Law Suits: MSA Update

Seneca cigarette dealer files for bankruptcy

December 7, 2011
By Tom Precious News Albany Bureau

Montour is pursued for tens of millions

ALBANY — One of the biggest movers of Native American-made cigarettes has filed for federal bankruptcy protection, a month after a court said the wholesaler is responsible for potentially tens of millions of dollars in federal tobacco assessments.

The Chapter 11 reorganization filing by Arthur Montour, owner of Native Wholesale Supply on the Seneca Indian Nation’s Cattaraugus Reservation, lists more than $50 million in liabilities by the businessman who has become wealthy by moving billions of cigarettes made on an Ontario reservation to other tribes across the United States.

The company and its Ontario cigarette partners, the subjects of a 2009 investigation by The Buffalo News, also listed as creditors a half-dozen states that have brought various lawsuits against Native Wholesale Supply over its tobacco-distribution practices.

But Montour’s biggest creditor — at $43 million — is the U. S. Department of Agriculture, which brought his company to court for failing to pay into a federal trust fund designed to move tobacco growers away from a regulated price market and into a free-market system.

In October, U. S. District Judge Richard J. Arcara ordered Montour’s company to comply with the terms of the Fair and Equitable Tobacco Reform Act of 2004 and pay into the tobacco trust fund. In his company’s Chapter 11 filing with the U. S. Bankruptcy Court in the Western District of New York, Montour listed the $43 million owed to the Agriculture Department as an unsecured claim.

Montour acts as a wholesaler of cigarettes — chiefly the Seneca brand—made by Grand River Enterprises, a plant on the Six Nations of the Grand River Indian Reservation in Ohsweken, Ont., near Hamilton.

The cigarettes cross the border near Buffalo and head to various warehouses, including a duty-free zone in Las Vegas, before being sold to tribes across the country. They, in turn, sell the cigarettes tax-free. The cigarettes also are sold by Indian retailers in New York, including most Seneca Nation merchants.

Montour, a former Seneca Tribal Council member, had his Perrysburg company incorporated by the Sac and Fox Nation in Oklahoma.

Several states have sued Montour’s company for various reasons, including alleged violation of cigarette- shipment laws and sale of cigarettes that do not meet fire-safety standards.

“The [bankruptcy] filing automatically stayed our case against Native Wholesale Supply,” said Diane Clay, Oklahoma Attorney General’s Office spokeswoman.

Oklahoma went after Montour’s company in court, alleging that he failed to make required payments into an escrow account created in the wake of a landmark 1998 settlement by 49 states and the nation’s major tobacco companies.

In court papers filed last week in U. S. Bankruptcy Court in Buffalo, the State of Oklahoma—at $5.1 million — is listed as the second-largest unsecured claim for Montour’s wholesale company.

Other creditors include U. S. Customs and Border Protection, which is owed $2.6 million for excise taxes and customs duties for the cigarettes crossing the border into the United States, and the U. S. Food & Drug Administration, which is due $1.1 million for estimated quarterly importation taxes.

In Idaho, which has had a long-standing court battle with Montour, officials found out last week about the bankruptcy filing. A judge has ordered Montour to pay $250,000 in civil penalties and other costs in a court case there.

“We’re still digesting this and considering our options,” said Brett

T. DeLange, head of the Consumer Protection Division of the Idaho Attorney General’s Office.

Other creditors include the states of New Mexico and California, which has ongoing litigation with Montour over its claims that hundreds of millions of cigarettes were illegally shipped to Big Sandy Rancheria, a California tribe.

While the bankruptcy filing shows potential big bills for Montour’s company, it also says the firm has assets valued at between $50 million and $100 million—the same broad range as the listed liabilities. Under Chapter 11, the company is seeking to stay in business as it attempts to reorganize.

The papers say Montour’s company has up to $18 million in various forms of indebtedness with the Canadian cigarette manufacturer. The company plans to continue selling cigarettes during the bankruptcy proceeding — using credit and cash collateral to buy products from Grand River.

The court documents say Montour’s company needs $15 million a month to keep operating. Estimated monthly payments include $11.5 million to several federal agencies for excise taxes and $3 million to Grand River for the cost of cigarette purchases.

