interpretation applicable to the
Trust:
Interpreting a contract requires the
court to examine the language of the contract
itself for indications of the parties’ intent
at the moment of execution.  Lane v.
Scarborough, 284 N.C. 407, 409-10, 200 S.E.2d
622, 624 (1973).  “If the plain language of a
contract is clear, the intention of the
parties is inferred from the words of the
contract.”  Walton v. City of Raleigh, 342
N.C. 879, 881, 467 S.E.2d 410, 411 (1996) (“A
consent judgment is a court-approved contract
subject to the rules of contract
interpretation.”).  Intent is derived not
from a particular contractual term but from
the contract as a whole.  Jones v.
Casstevens, 222 N.C. 411, 413-14, 23 S.E.2d
303, 305 (1942) (“‘Since the object of
construction is to ascertain the intent of
the parties, the contract must be considered
as an entirety.  The problem is not what the
separate parts mean, but what the contract
means when considered as a whole.’”)
(citation omitted).
Id. (footnote omitted).  However, we are also mindful that in
reviewing the entire agreement, our task is not “to find discord
in differing clauses, but to harmonize all clauses if possible.” 
Peirson v. Am. Hdwe. Mut. Ins. Co., 249 N.C. 580, 583, 107 S.E.2d
137, 139 (1959) (citations omitted).  Furthermore, when the terms
of a contract “are plain and unambiguous, there is no room for
-13-
construction.  The contract is to be interpreted as written,”
Jones, 222 N.C. at 413, 23 S.E.2d at 305 (citations omitted), and
“enforce[d] . . . as the parties have made it,” Wachovia Bank &
Tr. Co. v. Westchester Fire Ins. Co., 276 N.C. 348, 354, 172
S.E.2d 518, 522 (1970) (citations omitted).
Here, the disagreement among the parties lies in the
portion of the TOA provision determining the amount by which
Settlors may reduce their obligation to the Trust:  specifically,
whether Settlors may offset their FETRA obligation against the
amount due the Trust for all Grower States, or whether Settlors
are entitled to offset their FETRA obligation against only the
amount designated for those Grower States actually receiving
FETRA benefits.  To resolve this dispute, we first examine the
language of the Trust.  
The TOA provision contains the formula used in
determining the amount by which Settlors may reduce their
payments to the Trust following the creation of a Governmental
Obligation.  That formula provides that the amount of the
payments otherwise required of Settlors “shall be reduced by an
amount equal to the product of the amount of such Governmental
Obligation paid . . . multiplied by the ratio of the Grower
Governmental Obligation divided by the amount of the Governmental
Obligation.”  Trust Agreement at A-7.  
Before we interpret this formula, we are constrained to
mention several other principles of contract interpretation
applicable to the provision at issue.  If the parties agreed to
define a term, and the Trust “contains a definition of a term
-14-
used in it, this is the meaning which must be given to that term
wherever it appears in the [Trust], unless the context clearly
requires otherwise.”  Wachovia Bank & Tr., 276 N.C. at 354, 172
S.E.2d at 522 (citation omitted).  Furthermore, any undefined,
nontechnical word is “given a meaning consistent with the sense
in which [it is] used in ordinary speech, unless the context
clearly requires otherwise.”  Id. (citing Peirson, 249 N.C. at
583, 107 S.E.2d at 139).  “Where the immediate context in which
words are used is not clearly indicative of the meaning intended,
resort may be had to other portions of the [Trust] and all
clauses of it are to be construed, if possible, so as to bring
them into harmony.”  Wachovia Bank & Tr., 276 N.C. at 355, 172
S.E.2d at 522 (citing Peirson, 249 N.C. at 583, 107 S.E.2d at
139).    
The TOA provision defines “Governmental Obligation” and
“Grower Governmental Obligation.”  Id. at A-6.  Accordingly, we
must ascribe to these terms the meanings the parties intended. 
See, e.g., Wachovia Bank & Tr., 276 N.C. at 354, 172 S.E.2d at
522.  The parties defined the term “Governmental Obligation” as,
inter alia, a “change in a law . . . that leads to a new . . .
financial obligation of any kind . . . imposed by any
governmental authority . . . on the Settlors.”  Trust Agreement
at A-5 to A-6.  The parties described a “Grower Governmental
Obligation” as a Governmental Obligation that is used for “any”
number of specified purposes, including “direct payments to
Tobacco Growers or Tobacco Quota Owners.”  Id. at A-6 (emphasis
added).  Further, the parties agreed that the words “‘any’” and
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  Any number divided by itself is 1.  Further, any number
3
multiplied by 1 remains the same.  Thus, if the Grower
Governmental Obligation equals the Governmental Obligation, i.e.,
Settlors’ payments are entirely used for a purpose stated in the
TOA provision, then the formula ratio is 1, and Settlors can
reduce their payments to the Trust by the amount they pay under
FETRA.
“‘or’” would be read as having the same meaning, and that meaning
is “‘any one or more or all of.’”  Id. para. 4.09 (stating
further that words “in the text of this Agreement shall be read
as the singular or plural and as the masculine, feminine or
neuter as may be applicable or permissible in the particular
context”).  Thus, so long as the Governmental Obligation is being
used to make payments to Tobacco Growers, Tobacco Quota Owners,
both Tobacco Growers and Tobacco Quota Owners, or any subset of
Tobacco Growers or Tobacco Quota Owners, the TOA provision allows
Settlors to offset the total amount of the Governmental
Obligation.   
