Appendix — Strawser v. Atkins

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APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

[Filed May 22, 2002]

No. 01-1175

Lois STRAWSER, et ai.,

Plaintiffs-Appellants,

NANCY V. ATKINS, et al.

Defendants-Appellees.

Appeal from the United States District Court

for the District of West Virginia, at Charleston

No. 01-1557

STEPHEN ALBERT JOSEPH, JR., et al.,

Plaintiffs-Appellants,

CHARLES M. CONDON, et ai.,

Defendants-Appellees

Appeal from the United States District Court

for the District of South Carolina, at Greenville

eat OREN

No. 01-2245

HILDA WHITE, et al.,

Plaintiffs-Appellants,

Vv.

MICHAEL EASLEY, et al.,

Defendants-Appellees.

Appeal from the United States District Court

For the Western District of North Carolina, at Statesville

AFFIRMED

This cause came on to be heard on appeal from the United

States District Court for the District of Rhode Island, and

was argued by counsel.

Upon consideration whereof, it is now here ordered,

adjudged and decreed as follows: The judgment of the

district court is affirmed.

By The Court:

Richard Cushing Donovan, Clerk

/s/

Deputy Chief Clerk

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

[Filed May 22, 2002]

No. 01-1175

Lois STRAWSER, et al.,

Plaintiffs-Appellants,

NANCY V. ATKINS, et al.

Defendants-Appellees.

Appeal from the United States District Court

for the District of West Virginia, at Charleston

No. 01-1557

STEPHEN ALBERT JOSEPH, JR., ef ai.,

Plaintiffs-Appellants,

CHARLES M. CONDON, et al.,

Defendants-Appellees

Appeal from the United States District Court

for the District of South Carolina, at Greenville

No. 01-2245

HILDA WHITE, et al.,

Plaintiffs-Appellants,

MICHAEL EASLEY, et al.,

Defendants-Appellees.

Appeal from the United States District Court

For the Western District of North Carolina, at Statesville

AFFIRMED

Before JUSTICES MOTZ and TRAXLER, Circuit

Judges, and W. Craig) BROADWATER, United States

District Judge for the Northern District of West Virginia,

sitting by designation.

OPINION

These appeals grow out of a 1998 settlement of litigation

that many states brought against a group of major tobacco

companies. West Virginia, North Carolina, and South

Carolina, like all other states participating in the settlement,

stand to receive substantial funds pursuant to it. Residents of

each of those states, who have received Medicaid assistance

for medical problems related to tobacco, filed suit to obtain a

share of the funds their respective states will receive under

the settlement. In each case, the district court dismissed the

patients’ complaints on multiple grounds. Because federal

law bars the claims, see 42 U.S.C.A. § 1396b(d)(B)(ii) (West

Supp. 2001), we affirm the judgment of the district court in

each case.

These cases concern the relationship between the

Medicaid program, which provides funds for health care for

poor people, and the 1998 tobacco settlement. To facilitate

understanding of the issues involved, we briefly describe the

relevant federal and state Medicaid law, the litigation and

1998 settlement between the states and the tobacco

companies, and the claims raised in these appeals.

In the United States, a person who cannot pay his or her

medical bills may be eligible for financial assistance under

the Medicaid program. If so, and if the states in which the

person lives participates in the federal Medicaid program,

both the federal government and the government of his or

her state contribute through the program to pay some of the

medical bills. See 42 U.S.C.A. §§ 1396, 1396a-1396u (1992

& West Supp. 2001). West Virginia, North Carolina, and

South Carolina all participate in the Medicaid program and

receive federal funds under the program. See N.C. Gen. Stat.

§ 108A-54 (1999); W. Va. Code Ann. §§ 9-1-1 to 9-2-3

(Michie 1998 & Supp. 2001); S.C. Code Ann. § 43-7-20, 43-

7-410 to 43-7-460 (Law. Co-op. 1985 & Supp. 2001).

In some instances, third parties are liable for the health-

care expenses of Medicaid patients, through, for example,

insurance, tort liability, or a court order based on familial

obligation. To obtain federal assistance with Medicaid costs,

a state must require Medicaid recipients to assign any rights

they possess against such third parties to the states, and must

make reasonable efforts to collect on all third-party claims

that are assigned. See 42 U.S.C.A. §§ 1396a(a)(25),

1396k(a) (West 1992 & Supp. 2001). In keeping with these

federal requirements, West Virginia, North Carolina, and

South Carolina each mandate such an assignment. See

W.Va. Code Ann. § 9-5-11(a) (Michie 1998); S.C. Code

Ann. §§ 108A-57, 108A-59(a) (1999).

Federal law also governs a _ participating state’s

distribution of any recovery on a third-party claim assigned

by a Medicaid recipient. If a state recovers “under an

assignment,” payments from third parties go first to the state

up to its relevant Medicaid expenses; then to the federal

government, up to its relevant Medicaid expenses (minus an

incentive payment to encourage the state to collect, see 42

C.F.R. § 433.153 (2001)); and finally, if any funds remain, to

the patient who assigned the claim. See 42 U.S.C.A. §

1396k(b); see also 42 C.F.R § 433.1543 (2001). A state

must distribute any remainder to the individual Medicaid

recipient. See 42 U.S.C.A. § 1396k(b) (requiring that after

both governments cover all of their expenses, “the remainder

of such amount collected shall be paid to such individual”

(emphasis added)).

In the 1998 settlement of the tobacco litigation, each

settling state recovered a substantial amount of money from

tobacco companies. In many of the settling states, including

West Virginia, North Carolina, and South Carolina,

Medicaid patients then brought suit against state officials.’

Every federal appellate court to consider similar patients’ claims has

rejected them. See Greenless v. Almond, 277 F.3d 601 (1™ Cir.

2002); Tyler v. Douglas, 280 F.3d 116 (2d Cir. 2001); Harris v.

Owens, 264 F.3d 1282 (10" Cir. 2001); McClendon v. Georgia, 261

F.3d 1252 (11" Cir. 2001); Floyd v. Thompson, 227 F.3d 1029 (7"

Cir. 2000); see also Watson v. Texas, 261 F.3d 436 (5" Cir. 2001)

(addressing similar claims based on a separate settlement between

Texas and the tobacco companies); Table Bluff Reservation (Wiyot

Tribe) b. Philip Morris, Inc., 256 F.3d 879 (9" Cir. 2000) (ruling

that Indian tribes lacked standing to challenge the tobacco

settlement). The district courts have also uniformly rejected such

claims in cases too numerous to list.

The patients contend that at least part of the tobacco

settlement constituted a Medicaid recovery subject to the

Statutory framework outlined above. Therefore, they argue,

state officials should distribute excess funds recovered under

the settlement to them. Before analyzing these contentions,

we describe the nature of the state lawsuits against tobacco

companies and the settlement reached.

In the 1990s, nearly all the states sued major tobacco

companies for harm arising from the deliberate concealment

of the health risks posed by tobacco.’ In their complaints,

West Virginia, North Carolina, and South Carolina all cited

the medical costs of treating smoking-related injuries as a

major source of damages.

West Virginia filed suit on September 20, 1994. the

state’s third amended complaint lists a number of tobacco

harms to the state, including its expenses in treating tobacco-

related health problems, its expenses in countering tobacco

advertising aimed at young people, products-liability claims,

and antitrust violations. The complaint includes fourteen

counts; several discuss damage to the state other than health-

care costs, such as the cost of public campaigns about the

dangers of tobacco, and pursue relief other than the money

the state had spent on health-care costs.

South Carolina filed suit on May 12, 1997. Preliminary

language in its amended complaint describes only the

medical expenses the state had incurred. The complaint

The states and tobacco companies participating in the tobacco

settlement have varied over time. See, e.g., Star Scientific, Inc. v.

Beales, 278 F.3d 339 (4" Cir. 2002) (considering the claims of a

tobacco company facing a choice as to whether to participate in the

settlement); infra (noting North Carolina’s decision to join the

settlement after it had been executed). Because nothing turns on

these details in these appeals, we have not attempted to specify

which tobacco companies and states were involved at any given

point.

includes sixteen counts. The only harm to South Carolina

discussed in any of the counts is the cost of medical

treatment for tobacco-related health problems. However,

South Carolina did seek an order requiring the tobacco

companies to fund a campaign of public education about

smoking and health, as well as orders barring them from

marketing and sales practices aimed at minors and requiring

them to disclose information related to tobacco.

North Carolina filed suit on December 21, 1998. (North

Carolina’s lawsuit actually followed the execution of the

settlement between the tobacco companies and many other

states by several weeks; on the same day, the state both filed

suit and immediately dismissed its suit in order to join the

settlement.) The complaint included two state-law claims,

for restraint of trade and unfair commercial practices. The

state cited the financial harm that the shrinking tobacco

market inflicted on its communities that depended on

growing tobacco and health-care costs incurred in treating

smoking-related illnesses. It sought damages “for the past

and future medical costs paid by North Carolina to medical

assistance beneficiaries, state employees, and others for

treatment of tobacco-related illnesses.” The state also sought

injunctions and “mandatory orders” to bar tobacco

advertising and tobacco-related conspiracy and to provide

funds for public education about the dangers of tobacco and

for financial assistance to “tobacco-dependent communities.”

Late in 1998, without admitting liability, the tobacco

companies settled the claims of West Virginia, North

Carolina, South Carolina and most other states. In a

document entitled “Master Settlement Agreement”) (MSA),

the companies agreed to pay billions of dollars to the states

in future installments. Under the MSA, settlement funds

went into escrow, with Citibank as the escrow agent. The

total amounts involved cannot be fixed exactly, but the

patients pursuing these cases allege that West Virginia

expects to receive $1.933 billion, South Carolina $2.3

billion, and North Carolina $4.6 billion, and that these

payments exceed what each state has paid and expects to pay

for Medicaid costs related to tobacco.

In return for these funds, the states released their rights to

pursue a wide range of claims against the tobacco

companies. The states released the companies from liability

based on their past conduct and from future monetary

liability arising solely from use of or exposure to tobacco.

Some of the claims released by the states did not related to

health-care costs; the MSA covered all claims “directly or

indirectly based on, arising out of or in any way related, in

whole or in part, to (A) the use, sale, distribution,

manufacture, development, advertising, marketing, or health

effects of, (B) the exposure to, or (C) research, statements or

warning regarding, Tobacco Products.”

West Virginia, North Carolina, and South Carolina have

all received payments under the MSA. A South Carolina

Statute assigns all MSA receipts to a Tobacco Settlement

Revenue Authority created by the statute, which issues bonds

(though not to South Carolina) and pays their proceeds to

various trust funds. S.C. Coe Ann. § 11-49-50, 11-49-70

(Law. Co-op. Supp. 2001). Similarly, a North Carolina

statute assigns 50% of that state’s MSA funds to a non-profit

corporation called The Golden L.E.A.F. (Long-term

Economic Advancement Foundation) to provide financial

assistance to tobacco-dependent areas of North Carolina.

See 1999 N.C. Sess. Laws 2, available’ at

http://www.ncga.state.nc.us/SessionLaws/1999_/s 119990002

/default.htm (last visited April 11, 2002).

In 1999, after the tobacco settlement had been reached,

Congress passed an amendment to federal Medicaid law that

specifically addresses the MSA, in a section of an emergency

appropriations act, entitled “Prohibition on Treating Any

Funds Recovered From Tobacco Companies as an

Overpayment for Purposes of Medicaid.” See 1999

10a

Emergency Supplemental Appropriations Act, Pub. L. No.

106-31, 113 Stat. 57, 103-04, codified at 42 U.S.C.A. §

1396b(d)(3)(B) (West Supp. 2001). Congress addressed the

tobacco settlement in two provision that altered the usual

manner for distribution of recovery on third-party claims.

See 42 U.S.C.A. § 1396b(d)(3)(B)(i, ii).

The first provision exempts the tobacco settlement from

the usual statutory payment scheme for state reimbursement

of federal Medicaid costs. Ordinarily, a state reimburses the

federal government by designating the federal share of a

recovery as party of an “overpayment” on the federal

obligations under Medicaid, to be repaid to the federal

government. See 42 U.S.C.A. §§ 1396b(d)(2)(A), (2)(B),

(3)(A) (West Supp. 2001). Under the 1999 amendment,

however, Congress directed that this procedure

shall not apply to any amount recovered or paid to a

State as part of the comprehensive settlement of

November 1998 between manufacturers of tobacco

products ... and State Attorneys General [the MSA],

or as part of any individual State settlement or

judgment reached in litigation initiated or pursued by

a State against one or more such manufacturers.

42 U.S.C.A. § 1396b(d)(3)(B)(ii). We refer to this provision

herein as “clause (ii).”

isk

By April 26, 2000, Medicaid patients suffering from

tobacco-related illnesses had filed the three similar amended

complaints against official in West Virginia, North Carolina,

lla

and South Carolina, which form the basis for these appeals.*

In these complaints, the patients seek a share of the MSA

funds received by their respective states, under the theory

that the Medicaid recovery provisions described above apply

to the MSA settlement, and that they have a right to

payments in excess of the states’ actual Medicaid expenses. —

Specifically, proceeding under 42 U.S.C.A. § 1983, the

Medicaid patients allege that state officials violated

provisions of the Medicaid statute that require states to

disburse excess funds to individual recipients, see 42

U.S.C.A. § 1396a(a)(25). They further allege that these

asserted deprivations violate the Due Process Clause and the

Takings Clause.

By suing state officials rather than the stateitself, the

patients seek to invoke the Ex parte Young, 209 U.S. 123

(1908), exception to the Eleventh-Amendment immunity of

the states. The patients ask for a declaratory judgment of

their rights and their state’s obligations under federal

Medicaid law, and injunctive relief requiring state officials

inter alia to “disburse ... or to cause the disbursement” of

the MSA settlement funds that assertedly belong to the

patients. In each case, the district court dismissed the

patients’ claims on multiple grounds. See Strawser v.

Lawton, 126 F. Supp. 2d 994 (S.D. W.Va. 2001); Joseph v.

Condon, No. 00-324 (D.S.C. Mar. 19, 2001) (opinion and

order dismissing the case with prejudice); White v. Hunt, No.

For ease of reference, we often refer within to the individual state

defendants as “the states”.” The patients in all three cases also filed

suit against Citibank, the escrow agent for the MSA, and the North

Carolina patients sued the nonprofit organization that received a

share of the state’s funds from the tobacco settlement, The Golden

L.E.A.F. Both The Golden L.E.A.F. and Citibank make a number of

arguments on the merits in their own behalf. Because we rule that

the patients have no claim at all to the MSA funds paid to the state,

and because the patients’ claims against the non-state defendants are

derivative of their other claims, we need not address the specific

arguments made by The Golden L.E.A.F. or Citibank.

12a

00-14 (W.D.N.C. Sept. 25, 2001) (same); White v. Hunt, No.

00-14, 2000 WL 33261006 (W.D.N.C. July 13, 2000)

(magistrate judge’s report and recommendations).

These appeals followed. Our review is de novo. See

TWFS, Inc. v. Schaefer, 242 F.3d 198, 204 (4" Cir. 2001);

Lynn v. West, 134 F.3d 582, 585 (4" Cir. 1998). We heard

oral argument in all three cases. Because of the identical

central issues presented in each, however, we resolve all

three appeals in this single opinion.

II.

The patients’ central contention is that the usual

provisions for distribution of Medicaid recoveries apply to

the funds the states receive from the MSA, so that under 42

U.S.C. §1396k(b), they have a federal right to a share of

those funds. The state officials respond that the district court

in each case properly dismissed the complaints because, for

numerous reasons, the complaints fail to state a claim on

which relief can be granted and, in any event, the state

officials enjoy Eleventh-Amendment immunity from these

lawsuits. Each district court made rulings on both grounds,

and, in particular, each ruled that the 1999 amendment to the

Medicaid statute bars any claim by the patients to part of

13a

their respective states’ shares of the tobacco settlement.’ We

affirm on that basis.

Even though generally “[q]Juestions of jurisdiction

should be given priority,” and some courts have held that the

Eleventh Amendment constitutes such a jurisdictional bar,

see Vermont Agency of Natural Res. v. United States, 529

U.S. 765, 778 (2000) (discussing circuit split), in this case,

we can properly base our holding on the plain language of

the 1999 amendment to the Medicaid statute without

resolving the Eleventh-Amendment question. This is so for

two reasons.