In 2009, The News reported on the massive sales operation behind the movement of the Seneca brand made by a private company on land owned by the Ontario tribe. The investigation, which spawned a separate Seneca Nation probe into the brand, included concerns by Roswell Park Cancer Institute scientists about potentially dangerous metallic elements in Seneca Light cigarettes that it had tested by a lab in Scotland at the time.

Sales of the brand have spawned everything from dozens of lawsuits in various states to challenges over whether the sales comply with the North American Free Trade Agreement. Tobacco executives at the time estimated that the Seneca brand alone may have had as much as 10 billion cigarettes sold annually.

The Cuomo administration has cracked down on tax-free sales by Native Americans of premium, domestic- brand cigarettes while holding off on tax collections of the Indian- made products.

Seneca leaders have vowed litigation if the state tries to halt those tax-free sales, arguing that the products, by being made on Indian lands, are free from taxation.

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Court Denies N.Y. State a Separate Arbitration Over Huge Tobacco Settlement
Appeals court also removes Manhattan justice as judge responsible for enforcing compliance with the 1998 settlement

Daniel Wise, New York Law Journal
May 19, 2008
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New York state is not entitled to its own separate arbitration to determine whether it must contribute to a $1.1 billion adjustment that the tobacco industry has won for payments it must make under the 1998 nationwide tobacco settlement, a unanimous appeals court has ruled.

In an unsigned ruling, the Appellate Division, 1st Department, last week reversed a January decision by Manhattan Supreme Court Justice Charles E. Ramos granting the state attorney general’s request for a separate arbitration and ordering the tobacco industry to select an arbitrator for the single-state arbitration.

In its four-page decision, the panel also removed Ramos as the judge responsible for enforcing compliance in New York with the 1998 settlement. Ramos has overseen settlement-related issues since 2001.

The attorney general’s office did not respond to a request for comment.

At issue is a determination that could affect some, and possibly all, of the roughly $800 million a year New York receives from the settlement, which provides for annual payments from the tobacco industry to 52 states and territories.

The payments, which compensate states for expenditures made for treatment of smoking-related ailments both for their own employees and under their Medicaid programs, have been estimated to total $248 billion over the first 25 years of the settlement.

The pact allows the 45 signatory cigarette makers to receive a reduction in their annual payments for any year in which they can demonstrate that the pact has caused them to lose market share to the 80 manufacturers who operate outside the accord.

The pact has the potential to place the signatories at a competitive disadvantage because they are required to operate under marketing and advertising restrictions. In addition, they are required to contribute to the annual payments made to the states, which nationwide have been running at about $6.2 billion a year.

The first year in which the signers were entitled to claim a reduction in their payments was 2004, based on 2003 cigarette sales data. It was determined that the 40 signatories lost a 6 percent market share because of their participation in the pact. The percentage translated to a $1.1 billion loss nationwide.

But the pact also provides that, before the signers could reduce any state’s payment to recoup that loss, they must prove the state had failed to “diligently enforce” statutes it was required to adopt in joining the settlement in order to put the signers and nonsigners on equal footing.

Those statutes require the non-signers to make annual payments in each state, based on market share in that state, that are equivalent to the payments made by those who had joined the pact.

New York adopted such a law in Public Health Law ?1399-oo, which resulted in payments by the non-signers of 2 cents per every cigarette sold within the state in 2003, the base year upon which the 2004 adjustment was calculated. In total, New York collected $1.8 million from the non-signers in 2003. That money is to be held in escrow by the state to satisfy any future smoking-related claims asserted against the non-signers.

ENORMOUS FISCAL DOWNSIDE

Resolution of whether New York has diligently enforced its statute has enormous financial repercussions. Should the state be found to be the only one not to have diligently enforced its statute, it would be required to contribute its entire $800 million payment to cover the industry’s $1.1 billion adjustment for 2004.

If other states are also found to have failed to diligently enforce their statutes, however, New York’s share of the $1.1 billion could be reduced proportionately. Any single state’s responsibility for the adjustment must reflect the ratio of its payments for the year in question to the total payments received during that year by all states found not to have diligently enforced their statutes.

The question before Ramos, and subsequently the 1st Department, was whether the issue of New York’s diligent enforcement should be decided in a single nationwide arbitration or a separate arbitration involving only New York.