3
The parties also defined the terms “Tobacco Grower” and
“Tobacco Quota Owner.”  Id. para. 4.01.  The Trust provides:
“Tobacco Grower” shall mean an individual or
entity who, during a base period established
by the Certification Entity for the pertinent
Grower State, was one or more of the
following:
(i)
the principal producer of tobacco
for use in Cigarettes on a farm
where tobacco was produced pursuant
to a tobacco farm marketing quota
or farm acreage allotment
established under the Agricultural
Adjustment Act of 1938 . . . ;
(ii)
a producer who owned a farm that
produced tobacco for use in
Cigarettes pursuant to a lease and
transfer to that farm of all or a
part of a tobacco farm marketing
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quota or farm acreage allotment
established under the Agricultural
Adjustment Act of 1938;
(iii)
a producer who rented farm land to
produce tobacco for use in
Cigarettes under a tobacco farm
marketing quota or farm acreage
allotment established under the
Agricultural Adjustment Act of
1938;
(iv)
an individual or entity in Maryland
or Pennsylvania who in connection
with the production of Maryland
Type 32 tobacco for use in
Cigarettes was one of the
following:
(a) 
the principal producer
of such tobacco (which
may include an
operator, tenant, or
sharecropper who
shared in the risk of
producing a crop and
who was entitled to
share in the revenues
derived from marketing
the Cigarette tobacco
crop from the farm);
or
(b) 
a producer who
owned or rented a
farm that
produced Maryland
Type 32 tobacco
for use in
Cigarettes.
Id. para. 4.01(a) (emphasis added) (internal citations omitted). 
The Trust further provides:  “‘Tobacco Quota Owner’ shall mean
the owner of record of a tobacco farm marketing quota or farm
acreage allotment established under the Agricultural Adjustment
Act of 1938 during a base period established by the Certification
Entity for the Grower State in which the farm is located.”  Id.
para. 4.01(b) (internal citation omitted).  
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Upon applying these definitions contained in the Trust
and the ordinary meaning of nontechnical words, the language of
the TOA provision is clear.  The TOA provision may be implemented
when, for example, a financial obligation on Settlors is used to
make payments to “principal producer[s] of tobacco . . . produced
pursuant to a tobacco farm marketing quota or farm acreage
allotment established under the Agricultural Adjustment Act of
1938.”  Id. para. 4.01(a)(i).  The offset is then allowed because
the financial obligation on Settlors is used to make “direct
payments to Tobacco Growers.”  Id. at A-6.  Similarly, the TOA
provision may be applied when Settlors’ assessments paid pursuant
to a Governmental Obligation are used to pay the “owner[s] of
record of . . . tobacco farm marketing quota[s] or farm acreage
allotment[s] established under the Agricultural Adjustment Act of
1938,” id. para. 4.01(b), because the assessments are being used
to make “payments to . . . Tobacco Quota Owners,” id. at A-6. 
Therefore, and controlling in the case sub judice, all financial
obligations imposed on and paid by Settlors pursuant to FETRA
used to make payments to an individual or entity described in any
of the four, alternative categories of Tobacco Grower, or used to
make payments to an individual or entity described in the Trust’s
definition of Tobacco Quota Owner, can be offset against
Settlors’ obligation to the Trust.  An examination of the Trust
as a whole has revealed no text that contradicts the meaning of
the plain language of the TOA provision.
Since the language of the Trust is clear, we must infer
the intent of the parties “from the words of the contract.” 
-18-
Walton, 342 N.C. at 881, 467 S.E.2d at 411 (citing Lane, 284 N.C.
at 410, 200 S.E.2d at 624-25).  The TOA provision is firm in its
command that Settlors’ obligation to the Trust “shall . . . be
reduced” by the total amount of any financial obligation used to
benefit any one of the numerous individuals or entities listed in
any of the four disjunctive categories by any method described in
the category in which the benefitted individuals or entities are
found, even if it be only one type of individual by only one
method.  Trust Agreement at A-5 to A-6 (emphasis added).  The TOA
provision’s definition of Grower Governmental Obligation
reinforces that any benefit flowing from Settlors to any of the
individuals or entities listed, without regard to geographic
location, in any of the four disjunctive categories, “shall be
the ‘Grower Governmental Obligation.’”  Id. (emphasis added). 
The parties agreed that the words “‘any’” and “‘or’” would each
mean “‘any one or more or all of,’” and the language used by the
parties indicates that the word “or” as used twice in the
definition was given its common, ordinary meaning by the parties. 
“Given the degree of lawyerly scrutiny each word of the Trust
Agreement doubtless underwent, we are not inclined to interpret
the terms of Schedule A in a fashion that deviates from the
meaning commonly ascribed to them.”  Philip Morris I, 359 N.C. at
775, 618 S.E.2d at 227.  Using the appropriate meanings of these
words, the amount of the Governmental Obligation on Settlors
under FETRA being used to make payments to any of the four
disjunctive categories of Tobacco Growers, or to Tobacco Quota
Owners, constitutes the Grower Governmental Obligation. 