First, the limited nature of our holding permits this. In

Vermont Agency, the Supreme Court specifically held it

“appropriate” to determine whether a statute permitted a

cause of action against the states without resolving an

Eleventh-Amendment question. /d. at 779-780. The Court

explained that the statutory question was both “logically

antecedent” to the Eleventh-Amendment question and so

limited that there was no “realistic possibility that

Although the United States District Court for the District of South

Carolina did not explicitly dismiss the suit before it for failure to

state a claim, two of the court’s rulings addressed the merits. First,

the court ruled that South Carolina had not violated federal law in

any respect; although the court handled that determination as an

Eleventh-Amendment issue under Ex parte Young, it more properly

constitutes a determination on the merits. See Harris, 264 F.3d at

1289; TWFS, 242 F.3d at 204-06; Booth v. Maryland, 112 F.3d 139,

143-43 (4" Cir. 1997). The court also concluded that “Congress has

relieved states participating in the MSA of any obligation to disburse

funds to Medicaid recipients pursuant to § 1396k(b) of the Act” and

that therefore “Plaintiffs have been deprived of no right or privilege

secured by the Act” and “§ 1983 is not implicated in the within

action.” In any case, of course, we may affirm on any ground

revealed in the record. See, e.g., Adventure Communications, Inc. y.

Kentucky Registry of Election Fin., 191 F.3d 429, 439 n.9 (4" Cir.

1999) (quoting PHP Healthcare Corp. v. EMSA Ltd. P’ ship, 14 F.3d

941, 945 (4" Cir. 1993)).

l4a

addressing” it could “expand the Court’s power beyond the

limits that the jurisdictional restriction has imposed.” /d. at

779. Cf. BellSouth Telecomms., Inc. v. North Carolina Utils.

Comm’ n, 240 F.3d 270, 275-76 (4" Cir. 2001) (ruling that a

federal court may not avoid ruling on an assertion of

Eleventh-Amendment immunity while permitting a case to

proceed). Even if the statutory question here is not as plainly

“logically antecedent” to the Eleventh-Amendment

question,” it provides the basis for an even more limited

holding than that in Vermont Agency. That case held that

individual plaintiffs could obtain no relief of any type from

the states under a particular federal statute (31 U.S.C.A. §

3729(a) (West Supp. 2001)); we merely hold that individual

plaintiffs cannot obtain certain relief (tobacco settlement

funds) from the states under a particular federal statute (42

U.S.C.A. § 1396k(b)). Thus, as in Vermont Agency,

resolution of the statutory question here does not involve a

court in “pronounc[ing] upon any issue, or upon the rights of

any person, beyond the issues and persons that would be

reached under the Eleventh Amendment inquiry.” Vermont

Agency, 529 U.S. at 799.

Second, and independent of the limited nature of our

holding, the states’ litigating position renders it appropriate

to resolve these cases on the basis of the Medicaid statute.

Both in their briefs and at argument the states have relied on

the contention that the 1999 amendment bars the patients’

claims, as well as their Eleventh-Amendment defense.

Although at oral argument counsel for the state officials

carefully refrained from in any way waiving that defense,

they did not insist on it. Thus, like the state official in

The statutory question here well may be just as “logically

antecedent” to the constitutional question; the statutory question in

this case is in the nature of an affirmative defense. Courts often base

their holdings on an affirmative defense without even resolving the

existence of a cause of action. See SA Charles Alan Wright &

Arthur R. Miller, Federal Practice & Procedure § 1357 (1990), and

the many cases cited therein. .

1Sa

McClendon, the officials here argue the merits and rely

“upon that defense only if it is necessary to prevent judgment

against them on the merits.” 261 F.3d at 1238. The

Eleventh Amendment can be waived by a party, see, e.g.,

College Sav. Bank v. Florida Prepaid Postsecondary Educ.

Expense Bd., 527 U.S. 666, 675 (1999), and so does not

automatically divest a court of jurisdiction. See Wisconsin

Dept. of Corr. v. Schact, 524 U.S. 381, 389 (1998). The |

states’ restricted use of the Eleventh-Amendment defense |

here provides another reason permitting us “to decide in their

favor on the merits.” McClendon, 261 F.3d at 1258.

Additionally, we note that avoiding the constitutional

question and resolving this case on the merits — on the basis

of the 1999 amendment to the Medicaid statute — well

accords with the venerable principle that a court will not

decide a constitutional question, particularly a complicated

constitutional question, if another ground adequately

disposes of the controversy. See INS v. St. Cyr, 533 U.S.

289, 299-301 & n.13 (2001); Ashwander v. TVA, 297 U.S.

288, 347 (1936) (Brandeis, J., concurring).° While the

statutory question here is easy, several courts have concluded

that the Eleventh-Amendment question presents real

difficulty. See Greenless, 277 F.3d at 607; Tyler, 280 F.3d at

121; Floyd, 227 F.3d at 1034-35. In fact, no circuit has

upheld the states’ contention that the Ex parte Young

exception does not apply. See Harris, 264 F.3d at 1288-94

(expressly holding that an Ex parte Young exception is

available); Greenless, 277 F.3d at 606-08 (holding on the

merits); Tyler, 280 F.3d at 121 (same); McClendon, 261 F.3d

at 1256-59 (same); Floyd, 227 F.3d at 1034-35 (same).

We recognize that this principle does not permit a court to refrain

from resolving a disputed question as to Article III jurisdiction, see

Steel Co. v. Citizens for a Better Env’ t, 523 U.S. 83, 94-100 & n.3

(1998), but no party contends that this case involves any lack of

Article III jurisdiction.

16a

For these reasons, we can and do resolve this case on the

merits, without reaching the Eleventh-Amendment question.

Resolution of the patients’ claims on the merits is

straightforward. But for an exception that is irrelevant here

for litigation costs proscribed by 42 U.S.C.A. § 1396b(i)(19),

the 1999 Medicaid amendment expressly provides that “a

State may use amounts recovered or paid to the state” under

the MSA “for any expenditures determined appropriate by

the state.” See 42 U.S.C.A. § 1396b(d)(3)(B)(ii). The states

argue that the permission to use the funds freely applies to

all “amounts recovered or paid to” them under the tobacco

settlement, and that it therefore extinguishes the rights of

individual Medicaid recipients under 42 U.S.C.A. §

1396k(b), with respect to tobacco-settlement funds alone.

The patients respond that the permission to undertake “any

expenditures determined appropriate by the state” applies

only to the funds that the federal government itself

relinquished. The statutory text supplies a clear answer.

The relevant statutory language in clause (ii) provides

that:

a State may use amounts recovered or paid to the

state as part of a comprehensive or individual

settlement, or a judgment, described in clause (i) for

any expenditures determined appropriate by the state.

42 U.S.C.A. § 1396b(d)(3)(B)(ii). Clause (i), meanwhile,

provides that certain provision under which the federal

government ordinarily recoups its chare of a Medicaid

recovery

shall not apply to any amount recovered or paid to a

State as part of the comprehensive settlement of

November 1998 between manufacturers of tobacco

products ... and State Attorneys General [the MSA],

or as part of any individual State settlement or

17a

judgment reached in litigation initiated or pursued by

a State against one or more such manufacturers.

42 U.S.C.A. § 1396b(d)(3)(B)(i). Clause (i) thus discusses

an “amount,” the MSA itself, and “individual state

settlement[s] or judgment{[s].”

The patients’ theory rests on two propositions. First, they

assert that in clause (ii), the phrase “described in clause (i)”

modifies “amounts,” not “settlement, or ... judgment.”

According to the patients, clause (ii) only provides the states

federal permission to do what they like with

“amount...described in clause (i),” whatever those might be.

Second, the patients contend that the “amounts...described

in clause (i)” constitute only “the federal share of the tobacco

settlement,” not all the money recovered. Thus, the

permission granted in clause (ii) applies only to the federal

share of the MSA, leaving the individual claims under §

1396k(b) intact.

Neither proposition is tenable. First, clause (ii)’s term

“described in clause (i)” is better read to modify “settlement,

or ...judgment.” Clause (ii) provides that “a State may use

amounts recovered or paid to a state as part of a

comprehensive or individual settlement, or a judgment,

described in clause (i)” as it likes. It is the phrase

“settlement, or... judgment” that would be vague without the

modifier directing the reader to clause (i), not the phrase

“amounts recovered or paid to the state.’ An amount

recovered or paid to a state under a settlement or judgment is

the incoming money, plainly. Meanwhile, without more, “a

comprehensive or individual settlement, or a judgment,” is

much broader than the scope of the 1999 amendment. The

modifier is only necessary for the latter.

Moreover, even if the phrase “described in clause (i)” did

modify “amounts,” the “amount” that clause (ji) itself

discusses is “any amount recovered or paid to a State” as a

result of the MSA or other tobacco settlements — not just the

federal share. See Tyler, 280 F.3d at 122-23; Harris, 264

18a

F.3d at 1295-96; Strawser, 126 F. Supp. 2d at 1000. This is

true even though clause (i) itself functions to exempt such

amounts from the ordinary processes by which the states

repay the federal government for its share of Medicaid

expenses. We thus reject both propositions supporting the

patients’ reading of clause (ii).

Turning to the impact of clause (ii) on the patients’ claims

in these cases, we consider its statement that “a State may

use amounts recovered or paid to the state” under the MSA

“for any expenditures determined appropriate by the state.”

This provision permits a state to use “amounts recovered or

paid...for any expenditure,” and does not gualify the term

“amounts.” There is no ambiguity in this sentence:

Congress declares that the states may spend any money they

receive under the MSA on any expenditure. See Greenless,

277 F.3d at 609 (“Congress made its intent clear in the

amendment.”); Tyler, 280 F.3d at 124 (“[T]here is no

ambiguity in the language of § 1396b(d)(3)(B)(ii).”); Harris,

264 F.3d at 1295.’

Notwithstanding the clarity of this language, the patients

offer several reasons why we should ignore it.

The West Virginia patients argued unsuccessfully below that the

1999 amendment raised problems of retroactivity. See Strawser, 126

F. Supp. 2d at 1002 n.5. Neither they nor the South Carolina

patients press this argument in their briefs on appeal. The North

Carolina patients do press such an argument on appeal, but they

failed to preserve it in objecting to the magistrate judge’s

recommendation of dismissal. See 28 U.S.C.A. § 636(b)(1) (West

1993); Praylow v. Martin, 761 F.2d 179, 180 n.1 (4" Cir. 1985)

(ruling that an issue is waived where no specific objection is filed).

Accordingly, we need not and do not reach it; we note, however, that

two of our sister circuits have expressly rejected such an argument.

See Greenless, 277 F.3d at 609 (rejecting a retroactivity argument

against application of the 1999 amendment); Harris, 264 F.3d at

1296-97 (same).

19a

First, they maintain that the legislative history, the title,

and the context of the 1999 amendment require rejection of

its clear language.

Even if it were appropriate to consider legislative history

when the statutory text is plain, and it is not, the legislative

history here does not contradict the statutory text; indeed, the

legislative history does not even mention individual

Medicaid recipients. See Tyler, 280 F.3d at 124; Harris, 264

F.3d at 1297. Rather, the legislative history of the 1999

amendment describes, without reference to individual

patients, the existence and nature of a federal right to a share

of the MSA. The patients actually emphasize this silence,

suggesting that it supports them, because the legislative

history does not expressly discuss the states’ entitlement to

all funds from the tobacco litigation here. However, total

silence on a point is far from the “substantial, unambiguous

evidence” necessary for a court to consider reaching “a

contrary interpretation” of clear statutory language. Matala

v. Consolidation Coal Co., 647 F.2d 427, 430 (4" Cir. 1981).

The title of the amendment similarly contains no mention

of the rights o individual Medicaid patients. That title —

“Prohibition on Treating Any Funds Recovered From

Tobacco Companies as an Overpayment for Purpose of

Medicaid” — instead simply refers to “an overpayment,” the

term of art used for refunding state money to the federal

government in this context. See 42 US.C.A. §§

1396b(d)(2)(A), (2)(B), (3)(A). Nor, contrary to the

patients’ suggestion, does the 1999 amendment’s context —

the amendment’s “distance” of 113 pages in the U.S.C.A.

from § 1396k(b), under which the patients seek to recover —

affect the amendment’s legal import.

In short, we agree with the states (and with the First,

Second, and Tenth Circuits) that the plain language of the

Medicaid statute, specifically the 1999 amendment, permits

the states to do whatever they like with all “amounts

20a

recovered” under the MSA, that is, with all the money they

derive from it. See Greenless, 277 F.3d at 605-09; Tyler,

280 F.3d at 121-24; Harris, 264 F.3d at 1294-97; see also

McClendon, 261 F.3d at 1262 (Noonan, J., concurring in the

judgment)."

y J

The patients next contend that to find the 1999

amendment dispositive, we must conclude that it repealed §

1396k(b) by implication, a conclusion that they say we

should be extremely reluctant to draw. The plain language

of the 1999 amendment does necessarily signal a marked

departure from § 1396k(b)’s general requirement for the

final distribution of monies to individual Medicaid

recipients. See Greenless, 227 F.3d at 609 n.89; Strawser,

126 F. Supp. 2d at 1000 n.4. And courts do indeed disfavor

repeals by implication. See, e.g., Rodriguez v. United States,

480 U.S. 522, 524 (1987); Rodgers v. United States, 185

U.S. 83, 87-88 (1902). But we do not believe that the 1999

amendment repeals § 1396k(b) by implication.

In support of their contrary view, the patients cite only

cases involving repeals of entire statutes or rules. See, e.g.,

United States v. United Cont’l Tuna Corp., 425 U.S. 164,

169 (1976) (“[T]he expectation that there would be some

* At oral argument the patients contended that the district courts had

improperly overlooked their claims under the Takings Clause. See

U.S. Const. amend. V. Their briefs in this court make no Takings

Clause argument; nor have they asserted that the 1999 amendment

itself constitutes or unconstitutionally authorizes a taking. Cf.

Joseph Reply at 12 (“American citizens cannot be stripped of their

statutory rights sub silentio”),; White Reply at 19 (addressing

whether Congress wished “to take private property” in an argument

about how “courts may properly interpret acts of Congress”). The

states contend that, regardless of the effect of the 1999 amendment

on their use of MSA funds, the tobacco settlement did no resolve and

had no effect on individual claims against the tobacco companies,

which remain viable in separate actions. See also McClendon, 261

F.3d at 1261-62; Floyd, 227 F.3d at 1033-34, 1037. in light of our

disposition of these appeals, we need take no position on that issue.

2la

expression of an intent to ‘repeal’ is particularly strong in a

case ... in which the ‘repeal’ would extend to virtually every

case to which the statute had application.”); FDIC v. Hirsch

(In re Colonial Realty Co.), 980 F.2d 125, 133 (2d Cir. 1992)

(noting that finding a repeal would be “a quite significant

modification” of a general rule). By contrast, the effect of

the 1999 amendment is highly specific. The amendment

does not repeal the general operation of § 1396k(b). See

Greenless, 277 F.3d at 608. Every Medicaid recipient —

except those seeking tobacco money from the states — has the

same rights under § 1396k(b) after the 1999 amendment as

he or she had before it.

Rather than repeal by implication a general statute (§

1396k(b)), the 1999 amendment simply created a specific,

discrete exception to that statute. See Harris, 264 F.3d at

1296 (ruling that the 1999 amendment “simply addresses one

particular application and carves out an exception’). “It is a

well-settled principle of construction that specific terms

covering the given subject matter will prevail over general

language of the same or another statute which might

otherwise prove controlling.” Kepner v. United States, 195

U.S. 100, 125 (1904) (citations omitted); see also Stewart v.

Zsmith, 673 F.3d 485, 492 (D.C.Cir. 1982) (“When one

Statute speaks in general terms while the other is specific,

conflicting provisions may be reconciled by carving out an

exception from the more general enactment for the more

specific statute.”); 1A Norman J. Singer, Sutherland

Statutory Construction § 23:16 (6" ed. 2002); cf. Brown v.

Gen. Servs. Admin., 425 U.S. 820, 834 (1976) (“In a variety

of contexts the Court has held that a precisely drawn,

detailed statute pre-empts more general remedies.”).

Although the 1999 amendment conflicts with § 1396k(b)

with respect to individual recovery under the tobacco

settlement, “[bJoth will be given effect if the general

language of [§ 1396k(b)] be construed as applying generally,

and [the 1999 amendment] be construed as creating an

22a

exception to its general application.” Niagara Fire Ins. Co.

of New York v. Raleigh Hardware Co., 62 F.2d 705, 709 (4"

Cir. 1933); see also Greenless, 277 F.3d at 608-09 (rejecting

a repeal-by-implication argument); Harris, 264 F.3d at 1296

(same).

