Court Opinion

ID: 9624302
Source: CourtListenerOpinion
Date Created: 2023-08-22 06:57:38.485935+00
Date Added: 2024-06-11T18:05:43.147081
License: Public Domain

TYSON, Judge.
Philip Morris USA, Inc., R.J. Reynolds Tobacco Company, and Lorillard Tobacco Company (collectively, “Settlors”) appeal order entered, which denied their motion for summary judgment and granted the motion for summary judgment submitted by Maryland Certification Entity (“Maryland”) and Pennsylvania Certification Entity (“Pennsylvania”). We reverse and remand.
I. Background
During litigation over the health effects of tobacco and its impact on state funding in the 1990s, Settlors and their predecessors-in-interest entered into a Master Settlement Agreement (“MSA”) with various states and territories. State v. Philip Morris USA, Inc., 359 N.C. 763, 765, 618 S.E.2d 219, 221 (2005) (“Philip Morris 2”). One of the MSA’s aims was to reduce the public’s consumption of tobacco and its related health impacts on state budgets. The parties anticipated that reduced consumption “could cause tobacco growers and quota holders (‘tobacco farmers’) significant economic hardship.” Id. To address this problem, the MSA required Settlors “to devise a plan for mitigating the MSA’s potentially negative economic consequences.” Id. The result of this plan was a Trust Agreement, signed by the parties, under which “Settlors pledged to spend approximately $5.15 billion on economic assistance to tobacco farmers in Grower States.” Id. The tobacco grower states listed in the Trust Agreement were: Alabama, Florida, Georgia, Indiana, Kentucky, Maryland, Missouri, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, and West Virginia. Id.
*257The Trust Agreement provides economic assistance to tobacco farmers through annual distributions. Settlors fund the Trust through scheduled base payments and the Trustee distributes money in the Trust to the Grower States based on a percentage allocation schedule contained in the agreement. Each Grower State established a Certification Entity to receive these payments from the Trustee. Each Certification Entity distributes the funds as it deems appropriate to tobacco growers located within its state.
Schedule A of the Trust Agreement contains a Tax Offset Adjustment (“TOA”) provision. The TOA provision “entitles Settlors to reduce their Annual Payment in response to the imposition of a ‘Governmental Obligation,’ which is a new or increased cigarette tax used in whole or in part for the benefit of tobacco farmers.” Id. at 767, 618 S.E.2d at 222. Our Supreme Court, in Philip Morris I resolved the issue of whether the TOA is “contingent upon [an] actual payment of a Governmental Obligation.” 359 N.C. at 771, 618 S.E.2d at 224.
That previous appeal arose after Congress’s October 2004 passage of the Fair and Equitable Tobacco Reform Act of 2004 (“FETRA”). Pub. L. No. 108-357, 118 Stat. 1521 (codified as amended in scattered sections of 7 U.S.C.). FETRA “terminated the price control/quota system for U.S. tobacco beginning with the 2005 crop,” and “directed] the U.S. Secretary of Agriculture to offer tobacco farmers annual payments during fiscal years 2005 through 2014 in exchange for ending marketing quotas and related price supports.” Philip Morris I, 359 N.C. at 769-70, 618 S.E.2d at 223.
All Grower States listed in the Trust Agreement, except Maryland and Pennsylvania, had participated in the federal system of quotas and price supports that FETRA eliminated. “As part of the transition to a free-market, FETRA directed the Secretary of Agriculture to offer payment contracts to tobacco quota holders and tobacco producers who had operated under the old system.” Neese v. Johanns, 518 F.3d 215, 217 (4th Cir. 2008) (citing 7 U.S.C. §§ 518a, 518b). FETRA made $6.7 billion available to tobacco quota holders and $2.9 billion available to tobacco producers. Id. It is undisputed that the amounts Settlors are required to pay to tobacco farmers under FETRA exceeds the amounts they were due to pay under the Trust Agreement.
Maryland and Pennsylvania tobacco farmers received no FETRA payments because those states had chosen not to participate in the federal tobacco quota and price support system. Settlors paid all sums due under the Trust Agreement until they were required to *258begin payments under FETRA. Maryland and Pennsylvania stopped receiving Trust benefits in 2005, after Settlors asserted they were no longer required to fund the Trust due to the TOA provision because of their payment obligations under FETRA. In the trial court, Maryland and Pennsylvania sought to require Settlors to continue making Trust payments for the benefit of their states’ tobacco farmers, despite the TOA provision both states had agreed to in the Trust Agreement.
On 17 December 2004, Maryland and Pennsylvania moved the trial court to enter an order that either clarifies or modifies the Trust Agreement to ensure that Settlors will continue to make annual Trust payments for the benefit of Maryland and Pennsylvania tobacco growers. Maryland and Pennsylvania alleged that FETRA “raise[d] a situation not anticipated by the parties to the Trust Agreement — a federal Governmental Obligation that benefits tobacco farmers in some states but not others.” Both parties moved for summary judgment. The trial court granted Maryland and Pennsylvania’s motion for summary judgment and denied Settlors’ motion. Settlors appeal.
II.Issue
Settlors argue the trial court erred when it disregarded the plain and unambiguous language of the Trust Agreement, denied their motion for summary judgment, and granted summary judgment for Maryland and Pennsylvania.
III.Standard of Review
In Philip Morris I, our Supreme Court stated: “this case is one of contract interpretation, and we review the trial court’s conclusions of law de novo.” 359 N.C. at 773, 618 S.E.2d at 225 (citing Register v. White, 358 N.C. 691, 693, 599 S.E.2d 549, 552 (2004)).