The 1st Department, in State of New York v. Philip Morris, 400361/97, rejected Ramos’ conclusion that the question should be decided in a single-state arbitration.

That issue, the panel wrote, had been resolved by the 1st Department in 2006, when a separate panel overturned a different ruling from Ramos. That decision said the court, as opposed to an arbitration panel, should decide diligent enforcement issues.

On the question of a national versus New York-only arbitration, Ramos had accepted the attorney general’s argument that a nationwide arbitration was inappropriate because each settling state reflected a separate side of the dispute.

The panel, however, wrote that the court in its earlier ruling had held that the 1998 pact provided for only two sides in the arbitration, the industry and the states collectively. The court’s earlier ruling, State v. Philip Morris, AD3d 26, was upheld by the Court of Appeals, 8 NY3d 574 (2007).

Justices Angela M. Mazzarelli, David Friedman, John T. Buckley, John W. Sweeny Jr. and Diane T. Renwick joined in last week’s ruling, which also noted that appellate courts in four other states had taken a similar position: Alabama, Connecticut, Indiana and Maryland.

So far, 20 states have agreed to submit diligent enforcement issues to a single arbitration, according to the National Association of Attorneys Generals. The signatories have designated former Judge William G. Bassler of the District of New Jersey as their arbitrator. The 20 states have designated Abner Mikva, a former judge of the U.S. Court of Appeals for the D.C. Circuit, as their arbitrator.

Under the terms of the settlement agreement Mikva and Bassler must select the third member of the arbitration panel, who must also be a former federal judge.

Thirteen states continue to appeal orders requiring that the question of diligent enforcement be decided in arbitration as opposed to by a state judge, according to the attorneys general group.

‘CONFLICTING INTERESTS’

In accepting the attorney general’s argument that each state is entitled to a separate arbitration, Ramos had found that the states have “conflicting interests.” Only those states found to have failed to diligently enforce their statutes can have their payments reduced to cover the adjustment, he noted.

In addition to the two reversals on questions relating to the proper forum for resolution of diligent enforcement, the 1st Department also rebuffed Ramos in 2003 when he sought to examine the propriety of a $625 million award in attorney fees to the six firms that represented New York in litigation that was resolved as a part of the 1998 settlement.

The fee awards were also authorized under an arbitration provision contained in the 1998 pact.

The 1st Department ruled that Ramos was without jurisdiction to scrutinize those awards.

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The Nation’s Top Ten Worst State Attorneys General
by Hans Bader
January 24, 2007

Daily Policy Digest LEGAL ISSUES

Monday, August 29, 2005

Settlement money from the historic tobacco lawsuit in the late 1990s was never intended to balance ailing state budgets, let alone buy golf carts, cable lines and security cameras, says Howard Markel, a pediatrician and historian of medicine at the University of Michigan.

As part of the legal settlement, tobacco companies agreed to pay $246 billion over 25 years to every state and the District of Columbia for tobacco prevention and cessation programs. However, in the last five years, states have received $40.7 billion in tobacco settlement revenue but have devoted only five percent of this money to fighting the tobacco epidemic.

Markel reveals where some states are misspending their settlement money:

Alabama has spent more than $1 million of this money on boot camps for juvenile delinquents, alternative schools and metal detectors and surveillance cameras for public schools, while Michigan has used 75 percent to provide $2,500 college scholarships to high schools students.
Illinois has used $315 million for property tax relief and an earned-income tax rebate, whereas North Dakota has spent about 45 percent of its settlement on water resources and flood control projects.
In North Carolina, 75 percent of the tobacco settlement money went to provide assistance to the tobacco-producing community.
New York has used $700,000 to buy golf carts and an irrigation and sprinkler system for a public golf course in Niagara County, and Virginia has spent $12 million to lay fiber-optic lines for broadband cable in southern sections of the state.
Voters, millions of smokers who want to quit and millions more we want to keep from ever smoking ought to ask their legislators where the money went, says Markel.

Source: Howard Markel, “Burning Money,” New York Times, August 22, 2005.
For text (subscription required): http://www.nytimes.com/2005/08/22/opinion/22markel.html
For more on Tobacco Company Suits: http://www.ncpa.org/iss/leg/
http://www.ncpa.org/newdpd/dpdarticle.php?article_id=2179