Finally, the patients contend that because the 1999

amendment was part of an emergency appropriations rider,

we should be even more reluctant to hold that it affects an

earlier substantive statute. Again, we agree as a general

matter: “According to its own rules, Congress is not

supposed to use appropriations measures as vehicles for the

amendment of general laws . . . . [T]he doctrine disfavoring

repeals by implication is said to apply ‘with full vigor’ when

the subsequent law is an appropriations measure.” City of

Los Angeles v. Adams, 556 F.2d 40, 48 (D.C. Cir. 1977)

(citations omitted); see also TVA v. Hill, 437 U.S. 153, 189-

90 (1978). The Supreme Court has ruled, however, that

despite legislative rules to the contrary, Congress may

“accomplish its purpose by an amendment to an

appropriation bill, or otherwise.” United States v. Dickerson,

310 U.S. 554, 555 (1940) (citations omitted), cited

approvingly in United States v. Will, 449 U.S. 200, 221-24

(1980); see also 1A _ Singer, Sutherland Statutory

Construction, § 23:17 (“A purpose to repeal substantive

provisions in earlier statutes may be manifested by provision

in subsequent appropriation acts directing what use may be

made of funds in relation to the subject dealt within in the

earlier act.”’).

If two statutes can otherwise be reconciled, a court should

not read a later amendment as an exception to an established

general statute. See TVA, 437 U.S. at 189-93. But as any

child with an allowance knows, permission to use money

“for any expenditure” clearly conflicts with a mandate to

give some of the money to someone else. “Where Congress

chooses” to amend substantive law in an appropriations

rider, “we are bound to follow Congress’s last word on the

23a

matter even in an appropriations law.” City of Los Angeles,

556 F.2d at 49. With respect to the tobacco settlement,

Congress has spoken, and spoken clearly.

Il.

In sum, we hold that 42 U.S.C.A. § 1396b(d)(3)(B)(ii)

ars any recovery by individual Medicaid recipients to a

share of the money the states receive under the Master

Settlement Agreement.’ The judgments of the district courts

are therefore

AFFIRMED.

In addition to the ground on which we rule, the states argue that

individual Medicaid recipients only assigned their third-party claims

to the states up to the amount the states had spent on their care; that

the states did not sue the tobacco companies on behalf of individual

Medicaid recipients; that the MSA did not resolve claims that

individual Medicaid recipients might have against the tobacco

companies; that the tobacco settlement did not constitute a Medicaid

recovery at all, so neither the federal government nor individual

recipients had any right to any of its funds; that the state officials

have no authority under the state law to disburse MSA funds; and

that even if the MSA constituted a Medicaid recovery in part, any

money the states received in the tobacco settlement was for non-

Medicaid claims that were settled in the MSA, so no excess exists to

be refunded under 42 U.S.C.A. § 1396k(b). We need not address

these arguments given our disposition of these appeals.

——

24a

APPENDIX C

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF NORTH CAROLINA

STATESVILLE DIVISION

Civil Action No. 5:00CV14-V

HILDA WHITE, et al.,

Plaintiffs,

JAMES B. HUNT, JR., e¢ al.,

Defendants.

MEMORANDUM AND ORDER

THIS MATTER is before the Court on three motions to

dismiss: The “State Official Defendants’ Motion to

Dismiss” filed March 13, 2000; the Golden L.E.A.F., Inc.’s

“Motion to Dismiss” filed March 13, 2000; and “Motion of

Defendant Citibank, N.A. to Dismiss Complaint” filed June

2, 2000. Memoranda in support were filed with each motion.

Pursuant to 23 U.S.C. § 636(b)(1)(A) and the standing

order of designation, this Court referred the case to Chief

United States Magistrate Judge Carl Horn for recommended

disposition. Ina Memorandum and Recommendation and

Order” filed July 13, 2000, Magistrate Horn recommended

that all three motions to dismiss be granted. Plaintiffs filed

Objections to the “Memorandum and Recommendation and

25a

Order” on July 21, 2000, which are deemed to be timely and

are considered herein.

I. STANDARD OF REVIEW

The Federal Magistrate Act provides that “a district court

shall make a de novo determination of those portions of the

report or specific proposed findings or recommendations to

which objection is made.” 28 U.S.C. § 636(b)(1); Camby v.

Davis, 718 F.2d 198, 200 4" Cir. 1983); Keeler v. Pea, 782

F. Supp. 42, 43 (D.S.C. 1992). De novo review is not

required by the statute when an objecting party makes only

general or conclusory objections that do not direct the court

to the specific error in the magistrate judge's

recommendations. Orpiano v. Johnson, 687 F.2d 44, 47 (4"

Cir. 1982). Furthermore, the Statute does not require any

review at all of issues that are not the issue of an objection.

Thomas v. Arn, 474 U.S. 140, 149 (1985); Camby, 718 F.2d

at 200; Eker v. Apfel, 152 F. Supp. 2d 863, 864 (W.D.N.C.

1998). Nonetheless, a district court judge is responsible for

the final determination and outcome of the case, and,

therefore, this Court has conducted a careful review of

Magistrate Judge Horn’s “Memorandum and

Recommendation and Order,” as well as a de novo review of

those issues specifically in Plaintiffs’ Objections.

Il. STATEMENT OF FACTS AND PROCEDURAL

BACKGROUND

Plaintiff has not made specific or general objections to the

findings of fact and procedural background contained in

Magistrate Judge Horn’s “Memorandum and

Recommendation and Order.” After a review of the record

in this case, the Court adopts the factual findings made by

the Magistrate Judge on pages two through six of his opinion

filed July 13, 2000.

III. DISCUSSION OF LAW

Applying the careful standard of review to those portions

of the Magistrate Judge’s recommendation that were not

26a

specifically objected to, the Court finds that the Magistrate

Judge’s findings of fact are supported by the record and his

conclusions of law are consistent with the current case law.

Plaintiffs’ first objection, that Plaintiffs’ claims are not

barred by the Eleventh Amendment because Plaintiffs do not

seek retroactive relief, is merely a general and conclusory

objection that does not direct the Court to a specific

objectionable aspect of the Magistrate Judge’s

recommendation, and, therefore, is only subject to careful

review. Not with standing this Court’s obligation to conduct

a less-searching standard of review, this Court finds that the

Magistrate Judge’s conclusion that Plaintiffs are essentially

seeking a retroactive damages award, regardless of how

artfully they have characterized the relief requested by

Medicaid recipients suing for a portion of the tobacco

settlement. See, e.g., Floyd v. Thompson, 111 F. Supp. 2d

1097, 1100 (W.D. Wis. 1999); Cardenas v. Anzai, 128 F.

Supp. 2d 704, 709 (D. Haw. 2001); Strawser v. Lawton, 126

F. Supp. 2d 994, 1003 (S.D.W.V. 2001), appeal _docketed,

No. 01-1175 (4" Cir. Feb. 9, 2001); Martin v. State of New

Mexico, 197 F.R.D. 694, 696 (D.N.M. 2000) (stating that

Plaintiffs’ argument “is not well taken”); Downs_v.

Commonwealth of Kentucky, No. 00-23, *6-8 (E.D. Ky.

Aug. 31, 2000), appeal docketed, No. 00-6282 (6" Cir. Sept.

27, 2000); Tyler v. Douglas, 2000 WL 1146575, *3 (D. Vt.

June 21, 2000), appeal docketed, No. 00-7839 * Cir. July

11, 2000); Barton v. Summers, 111 F. Supp. 2d 989, 992-93

(M.D. Tenn. 2000), appeal docketed, No. 00-5942 (6™ Cir.

July 19, 2000); but see Harris v. Owens, 2001 WL 103907,

*6-7 (10 cir. 2001) (stating that the Court disagrees with

those district courts holding otherwise, but affirming the

district court’s dismissal of the suit on the merits).

Plaintiffs’ second objection regarding the applicability of

cited case law simply reiterates their legal arguments, which

were presented to, reviewed, and taken into consideration by

the Magistrate Judge in making his recommendation. Upon

27a

a careful review of those portions of the Magistrate’s

recommendation, this Court finds that his findings of fact are

supported by the record and his conclusions of law are

consistent with current case law. See, e.g., McClendon v.

Georgia Dep’t of Cmty. Health, 2001 WL 936051, *8 (11

Cir. 2001)( (agreeing with the Floyd court’s analysis of the

merits in dismissing Plaintiff Medicaid recipients’ lawsuit);

Floyd, 111 F. Supp. at 1034-38 (affirming the District

Court’s dismissal of Plaintiff Medicaid recipients’ lawsuit on

the merits, rather than on Eleventh Amendment grounds);

Clark v. Stovall, 2001 WL 395349, *19-21 (D. Kan. 2001)

(relying on the analysis of Barton and Floyd in dismissing

Plaintiff Medicaid recipients’ lawsuit); Cardenas, 128 F.

Supp. 2d at 709 (relying on Barton and Floyd in dismissing

Plaintiff Medicaid recipients’ lawsuit); Martin, 197 F.R.D. at

696-97 (relying on Barton and Floyd in dismissing Plaintiff

Medicaid recipients’ lawsuit on Eleventh Amendment

grounds); Brown v. Minnesota, 617 N.W.2d 421, 428 (Minn.

App. 2000), cert_denied, 1655, 69 U.S.L.W. 3593, 69

U.S.L.W. 3683, 69 U.S.L.W. 3685, (U.S. April 23, 2001)

No. 00-1339) (Affirming the District Court’s order

dismissing Plaintiff Medicaid recipients’ lawsuit).

Additionally, Plaintiffs’ third objection, that Magistrate

Judge Horn was required to take as true Plaintiffs’ assertion

that the North Carolina tobacco litigation was a Medicaid

recovery action, is a frivolous objection with no basis in law.

It is true that a judge must take factual allegations as true for

purposes of a motion to dismiss. See Gomer v. Philip

Morris, Inc., 106 F. Supp. 2d 1262, 1268 (M.D. Ala. 2000)

(citations omitted).

The Court must now consider the specific objections

raised by Plaintiffs. As to all issues not specifically

discussed below, this Court has conducted a careful review

of all issues and adopts the recommendations of Magistrate

Judge Horn.

28a

A. Nature of the State Tobacco Settlements

Plaintiffs specifically object to Magistrate Judge Horn’s

conclusion that the amendment to 42 U.S.C. § 1396b(d)(3)

indicates that the “state tobacco settlements were not to be

considered an ‘overpayment’ under the Medicaid

reimbursement statute.”” Civ. No. 5:00CV14V, Doc. No. 36,

~ “Plaintiffs’ Objections to Recommendation,” July 21, 2000,

at 7 (quoting Magistrate Judge Horn’s Memorandum and

Recommendation and claim to Medicaid reimbursement

from the tobacco settlement funds to which it would

otherwise have been entitled under 42 U.S.C. § 1396K.” See

id. In addition to the findings of fact and conclusions of law

asserted by Magistrate Judge Horn, other courts have

specifically rejected this same argument. Harris, 2001 WL

103297, at *9-12 (holding that funds received by states under

the tobacco litigation settlement are not subject to the

distribution requirements of § 1396k(b), which requires

states to forward any overpayment under the reimbursement

scheme to Medicaid recipients); Strawser, 126 F. Supp. 2d at

1000 (stating that “Plaintiffs’ proposed interpretations . . . do

| not find support in the comparatively unembellished

statutory language’’). Additionally, all courts are in

agreement that the amendment vests states with a “complete

right, title, and interest in the settlement proceeds,” Strawser,

126 F. Supp. 2d at 1000, and therefore, is not to be

considered as an overpayment under the Medicaid

reimbursement scheme. See Harris, 2001 WL 1032907, at

*9-12: McClendon, 2001 WL 936051, at *7-8; Watson _v.

Texas, 2001 WL 883533, *HN 13-14 (no page references

available); Floyd, 227 F.3d at 1034-38; Clark, 2001 WL

395349, at *6; Villagrana v. Graham, 2001 WL 670934, *2-3

(D. Utah 2001); Strawser, 126 F. Supp. 2d at 999-1002;

Skillings v. Illinois, 121 F. Supp. 2d 1235, 1236-39 (C.D. Ill,

2000); Tyler, 2001 WL 1146575, at * 1-2: Brown, 617 N.W.

4d at 425-27; State of California v. Bolduc, 83 Cal. App. 4"

597, 602-08 (Aug. 31, 2000) review denied (Cal. Nov. 15,

29a

2000). Accordingly, this Court finds that Magistrate Judge

Horn’s findings of fact are supported by the record and his

conclusions of law are consistent with current case law, and

therefore, adopts the recommendations of the Magistrate

Judge regarding the nature of the state tobacco settlements.

IV. ORDER

IT IS, THEREFORE, ORDERED that the “state

Official Defendants’ motion to Dismiss” be GRANTED.

IT IS FURTHER ORDERED that the Golden

L.E.A.F., Inc.’s “Motion to Dismiss” be GRANTED.

IT IS FURTHER ORDERED that the Plaintiffs’ case

is hereby DISMISSED WITH PREJUDICE.

THIS the 21“ day of September, 2001.

/s/

Richard L. Voorhees

United States District Court Judge

30a

APPENDIX D

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF NORTH CAROLINA

STATESVILLE DIVISION

Civil Action No. 5:00CV14-V

HILDA WHITE, et al.,

Plaintiffs,

JAMES B. HUNT, JR., ef al.,

Defendants.

Civil Action No. 5:00CV14-V

MEMORANDUM RECOMMENDATION AND ORDER

THIS MATTER is before the Court on three motions to

dismiss: the “State-Official Defendants’ Motion to Dismiss)

(docket #6) and the Gold L.E.A.F., Inc. “Motion to Dismiss”

(document #8), both filed March 13, 2000, and “Motion of

Defendant Citibank, N.A. to Dismiss Complaint” filed June

2, 2000 (document #24). Memorandum in Support

(documents #7, #9, and #24) were filed with each motion.

“Plaintiff's Memorandum of Law In Opposition . . “ was

filed by the State-Official Defendants (document #27 and a

“Reply to Plaintiff's Memorandum in Opposition to

Citibank’s Motion to Dismiss” (document #30) was filed.

ee Se

3la

Having carefully considered the arguments, the

record, and the applicable authority, the undersigned will

respectfully recommend that all three motions to dismiss be

granted and that the Complaint be dismissed with prejudice.

I. FACTUAL AND PROCEDURAL BACKGROUND

Plaintiffs, purporting to represent a class of Medicaid

recipients, filed this action January 27, 2000 claiming a

portion of the State of North Carolina’s 1998 settlement with

the major national tobacco companies. Each of the four

courts which have considered similar claims to date (in

Wisconsin, Minnesota, Tennessee, and Colorado, discussed

infra) have found them to be without merit, as does the

undersigned. Indeed, the state court in Minnesota found the

claims sufficiently frivolous to support sanctions against

Plaintiffs’ counsel for asserting them, and U.S. District Judge

Todd J. Campbell of the Middle District of Tennessee

described the Plaintiff's position in that case as based on

“exquisite sophistry.”

In November 1998, the State of North Carolina joined 45

other states in entering a comprehensive “Master Settlement

Agreement” (“MSA”) with the nation’s major national

tobacco companies. In addition to agreeing to pay the states

billions of dollars — continuing as long as tobacco products

are sold in the United States — the MSA prohibited the

tobacco companies from engaging in certain advertising,

including advertising, including advertising directed at

young people, and required states that had not yet filed suit

against tobacco companies to do so and move for court

approval of the MSA.

Upon entering the MSA, the State of North Carolina,

through the Attorney General, filed the required suit, State v.

Philip Morris, Inc., No. 98 CVS 14377, in the Superior Court

of Wake County, North Carolina. The same date the lawsuit

was filed the parties entered into a “Consent Decree and

Final Judgment,” which enjoined the prohibited advertising

and provided for the creation of a nonprofit corporation to

32a

receive and distribute fifty percent of the tobacco settlement

funds. North Carolina’s share of the payments from the

tobacco companies over the next 25 years is projected to be

about $4.6 billion.

In sharp contrast to Plaintiffs’ simplistic attempt to

construe the 1998 lawsuit and settlement as a Medicaid

reimbursement action, the 1998 action also asserted and

settled claims for unfair and deceptive trade practices,

restraint of trade in violation of the antitrust laws, deceptive

advertising, and unjust enrichment. Furthermore, to

eliminate any possible doubt about whether the settlement

was a Medicaid reimbursement action (and thus, subject to

the kind of excess recovery claim asserted by the Plaintiffs),

in May 1999, Congress specifically amended 42 US.C.