-19-
Consequently, we conclude that the parties intended the TOA
provision to offset Settlors’ entire obligation to the Trust, not
only that portion designated for those now receiving FETRA
benefits.  
Since the plain language of the TOA provision, after
examining the Trust as a whole, is clear and unambiguous, it does
not permit construction and our inquiry ends here.  See Wachovia
Bank & Tr., 276 N.C. at 354, 172 S.E.2d at 522 (explaining that
if there is no ambiguity the court does not apply rules of
construction); Jones, 222 N.C. at 413, 23 S.E.2d at 305 (stating
that when contract terms “are plain and unambiguous, there is no
room for construction”); Wallace v. Bellamy, 199 N.C. 759, 763,
155 S.E. 856, 859 (1930) (“In the interpretation of contracts the
general rule is that a court will not resort to construction
where the intent of the parties is expressed in clear and
unambiguous language . . . .”); McCain v. Hartford Live Stock
Ins. Co., 190 N.C. 549, 551, 130 S.E. 186, 187 (1925) (“Rules of
construction are only aids in interpreting contracts that are
either ambiguous or not clearly plain in meaning, either from the
terms of the contract itself, or from the facts to which it is to
be applied.”).  An examination reaching beyond the face of the
whole contract to ascertain the parties’ intent is necessary only
when construing an ambiguous contract term.  Jones, 222 N.C. at
413-14, 23 S.E.2d at 305; Simmons v. Groom, 167 N.C. 271, 275, 83
S.E. 471, 473 (1914) (“It is well recognized that the object of
all rules of interpretation is to arrive at the intention of the
-20-
parties as expressed in the contract . . . .” (citation and
internal quotation marks omitted)).  
Assuming arguendo, however, that the TOA provision is
ambiguous, the parties’ intent, illustrated by inferences to be
made from the Trust as a whole and the Trust’s purpose, accords
with the express language of the TOA provision.  The plain
language of the TOA formula is consistent with other portions of
the TOA provision.  Realizing that the formula created in the TOA
provision broadly defined “Governmental Obligation” to include
virtually any obligation imposed by any governmental body, the
parties included in the TOA provision a method by which to
prevent one Grower State from imposing an obligation on Settlors
that would result in decreased payments to other Grower States. 
See Trust Agreement at A-7.  This portion of the TOA provision
allows Settlors to offset amounts paid under any obligation
imposed by “a Grower State, or by a political subdivision within
such Grower State,” only by the amount that Grower State would
have otherwise received according to the “allocation percentage
for the pertinent Grower State set forth in Section 1.03” of the
Trust.  Id.  As the plain language indicates, this portion only
applies to obligations imposed at the state or local level. 
There is no comparable portion of the TOA provision that reduces
Settlor payments following a federal Governmental Obligation
based on which state is receiving benefits from that Governmental
Obligation.  As such, like the Court of Appeals, we conclude that
the sophisticated parties to the Trust intended to apply the TOA
provision to reduce those amounts due the state or states
-21-
receiving benefits from a Governmental Obligation only when
dealing with an obligation created by a state or local
government.  State v. Philip Morris USA Inc., __ N.C. App. at __,
669 S.E.2d at 757 (citing Hartford Accident & Indem. Co. v. Hood,
226 N.C. 706, 710, 40 S.E.2d 198, 201 (1946) (“It must be
presumed the parties intended what the language used clearly
expresses and the contract must be construed to mean what on its
face it purports to mean.” (citations omitted))).  
Moreover, the parties understood how to express their
intention to have Settlors reduce their payments to the Trust
based on which states were receiving benefits from a Governmental
Obligation and apparently chose not to do so with respect to an
obligation imposed by the federal government.  However, the
States contend that, for our reading of the TOA provision to be
correct, there would need to be additional language in the
provision stating that the funds paid by Settlors pursuant to a
Governmental Obligation used to benefit individuals or entities
“IN ANY ONE OR MORE GROWER STATES” would constitute the Grower
Governmental Obligation.  In the absence of this additional
language allowing Settlors to reduce their payments without
reference to which states are receiving governmental benefits,
the States contend, Settlors are prohibited from reducing their
payments in any manner other than by the percentage of those
payments to the Trust originally designated for those states now
receiving benefits under a Governmental Obligation.    
Section 1.03 of the Trust, however, designates the
percentage of Settlors’ payments each Grower State is to receive. 
-22-
Trust Agreement para. 1.03.  The parties explicitly instructed
Settlors to consult Section 1.03 when determining the amount by
which to reduce their payments to the Trust in several portions
of the TOA provision by including express references to Section
1.03.  Significantly, however, the parties instructed Settlors to
consult Section 1.03 in the TOA provision only when discussing
reductions in Settlor payments following an obligation imposed by
a state or local government.  Id. at A-7 to A-8.  That the TOA
provision instructs Settlors to consult Section 1.03 only when
referring to a financial obligation imposed by a government other
than the federal government is consistent with the plain language
of the TOA provision that Settlors may offset payments made
pursuant to FETRA against their obligation to the Trust without
any reference to which states are receiving FETRA benefits.  To
read the TOA provision otherwise would impermissibly add an
additional requirement to consult Section 1.03 that the parties
did not choose to include.  Hartford Accident & Indem., 226 N.C.
at 710, 40 S.E.2d at 201-02 (“The Court, under the guise of
construction, cannot reject what the parties inserted or insert
what the parties elected to omit.” (citations omitted)).
