Opinion ID: 2598794
Heading Depth: 1
Heading Rank: 1

Heading: Whether the state's right is vested

Text: The state's right to share in the master settlement agreement's settlement funds appears to be fully vested. This factor poses no apparent obstacle to treating the right as a current, marketable asset. 3. Whether the law or the settlement agreement bars the transfer No state law bars the state from transferring its right to receive revenues under the settlement agreement, and the parties point to no federal law forbidding or limiting the transfer. But the settlement agreement itself imposes a limitation. The state fails to discuss this restriction, and neither the superior court nor this court's opinion gives it serious attention. Yet in my view it is potentially critical. Part XVIII(p) of the master settlement agreement explicitly limits the intended benefits of the agreement to the settling states that joined in the agreement; and this provision expressly prohibits settling states from assigning their enforcement rights under the settlement agreement: (p) Intended Beneficiaries. No portion of this Agreement shall provide any rights to, or be enforceable by, any person or entity that is not a Settling State or a Released Party. No Settling State may assign or otherwise convey any right to enforce any provision of this Agreement. On its face, this language appears to require that all settlement funds destined for Alaska be collectible exclusively by the state of Alaska; the language further seems to preclude the state from assigning to a third party like NTSC the state's right to demand payment, or any other benefit of the agreement, directly from the master settlement agreement's (MSA) escrow agent. Although this paragraph might not bar the state from selling to NTSC the state's present right to retain future settlement funds upon their receipt by the state, it does seem to say that the state cannot put a third party in its shoes by assigning the state's right to collect directly from the MSA escrow agent. The provision would appear to allow a settling state to sell only the right to acquire settlement payments through the state. As discussed more fully below, this distinction could have critical constitutional implications. [3] 4. Predictability of value and dependency on state's performance of governmental functions This factor recognizes that constitutional policies can sometimes preclude legislation from treating future state revenues as marketable assets: for example, the revenue's future value might be so speculative as to defy meaningful prediction, thereby precluding statutory assetization of the revenue, since the legislation would amount to arbitrary and irrational state action; alternatively, a legislative directive to sell not-yet-realized revenues at present value might impermissibly constrain the executive branch's prerogatives by foreclosing its future ability to perform essential, constitutionally mandated governmental duties. In my view, a policy concern of this latter kind arises under the purchase and sale agreement and deserves serious attention. Although the superior court and the opinion describe the tobacco settlement's payout provisions as fortuitous, this description hardly seems accurate. The settlement agreement's opening recitals make it clear that the settlement is founded on and carefully structured to address the settling states' strong and continuing interests in promoting public health and reducing youth smoking. Reflecting these ongoing concerns and interests, the settlement agreement establishes a theoretically perpetual stream of future payments whose size will depend inversely on each state's ability to curb future smoking: the greater the success a state achieves, the lower will be its future payment stream. From a settling state's perspective, this inverse relationship makes sense as long as the tobacco settlement's benefits inure exclusively to the settling parties, as Part XVIII(p) of the settlement agreement itself (non-fortuitously) seems to require. The state stands to receive less if it succeeds in curbing smoking, but its loss of settlement revenues through decreased smoking will presumably be more than offset by the economic and public health benefits gained through the successful state regulatory efforts that caused the decrease in smoking. As long as the future revenues belong to the state, then, there is no possibility of irreconcilable tension between the state's two theoretically conflicting interestsmaximizing its settlement revenues, on the one hand, and protecting the health and safety of its citizens, on the other. The settlement thus offers settling states a win-win situation. But a sharp disparity of interests potentially arises when, as here, the state divorces its interest in receiving future settlement revenues from its vital interests in public health and safety by transferring its current right to future revenues to a group of third-party investors. As we have seen, under the terms of the master settlement agreement itself, the state's rights to receive benefits under the agreement cannot be assigned directly to a third party like NTSC; those rights can only be assigned vicariously, since the settlement agreement precludes their direct enforcement by anyone but a settling state. For this reason, the terms of the master settlement agreement apparently led the AHFC and NTSC to oblige the state, in the purchase and sale agreement, to pledge to make all efforts within its lawful powers to maximize the investors' future revenue streampresumably, even if this means placing the investors' financial interests ahead of the state's governmental duty to protect the health and safety of its citizens. The court dismisses the potential for this kind of conflict as illusory, concluding that [n]othing ... obligates the state to take steps to maximize the income stream. The state is obligated only not to interfere with AHFC's receipt of the income stream. [4] But the express terms of the purchase and sale agreement belie this conclusion. Specifically, the agreement strives to enhance investor confidence by explicitly requiring the state to promise, among other things, (1) to take all actions as may be required by law fully to preserve, maintain, defend, protect and confirm [AHFC's and NTSC's] interest[s]; (2) not [to] take any action that will adversely affect [their] legal right to receive the Tobacco Assets; (3) not to impair the rights and remedies of Bondholders until the bonds are fully paid and discharged; (4) not [to] take any action and [to] use its best reasonable efforts not to permit any action to be taken by others that ... would result in the amendment, hypothecation, subordination, termination, or discharge of, or impair the validity or effectiveness