§ 1396b(d) to make it clear that the settlement funds under

the MSA were not to be considered “overpayment” under the

Medicaid laws.

According to the Consent Decree and Final Judgment, the

nonprofit corporation was to use its designated “fifty percent

of the funds . . . to provide economic impact assistance to

economically affected or tobacco-dependent regions of

North Carolina.” The parties and the Wake County Superior

Court recognized that all payments to this yet-to-be created

nonprofit corporation were “at the direction and on behalf of

the State of North Carolina.” The Superior Court retained

jurisdiction to implement and enforce the MSA and the

Consent Decree.

On March 16, 1999, the North Carolina General

Assembly complied, directing the Attorney General to

created the required nonprofit corporation, Defendant THE

GOLDEN L.E.A.F. (Long-term Economic Advancement

Foundation), Inc. (L.E.A.F.). The intent of this legislation,

as the Act itself specifically provided, was to allocate half of

the funds it received for the benefit of tobacco producers and

allotment holders and the other half “for the benefit of

health.”

33a

In addition to naming North Carolina’s Governor,

Treasurer, and Secretary of Health Human_ Services,

Plaintiffs name the Golden L.E.A.F. and “JOHN DOE, in his

or its official capacity as Tobacco Escrow Agent for the

State of North Carolina” as party defendants. As it turns out,

“JOHN DOE” is Citibank, which was chosen to serve as

escrow agent for all 46 states who entered the MSA.

Following the November 1998 settlement, on December

23, 1998, the settling states and some of the affected tobacco

companies signed an Escrow Agreement in which Citibank

agreed to receive and administer the subject funds. On the

same date, this Escrow Agreement was approved by the

Supreme Court for the County of New York, New York,

which retained exclusive jurisdiction over its administration.

See State of New York v. Philip Morris, No. 400361-97

(Order dated December 23, 1998). Citibank essentially

argues that it is merely an “innocent third-party escrow

agent,” that it had nothing whatever to do with the terms of

the MSA or any state-based decision concerning expenditure

of the settlement proceeds, and that it agreed to serve as

Escrow Agent on the specific condition that it would not be

haled into the courts of the 46 states governed by the MSA.

Il. CONCLUSIONS OF LAW

A. Standard of Review/Motions to Dismiss

“A motion to dismiss under [Fed. R. Civ. P. 12(b)(6)]

tests the sufficiency of a complaint; importantly, it does not

resolve contests surrounding the facts, the merits of a claim,

or the applicability of defenses.” Republican Party of North

Carolina v. Martin, 980 F.2d 943, 952 (4™ Cir. 1993), citing

SA C. Wright & A Miller, Fed. Practice and Procedure

§ 1356 (1990).

“A motion to dismiss for failure to state a claim should

not be granted unless it appears to a certainty that the

plaintiff would be entitled to no relief under any state of facts

which could be proved in support of [the subject} claim.”

34a

McNair v. Lend Lease Trucks, Inc., 95 F.3d 325, 328 (4™

Cir. 1996) (en banc), citing Rogers v. Jefferson-Pilot Life

Ins. Co., 883 F.2d 324, 325 4" cir. 1989); and Johnson v.

Mueller, 415 F.2d 354, 355 (4" Cir. 1969). Accord

Republican Party of NC, 980 F.2d at 952 (“A complaint

should not be dismissed for failure to state a claim unless it

appears beyond doubt that the plaintiff can prove no set of

facts in support of his claim which would entitle him to

relief’) (internal citation omitted).

In considering a Rule 12(b)(6) motion, the complaint

must be construed in the light most favorable to the plaintiff,

assuming its factual allegations to be true. See, e.g., Hishon

v. King & Spaulding, 467 U.S. 69, 73 (1984); Scheuer v.

Rhodes, 416 U.S. 232, 236 (1974); Mylan Labs, Inc. v.

Matkari, 7 F.3d 1130, 1134 4" Cir. 1993); Martin Marietta

v. Int’l Tel. Satellite, 991 F.2d 94, 07 (4 Cir. 1992); and

Revene v. Charles County Comm’rs., 882 F.2d 870, 872 (4"

Cir. 1989).

B. Eleventh Amendment Immunity

Under the Eleventh Amendment, “an unconsenting state

is immune from suits is immune from suits brought in

federal courts by her own citizens as well as by citizens of

other states.” Edelman v. Jordan, 415 U.S. 651, 633 (1974);

accord Idaho v. Coeur d’Alene Tribe of Idaho, 521 U.S. 261,

268 (1997); Seminole Tribe of Florida v. Florida, 517 U.S.

44, 54 (1996); Pennhurst State School & Hospital v.

Halderman, 465 U.S. 89, 98 (1984); Cory v. White, 457 U.s.

85, 90-91 (1982). This immunity extends to State agencies

and entities that are arms of a State. Mt. Healthy City Bd. of

Educ. v. Doyle, 429 U.S. 274, 280 (1977); Harter v. Vernon,

101 F.3d 334, 337 (4" Cir. 1996); Ristow_v. South Carolina

Ports Auth., 58 F.3d 1051, 1052 (4™ Cir. 1995); Gray v.

Laws, 51 F.3d 426, 430 (4" Cir. 1995).

The Eleventh Amendment “is rooted in a recognition that

the States, although a union, maintain certain attributes of

sovereignty, including Sovereign immunity.” Seminole

35a

Tribe, 517 U.S. at 54. Both the Supreme Court and the

Fourth Circuit have noted the Amendment’s dual purpose:

preventing the judicial depletion of state funds and

protecting the sovereign dignity of the states. See, ¢.2..

Seminole Tribe, 517 U.S. at 54; Harter, 101 F.3d at 337;

Gray, 51 F.3d at 431.

The Plaintiffs argue that an exception to Eleventh

Amendment immunity first recognized in Ex Parte Young,

209 U.S. 123 (1908), applies in this case. Under this

exception — which has been interpreted strictly rather than

expansively by the supreme Court — the Eleventh

Amendment does not bar injunctive relief requiring a State to

comply with federal law in the future, even if compliance

will require an ancillary expenditure of state funds. See. ¢.2..

Pennhurst, 465 U.S. at 102; Papasan v. Allain, 478 U.s. 265,

277 (1986); and Green v. Mansour, 474 U.S. 64, 68 (1985).

As the first state and federal courts to consider it have

concluded, however, the Ex Parte Young exception does not

apply to Medicaid recipients suing for a portion of the

tobacco settlement for two basic reasons. First, although not

a named defendant, the State of North Carolina is the real

party-in-interest in this action, all “sophistry” and rhetoric

aside. And second, the Plaintiffs in this action are seeking

far more than the “prospective” injunctive relief they allege:

in fact, the Plaintiffs seek a very substantial share of the

State’s retroactive damages award. As the Defendants

correctly urge, the fact that this retroactive damages award is

to be paid in future installments is of no legal significance.

It is “well established that even though a State is not

named as a party to the action, the suit may nonetheless be

barred by the Eleventh Amendment.” Edelman, 415 U.S. at

663. The Supreme Court has held that “. . . when the action

is in essence one for recovery of money from the state, the

State is the real, substantial party in interest and is entitled to

invoke its sovereign immunity from suit even though

individual officials are [named as] nominal defendants.”

36a

Ford Motor Co. v. Dept of Treasury of the State of Indiana,

323 U.S. 459, 464 (1945) (emphasis added). “Thus, the

general rule is that relief sought nominally against an officer

is in fact against the sovereign if the decree would operate

against the latter.” Halderman, 465 U.S. at 101 (internal

quotations omitted), citing State of Hawaii v. Gordon, 373

U.S. 57, 58 (1963); accord Edelman, 415 U.S. at 663 (“Thus

the rule has evolved that a suit by private parties seeking to

impose a liability which must be paid from public funds in

the state treasury is barred Eleventh Amendment.”)

Although Plaintiffs named only state officials as

defendants, the State of North Carolina is the real party in

interest in that Plaintiffs clearly seek money from state funds

rather than from individuals sued in their “official capacity.”

Indeed, if granted, the relief implicates powers that only the

State as whole, not the individual Defendants, can possibly

exercise.

In this action, Plaintiffs seek to have this Court enter an

order which: (1) seizes North Carolina’s share of tobacco

settlement funds; (2) places these funds in escrow until the

putative class’ claims are resolved; and (3) if it determines

that the putative class has established their claim, requires

North Carolina to pay the funds to the class represented by

the Plaintiffs. The attempt to portray this as something less

than an action against the State of North Carolina is

unpersuasive, to put it nicely. To the contrary, if the

requested relief is granted, it will clearly operate directly on

North Carolina’s treasury, and will have the direct effect of

disbursing millions of dollars in state funds to the putative

class.

Nor, as Plaintiffs also argue is this essentially an action

for prospective “injunctive” or “declaratory” relief to which

the Ex Parte Young exception properly applies. See, ¢.g.,

Edelman, 415 U.S. at 678 (in action by aid recipients, Young

permits injunction requiring future compliance with federal

law, although not an award of retroactive benefits); Quern v.

37a

Jordan, 440 U.S. 332, 349 (1979) (Young permits

prospective injunction requiring state to post notices for the

benefit of those on public assistance); Milliken v. Bradley,

433 U.S. 267, 290 (1977) (in school desegregation case,

Young allowed injunction requiring prospective remedial

education programs, even though expenditure of state funds

was required). But cf. Pennhurst, 465 U.S. at 103 (federal

court but may not award retroactive monetary relief); Floyd

v. Thompson, No. 99-C-0268-C (W.D. Wisc. Sept. 2, 1999)

(finding almost identical arguments to constitute improper

claim for retroactive monetary relief).

In short, because the Plaintiffs are essentially seeking a

retroactive damages award from the State of North Carolina,

their claims are barred by the Eleventh Amendment.

C. Failure to State Claims

Even if their claims were not barred by the Eleventh

Amendment, the Plaintiffs have also failed to state a claim

on which relief can be granted.

The Plaintiffs claims rest on a fundamentally false

premise: namely, that the MSA settled a Medicaid

reimbursement claim governed by 42 U.S.C. § 1396(k)(b).

This premise is both factually and legally fallacious. First, as

noted with particularity in Section I, the MSA was settlement

by the State of a wide variety of state claims - - including tort

liability claims sounding in quasi-criminal conduct.

Accordingly, to characterize the 1998 negotiations and

proceedings as a Medicaid reimbursement action borders on

the frivolous. And second, to remove any doubt in May

1999 Congress amended the statute in question to make it

clarion clear that the state tobacco settlements were not to be

considered “overpayment” under the Medicaid

reimbursement statute.

As has been noted, each of the five courts known to have

considered similar or identical claims — on state court and

three federal courts — has found the Plaintiffs’ argument to

38a

be without merit. See Tyler _v. Douglas, No. 1.00CV39

(D.Vt.., June 21, 2000) dismissing Complaint for failure to

state claims and on Eleventh Amendment grounds); Barton

v. Summers, No. 3:00-0078 (M.D. Tenn., May 23, 2000)

(dismissing Complaint for failure to state claims and on

Eleventh Amendment grounds, characterizing Plaintiffs’

position as based on “exquisite sophistry’’); Harris v. Owens,

Civil Action No. 99-S-953 (D. Colo. January 19, 2000)

(recommendation of Magistrate Judge that claims be

dismissed on Eleventh Amendment grounds); Floyd _v.

Thompson, 99-C-0268-C (W.D. Wis., Sept. 2 and 22, 1999)

(dismissing Complaint for failure to state a claim and on

Eleventh Amendments grounds); Brown v. Minnesota, File

No. 98-11152 (Hennepin County, Minn. Dec. 15, 1998)

(dismissing Complaint for failure to state a claim, finding

claims sufficiently frivolous to support sanctions against

plaintiff's counsel).

The undersigned is in accord with what our sister courts

have concluded. In addition, as the Defendants have argued

‘n their various pleadings in support of their motions to

dismiss, there are a myriad of additional reasons why the

Plaintiffs’ claims must fail in this action. Among them: (1)

Medicaid recipients in North Carolina do not assign all their

rights to the State, (2) North Carolina’s settlement with the

tobacco companies did not release any individual’s arguable

claim against the same companies; (3) the amount of future

payments and/or future Medicaid expenses are

indeterminable; (4) to the extent they deal with future claims,

as Plaintiffs unpersuasively insist, their claims are not yet

ripe and/or the Plaintiffs lack standing to assert them; and (5)

the joinder of the Escrow Agent for the entire MSA

governing settlements with 46 states was improper for all the

reasons argued in the “Brief In Support Of Citibank, N.A.’s

Motion to Dismiss Complaint” filed June 2, 2000 (document

#25).

39a

Ill. RECOMMENDATION

For the foregoing reasons, the undersigned respectfully

recommends that the subject motions to dismiss (docket #6,

#8 and #24) be granted; and that the Complaint be dismissed

with prejudice.

IV. NOTICE OF APPEAL RIGHTS

The parties are hereby advised, pursuant to 28 U.S.C.

§ 636(b)(1)(c), that written objections to the proposed

findings of fact and conclusions of law and_ the

recommendation contained in this Memorandum must be

filed within ten (10) days after service of same. Snyder v.

Ridenour, 889 F.2d 1363, 1365(4" Cir. 1989); United States

v. Rice, 741 F. Supp. 101, 102 (W.D.N.C. 1990). Failure to

file objections to this Memorandum with the district court

constitutes a waiver of the right to de novo review by the

district court, Snyder, 889 F.2d at 1365, and may preclude

the parties from raising such objections on appeal. Thomas

v. Arm, 474 U.S. 140 (1985); Wright v. Collins, 766 F.2d

841, 845-46 (4 Cir. 1985); United States v. Schronce, 727

F.2d 91, 93-94 (4" Cir.), cert. denied, 467 U.S. 1208 (1984).

V. ORDER

NOW THEREFORE, all discovery and __ further

proceedings in this action are hereby STAYED, pending.

final resolution of these motions the Honorable Richard L.

Voorhees. If Judge Voorhees agrees with the undersigned

and allows the case to go forward, then any defendant

remaining in the case shall file an Answer, conduct an Initial

Attorneys Conference, and otherwise comply with the

Federal Rules of Civil Procedure and the Local Rules of this

Court in all their particulars.

The Clerk is directed to send copies of this Memorandum

and Recommendation and Order to counsel for the parties,

and to the Honorable Richard L. Voorhees.

: 40a

SO ORDERED AND RECOMMENDED, this ¥ ge day of

July, 2000.

/s/

Carl Horn

Chief U.S. Magistrate Judge

4la

APPENDIX E

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF SOUTH CAROLINA

GREENVILLE DIVISION

Civil Action No. 6:00-324-24

STEPHEN ALBERT JOSEPH, JR.; SELMA CHARLENE HATFIELD;

HOWARD S. MILLER; ANNIE SAMS MOSTELLER; DEBORAH

KAY MULLINS; MAMIE BREWER, PERSONAL REPRESENTATIVE

OF THE ESTATE OF CALVIN BREWER; BRENDA CARSON,

PERSONAL REPRESENTATIVE OF THE ESTATE OF BONDALE

CARSON MILER; MARGARET RENEE FLEMING, PERSONAL

REPRESENTATIVE OF THE ESTATE OF ERNESTINE FLEMING;

LAURA KELLY, PERSONAL REPRESENTATIVE OF THE ESTATE

OF ELIZABETH MCABEE; ALFORD WELBORNE, INDIVIDUALLY

AND ON BEHALF OF THE OTHERS SIMILARLY SITUATED;

Plaintiffs,

Vv.

CHARLES M. CONDON, ATTORNEY GENERAL, IN HIS OFFICIAL

CAPACITY AS ATTORNEY GENERAL; SAM GRISWOLD,

DIRECTOR, DEPARTMENT OF HEALTH AND HUMAN SERVICES,

IN HIS OFFICIAL CAPACITY AS DIRECTOR, DEPARTMENT OF

HEALTH AND HUMAN SERVICES; CITIBANK, N.A., IN ITS

OFFICIAL CAPACITY AS ESCROW AGENT,

Defendants.