Furthermore, the organization of the Trust document is
consistent with an intention for Settlors to not consult Section
1.03 without an explicit instruction to do so.  Schedule A of the
Trust contains the Trust’s “PAYMENT SCHEDULE.”  Trust Agreement
at A-1.  This part of the Trust establishes the amounts Settlors
must pay to the Trust and the dates by which Settlors must make
those payments.  Id. at A-1 to A-18.  Generally, Schedule A sets
-23-
  Settlors’ total base payment amounts are listed as:
4
1999
$380,000,000
forth Settlors’ total base payment figures for each of the years
1999 through 2010.  Id. at A-2.  Schedule A then details various
adjustments, including the TOA provision, that must be made to
the total base payment figure to determine the actual amount
Settlors must pay.  Id. at A-4 to A-16.  Schedule A also provides
the method for determining what percentage of the adjusted total
amount must be paid by each Settlor.  Id. at A-2 to A-4. 
Conversely, Section 1.03 of the Trust commands the Trustee to
allocate a certain percentage of the Trust funds to each Grower
State.  Id. para. 1.03.  Moreover, this command to the Trustee
regarding allocation of disbursements from the Trust is contained
in a separate part of the Trust.  There is neither an instruction
to Settlors to look to Section 1.03 nor a reference to Section
1.03 regarding offsetting payments made pursuant to an obligation
imposed by the federal government.  Thus, the organization of the
Trust document is consistent with the plain language of the TOA
provision.  
The manner in which the Trust operates also precludes
the inference that Settlors may offset their FETRA obligation
against only those amounts that would have been disbursed from
the Trust to those Grower States now receiving FETRA benefits. 
Once the Trust was executed and began operation, Settlors no
longer engaged the other parties to the Trust on a state-specific
basis.  Settlors made annual payments to the Trust in an amount
representing the benefit all Grower States would receive.   Id.
4
-24-
2000
$280,000,000
2001
$400,000,000
2002
$500,000,000
2003
$500,000,000
2004
$500,000,000
2005
$500,000,000
2006
$500,000,000
2007
$500,000,000
2008
$500,000,000
2009
$295,000,000
2010
$295,000,000
Trust Agreement at A-2.
at A-1 to A-2.  After Settlors made payments to the Trust, the
Trustee could then set aside expenses incurred or to be incurred
in administering the Trust.  Id. para. 1.03.  After the Trustee
set aside funds for administrative expenses, the Trustee would
then allocate the remaining funds among the accounts of the
several Grower States.  Id.  The Trust operated in this manner,
with Settlors paying a total sum unaffected by the percentage
that any Grower State was to receive, unless the parties provided
Settlors a specific contrary instruction.  On several occasions,
the parties did provide Settlors with a contrary instruction, and
Settlors were thus able to reduce the amount of their payment to
the Trust by an amount related to a specific Grower State.  E.g.,
Trust Agreement at A-7 (Tax Offset Adjustment) (instructing
Settlors to consult Trustee’s allocation percentage table
following a Grower State-imposed Governmental Obligation); id. at
A-8 (Tax Offset Adjustment) (allowing Settlors to consult
Trustee’s allocation percentage table following a Grower State’s
imposition of an obligation on Settlors to “purchase or use . . .
a minimum quantity or percentage of domestically grown tobacco
for Cigarettes”); id. at A-11 (MSA Finality Adjustment) (enabling
-25-
Settlors to consult the Trustee’s allocation percentage table and
to reduce their payments to the Trust by the amount a Grower
State would have been allocated by the Trustee if that Grower
State had achieved State-Specific Finality under the MSA).  The
parties did not instruct Settlors to consult the Trustee’s
allocation percentage table in determining the amount by which to
reduce their payments to the Trust following the imposition of a
financial obligation by the federal government.  Because the
Trust operates in such a manner that Settlors would reduce their
total payments to the Trust by the total amount of any
Governmental Obligation, unless Settlors were specifically
instructed to reduce their payments on a state-specific basis,
Settlors can offset their FETRA obligation against the total
amount due the Trust.  The parties agreed to apply the offset
provisions, including the TOA provision, in this manner, and the
manner in which the Trust operates only confirms this agreement
between the parties and precludes the States’ proposed reading of
the TOA provision.  
Finally, the TOA provision is consistent with the
express purpose of the Trust.  In Philip Morris I, we noted that
“[t]he preamble announces the purpose of the Trust:  ‘[T]o
provide aid to Tobacco Growers and Tobacco Quota Owners and
thereby to ameliorate potential adverse economic consequences to
the Grower States.’”  359 N.C. at 766, 618 S.E.2d at 221 (second
alteration in original).  The parties, in expressing their
purpose, used terms that they defined in the Trust.  Trust
Agreement para. 4.01.  As explained earlier, an “individual or
-26-
entity” is a Tobacco Grower under the Trust if he, she, or it
“was [listed in] one or more” of four categories.  Id. (emphasis
added).  Three of those four categories appear to fall within the
definition of “producer of quota tobacco” under FETRA.  See 7
U.S.C. § 518(6) (2006).  Further, except for a possible
difference in the time at which one must own the quota, the
Trust’s definition of Tobacco Quota Owner accords with the
definition of “tobacco quota holder” under FETRA.  See id. §
518(9) (2006).  As such, the TOA provision is consistent with the
Trust’s express purpose because Tobacco Growers and Tobacco Quota
Owners are receiving benefits under FETRA, thus relieving
Settlors of their burden under the Trust.