IV.Intention of the Parties
Settlors argue the trial court “misunderstood and misapplied the Supreme Court’s decision” by failing to follow or apply the principles of contract interpretation set forth in established case law and by the Supreme Court in Philip Morris I. We agree.
Our Supreme Court stated in Philip Morris I:
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 *259words 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).
359 N.C. at 773, 618 S.E.2d at 225 (footnote omitted).
The TOA provision contained in Schedule A of the Trust Agreement states:
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”) that is based on the purchase of tobacco or tobacco products or on production of Cigarettes or use of tobacco in the manufacture of Cigarettes at any stage of production or distribution or that is imposed 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 . . .;
(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 . . .; or
(iv) payments, grants or loans to any individual, organization, or Grower State for use in activities which are designed *260in whole or in part to obtain commitments from, or provide compensation to, Tobacco Growers or Tobacco Quota Owners to eliminate tobacco production.
(Emphasis supplied).
The Settlor’s FETRA payments clearly result from a “Governmental Obligation” that “provide[s] . . . direct payments to Tobacco Growers or Tobacco Quota Owners . . . .” “FETRA payments to tobacco farmers between 2005 and 2014 will approach $9.6 billion.” Id. at 769, 618 S.E.2d at 223. As noted earlier, it is undisputed that the amounts Settlors must pay under FETRA exceeds the amounts Settlors are to pay under the Trust Agreement. FETRA payments are a “Governmental Obligation” that fit squarely under the plain and unambiguous terms of the TOA provision contained in Schedule A of the Trust Agreement.
Our Supreme Court recognized in Philip Morris I that:
Problems with the tobacco industry prompted members of Congress to introduce more than twenty tobacco buyout bills from 1997 through 2004. The parties to the Phase II Trust understood they haid much to gain from legislation ending quotas and price controls. The Grower States recognized a federal buyout program would almost certainly offer larger payments to tobacco farmers than those available under the Trust.
359 N.C. at 769, 618 S.E.2d at 223. At the time the TOA provision was drafted and agreed to by all parties, attorneys for Settlors and Maryland and Pennsylvania knew or should have known that FETRA or a similar national tobacco grower payment plan was not only a possibility, but a probability. With the October 2004 passage of FETRA, a “Governmental Obligation” was created, which “provide [s] . . . direct payments to Tobacco Growers or Tobacco Quota Owners . . . .”
No language in the Trust Agreement suggests that an obligation imposed by the federal government would not offset Settlor’s obligations under the Trust Agreement or trigger a state-by-state application of the TOA to some grower states and not others, as Maryland and Pennsylvania argue we should hold. If the parties to the Trust Agreement had intended for a state-by-state application of the TOA be based upon a “Governmental Obligation” imposed by the federal government, the agreement would have included or incorporated such a provision. See Indemnity Co. v. Hood, 226 N.C. 706, 710, 40 *261S.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)). None of the other Grower States have challenged the Settlors’ right to offset the FETRA payments against those which would have otherwise been due under the Trust Agreement.
The parties to the agreement clearly understood the significance of offsets to one state and not another and included a state-by-state adjustment clause in the TOA provision. A state-by-state adjustment provision for any “Governmental Obligation” imposed by a “Grower State” is specifically stated:
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.
Our Supreme Court stated in Philip Morris I that “[gjiven 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.” 359 N.C. at 775, 618 S.E.2d at 227. Our Supreme Court’s prior interpretation of this provision and the plain language of the TOA provision contained in Schedule A compels us to hold that Settlors are entitled to offset amounts paid under FETRA against the amounts due to all Grower States under the Trust Agreement. Id,.; see Walton, 342 N.C. at 881, 467 S.E.2d at 411 (“If the plain language of a contract is clear, the intention of the parties is inferred from the words of the contract.”).
Our adherence to the plain and unambiguous language of the TOA provision is not contrary to the express purpose of the trust. “The 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.’ ” Philip Morris I, 359 N.C. at 766, 618 S.E.2d at 221.
In Philip Morris I, our Supreme Court stated, “we hold that Settlors must actually assume the burden of FETRA before being *262relieved of this obligations to the Phase II Trust. In so doing, we adhere to the plain language of the Tax Offset Adjustment provision and the express purpose of the Trust.” 359 N.C. at 781, 618 S.E.2d at 230. Settlors have now “assum[ed] the burden of FETRA” and are entitled to the benefit and relief they bargained for under the TOA provision. Id. FETRA is a “Governmental Obligation,” which “provide[s] aid to Tobacco Growers and Tobacco Quota Owners[,]” and fits squarely under the plain and unambiguous meaning of the terms of the TOA provision. The trial court erred when it granted Maryland and Pennsylvania’s motion for summary judgment and denied Settlors’ motion for summary judgment.
V. Conclusion
Considering the agreement as a whole, FETRA payments are a “Governmental Obligation,” which fit squarely under the plain and unambiguous terms of the TOA provision contained in Schedule A of the Trust Agreement. Id. The amounts that Settlors must pay under FETRA to tobacco producers and tobacco quota owners exceeds the amounts due to be paid under the Trust Agreement. The TOA provision expressly and unambiguously states that settlors are entitled to offset any “Governmental Obligation” paid under FETRA against the amounts due under the Trust Agreement. The trial court’s order is reversed and this case is remanded for entry of judgment in favor of Settlors.
Reversed and Remanded.
Judge CALABRIA concurs.
Judge ELMORE dissents by separate opinion.