ORDER

This action arises out of a case brought in state court by

the State of South Carolina against numerous tobacco

companies. See State of South Carolina v. Brown &

42a

Williamson Corp., C/A 97-CP-40-1686. In that case, South

Carolina based its allegations upon its contention that:

[iJn the name of profits, the tobacco industry has

chosen to ignore and suppress the truth about the

health hazards of cigarette smoking and of being

exposed to cigarette smoke. As a result, Medicaid

and other publicly-funded health care recipients in

the State of South Carolina have contracted smoking-

related diseases, including, without limitation, cancer,

emphysema and heart disease. The care of these

Medicaid and other publicly—funded health care

recipients has placed a significant burden on the State

of South Carolina. This burden should rightly be

borne by the tobacco industry. Therefore, the State

of South Carolina has filed this lawsuit to force the

tobacco industry to pay for the health care crisis its

cigarettes have caused .... [the action is brought]

pursuant to {South Carolina] constitutional, statutory,

common law, legal and/or equitable authority for the

purposes of, inter alia, obtaining reimbursement for

all monies paid by the State of South Carolina for

medical assistance to Medicaid and other publicly-

funded health care recipients who suffer, who have

suffered, from tobacco-related disease as a result of

the actions of Defendants, for statutory penalties, as

well as such other relief as will afford a full and

complete remedy.

Amended.Complaint dated August 1, 1997, 4§ 1-2.

The state court case was settled pursuant [to South

Carolina’s participation in a nationwide Master Settlement

Agreement (MSA) and subsequent Consent Decree and Final

Judgment entered December 31, 1998. The MSA provided

that the participating tobacco companies would agree to

permanent relief in the form of, among other things, a

prohibition against advertisements targeting youth smoking,

a ban on use of cartons to package tobacco products, a

43a

limitation in sponsorships, and the elimination of outdoor

advertising. In addition, the tobacco companies agreed to

establish a national foundation to support the study of and

programs to reduce the use of tobacco products by youth, as

well as the study of and programs to prevent diseases

associated with the use of tobacco. The participating

tobacco companies also agreed to fund annually an escrow

account to be allocated among the participating states

pursuant to the terms of an Escrow Agreement, Funds in the

escrow account are to be disbursed periodically. In South

Carolina, the payments are deposited into the General Fund.

South Carolina stands to receive cash payments in an amount

in excess of $2.3 billion over the next 25 years.

In exchange for the concessions made by the tobacco

companies under the MSA, the participating states, including

South Carolina released:

(1) for past conduct, acts or omissions (including

any damages incurred in the future arising from such

past conduct, acts or omission, those Claims directly

or indirectly based on, arising out of or in any way

related, in whole or part, to (a) the use, sale,

distribution, manufacture, development, advertising,

marketing or health effects of, (b) the exposure to, or

Tobacco Products...

(2) for future conduct, acts or omissions, only

those monetary claims, directly or indirectly based

on, arising out of or in any way related to, in whole

or in part the use of or exposure to Tobacco Products

manufactured in the ordinary course of business,

including without limitation any future Claims for

reimbursement of health care costs allegedly

associated with use of or exposure to Tobacco

Products.

MSA, pp. 13-14.

44a

Plaintiffs comprise a proposed class of persons who suffer

from various diseases that they assert result from smoking

cigarettes. Plaintiffs receive assistance through the South

Carolina Medicaid program, S.C. Code Ann. §§ 43-7-50 to —

460, for payment of treatment they required result of their

smoking-related illnesses. The South Caroliga Medicaid

program receives federal funds under the Medicaid Act, 42

U.S.C. §§ 1396 to 1396v (“the act”). As a condition of

receiving such funds for the Medicaid program, South

Carolina must comply with the terms and provisions of the

‘Act and applicable federal regulations. See 42 U.S.C.

§ 1396a.

Pertinent to the within action, the Act requires those states

that participate in the Medicaid program “to take all

reasonable measures to ascertain the legal liability of third

parties... to pay for care and services under the plan{.]” Id.

§ 1396a(a)(25)(A). In any case “where legal liability is

found to exist after medical assistance has been made

available on behalf of the individual and where the amount

of reimbursement the State can reasonably expect to recover

exceeds the costs of such recovery, the State ... will seek

reimbursement for such assistance to the extent of such legal

liability.” Id. § 1396a(a)(25)(B). When the State collects

funds from a third party as reimbursement for Medicaid

benefits expended on a recipient, the funds received are

utilized to reimburse the State and federal governments for

medical assistance payments made on behalf of an

‘ndividual. Id. § 1396k(b); 42 C.F.R. § 433.154. The state

plan must provide that the requirements for distributing third

party collections are met. 42 C.F.R. § 433.151. If a state

fails to comply with the third-party recovery provisions of

the Act, it can lose its entitlement to federal Medicaid funds.

See 42 C.F.R. § 433.140(a)(1). Under South Carolina law, a

person who receives Medicaid benefits is deemed to have

made an automatic assignment to the state of his right to seek

45a

reimbursement from a third party. S.C. Code Ann. § 43-7-

420; see 42U.S.C. § 1396(a)(1)(A).

The federal government may reduce its payments to states

under the Act “to the extent that the State or local agency

administering such plan has been reimbursed for such

expenditures by a third party pursuant to the provisions of its

plan in compliance with section 1396(a)(25){.]” 42 U.S.C.

§ 1396b(d)(2)(B). In May 1999, Congress amended the Act

to provide that the federal government would waive its right

to reduce payments to the states because of “any amount

recovered or paid to a State as part of the comprehensive

settlement of November 1998 between manufacturers of

tobacco products ... and State Attorneys General[.]” Id.

§ 139b(3)(B)(i). Significantly, Congress also provided that,

“[e]xcept as provided in subsection (i)(19) [providing for

amounts expended on administrative costs to initiate or

pursue the tobacco litigation], a State may use amounts

recovered or paid to the state as part of a comprehensive or

individual settlement, or a judgment, . . . for any

expenditures determined appropriate by the state.” Id.

§ 1396b(d)(3)(B)(ii).

The gravamen of Plaintiff's complaint is that the

underlying purpose of the state court case was to seek

reimbursement for Medicaid expenses incurred by the State

of South Carolina in caring for Medicaid recipients with

smoking-related health problems. Plaintiffs contend that the

parties to the MSA “took pains to avoid characterizing any

portion of the settlement as attributable to Medicaid costs,

even though the Complaint filed by South Carolina explicitly

sought to recover medical expenditures[.]” | Amended

Complaint, § 54. According to Plaintiffs, the MSA was

crafted in this manner so that the participating states could

avoid their recovery obligations under the Act. Id., 99 55,

60. Plaintiffs assert that they have waived no rights under the

Act, so that any excess recovery belongs to them and must

46a

be disbursed to them in accordance with 42 U.S.C.

§ 1396k(b). Id., § 60.

Plaintiffs bring this action pursuant to 28 U.S.C. § 2201,

seeking a declaration of their rights and Defendants’

obligations (1) “with respect to the integrity of the South

Carolina Medicaid program insofar as Defendants’ failure to

comply with federal law imperils its continued receipt of

federal funds and endangers the public assistance program

upon which Plaintiffs rely to maintain their health and well-

being’; and (2) “with respect to the provisions of the

Medicaid Act governing the recovery of medical assistance

payments from responsible third parties, such as the tobacco

companies, and with respect to the proper disbursement of

amounts recovered.” Id., {if 65-66. Plaintiffs also bring this

action pursuant to 42 U.S.C. § 1983, asserting that

Defendants have (1) deprived them of their property without

just compensation in violation of the Fifth and Fourteenth

Amendments; and (3) violated the disbursement and

recovery requirements of the Act. Plaintiffs seek an order

certifying the class and granting declarative and injunctive

relief, as well as costs and reasonable attorneys’ fees.

This matter is before the court on motion of Defendants

Charles M. Condon and Sam Griswold (the “State

Defendants”) pursuant (oO Rules 12(b)(1) and (b)(6), FRCP,

to dismiss the amended complaint filed on April 25, 2000.

Plaintiff filed a memorandum in opposition to the State

Defendants’ motion to dismiss on May 10m 2000. Also

before the court is a motion pursuant to Rules 12(b)(1),

(b)(6), and (b)(7), FCRP, to dismiss filed by Defendant

Citibank, N.A. (“Citibank”) on June 8, 2000. Plaintiffs filed

4 memorandum in opposition to Citibank’s motion to dismiss

on June 23, 200. Citibank filed a reply brief a reply on July

18, 2000. ~

A hearing was held on the motions on August 21, 2000.

The State Defendants thereafter filed a number of cases in

support of their position. Plaintiffs filed a supplemental

47a

memorandum in opposition to the State Defendants’ motion

to dismiss on November 21, 2000. The State Defendants

filed a reply to Plaintiffs’ supplemental memorandum on

December 4, 2000. Citibank also filed additional authority in

support of its motion to dismiss on January 25, 2001.

The court has reviewed the pleadings, memoranda,

exhibits, and other documents of record. The court

concludes that the motions to dismiss should be granted.

DISCUSSION

A. Section 1983 Claims

1. Motion to Dismiss of State Defendants

The State Defendants assert numerous grounds upon

which the complaint should be dismissed. The threshold

issue, however, is the State Defendants’ contention pursuant

to Rule 12(b)(1) that the court lacks subject matter

jurisdiction because Plaintiffs’ claims are barred under the

Eleventh Amendment and the doctrine of sovereign

immunity.

A plaintiff has the burden of proving that subject matter

jurisdiction exists. See Richmond, Fredericksburg &

Potomac R. Co. v. United States, 945 F.2d 765, 768 (4" Cir.

1991). When a defendant challenges subject matter

jurisdiction pursuant to Rule 12(b)(1), the court is to regard

the pleadings as mere evidence on the issue, and may

consider evidence outside the pleadings without converting

the proceedings as mere evidence on the issue, and may

consider evidence outside the pleadings without converting

the proceeding to one for summary judgment. Id. The court

should grant the Rule 12(b)(1) motion to dismiss only if the

material jurisdictional facts are not in dispute and the moving

party is entitled to prevail as a matter of law. Id.

The Eleventh Amendment to the United States

Constitution provides:

48a

The judicial power of the United States shall not be

construed to extend to any suit in law or in equity,

commenced or prosecuted against one of the United

States by citizens of another state, or by citizens or

subjects of any foreign state.

The Eleventh Amendment has been construed as

preventing a federal court from entertaining a suit brought by

a citizen against his own state. Hans v. Louisiana, 134 U.S.

| (1980). The purpose of the Eleventh Amendment is to

prevent federal court judgments that must be paid out of a

State’s treasury and to avoid “the indignity of subjecting a

state to the coercive process of judicial tribunals at the

instance of private parties.” Kess v. Maryland, 2001 WL

85179, at &1 (D. Md. Jan. 29, 2001) (quoting Seminole

Tribe of Florida v. Florida, 517 U.S. 44, 58 (1996)). The

doctrine applies both to recovery of damages and to

injunctive relief. Cory v. White, 457 U.S. 85 (1982).

Courts have recognized exceptions to Eleventh

Amendment immunity (1) where the state has consented to

suit; (2) where Congress has abrogated the state’s immunity;

and (3) where the application of Ex parte Young, 209 U.S.

123 (1908), and its progeny is appropriate. Barton v.

Summers, 111 F. Supp. 2d 989, 990-91 (M.D. Tenn. 2000)

(citing Nelson v. Miller, 170 F.3d 641, 646 (6" Cir. 1999)).

It is upon the Ex parte Young exception that Plaintiffs rely to

refute the State Defendants’ claim that the Eleventh

Amendment bars this action.

Ex parte Young provides that a plaintiff may seek

prospective injunctive relief against a state official in order

to compe! a state to conform its conduct to federal statutes or

the Constitution, even if the change in conduct would have

an ancillary effect on the state treasury. Cardenas v. Anzai,

2001 WL 58857, at *2 (D. Hawaii Jan. 18, 2001) (citing

Edelman v. Jordan, 415 U.S. 651, 668 (1974)). In other

words, the Eleventh Amendment does not preclude suit

against state officials for “’prospective relief for an ongoing

49a

violation of federal law.’” Id. (quoting Children’s Hospital

& Health Ctr. v. Belshe, 188 F.3d 1090, 1095 (9" Cir.

1999)). However, the Eleventh Amendment does bar actions

against state officials “when the action is in essence one for

recovery of money from the state, [because then] the state is

the real, substantial party in interest and is entitled to invoke

its sovereign immunity from suit even though individual

officials are [named as] nominal defendants.” Ford Motor

Co. v. Department of Treasury, 323 U.S. 459, 464 (1945).

This is because damages for past harm inevitably will be

paid out of the state treasury. Edelman v. Jordan, 415 U.S.

651, 666-67 (1974). In sum, the Ex parte Young exception

would allow Plaintiffs to maintain this action against the

State Defendants if “[1] there is an ongoing violation of

federal law that [2] can be cured by prospective relief.”

DeBauche v. Trani, 191 F.3d 499, 505 (4" Cir. 1999). The

Ex parte Young exception does not apply when the alleged

violation of federal law occurred entirely in the past. Id.

The first question, then, is whether there exists an

“ongoing violation of federal law.” According to Plaintiffs,

the State Defendants have failed and continue to fail to

comply with the provisions of § 1396k(b) of the Act with

respect to funds disbursed to South Carolina under the terms

of the MSA. As noted previously, § 1396k(b) requires

amounts collected from third parties in excess of any amount

retained by the State to be paid to the federal government to

the extent of its participation in the financing of the medical

assistance, and the remainder to the recipient of the

assistance. Thus, Plaintiffs contend that they are entitled to a

portion of the MSA disbursement.

Plaintiff's contention neglects to consider the import of §

1396b(d)(3)(B)(ii), which grants states the authority to

utilize payments made pursuant to the MSA “for any

expenditures determined appropriate by the state.” The court

in Strawser v. Lawton, 126 F. Supp. 2d 993, 999 (S.D.W.

Va. 2001), found that with the enactment. of §

50a

1396b(d)(3)(B)(ii) Congress “changed the statutory scheme

where tobacco settlement funds are involved.” Relying upon

established principles of statutory construction, the Strawser

court determined that § 1396b(d)(3)(B)(ii) “is an

unambiguous Congressional mandate vesting in the

participating states a complete right, title, and interest to the

settlement proceeds, excepting only litigation expenses.

Hence, there is no ongoing violation of federal law, and Ex

parte Young is inapplicable.” Id. at 1000. The court finds

the reasoning of the Strawser court to be persuasive and

adopts it herein. The court finds that no ongoing violation of

federal law exists because Congress has relieved states of

their obligations under § 1396k(b) with respect to funds

received under the MSA. Accord Clark v. Stovall, C/A No.

00-4054 (D. Kan. March 2, 2001) (citing cases); Tyler v.

Douglas, 2000 WL 1146575 (D. Ver. June 21, 2000) (no

violation of federal law arises from Vermont’s participation

in MSA). Thus, the Ex parte Young exception does not

remove the Eleventh Amendment bar to the within action.

The State Defendants’ motion to dismiss is granted on this

ground.

Even if the court were to find that the State Defendants’

failure to comply with the provisions of § 1396k(b) of the

Act did constitute an ongoing violation of federal law,

Plaintiffs cannot prevail on the second prong of the analysis,

which requires that the relief they seek be prospective in

nature. Plaintiffs argue that they “seek only a declaration

that state officials are violating federal law and an injunction

requiring their future compliance with that law.” Plaintiffs’

Opposition to Defendants’ Motion to Dismiss, p. 6.

According to Plaintiffs, they do not lay claim to

disbursements previously made to Scuth Carolina pursuant

to the MSA. Rather, they “seek a declaration that monies yet

uncollected but due to be paid to South Carolina in the future

must be distributed in accordance with federal law.” Id., p.

Sla

Other courts have addressed and rejected similar

arguments with respect to disbursements under the MSA,

and have found that such relief as that pursued by Plaintiffs

is retrospective. In Floyd v. Thompson, 227 F.3d 1029, 1101

(7" Cir. 2000), aff'd on other grounds, 227 F.3d 1029 (7"

Cir. 2000), the court explained:

Plaintiffs argue that the relief they seek is prospective

in the sense that a designated portion of future

settlement proceeds would be paid to plaintiffs, rather

than to the state treasury .... It is wholly irrelevant

that payments will be made in fixed future

installments rather than a lump sum. Allowing

plaintiffs to recover a portion of the settlement funds

would be the functional equivalent of retrospective

monetary damages paid from the state treasury

because the amount, obligation and ownership of the

funds was fixed when the Master Settlement

Agreement was signed, rather than upon receipt of

the funds. Therefore, even if the proceeds are paid in

installments, the Eleventh Amendment bars plaintiffs

from gaining access to the funds through suit in

federal court.

Accord Clark, C/A/ No. 00-4054-SAC, at 19 (“the payments

are being made in settlement of past claims, the mode of

payments is in installments as opposed to a lump sum

settlement, the amount of installment payments is computed

from terms fixed by the M.SA, and the states have a ‘vested

right’ or ‘equitable title’ to the escrowed funds’’); Rickerts v.