Notably, the parties did not say their purpose was to
ensure all Tobacco Growers and Tobacco Quota Owners received aid. 
In fact, the parties went to great lengths to ensure that the
Trust was not read in such a manner.  See Trust Agreement paras.
4.01, 4.09; id. at A-6.  As long as Tobacco Growers and Tobacco
Quota Owners are receiving benefits under FETRA, the purpose of
the Trust is satisfied.  In Philip Morris I, we explained, in
rejecting Settlors’ proposed reading of the TOA provision, that
the purpose of the Trust was for Settlors to provide benefits to
Tobacco Growers and Tobacco Quota Owners.  359 N.C. at 777, 779,
618 S.E.2d at 228-29.  We emphasized the Trust’s purpose because
Settlors’ reading would have allowed Settlors to pay nothing
while no Tobacco Grower and no Tobacco Quota Owner received any
benefit.  Here, the circumstances are such that Settlors are
making payments under FETRA, and Tobacco Growers and Tobacco
-27-
Quota Owners are receiving benefits under FETRA--circumstances
resulting in the fulfillment of the very purpose we examined and
protected in Philip Morris I.  
As the language of the TOA provision is clear and
unambiguous, we hold that under the TOA provision, Settlors may
offset all of their payments made under FETRA for the benefit of
Tobacco Growers or Tobacco Quota Owners without any reference to
which states are receiving benefits under FETRA.  So long as
Settlors’ obligation under FETRA exceeds their obligation to the
Trust, Settlors owe nothing to the Trust.
The States alternatively contend that the TOA provision
is ambiguous and should be construed in their favor.  In support
of their argument, the States explain that the Business Court and
the dissenting opinion at the Court of Appeals interpreted the
TOA provision in their favor, while the majority at the Court of
Appeals interpreted the provision in Settlors’ favor.  These
facts, however, are not what makes a contract term ambiguous.  A
contract term is ambiguous only when, “in the opinion of the
court, the language of the [contract] is fairly and reasonably
susceptible to either of the constructions for which the parties
contend.”  Wachovia Bank & Tr., 276 N.C. at 354, 172 S.E.2d at
522 (citation omitted); see also Walton, 342 N.C. at 881-82, 467
S.E.2d at 412 (“Parties can differ as to the interpretation of
language without its being ambiguous . . . .”).  As we have
explained, the language of the TOA provision of the Trust is
clear, and a federal government obligation does not result in
application of the TOA provision to offset only those amounts to
-28-
be remitted to those states that receive benefits under that
federal obligation.  Since the language of the TOA provision is
clear, we are unable to, “under the guise of interpreting an
ambiguous provision, remake the contract and impose liability
upon [Settlors] which [they] did not assume and for which the
[States] did not pay.”  Wachovia Bank & Tr., 276 N.C. at 354, 172
S.E.2d at 522 (citations omitted). 
Furthermore, the TOA provision does not render illusory
any promise in the Trust or in any release signed in exchange for
the execution of the Trust.  The States contend that a reading of
the TOA provision other than theirs would allow “Settlors to
avoid any obligation to address the economic concerns of Maryland
and Pennsylvania growers if FETRA had gone into effect before the
first Trust payment became due.”  This possibility, however, does
not render illusory any promise or release from liability.  To
render a promise illusory, the promisor must reserve “an
unlimited right to determine the nature or extent of his
performance.”  Wellington-Sears & Co. v. Dize Awning & Tent Co.,
196 N.C. 748, 752, 147 S.E. 13, 15 (1929).  Here, Settlors agreed
to make base payments, subject to certain adjustments contained
in the Trust.  Trust Agreement at A-1.  The TOA provision, which
is one of the adjustments contained in the Trust, allows Settlors
to offset payments made under FETRA against payments due the
Trust.  The parties agreed to include the TOA provision in the
Trust, and the States executed releases in exchange for Settlors’
promise to pay the amount derived after applying all adjustments
to the base payment.  
-29-
To the extent that the States contend they would not
have released potentially valuable claims against Settlors for
economic damage resulting from the MSA if Settlors’ obligation to
the Trust could be eliminated without the States receiving
commensurate benefits from the Governmental Obligation, the
language of the TOA provision is contrary to their contention. 
The TOA provision allows Settlors to offset all benefits flowing
from them to Tobacco Quota Owners via a Governmental Obligation. 