of, the MSA or the Consent Decree; (5) to immediately pay over to the Trustee the proceeds of any Tobacco Assets received by the State in error; and (6) to exercise each and every right and remedy under the MSA. Given the inverse relationship between the size of a settling state's future settlement payments and the state's future success in curbing the public dangers of smoking, these promises may well create an intolerable and irreconcilable tension between the state's contractual obligation to maximize revenues for bondholders and its non-delegable governmental duty to protect the public health and safety of its citizens. At some point, our constitution necessarily circumscribes legislative authority to approve private contractual arrangements that have the effect of preempting the executive's constitutionally based prerogatives; [5] so too, there are constitutional lines that no branch of government is authorized to cross by contracting away its own core governmental powers and duties. [6] Hence, even if the state's right to receive future settlement payments under the master settlement agreement might otherwise be regarded as a marketable asset, concerns of this nature may well preclude securitizing these future revenues. Because the parties and the superior court did not develop or meaningfully address this issue, I believe that it warrants further consideration on remand. 5. Whether the sale mechanism does what it purports to do Not every transaction is what it purports to be. And the constitutionality of the transaction at issue here must ultimately be judged by what it does, not what it purports to do. I therefore believe that it is crucial to examine the mechanics of the state's sale of revenue rights to NTSC in order to determine if the sale actually and immediately conveyed what it purported to convey: all right, title and interest of the State ... in and to forty percent of the revenue ... that the State has a right to receive from time to time under the MSA. There is reason to doubt that it did. [7] As already mentioned, the master settlement agreement appears to preclude the state from assigning to NTSC the state's right to receive the tobacco settlement funds directly from the MSA escrow agent; the agreement seems to require that the funds be held for the benefit of the state by the MSA escrow agent until payment is due, and that they then be transferred to the appropriate State-Specified Account for such Settling State. The purchase and sale agreement seems to recognize this restriction but evidently attempts to skirt it by requiring the state to create a trust within its State-Specified Account and by having the state pledge its settlement payments to the account trustee upon their deposit. As currently presented, the details of this arrangement are sketchy. The arrangement is not precisely described in the parties' briefing or in the superior court's decision, and the trust agreement itself apparently has not been included in the appellate record. But the most likely scenario seems to be that as soon as the state's settlement payment is deposited in the state-specified account, the account's trustee (the bank in which the funds are deposited) divides the funds according to the terms of the purchase and sale agreement, disbursing forty percent to NTSC and sixty percent to the state general fund. The preliminary prospectus describing NTSC's tobacco settlement asset-backed bonds appears to confirm this interpretation, emphasizing that [t]he State may not convey and has not conveyed to NTSC or the Series 2000 Bondholders any right to enforce the terms of the MSA and declaring that the MSA escrow agent will disburse the [settlement] funds to the Settling States. [8] The prospectus includes a flow chart that lends further support to this reading. This chart depicts settlement payments flowing from the MSA escrow agent to the Alaska state-specified account, where the payments appear to be received as state revenue. According to the chart, after receipt in the state account, the money is divided into two separate funds, with forty percent flowing to NTSC and sixty percent to the statepresumably to the general fund. The chart labels NTSC's forty percent payment as pledged revenues, suggesting that NTSC does not acquire these monies by direct payment from the MSA settlement, but instead as payment from state revenues representing NTSC's forty percent share of the total received by the state. Seemingly, then, because the master settlement agreement prohibits the state from assigning its right to directly collect settlement revenues and requires settlement payments to be deposited to a state-specified account for its benefit, settlement payments necessarily arrive at the state-specified account as state revenues. The fact that the settlement payments are deposited into a state-specified account rather than into the state's general fund certainly would not, by itself, change their basic character upon deposit as state revenue; nor is it clear how the state could contractually alter the future payments' basic character as state revenue at the time of their receipt by creating a trust within its account that divides them after their deposit. For if the funds must be paid to the state for its exclusive benefit and received in a state-specified account, it would appear that the state's decision to dedicate this account to one or more specific purposes merely serves to make it a dedicated fund. This is precisely what the dedication clause prohibits. After all, if the anti-dedication clause could be circumvented by the simple expedient of depositing state revenues into prerestricted trust accounts instead of the general fund, then compliance with the clause would be reduced to a minor accounting inconvenience. Notably, Tamara Brandt Cook, Director of Legislative Services for the Legislative Affairs Agency, foresaw and warned of precisely this danger in her September 20, 2000, memo to Representative John Coghill. Addressing the problem under the appropriations clause rather than the anti-dedication clause, Cook commented that, because the `Tobacco Settlement' money is to flow to AHFC upon receipt without an appropriation, the arrangement may be vulnerable under Art. IX, sec. 13 of the state constitution. [9] This subtle transactional wrinklethat the settlement payments must be routed through the state instead of being paid by the MSA escrow agent directly to NTSCappears to be dictated by the settlement's express non-assignment provision; and as Cook aptly notes, the wrinkle has a crucial bearing on the sale's constitutionality. For although the anti-dedication clause might permit an advance sale of the state's right to collect directly from the MSA escrow agent, it squarely prohibits the state from selling