Guinn, C/A No. CV-N-00-0176-HDM(VPC) (D.Nev. Feb.

23, 20001), at 5 (irrelevant that funds are not yet-in the

physical possession of the state); Cardenas, 2001 WL 58857,

at *4 (“to enjoin State officials would be tantamount to

telling the state how to disburse funds” to which it has a

present entitlement under the MSA); Barton, 111 F. Supp. 2d

at 991 (future installment method of payment created by

MSA does not convert plaintiff's claim into one for

52a

prospective injunctive relief); Martin v. New Mexico, 197

F.R.D. 694, 696 (D.N.M. 2000) (the MSA “fixed the rights

of the parties, the states and the tobacco companies, at the

time the settlement was made, and it is irrelevant that the

money has not yet been deposited in the state treasury’’);

Downs v. Kentucky, C/A No. 00-23 (E.D. Ky. Aug. 31,

2000) (the MSA “created a defined obligation for payment.

The parties have settled their dispute and the Commonwealth

has a legal right to recover the money provided for by the

[MSA]. A fixed an ascertainable right to Settlement funds

has been established.”); McClendon v. Georgia Dep’t of

Community Health, C/A No. 4:000-CV-0026-HLM_(N.D.

Ga. Aug. 28, 2000), at 17 (“The difference between a lump

sum payment at the time of a settlement and future payments

is one of accounting, not immunity from suit.’’)

Plaintiffs contend, however, that CSX_ Transp., Inc. v.

Board of Pub. Works, 138 F.3d 537 (4 Cir. 1998), compels

a different result. In that case, the Court of Appeals enjoined

the state from collecting a tax that violated the Railroad

Revitalization and Regulatory Reform Act of 1976. The

Court of Appeals distinguished between funds that already

had been deposited into the state treasury and funds that had

not yet been collected from what it determined to be an

illegal tax. The court determined that the Ex parte Young

exception prevented application of the Eleventh Amendment

bar, even though the amount of tax liability had been

determined by the state. According to the Court of Appeals,

the relief sought was prospective because “no award of any

money need be made from the state treasury .... [Money]

which state officials would otherwise collect from the

Railroads, in violation of federal law, will be protected from

collection.” CSX, 138 F.2d at 542.

Plaintiffs’ reliance on CSX is misplaced. The plaintiffs in

CSX sought to prohibit the State’s future procurement of

illegal taxes and the placement of those funds into the state

treasury. In the within action, South Carolina has a vested

53a

right to receive proceeds under the SMSA in settlement of

the claims articulated in the state court case. The entitlement

to the proceeds was established at the time the MSA was

executed. However, the parties to the MSA have agreed that

the settlement may be paid out over time rather than in a

lump sum. “That these damage payments are to be made in

future installments does not alter the essential nature of these

payments as retroactive monetary relief.’ Barton, 111

F.Supp. 2d at 992 (citing Papasan v. Allain, 478 US. 265,

278 (1986)).

The relief sought by Plaintiffs is retrospective, rather than

prospective, in nature. For this additional reason, the Ex

parte Young exception does not remove the Eleventh

Amendment bar to this action. The court finds that, since

this action is one for recovery of money from the state, South

Carolina is the real party in interest, and the State Defendants

are entitled to assert the Eleventh Amendment. The court

concludes that Plaintiffs’ § 1983 claims against the State

Defendants are barred by the Eleventh Amendment.

2. Motion to Dismiss of Citibank

Citibank moves to dismiss pursuant to Rule 12(b)(6),

asserting that Plaintiffs have failed to state a claim against it.

Rule 12(b)(6) requires that the court accept the allegations in

the complaint as true, and all reasonable factual inferences

must be drawn in favor of the party opposing the motion.

Hishon_v. King & Spaulding, 467 U.S. 69, 73 (1984).

Therefore, a motion to dismiss can be granted only if no

relief could be obtained under the allegations of fact, if true.

Southmark Prime Plus, L.P. v. Falzone, 776 F.Supp. 888, -

891 (D. Del. 1991) (citing Turbe v. Virgin Islands, 938 F.2d

427, 428 (3d Cir. 1991)). According, the court turns to

Plaintiffs’ § 1983 claims as they related to Citibank.

Plaintiffs allege that Citibank has deprived them of MSA

proceeds in violation of their property rights under the Fifth

and Fourteenth Amendments, as well as the disbursement

requirements of the Act. Claims under § 1983 arise when

54a

the state acts “under color of any statute, ordinance,

regulation, custom, or usage, of any State” to deprive a

person of the “rights, privileges or immunities secured by the

Constitution and laws” of the United States. Significantly, §

1983 requires the identification of conduct that is “fairly

attributable to the state.” DeBauche v. Trani, 191 F.5d 499,

506 (4™ Cir. 1999) (quoting Lugar v. Edmondson Oil Co.,

457 U.S. 922, 937 (1982)). The person charged either must

be a state actor or have a sufficiently close relationship with

state actors such that a court would conclude the nonstate

actor is engaged in the state’s actions. Id. (citing cases). -

Citibank is a private corporation whose involvement with

the MSA is through its activities as escrow agent. Private

activity generally will not be deemed “state action” unless

the state has so dominated such activity as to convert it into

state action. Mere approval of or acquiescence in the ©

initiatives of a private party is insufficient. Id. at 507 (citing

Blum v. Yaretsky, 457 U.S. 991, 1004 (1982)). The Court of

Appeals for the Fourth Circuit has recognized four

circumstances under which a private party can be deemed to

be a state actor: (1) when the state has coerced the private

actor to commit an act that would be unconstitutional if done

by the state; (2) when the state has sought to evade a clear

constitutional duty through delegation to a state actor; (3)

when the state has delegated a traditionally and exclusively

public function to a private actor; or (4) when the state has

committed an unconstitutional action in the course of

enforcing a right of a private citizen. Id. (citing Andrews v.

Federal Home Loan Bank of Atlanta, 998 F.2d 214, 217 (4"

Cir. 1993)).

None of four these categories appertains here. The

relationship between Citibank and the State of South

Carolina is purely contractual. The mere existence of a

contract between a private party and South Carolina is

insufficient to create state action unless the contract

delegates a public function to the private party. Dobyns v.

5Sa

E-Systems, Inc., 667 F.2d 1219, 1227 (5" Cir. 1982). In this

case, the Escrow Agreement requires Citibank to make

disbursements of funds received pursuant to the MSA in

accordance with the terms of the Escrow Agreement.

Citibank makes no decisions regarding the use of MSA

monies by South Carolina. Those decisions are made by

State officials. The court discerns no requirement in the

Escrow Agreement that Citibank perform a state function.

Accordingly, the court concludes that Citibank is not a state

actor for purposes of Plaintiffs’ § 1983 claims.

Moreover, as discussed previously, no violation of federal

law is apparent because Congress has relieved states

_ participating in the MSA of any obligation to disburse funds

to Medicaid recipients pursuant to § 1396k(b) of the Act.

Because Plaintiffs have been deprived of no right or

privilege secured by the Act, § 1983 is not implicated in the

within section.

B. Declaratory Judgment

Plaintiffs’ claim for declaratory relief is barred by the

Eleventh Amendment as against the State Defendants.

Green v. Mansour, 474 U.S. 64, 73 (1985). “[A] declaratory

judgment is not available when the result would be a partial

‘end run’ around the rest of the Supreme Court’s Eleventh

Amendment jurisprudence, particularly its limitations on the

Ex parte Young doctrine.” Castro v. Puerto Rico, 43 F.,

Supp. 2d 186, 192 (D.P.R. 1999) (quoting Mills v. Maine,

118 F.3d 37, 55 (1997)). e

Citibank’s obligations to disburse funds to Plaintiffs

would come into play only if it were found that the State

Defendants had violated the Act. Because the State

Defendants are entitled to Eleventh Amendment immunity

on this issue, declaratory relief with respect to Citibank is

inappropriate. See Strawser, 126 F. Supp. 2d at 1001.

56a

II. CONCLUSION

For the reasons stated, Defendants’ motions to dismiss are

granted.

IT IS SO ORDERED.

/s/

Margaret B. Seymour

United States District Judge

March 19, 2001

Spartanburg, South Carolina.

S7a

APPENDIX F

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF WEST VIRGINIA

CHARLESTON DIVISION

—

Civil Action No. 2:00-0073

LOIS STRAWSER, et al.

ELIZABETH S. LAWTON, et al.

MEMORANDUM OPINION AND ORDER

Pending are (1) separate motions to dismiss filed by

Defendants (a) Elizabeth S. Lawton, Darrell W. Peters, and

Joan E. Ohl, (b) Darrell McGraw, and (c) Citibank N.A.; (2)

Plaintiffs’ motion for oral argument; and (3) Defendants’

motions to stay discovery pending disposition of their

dispositive motions.

The Court GRANTS the motions to dismiss, DENIES

the motions to stay as moot, and DENIES Plaintiffs’ motion

for oral argument.

I. FACTUAL BACKGROUND

In 1994, West Virginia Attorney General Darrell V.

-McGraw, Jr., on behalf of his statutory clients at the West

Virginia Public Employees Insurance Agency (PEIA) and

' The facts and legal theories are adequately briefed and oral argument

would not materially aid the decisional process.

EY sel

58a

the West Virginia Department of Health and Human

Resources (DHHR), instituted an action against the major

tobacco companies and other Defendants in the Circuit Court

of Kanawha County. The complaint stated claims for (1)

unjust enrichment and restitution, (2) indemnity, (3) public

nuisance, (4) fraud and approximately ten (10) other claims.

The relief sought was broad, including compensatory and

punitive damages, an injunction prohibiting the promotion of

tobacco products to minors, and disgorgement of profits

from the sale of cigarettes in West Virginia.

In November 1998, the tobacco companies and all but.

four states entered into a Master Settlement Agreement

(M.S.A.) valued at an immense $200 billion dollars. The

M.S.A., in part, compensates the states for past and future

medical expenses occasioned by state underwritten treatment

of tobacco-related illnesses. Payments under the M.S.A. will

be made to the states over two and one-half decades. The

M.S.A. does not resolve and release claims for “private or

individual relief for separate and distinct injuries ... or ...

recovery of health-care expenses” by individuals. (M.S.A. at

II (pp)(2)(A) & (B).)

Over the last two years, West Virginia has received

approximately $40 million dollars under the M.S.A. The

money is transferred by the settling tobacco companies to an

escrow agent, Citibank. Citibank then transfers a

proportionate share of the monies to the State of West

Virginia. :

The West Virginia Legislature acted with dispatch to

assert its sovereign control over the West Virginia portion.

See W.Va.Code § 4-11A-1(c) et seq. (“The receipt of funds

in accordance with the master settlement agreement shall be

deposited only in accordance with the provisions of this

article.”) By this enactment, the Legislature exercised

59a

control over the earmarking and disbursement of the

settlement proceeds.’

Plaintiffs are Medicaid recipients who were harmed by

tobacco products. Despite section 4-11A-1(c) et seq., they

seek an Order from this Court prescribing how West

Virginia’s nearly $2 billion share of the M.S.A. fund should

be allocated, partially to their benefit.

II. DISCUSSION

A. Medicaid Program Background

The Medicaid program was established in 1965 as “a

cooperative federal-state” venture providing monies for

medical care to needy individuals. See Prestera Ctr. for

Mental Health Servs. v. Lawton, 111 F.Supp.2d 768, 773

(S.D.W.Va. 2000) (quoting Wilder v. Virginia Hosp. Ass’n,

496 U.S. 498, 502, 110 S.Ct. 2510, 110 L.Ed.2d 455 (1990)).

One commentator describes the system aptly, asserting it:

cast[s] state officials in the role of middlemen

entrusted with the distribution of combined federal-

State largesse to eligible beneficiaries. A state is

under no legal obligation to utilize federal funds to

meet the needs of its disadvantaged citizens. If it

chooses to avail itself of such funds, however, it must

expend them in a manner consistent with the federal

Statutes and regulations governing their use.

Leonard Weiser-Varon, Note, Injunctive Relief from State

Violations of F | Fundin onditions, 82 Colum.

L.Rev. 1236, 1237-38 (1982).

When a state violates any condition governing the use of

federal funds, the responsible federal official must terminate

the funding to the state program, after providing notice and

an opportunity to be heard. 42 U.S.C. § 1396c. The

applicable conditions most often appear in a state plan, a

The very enactment of the statute poses a grave problem for

Plaintiffs in circumnavigating the Eleventh Amendment.

60a

comprehensive document Congress has directed each

participating state to file. One such plan condition states:

A State plan for medical assistance must--.... (25)

provide--(A) that the state ... administering such plan

will take all reasonable measures to ascertain the

legal liability of third parties ... to pay for care and

services available under the plan ... [and] (B) that in

any case where such a legal liability is found to exist

after medical assistance has been made available on

behalf of the individual and where the amount of

reimbursement the state can reasonably expect to

recover exceeds the costs of such recovery, the state

... will seek reimbursement for such assistance to the

extent of such legal liability.

42 U.S.C. § 1396a(a)(25). Subsection 1396a(a)(45) provides

further:

A State plan for medical assistance must--.... (45)

provide for mandatory assignment of rights of

payment for medical support and other medical care

owed to recipients, in accordance with section 1396k

of this title.

Id. Title 42 U.S.C. section 1396k(b), the statute upon which

Plaintiffs principally rely, discusses the disbursement of

monies recovered by states from liable third parties:

Such part of any amount collected by the state under

an assignment made under the provisions of this

section shall be retained by the state as is necessary

to reimburse it for medical assistance payments made

on behalf of an individual with respect to whom such

assignment was executed (with appropriate

reimbursement of the Federal Government to the

extent of its participation in the financing of such

medical assistance), and the remainder of such

amount collected shall be paid to such individual.

42 U.S.C. § 1396k(b) (emphasis added).

6la

Plaintiffs’ claims are Straightforward. They assert (1) the

tobacco companies are third parties liable to Medicaid

recipients injured by cigarettes; (2) the recipients assigned

their claims to the state; (3) the state’s suit against the

tobacco companies was a Medicaid reimbursement action

pursuant to subsection 1396k(b); (4) there is a “remainder”

from the settlement with the tobacco companies under

subsection 1396k(b); and (5) West Virginia has a mandatory

obligation to pay over the remainder to Medicaid recipients

injured by tobacco products. The State Defendants’

principal argument for dismissal is that Plaintiffs’ requested

relief would amount to a retroactive award of damages

against the State in violation of the Eleventh Amendment.

B. Eleventh Amendment Immunity From Suit

“Although the Constitution establishes a National

Government with broad, often plenary authority over matters

within its recognized competence, the founding document

‘specifically recognizes the states as sovereign entities.’”

Alden v. Maine, 527 U.S. 706, 715, 119 S.Ct. 2240, 144

L.Ed.2d 636 (1999) (quoting Seminole Tribe of Florida v.

Florida, 517 U.S. 44, 71 n. 15, 116 S.Ct. 1114, 134 L.Ed.2d

252 (1996)). Upon ratification of the Constitution, the states

thus enjoyed “ ‘a residuary and inviolable sovereignty.’”

Alden, 527 U.S. at 715, 119 S.Ct. 2240 (quoting The

Federalist No. 39, at 245 (James Madison)).

This understanding of the states’ role in the early years of

the Republic perhaps explains the Nation’s “profound shock”

following the Supreme Court’s 1793 decision in Chisholm v.

Georgia, 2 U.S. 419, 2 Dall. 419, 1 L.Ed. 440 (1793).

Chisholm held that Article III of the Constitution authorized

a private citizen of another State to sue the State of Georgia

without its consent. Congress and the states responded

swiftly with the Eleventh Amendment.

The Amendment provides in pertinent part that “(t]he

judicial power of the United States shall not be construed to

extend to any suit in law or equity, commenced or

62a

prosecuted against one of the United States by Citizens of

another State.” Id. Despite its text, the Amendment has been

construed also to prevent citizens from bringing federal

claims in a federal court against their own states. See Hans

v. Louisiana, 134 U.S. 1, 14-15, 10 S.Ct. 504, 33 L.Ed. 842

(1890).

