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 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 Agree *645 ment (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:

“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 *646 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.

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 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.

*647 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 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 *648 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 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 . . . [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 .

*649 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.