to NTSC the right to receive from the state the future revenues that the state itself will receive from the MSA escrow agent. That the master settlement agreement does not explicitly preclude states from transferring their present interests in future settlement funds and instead speaks only of restricting a settling state's right to assign or otherwise convey any right to enforce the agreement's provisions hardly rescues a present transfer of future revenues from the anti-dedication clause's proscriptions. The anti-dedication clause looks to the character of the conveyance as well as its timing. Because the master settlement agreement requires settlement funds to be held for the exclusive benefit of the settling state, requires those funds to be paid into the state-specified account, and precludes the state from transferring any right to enforce the agreement's provisions, it appears that neither NTSC nor the state, acting on NTSC's behalf, could ever compel a distribution of settlement funds directly to NTSC; instead, the funds must seemingly pass to NTSC through the state. Yet if the present transaction merely conveys the right to receive settlement revenues through the state when it eventually receives them, then the state's presently conveyed property interest is not what the state claims it to be: it is not an immediate conveyance of the state's title to the revenue stream itself but only a present pledge to hand over the state's future revenues when they accrue, through an airtight mechanism structured to ensure that the pledge will be honored. This form of salea dedication of proceeds from a source of future state revenuewould be impermissible whether characterized as a current sale at present value or as a promise to sell in the future. [10] It may be true that immediate assetization and sale of the state's settlement rights makes it possible for the state to receive all of the tobacco settlement payments now, rather than over a period of years. But constitutionally speaking, the salient fact is that the state receives its immediate payment not in exchange for its right to receive settlement revenues directly from the MSA escrow agent, but in exchange for irrevocably pledging to hand over its future settlement revenues as soon as the state receives them. AHFC and NTSC thus appear to be buying the fruit of the state's revenue tree, not the tree itself, years in advance; [11] yet the anti-dedication clause requires this fruit to be sold one year at a time, as it ripens. The point seems worth stressing again: an assignment of the right to receive the state's future revenues from the state is paradigmatically a dedication of state revenues; it makes no constitutional difference that the purchase and sale agreement conveys a present interest in the state's future revenue stream if that stream flows through the state's hands before reaching NTSC's banks. While the state goes to considerable lengths to justify the transaction by relying on opinions of various former attorneys general, these opinions lack persuasive force for the same reason that both the superior court's decision and today's opinion are unconvincing. The attorney general opinions all address the conceptual question of whether a state's right to receive future settlement revenues can be valued and sold as an asset. But in considering this point, they simply assume, or accept on faith, that the state's proposed sale actually will convey a share of the state's right to receive the settlement payment. None of the attorney general opinions take stock of the master settlement agreement's anti-assignment provision or discuss the agreement's apparent nullification of the state's ability to sell its direct rights to collect the revenue. Former Attorney General Charles Cole's letter to Senator Torgerson exemplifies the omission: it expressly acknowledges that once money is received by the State, it is `public revenue' which may not be dedicated for a special purpose; but the letter then accepts the state's characterization of the transaction at face value, assumes without examining the point that the settlement money will not be received by the state, and thus concludes that the sale will be valid. [12] Conceptually, the letter's observations are unassailable. Yet they incorrectly assume the truth of the state's unexplained and potentially unwarranted assertion that the chose in actionthe thing that is to be sold here is the state's right to receive the settlement. [13] Because the master settlement agreement appears to require that the state receive the MSA settlement firstbefore anyone else doesthe chose in action may not be a share of the settlement proceeds as such, but merely a share of the state's settlement share. Creating and freely trading in the present value of this kind of chose in action might be commonplace and entirely proper in the world of private finance. But in the sphere of state government, article IX, section 7 of the Alaska Constitution would strictly forbid it. For as Attorney General Cole's memorandum emphasizes, upon receipt by the State, but not before, the `proceeds' of the settlement are subject to the Section 7 constitutional restriction; and [o]nce money is received by the State, it is `public revenue' which may not be dedicated for a special purpose. In summary, the state's brief portrays the disputed transaction as a sale of the state's right to receive a stream of tobacco settlement funds. The superior court accepted this characterization of the disputed asset without serious question, and so has the court in its opinion. Yet it appears that this characterization may not reflect reality and may be barred by the express terms of the master settlement agreement. The transaction might more accurately be described as a sale of the right to receive from the state a portion of the state's future settlement revenues as soon as the state receives them. This distinction is critical for purposes of the anti-dedication clause. Moreover, it seems possible that other policy concerns might independently preclude recognizing the state's right to future settlement payments as a currently marketable asset: sale of that asset could potentially pit the state's contractual obligations to NTSC and its bondholders against the state's fundamental governmental duty to ensure public safety and welfare. Neither the appellate record nor the record before the superior court provides sufficient information to resolve these concerns definitively. As matters currently stand, I do not believe that the record can support a declaratory judgment in favor of either party. I would therefore vacate the superior court's judgment and remand for further proceedings. For these reasons, I dissent from the court's decision affirming the superior court's judgment.