The Amendment is much more than a constitutional

prohibition to prevent a drawdown of a state fisc via federal

litigation. Our Court of Appeals recently observed that

“Inherent in [our] federal structure is the mutual,

reciprocating respect for the state and federal sovereigns, and

forcing one sovereign to appear against its will in the courts

of another violates this respect.” Litman v. George Mason

University, 186 F.3d 544, 549 (4th Cir.1999) (emphasis

added) (noting the Amendment serves not only the purpose

of avoiding raids on the state treasury, but also “ ‘the

indignity of subjecting a State to the coercive process of

[federal] judicial tribunals at the instance of private

parties.’”) (quoted authority omitted).

There are certain limited situations, however, where the

Amendment does not apply. For example, the Ex parte

Young doctrine permits a private citizen to sue state officers

in federal court “to ensure that the officer's conduct is in

compliance with federal law.” Seminole Tribe, 517 U.S. at

71 n. 14, 116 S.Ct. 1114. In DeBauche v. Trani, 191 F.3d

499, 505 (4th Cir.1999), however, our Court of Appeals

restated the obvious corollary to this doctrine:

The ... exception ... applies only when [1] there is an

ongoing violation of federal law that [2] can be cured

by prospective relief. It does not apply when the

alleged violation of federal law occurred entirely in

the past. See Green v. Mansour, 474 U.S. 64, 68, 106

S.Ct. 423, 88 L.Ed.2d 371 (1985) (observing that

“compensatory or deterrence interests are insufficient

to overcome the dictates of the Eleventh

Amendment”); Republic of Paraguay v. Allen, 134

63a

F.3d 622, 627 (4th Cir. 1998) (noting that the Ex parte

Young exception applies only when “(1) the violation

for which relief is sought is an ongoing one, and (2)

the relief sought is only prospective” (citations

omitted)).

Id. (emphasis added).

Plaintiffs attempt to invoke Ex Parte Young to avoid the

Eleventh Amendment. Both parties’ arguments, however,

revolve around whether the relief sought by Plaintiffs is

prospective or retrospective in nature.

Although all federal courts to date addressing that

question in Medicaid recipient actions for recovery of

tobacco settlement money have ruled in favor of state

officers, the analysis is complex and somewhat enigmatic.

See Floyd v. Thompson, 227 F.3d 1029, 1031 (7th Cir. 2000)

(“While we think it possible that the district court’s Eleventh

Amendment analysis was correct, the answer is not obvious,

and we find it unnecessary to delve into the complexities of

that area of law.”). The instant briefing ignores the more

direct, first prong of the Ex parte Young analysis, namely

whether there is an ongoing violation of federal law.

The putatively violated federal law Plaintiffs rely upon is

42 U.S.C. § 1396k. Section 1396k(b) provides pertinently

that any remainder from Staie collection efforts against liable

third parties, after appropriate reimbursement of the Federal

Government, “shall be paid to” affected recipients.

Congress, however, has changed the statutory scheme where

tobacco settlement funds are involved.

In Title III of the 1999 Emergency Supplemental

Appropriations Act, ch. 11, 113 Stat. 57 (1999) (codified as

amended at 42 U.S.C. § 1396b(d)(3)(B)(i) and (ii)),

Congress addressed the National Governors Association’s

“highest priority” for the pending session, namely

“protecting state tobacco settlement funds .... from federal

seizure.” Pls.’ ex. 12 at 1. The new statute provides:

64a

(i) Subparagraph (A) [dealing with the federal pro

rata share of net recoveries by a state plan to which

the United States is equitably entitled] and paragraph

(2)(B) [dealing with treatment of reimbursements by

liable third parties to the state for injured recipient

expenditures] shall not apply to any amount

recovered or paid to a State as part of the

comprehensive settlement of November 1998

between manufacturers of tobacco products ... and

State Attorneys General, or as part of any individual

State settlement or judgment reached in litigation

‘initiated or pursued by a State against one or more

such manufacturers.

(ii) Except as provided in subsection (i)(19)

[providing for state payment of litigation costs and

expenses of pursuing the tobacco litigation], a State

may use amounts recovered or paid to the state as

part of a comprehensive or individual settlement, or a

judgment, described in clause (i) for any expenditures

determined appropriate by the state.

42 U.S.C. § 1396b(d)(3)(B)(i) and (11) (emphasis added).

Plaintiffs assert this amendment “pertains only to whether

[the Healthcare Finance Administration] may treat tobacco

settlement payments as an overpayment to the states for the

purpose of offsetting future federal Medicaid matching

funds.”’ (Mem. in Opp'n at 20.) Plaintiffs also construe the

Plaintiffs also assert the only purpose of the underscored language in

subsection (ii) was to “distinguish the Bill from competing

legislation that would have required the states to use ‘a portion of

such funds for tobacco use prevention and health care and early

learning programs.” Mem. in Opp’n at 21 (citing 145 Cong. Rec.

$2503). Plaintiffs’ citation does not lead ineluctably to that

conclusion.

65a

language to mean “the states are free to spend their legal

portion of the tobacco settlement on-whatever they see fit.”

(Id. at 21) (emphasis added).

Plaintiffs’ proposed interpretations of subsection (ii) do

not find support in the comparatively unembellished

Statutory language. Indeed, no construction or divination of

Congressional intent is necessary. See, e.g., United States v.

Murphy, 35 F.3d 143, 145 (4th Cir.1994) (“[I]f the statutory

language is plain and admits of no more than one meaning,

the duty of interpretation does not arise, and ... the sole

function of the courts is to enforce [the statute] according to

its terms.”’).

In the Court’s view, the statute is an unambiguous

Congressional mandate vesting in the participating states a

complete right, title, and interest to the settlement proceeds,

excepting only litigation expenses. Hence, there is no

ongoing violation of federal law, and Ex parte Young is

inapplicable.’

The citation is to a bill introduced by Senator Edward Kennedy that

would have permitted the Secretary of Health and Human Services

to waive recoupment of settlement funds received by a State if a

portion was used for tobacco use prevention, health care, and early

learning programs. There is no mention of competing legislation.

Furthermore, Senator Kennedy himself stated in introductory

remarks that “While the federal government could legally demand

that the states reimburse Washington from their settlements, I

believe the states should be allowed to keep one hundred percent of

the money.” 145 Cong. Rec. $2503-05 (Mar. 10, 1999) (emphasis

added).

In making its ruling, the Court is aware of “the ‘cardinal rule . . . that

repeals by implication are not favored.’” Posadas v. National City

Bank, 296 U.S. 497, 503 (1936). Indeed, “An implied amendment

or partial repeal of a statute will not be recognized by the courts,

unless it clearly appears the legislature so intended.” United States

v. Joya-Martinez, 947 F.2d 1141, 1144 (4" Cir. 1991). Plaintiffs

assert that resort to section 1396b(d)(3)(B)(ii) to trump section

1396k(b) would amount to a finding that Congress impliedly

amended the latter with the former. The Court disagrees.

66a

Accordingly, the Court GRANTS the State Defendants’

motion to dismiss. Further, Defendant Citibank’s obligation

At the outset, section 1396b(d)(3)(B)(ii) may be incorrectly

characterized as an implied amendment or partial repeal for at least

two different reasons. First, the new statute might simply be a final

statement of Congressional intent as to the disposition of tobacco

settlement funds without reference to section 1396k(b). Second, one

could reasonably assert a recipient-reimbursement obligation arises

_ only after the state has obtained a judgment after a finding of legal

liability. See 42 U.S.C. § 1396a(a)(25) (discussing the concept of

“legal liability”). Congress’ statement concerning disposition of

settlement proceeds then, would be a different matter entirely.

Even assuming section 1396b(d)(3)(B)(ii) is properly characterized

as an implied amendment or partial repeal, it is equally well-settled

that “An intent to repeal can be implied . . . . from ‘irreconcilable

conflict’ between enactments.” United States v. King, 824 F.2d 313

(4™ Cir. 1987) (quoting Kremer v. Chemical Constr. Corp., 456 U.S.

461, 468 (1982)); Patten v. United States, 116 F.3d 1029, 1034 (4™

Cir. 1997). Statutory provisions will be considered to be in

irreconcilable conflict when there is a “positive repugnancy”

between them such that they “ ‘cannot mutually coexist.’” Mitchell,

29 F.3d at 472 (quoted authority omitted). Section 1396k(b)

provides generally that in a State reimbursement action against a

liable third party, any “remainder” present after reimbursement of

the state and federal share “shall be paid to” the recipient who

assigned the claim to the state. Id. In relation to the tobacco

settlement, however, Congress specifically and explicitly stated in

section 1396b(d)(3)(B)(ii) that the states could “use amounts

recovered or paid to the state as part of [the] . . . settlement . . . for

any expenditures determined appropriate by the state.” Id.

(emphasis added). One has difficulty imagining a more clear-cut,

explicit conflict. A State cannot use the “amounts recovered or paid

. . . for any” purpose if it has a corresponding obligation to take a

portion and disburse it to compensate recipients as commanded by

1396k(b). So read, the two provisions are in direct and

‘rreconcilable conflict.

Third, Plaintiffs have not addressed whether the strong presumption

against implied amendments retains its full vigor when the implied

amendment acts to diminish a private citizen’s showing of an

ongoing violation of federal law under Ex parte Young. It would

seem the presumption might yield, or at least diminish in strength, in

the face of what amounts to a private citizen’s attempt to hale a state

sovereign into federal court to respond with what strongly resembles

a retroactive monetary award.

67a

to pay over monies to Plaintiffs from the settlement comes

into play only if the Eleventh Amendment does not bar the

payment. Consequently, based on the State Defendants’

successful claim of immunity, the Court likewise GRANTS

Citibank’s motion to dismiss.

C. Other Issues

The Court has chosen but one of a host of analyses

warranting dismissal of Plaintiffs’ claims. It is worth noting

briefly some of the other grounds upon which dismissal

might lie. ;

1. Limited Assignment Analysis

In Floyd v. Thompson, 227 F.3d 1029 (7th Cir. 2000), the

Court of Appeals for the Seventh Circuit posed a very cogent

question concerning the extent of the limited assignment

given the state by its Medicaid recipients:

But what exactly was assigned in Wisconsin? If the

only thing the individuals assigned was their right to

recover the amounts paid by the Medicaid program —

not their right to recover any excess — then there is

nothing left to distribute to them to which they could

have any claim.

Floyd, 227 F.3d at 1035. The answer to that question in

West Virginia proves fatal to Plaintiffs’ claims. West

Virginia’s assignment statute provides:

Submission of an application to the department of

health and human resources for medical assistance is,

as a matter of law, an assignment of the right of the

applicant or legal representative thereof, to recovery

from personal insurance or other sources, including,

but not limited to, liable third parties, 10 the extent of

the cost of medical services paid for by the medicaid

program.

W. Va.Code § 9-5-11 (emphasis added).

68a

The underscored language demonstrates Plaintiffs only

partially assigned to the State their claims against any liable

third party tobacco defendants. Specifically, Plaintiffs

assigned their claims only as to the monies the State

expended for their medical treatment, the State share under

Section 1396k(b). Accordingly, there is no possibility of a

“remainder” under Section 1396k(b) to which Plaintiffs are

entitled.

Plaintiffs yet hold the balance of their claims beyond what

the State had to pay to care for them. These claims may be

asserted at any time, subject to defenses asserted by the

tobacco companies. The M.S.A. and West Virginia law

specifically preserve Plaintiffs’ individual rights of action.

See also W. Va.Code § 9-5-11(b) (“Nothing in this section

shall be construed so as to prevent the recipient of medical

assistance from maintaining an action for injuries received

by him against any other person and from including therein,

as part of the compensatory damages sought to be recovered,

the amount or amounts of his or her medical expenses, even

though such person received medical assistance in the

payment of such medical expenses, in whole or in part.’’).

2. Enforcement via Section 1983

In light of section 1396b(d)(3)(B)(ii) and other

considerations, it is questionable whether Plaintiffs may now

use section 1983 to enforce their claim of a property right to

69a

settlement funds via section 1396k(b).° The violation of a

federal statute is not actionable under section 1983 if either

one of the following is true: (1) the statute does not create

enforceable rights, privileges, or immunities within the

meaning of § 1983, or (2) “Congress has foreclosed such

enforcement of the statute in the enactment itself.” Doe, 225

F.3d at 447. In determining whether a statute creates an

individual, enforceable right, this Court applies a well-

settled, three-part test:

[1] Did Congress intend the Statutory provision to

benefit plaintiff? [2] Is the ostensible right so “vague

and amorphous” that its enforcement would prove

difficult? And, [3] is the Statutory provision at issue

The Court does not share Plaintiffs’ conclusory assertion that

utilizing subsection 1396b(d)(3)(B)(ii) “would raise serious

retroactivity problems.” Opp. Memo. At 22. The amendment

applies to amounts paid to a State prior to, on, or after the date of the

enactment of this Act.” 1999 Emergency Supplemental

Appropriations Act, chap. 11, 113 Stat. 57 (1999) (codified as

amended at 42 U.S.C. § 1396b(d)(3)(B)(i) and (ii)). The question

that first arises is whether a retroactivity analysis is warranted in this

specific context. See Booth v. Maryland, 112 F.3d 139, 142 (4" Cir.

1997) (“In Green v. Mansour, for example, the Court ruled that any

possible violation of federal law ended when the relevant federal

statute was changed, so Ex Parte Young could not apply and the

Eleventh Amendment barred the action.”).

Assuming retroactivity analysis applies, our Court of Appeals has

Stated “the Due Process Clause of the Fifth Amendment allows

retroactive application of either federal or state statutes as long as the

Statute serves a legitimate legislative purpose that is furthered by

rational means.” Shadburne-Vinton v. Dalkon Shield Claimants

Trust, 60 F.3d 1071, 1076 (4° Cir. 1995). The amendment’s

paramount purpose was to facilitate implementation of the global

resolution of a complex, expensive, and highly contentious litigation

among nearly all the states and many tobacco companies. The

amendment was spurred by the states’ concern their hard-gained

settlement proceeds would dwindle in the face of claims by others to

M.S.A. monies. Congress chose a rational means to allay those

legitimate concerns with the amendments contained in the 1999

Supplemental Appropriations Act.

70a

phrased in mandatory rather than discretionary

terms?

Id. at 448; Prestera, 111 F.Supp.2d at 773-74. Plaintiffs

encounter significant problems on the first and second

factors.

Regarding the first, Congress’ addition of

1396b(d)(3)(B)(ii) at least muddies the questicn of whether

the Plaintiffs were intended beneficiaries in light of the entire

statutory scheme. As previously discussed, that amendment

treats tobacco settlement monies differently than other state

third-party liability recovery actions.

Regarding the second factor, Plaintiffs’ claims, reduced to

their essence, assert a right to “that portion of the tobacco

litigation settlement proceeds that belongs to” them. PIs.’

Compl. at 22. The United States Court of Appeals for the

Seventh Circuit commented recently on the enforcement of

that putative right:

We add that the administrative problems that would

be created by [permitting the claims to go forward]

would be nightmarish. As Wisconsin and the other

states point out, the total sums of money to be paid

under the M.S.A. are not earmarked for different

claims. Some of it is to go to educational programs;

some of it to research; some to reimbursement of the

state’s expenses in treating sick people and in

supporting families whose wage-earners are disabled

from smoking; some is frankly punitive. The final

amount to be paid, after 25 years have elapsed, is

unknown and unknowable at this point, because it

depends partly on how successful the anti-smoking

campaigns turn out to be.

Floyd, 227 F.3d at 1038; see also Evergreen Presbyterian

Ministries Inc. v. Hood, 235 F.3d 908, 924 (Sth Cir. 2000)

(noting the unavailability of § 1983 for enforcement of

statutory rights where “enforcement would strain judicial -

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competence”). Plaintiffs’ asserted right here is subject to the

same enforcement obstacles noted in Floyd.

3. The Second Prong of Ex Parte Young

While the Court bases its analysis for dismissal on

Plaintiffs’ failure under the first prong of Ex Parte Young,

virtually every court addressing the issue to date has

employed the second prong to dismiss on Eleventh

Amendment grounds. See, e.g., Floyd v. Thompson, 111

F.Supp.2d 1097, 1101 (W.D.Wis. 1999) (“Allowing

plaintiffs to recover a portion of the settlement funds would

be the functional equivalent of retrospective monetary

damages paid from the state treasury[.]”); Martin v. State of

New Mexico, 197 F.R.D. 694 (D.N.M. 2000); McClendon v.

Georgia Dep't of Commun. Health, 4:00cv26-HLM (N.D.Ga.