Maryland and Pennsylvania growers did not participate in the
federal tobacco quota and price support system.  Thus, any
Governmental Obligation providing benefits only to Tobacco Quota
Owners would have necessarily excluded those growers in Maryland
and Pennsylvania because those growers did not participate in the
federal quota system.  The States agreed to the inclusion of the
provision that allows Settlors’ obligation to the Trust to
terminate upon the satisfaction of a Governmental Obligation that
provides “direct payments to . . . Tobacco Quota Owners.”  Trust
Agreement at A-6.  This provision, by the parties’ choice, allows
the States’ benefits from the Trust to end even though the States
would not then be receiving any governmental benefits if Congress
had chosen to focus its support on only Tobacco Quota Owners.  
Moreover, any Governmental Obligation imposed on
Settlors is necessarily a result of the political process, which
involves representatives of Maryland and Pennsylvania citizens,
including growers, at the federal level, and at the state and
local levels.  While the parties to the Trust may have input in
the political process that determines whether a Governmental
-30-
Obligation is imposed, no party has an unlimited right to
determine whether, or to what extent, to perform any obligation
resulting in or arising from the Trust.  Thus, the TOA provision
does not render illusory any promise or release made or executed
by the parties. 
Finally, the States contend that they are entitled to
equitable modification of the Trust to require Settlors to
continue making payments for their benefit.  The Business Court
and the Court of Appeals addressed the States’ argument on this
point.  Though neither cited the section of our General Statutes
under which the States make their claim, the Business Court
declined to make its decision on equitable grounds, State v.
Philip Morris USA, Inc., No. 98 CVS 14377, 2007 WL 2570239, at
*6-7 (Wake County Super. Ct. Aug. 17, 2007), and the Court of
Appeals rejected the substance of the States’ argument on this
point, State v. Philip Morris USA Inc., __ N.C. App. at __, 669
S.E.2d at 756-57.  
The States claim they are entitled to modification of
the Trust under N.C.G.S. § 36C-4-412(a).  This statute provides
that “[t]he court may modify the administrative or dispositive
terms of a trust . . . if, because of circumstances not
anticipated by the settlor, modification . . . will further the
purposes of the trust.”  N.C.G.S. § 36C-4-412(a) (2007).  To
obtain relief under this statute, the States must show, inter
alia, an unanticipated circumstance.  FETRA, however, is not such
a circumstance.  As we said in Philip Morris I, “[p]roblems with
the tobacco industry prompted members of Congress to introduce
-31-
more than twenty tobacco buyout bills from 1997 through 2004.” 
359 N.C. at 769, 618 S.E.2d at 223.  Furthermore, the States knew
that their tobacco growers did not participate in the federal
quota and price support system and thus, may not be included in a
federal buyout.  Indeed, the portion of the Trust’s definition of
Tobacco Grower that specifically covers growers in Maryland and
Pennsylvania is the only provision that does not include a
reference to the Agricultural Adjustment Act of 1938.  Trust
Agreement para. 4.01(a)(iv).  These events indicate that the
States knew they were treated differently as a result of their
choice to not participate in the federal price control and quota
system and knew that they may not be covered by any federal
buyout legislation targeting that system.  Unfortunately, during
the political process resulting in FETRA, the benefits that would
have been provided to the States under the Senate amendment to
the buyout bill were not included in the final version signed
into law.  The inclusion of the TOA provision indicates that a
federal buyout like FETRA was an anticipated circumstance for
which the parties created a plan.  Accordingly, the States are
not entitled to modification under N.C.G.S. § 36C-4-412(a). 
Because we hold that the States are not entitled to modification
of the Trust, we necessarily do not reach the issue of what
evidence may be used in undertaking such a modification.
III. DISPOSITION
The Court of Appeals correctly held that Settlors may,
pursuant to the TOA provision, offset all payments made under
FETRA against all payments due the Trust, without regard to which
-32-
states are receiving benefits under FETRA.  That decision is
therefore affirmed.
AFFIRMED.
No. 2A05-4 - State v. Philip Morris USA Inc.
Justice TIMMONS-GOODSON dissenting.
After citing rules of contract interpretation that
require examining all component parts of a contract to determine
the parties’ intent, the majority devotes substantially all of
its analysis to the “plain language” of the TOA, neglecting other
provisions of the Trust Agreement that should inform its reading
of the TOA.  The majority concludes that, at the time of
execution, the parties intended that a federal governmental
obligation aiding some Grower States’ tobacco farmers would
completely discharge Settlors’ obligation to fund the Trust to
support tobacco farmers receiving no benefit from the federal
governmental obligation.  By so concluding, the majority does a
literal about-face from its analysis in Philip Morris I of the
very same Trust Agreement and TOA provision.  Because I believe
the majority disregards other language in the Trust Agreement
that necessarily informs the correct interpretation of the TOA,
and in doing so departs from its previous interpretation of the
same provision, I must respectfully dissent.
“Interpreting a contract requires the court to examine
the language of the contract itself for indications of the
parties’ intent at the moment of execution. . . .  Intent is
derived not from a particular contractual term but from the
contract as a whole.”  State v. Philip Morris USA Inc., 359 N.C.
763, 773, 618 S.E.2d 219, 225 (2005) (Philip Morris I) (citing,
inter alia, Jones v. Casstevens, 222 N.C. 411, 413-14, 23 S.E.2d
303, 305 (1942) (“Since the object of construction is to
-34-
ascertain the intent of the parties, the contract must be
considered as an entirety.  The problem is not what the separate
parts mean, but what the contract means when considered as a
whole.” (citation and internal quotation marks omitted))). 
Therefore, a true assessment of the parties’ intent at the moment
they executed an agreement requires a searching evaluation of the
entire agreement and not merely the component part that lies at
the heart of the dispute.  Thus, this Court’s duty is to
diligently examine all relevant language in the Trust Agreement,
including the Master Settlement Agreement (MSA) and individual
releases referenced in the Trust Agreement, to arrive at the
interpretation that best reflects the parties’ intent when they
executed the TOA.  See Robbins v. C.W. Myers Trading Post, Inc.,
253 N.C. 474, 477, 117 S.E.2d 438, 440-41 (1960) (“Individual
clauses in an agreement and particular words must be considered
in connection with the rest of the agreement, and all parts of
the writing, and every word in it, will, if possible, be given
effect.”) (citation omitted); see also Weyerhaeuser Co. v.
Carolina Power & Light Co., 257 N.C. 717, 719, 127 S.E.2d 539,
541 (1962); Westinghouse Elec. Supply Co. v. Burgess, 223 N.C.
97, 100, 25 S.E.2d 390, 392 (1943). 
Consistently with the principles noted above, this
Court has previously interpreted a contract term that purported
to relieve a defendant of a payment obligation, like the TOA in
this case, by examining all relevant language in the contract. 
In Burgess, for example, the Court applied the following rule:
-35-
“Great liberality is allowed in
construing releases.  The intent is to be
sought from the whole and every part of the
instrument; and where general words are used,
if it appears by other clauses of the
instrument, or other documents, definitely
referred to, that it was the intent of the
parties to limit the discharge to particular
claims only, courts, in construing it, will
so limit it. . . .  In determining the effect
of an instrument containing words that taken
by themselves would operate as a general
release, all the provisions of the instrument
must be read together; and if on such reading
an intent to limit the scope of the release
appears, it will be restricted to conform to
such intent.”
223 N.C. at 100, 25 S.E.2d at 392 (alteration in original)
(citation omitted). 
Upon applying the appropriate rule, there is good
reason to doubt the majority’s interpretation of the parties’
intent for the TOA.  The first six “WHEREAS” clauses of the Trust
Agreement make clear that Settlors’ agreement to establish the
Trust was a quid pro quo for the Grower States’ release of claims
for smoking-related health care costs and potential claims
resulting from the adverse economic consequences of the MSA. 
Indeed, the Court acknowledged this quid pro quo in Philip Morris
I:
Despite its cost, the Trust appealed to
Settlors for financial reasons.  Funding the
Trust satisfied the requirement of the MSA
“to address the economic concerns of the
Grower States.”  In other words, Settlors
agreed to the Trust because doing so was a
condition of the settlement that had relieved
them of potentially bankrupting liability for
smoking-related healthcare costs. 
Additionally, the Trust shields Settlors from
claims the Grower States might otherwise
bring for economic damages suffered as a
result of the MSA.
-36-
Philip Morris I, 359 N.C. at 766, 618 S.E.2d at 221 (footnote
omitted).  Thus, at the very beginning of the Trust Agreement,
the parties manifested an intention that the Trust should
“provide aid to Tobacco Growers” and “Tobacco Quota Owners” in
the several Grower States in exchange for those Grower States
releasing Settlors from pending and potential tobacco-related
claims.
Settlors bargained for separate releases with Maryland
and Pennsylvania to achieve the same quid pro quo.  Maryland and
Pennsylvania’s Attorneys General executed the releases
“contemporaneously with and as a condition to the creation of the
National Tobacco Grower Settlement Trust.”  As the Business Court
noted, “It makes little sense that Maryland and Pennsylvania
would execute releases of substantial claims in return for an
agreement that payments to their farmers could be eliminated by
payments to farmers in other states who were already receiving
the benefits from the federal tobacco quota program.”  State v.
Philip Morris USA, Inc., No. 98 CVS 14377, 2007 WL 2570239, at *5
(Wake County Super. Ct. Aug. 17, 2007).
Also highly relevant, but scantily discussed in the
majority opinion, are other provisions in the Trust Agreement and
the TOA itself that contemplate a state-by-state application of
adjustments and disbursements of the Trust funds.  First, it is
undisputed that Settlors make base payments to the Trust, which
the Trustee then distributes to the several Grower States
according to the percentages in Section 1.03, for further
distribution to Tobacco Growers and Tobacco Quota Owners in each
-37-
Grower State.  This distribution schedule assigns to each Grower
State a percentage of Settlor’s allotted base payments, which
percentage is distinct from that designated for every other
Grower State.  Thus, each of the beneficiary Grower States has a
unique, quantifiable interest in the Trust funds.  The majority’s
holding that Settlors are entitled to a complete offset of all
amounts owed to the Trust because tobacco growers and quota
holders in some Grower States receive FETRA assistance is
therefore contrary to the Trust Agreement’s distribution
schedule.
Moreover, aside from the TOA, the parties included an
MSA Finality Adjustment in the Trust Agreement that allowed
Settlors a state-specific offset against amounts paid to the
Trust if one or more Grower States failed to achieve eligibility
for Trust payments as anticipated.  The MSA Finality Adjustment
reads as follows:
MSA Finality Adjustment:  In the event
that a Grower State that is a Settling State
under the MSA does not achieve State-Specific
Finality on or before December 31, 2001 (or
such later date as extended pursuant to . . .
the MSA), or if there is an earlier final,
non-appealable judicial determination that
has the effect of precluding a Grower State
from participating in the MBA [sic] (each
event a “Non-Finality Event”), each Settlor
shall be entitled to reduce its annual
payment to the Trust after all other
adjustments have been made for the year in
which such a Non-Finality Event occurs, and
in each subsequent year, by the same
percentage as the pertinent Grower State’s
percentage allocation in Section 1.03.  In
addition, each Settl[o]r shall be entitled to
reduce its annual payment for the year in
which such a Non-Finality Event occurs (and,
if necessary to obtain full credit, in
subsequent years) by the amount of the
-38-
Settlor’s prior payments to the Trust
allocated in the manner prescribed in Section
1.03 to the pertinent Grower State plus
interest at the T-Bill Rate from the date the
amount was paid to the Trust by the Settlor
to the date the Settlor takes the credit for
the amount.
Trust Agreement at A-12.  So the parties clearly contemplated a
state-by-state offset for Settlors should one or more Grower
States not become eligible to participate in the Trust due to
lack of finality under the MSA.
Finally, the parties included in the TOA a
state-specific offset when a Grower State imposes on Settlors a
governmental obligation.  Upon such a Grower State-imposed
governmental obligation, a Settlor may reduce its payment to the
Trust by the percentage of the Settlor’s base payment that is
earmarked to that Grower State.  Id. at A-8.  The omission of a
state-by-state offset from the portion of the TOA applying to a
federal governmental obligation, however, does not necessarily
indicate that the parties did not intend a state-by-state offset
to apply to a federal governmental obligation.  Particularly in
light of other language in the Trust Agreement, the MSA, the
individual releases, and the state-by-state application of other
offset provisions, the lack of specific language applying a
state-by-state offset to a federal governmental obligation only
renders that part of the TOA ambiguous.  See State v. Philip
Morris USA Inc., __ N.C. App. __, __, 669 S.E.2d 753, 760 (2008)
(Elmore, J., dissenting) (“The ambiguity, if there is any, arises
here only in the context of whether the TOA provision explicitly
mandates or prohibits a state-by-state accounting of reductions
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resulting from Grower Governmental Obligations.  When the
contract is read as a whole, however, it is clear that the
parties intent was to protect tobacco farmers from the economic
harm caused by the MSA.”).
This Court’s analysis of the very same TOA provision in
Philip Morris I underscores the ambiguity in the federal
component of the TOA.  This Court rejected Settlors’ argument
that the TOA “is triggered whenever a change in law includes a
financial obligation on Settlors earmarked to aid tobacco
farmers.”  Philip Morris I, 359 N.C. at 777, 618 S.E.2d at 228. 
The Court observed that Settlors’ argument 
“would allow a Tax Offset Adjustment even if
the government never collects the assessments
due under a qualifying change of law and
hence never spends them for the benefit of
tobacco farmers.  Under those circumstances,
tobacco farmers would receive reduced
distributions (or no distributions) from the
Phase II Trust and nothing from the
government.  The negative financial
implications of this scenario for tobacco
farmers are obvious.”  
Id.  
Acknowledging that it was duty-bound to look beyond the
“plain language” of the TOA, see 359 N.C. at 778, 618 S.E.2d at
228 (citing Jones, 222 N.C. at 413-14, 23 S.E.2d at 305), the
Court rejected a reading of the TOA that was repugnant to the
Trust’s express purpose.  The Court stated:
Certainly the most compelling reason for
rejecting the trial court's holding is that,
taken to its logical extreme, it could defeat
the express purpose of the Phase II Trust. 
As previously explained, the Trust was
crafted to protect tobacco farmers from
economic harm caused by the MSA . . .
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[through] a steady stream of supplemental
income until at least 2010.
. . . .
. . .  Interpreting the Trust Agreement
in a manner that could leave those
individuals without this extra income for
years runs squarely counter to the express
purpose of the Trust.
Id. at 779-80, 618 S.E.2d at 229.  
Yet the majority’s interpretation of the Trust
Agreement in this case has precisely the result the Court found
unacceptable in Philip Morris I.  Considering all relevant
language in the Trust Agreement and the parties’ bargain in
general, the only reasonable conclusion is that the parties did
not intend that a governmental obligation compensating some
Grower States’ tobacco farmers could cut off Trust payments to
tobacco farmers in other Grower States that receive no benefit
from that governmental obligation.  This outcome is contrary to
the express purpose of the Trust and simply not consistent with
the quid pro quo negotiated between the parties.  To reach this
result, the majority examines the TOA in a vacuum, ignoring that
Settlors have all along dealt with the Grower States on a
state-by-state basis.  Accordingly, neither sound contract
interpretation nor equity supports leaving tobacco growers in
Maryland and Pennsylvania without governmental assistance or “a
steady stream of supplemental income” from the Trust.  Id. at
779, 618 S.E.2d at 229.  Therefore, I respectfully dissent. 
Justice HUDSON joins in this dissenting opinion.