Aug. 28, 2000); Downs v. Commonwealth, No. 00-23

(E.D.Ky. Aug. 31, 2000); White v. Hunt, 5:00cv14-V

(W.D.N.C. Jul. 13, 2000); Barton v. Summers, 111

F.Supp.2d 989 (M.D.Tenn. 2000); Harris v. Owens, No. 99-

S-953 (D.Colo. Jan. 19, 2000) (Magistrate Judge’s Report-

Recommendation adopted Jul. 19, 2000). In the alternative,

the Court also adopts the analyses performed by these

courts.°

Plaintiffs assert the Court can avoid the bar represented by the

second prong of the Eleventh Amendment analysis by way of an

inventive fiction. In sum, Plaintiffs invite the Court to order a

payout from escrow agent Citibank after its receipt of funds from the

Tobacco companies, but before transmission of the monies to the

state’s coffers.

Plaintiffs’ analysis is greatly oversimplified. For example, it ignores

the concept of bifurcated title. While the tobacco-company

depositors retain legal title to the monies once escrowed, West

Virginia likely enjoys equitable title to the funds, subject only to

computation and award of its allocable share. Plaintiffs avoid

discussion of the treatment of this ownership interest under the

Eleventh Amendment.

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Ill. CONCLUSION

Based on the foregoing, the Court GRANTS the motions

to dismiss, DENIES the motions to stay as moot, and

DENIES Plaintiffs’ motion for oral argument.

The Clerk is directed to (1) post a copy of this

Memorandum Opinion and Order on the Court’s public

website at www.wvsd.uscourts.gov and (2) send a copy to

counsel of record.

ENTER: January 3, 2001

/s/

Charles H. Haden II, Chief Judge

From a more practical standpoint, Plaintiffs’ proposed result would

open a gaping hole in the public fisc. It would permit, by analogy,

any seeker of state funds to look for accounts receivable of the State

and then attempt to garnish them before their purely ministerial

transmission to the treasury. Such a mechanism should not be

engrafted onto our system of dual sovereignty.

Finally, Citibank is a mere agent of its many clients, the several

sovereign states. Its possession of funds sought by Plaintiffs comes

about only through the scope of its agencies. Defenses to and

immunities available to its principals protect both the agent and the

escrow.

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APPENDIX G

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF NORTH CAROLINA

Civil Action No. 5:00CV14-V

HILDA WHITE; The Estate of ROBERT CORNELISON, by and

through Personal Representative, Helen Forte; MAUDE

STRICKLAND; The Estate of ROBERT ELTZ, by and through

Personal Representative, Nellie Eltz; The Estate of MARVIN

KING, by and through Personal Representative, Donna King;

The Estate of MAGGIE IRVING, by and through Personal

Representative, Wanda Jones; The Estate of ANNIS MESSER,

by and through Personal Representative, Charles Messer;

DEBORAH Morey; The Estate of HESTER HEATHERLY, by

and through Personal Representative, Carroll Heatherly; on

behalf of themselves and all others similarly situated,

Plaintiffs,

Vv.

JAMES B. HUNT, JR., in his official capacity as Governor of

North Carolina; JOHN DOE, in his or its official capacity as

Tobacco Escrow Agent for the State of North Carolina;

HARLAN BOYLES, in his official capacity as Treasurer of

North Carolina; H. DAVID BRUTON, M.D., in his official

capacity as Secretary of the N.C. Department of Health &

Human Services; PAUL R. PERRUZZI, in his official capacity

as Director of the Division of Medical Assistance; and, THE

GOLDEN L.E.A.F. (Long-term Economic Advancement

Foundation), INC., a N.C. Nonprofit Corporation,

Defendants.

CLASS ACTION COMPLAINT FOR DECLARATORY

AND INJUNCTIVE RELIEF

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Plaintiffs Hilda White, Estate of Robert Cornelison,

Maude C. Strickland, Estate of Robert W. Eltz, Estate of

Marvin King, Estate of Maggie Irving, Estate of Annis E.

Messer, Deborah Morey, and Estate of Hester Heatherly, on

behalf of themselves and all others similarly situated,

(collectively “Plaintiffs”) allege:

NATURE OF THE LAWSUIT

1. This action is brought by and on behalf of some of

North Carolina’s most powerless citizens — poor people who

have suffered death, disease, and debilitation from tobacco

use and who are dependent upon the State’s Medicaid

program to help pay for their medical care.

2. This case arises following the State’s successful

lawsuit against manufacturers of tobacco products, which

was filed and settled in December of 1998. North Carolina

is expected to receive in excess of four billion dollars as a

result of this lawsuit.

3. Because Defendants have not paid or arranged to pay

to Plaintiffs that portion of the settlement proceeds Plaintiffs

owr as a matter of law, or alternatively to seek Medicaid

damages from the tobacco companies, this action has been

instituted to protect Plaintiffs’ rights.

JURISDICTION AND VENUE

4. The claims in this litigation, which are brought

pursuant to 42 U.S.C. § 1983 and 28 U.S.C. § 2201, present

questions of federal Constitutional and statutory law.

Jurisdiction is based on 28 U.S.C. §§ 1331 and 1343.

5. Venue is based upon 28 U.S.C. § 1391(b)(2).

PARTIES

6. Plaintiffs are citizens of the State of North Carolina

who suffer from smoking-related illnesses and who have

been recipients of medical assistance benefits for those

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conditions through North Carolina’s Medicaid program, or

estates of such citizens.

7. Defendant James B. Hunt, Jr. is Governor of North

Carolina and as such is responsible for seeing that North

Carolina implements and observes federal law pertaining to

the State’s administration of the Medicaid program.

Defendant Hunt is sued in his official capacity.

8. Defendant John Doe is the escrow agent designated

by the parties to the Master Settlement Agreement to receive,

manage, and disburse the settlement monies to be paid by the

tobacco companies to the State.

9. Defendant Harlan Boyles is Treasurer of North

Carolina and as such is responsible for the receipt,

safekeeping, investment, administration, and disbursement of

funds directed to the State of North Carolina from its tobacco

litigation settlement. Defendant Boyles is sued in his official

capacity.

10. Defendant H. David Bruton, M.D. is the Secretary of

the North Carolina Department of Health and Human

Services. As such, he is responsible for establishing and

implementing policies and practices of the Department,

including policies and practices for the recovery and

disbursement of money paid through the Medicaid program.

Detendant Bruton is sued in his official capacity.

11. Defendant Paul R. Perruzzi is the Director of the

Division of Medical Assistance of the North Carolina

Department of Health and Human Services. As such, he is

responsible for enforcing the recovery policies and practices

at issue in this action. Defendant Perruzzi is sued in his

official capacity.

12. Defendant The Golden L.E.A.F. (Long-Term

Economic Advancement Foundation), Inc. is a non-profit

corporation established under and existing by virtue of the

laws of the State of North Carolina which, upon information

76a

and belief, will receive funds from the tobacco litigation

settlement on behalf of North Carolina.

13. At all times relevant to this Complaint, Defendants

have acted and will act under color of State law.

THE MEDICAID PROGRAM

14. Medicaid is a federal program that provides medical

assistance to eligible low-income persons. It is administered

by the States under a cooperative federal-state funding

scheme.

15. Although States are not required ‘to participate in

Medicaid, if a State chooses to do so it must follow federal

Medicaid law. North Carolina participates in the Medicaid

program; its program of medical assistance is authorized by

N.C.G.S. § 108A-54.

16. In order to participate in the Medicaid program, and

as a-condition for the receipt of federal funds under the

Medicaid program, North Carolina was required to submit a

comprehensive written statement, called a State Plan,to the

United States Department of Health and Human Services, ~

Health Care Financing Administration (“HCFA”). Upon

Information and belief, the State Plan describes the nature

and scope of North Carolina’s Medicaid program and gives

assurances that the program will be administered in

conformity with the requirements of the Medicaid Act and

all applicable federal regulations.

17. Upon information and belief, North Carolina has

received millions of dollars in federal Medicaid funds in

exchange for the State’s promise to abide by its State Plan

and to Administer its Medicaid program in compliance with

federal law.

MEDICAID THIRD-PARTY RECOVERY AND

DISBURSEMENT REQUIREMENTS

18. The Medicaid Act, at 42 U.S.C. §1396a(25)(A) and

(B), requires each State in its State Plan to agree to “take all

77a

reasonable measures to ascertain the legal liability of third

parties . . . to pay for care and services under the plan,” and

“in case where such a legal liability is found to exist after

medical assistance has been made available . . . [to] seek

reimbursement for such assistance to the extent of such legal

liability.”

19. The Act’s implementing regulations, at 42 C.F.R. §

433.138(a), echo this requirement, providing that the State

“must take reasonable measures to determine the legal

liability of the third parties who are liable to pay for services

furnished under the plan.”

20. To effectuate recovery from responsible third parties,

42 U.S.C. § 1396a(45) requires that each “tate Plan “provide

for mandatory assignment of rights of payment for medical

support and other medical care owed to recipients.”

21. Once the State recovers from responsible third

parties, the Medicaid Act and its regulations govern precisely

how those amounts are to be disbursed. Specifically, Title

42 U.S.C. § 1396k provides that: [s]uch part of any amount

collected by the State under an assignment made under the

provisions of this section shall be retained by the State as is

necessary to reimburse it for medical assistance payments

made on behalf of an individual with respect to whom such

assignment was executed (with appropriate reimbursement

of the Federal Government to the extent of its participation

in the financing of such medical assistance), and the

remainder of such amount collected shall be paid to such

individual.

22. Similarly, Title 42 C.F.R. § 433.154 mandates that

the State “must distribute” to the individual Medical

recipient all amounts recovered from responsible third

parties in excess of what is required to reimburse the State

and federal governments for medical payments made on

behalf of those recipients.

78a

23. As explained by HCFA in its official commentary

published in the Federal Register at the time that § 433.154

was codified, the Medicaid Act “specifically requires that

any overage be paid to the individual, who is usually a

person of limited resources.” This federally-mandated

distribution requirement ensures that both the State and

federal governments are made whole, with the balance of

any recovery going to the injured party.

24. In North Carolina, Medicaid recipients are required

to assign their rights to the State automatically when they

accept medical assistance under the Medicaid Program. See

N.C.G.S. § 108A-59(a) (“by accepting medical assistance,

the recipient shall be deemed to have made an assignment to

the State of the right to third party benefits, contractual or

otherwise, to which he may be entitled.”)

25. This assignment is a complete assignment. See

N.C.G.S. § 108A-57(a) (“the State... shall be subrogated to

all rights of recovery, contractual or otherwise, of the

beneficiary of [medical] assistance, or the beneficiary’s

personal representative, heirs, or the administrator or

executor of the estate, against any person.”) (emphasis

added)

26. Federal regulations, at 42 C.F.R. § 433.151(b),

require that North Carolina’s State Plan “must provide that

the requirements . . . for distributing third party collections

specified in [section] 433.154 are met.”

27. If North Carolina fails to comply with the third-party

recovery provisions of the Medicaid Act funds (42 C.F.R §

433.140(a)(1)), thereby endangering all Medicaid recipients’

continued receipt of medical assistance benefits and

jeopardizing the health and well-being of tens of thousands

of the State’s poorest citizens, including Plaintiffs.

THE TOBACCO LITIGATION IN NORTH CAROLINA

28. On or about November 16, 1998, Attorney General

Michael Easley, on behalf of North Carolina, entered into a

EEE

79a

Master Settlement Agreement (“MSA”) with the major

tobacco companies, whereby North Carolina agreed to

forever release and discharge its claims against the tobacco

industry in exchange for perpetual, periodic cash payments.

Over the next 25 years, these payments are expected to total

approximately $4.6 billion. The tobacco-companies made an

initial payment on or about December 21, 1999 of

$57,584,748.10.

29. As part of the MSA, North Carolina, which had not

filed suit against the tobacco companies at the time of the

settlement, agreed to bring litigation against the industry that

would be settled under the terms of the MSA. Suits that

were previously filed in other jurisdictions were also settled

by the MSA.

30. On December 21, 1998 at 12:58 p.m. the State filed

State of North Carolina ex. rel. Michael F. Easley v. Philip

Morris Incorporated et _al,(98 CVS 14377), in the Superior

Court of Wake County against the tobacco industry (“North

Carolina’s tobacco litigation”).

31. The State’s Complaint included the following

allegations:

In fulfilling its statutory duties, the State of North

Carolina has expended and will continue to expend

substantial sums of money, in the amount of billions

of dollars, to provide health care services for

treatment of illnesses caused or exacerbated by

tobacco use. These expenditures have been caused

by the Defendants’ unlawful conduct alleged herein.

As a result, the State of North Carolina has incurred

direct economic losses, amounting to billions of

dollars for treatment of tobacco related illnesses

under all applicable medical assistance programs and

the state funded health insurance plan. These

expenditures have been caused by the unlawful acts

of the Defendants. State v. Philip Morris et. al.,

Complaint at ¥ 40.

80a

32. Besides injunctive relief, the State in its prayer for

relief sought to recover two types of monetary relief: 1)

“damages for the past and future medical costs paid by North

Carolina to medical assistance beneficiaries, state employees

and others for treatment of tobacco-related illnesses” and 2)

attorneys’ fees.

33. Also on December 21, 1998, after the State’s

Complaint was filed, the following action occurred:

1:18 p.m. The parties filed an Agreed Motion for

Stay of Proceedings.

1:24 p.m. The parties filed an Agreed Motion for

Approval of Settlement Agreement and Entry of

Consent Decree and Final Judgment.

2:05 p.m. An Order Granting Stay of Proceedings

was filed.

2:06 p.m. An Agreed Dismissal Order was filed.

2:07 p.m. A Consent decree and final judgment was

filed.

DEFENDANTS’ FAILURE TO DISBURSE A

PORTION OF THE TOBACCO LITIGATION

SETTLEMENT TO PLAINTIFFS

34. North Carolina’s tobacco litigation was filed against

the tobacco industry because the state recognized the

companies to be third parties legally liable for causing

Medicaid recipients’ sickness, injury, disability, and death.

35. Once the State identified the tobacco companies as

responsible third parties within the meaning of the Medicaid

Act, responsible third parties within the meaning of the

Medicaid Act, federal law compelled the State to seek from

them reimbursement of all monies paid through North

Carolina’s Medicaid program on behalf of persons injured by

tobacco use.

36. The State’s Complaint reveals that the central

element of damages claimed by the State was the cost of

a I he asa Deiat epee eee

8la

medical payments made through North Carolina’s Medicaid

program to pay for smoking-related injuries caused by the

tobacco companies.

37. In addition, the MSA expressly declares that no

settlement payments are made “in settlement of an actual or

potential liability for a fine, penalty (civil or criminal) or

enhanced damages or . . . the cost of tangible or intangible

asset or other future benefit.”

38. Upon information and belief, the approximately $4.6

billion that North Carolina has already begun receiving from

the tobacco companies exceeds the amount of funds the State

has actually paid, or might in the future pay, on behalf of

Medicaid recipients who have suffered smoking-related

injuries.

39. This excess recovery belongs to Plaintiffs, and it

must be disbursed to them.

40. Notwithstanding the fact that the State’s lawsuit

explicitly sought to recover monies paid through the

Medicaid program, North Carolina has taken no steps to

disburse to Plaintiffs any portion of the settlement amount or

to inform Plaintiffs of their rights to claim that portion of the

settlement monies to which they are legally entitled.

41. The State has indicated that no part of the MSA

proceeds will be paid to Plaintiffs by its passage of Senate

Bill 6, which designates the tobacco litigation settlement

proceeds will be apportioned as follows: 50% to Defendant

the Golden L.E.A.F.; 25% to a trust to be established for the

benefit of tobacco producers and others; and 25% to a trust

to be established for the benefit of health. A copy of Senate

Bill 6 is attached as Exhibit A.

42. The drafters of the MSA took pains to avoid

characterizing any portion of the settlement as attributable to

Medicaid costs, even though the State was explicitly seeking

to recover medical expenditures, and even though

distribution of the settlement proceeds under the MSA

82a

mirrors each State’s proportionate share of tobacco-related

Medicaid expenditures. It has been admitted by various

State governors and by the Notional Governors Association,

for example, that “[oJur State’s Attorneys General carefully

crafted that tobacco agreement to reflect only State costs.”

43. The States were motivated to “carefully craft” the

MSA in this way so that they could attempt to avoid

recovery to the federal government. as required by the

Medicaid Act.

44. Further, the National Governor’s Association worked

to “develop a strategy aimed at preventing the federal

government’s seizure of State tobacco settlement funds,”

since the States, including North Carolina, were extremely

concerned about “the amount that could be lost because of

HCFA recoupment of federal Medicaid expenditures.”

45. In May 1999, as a result of a lobbying campaign by

the States, Congress amended the Medicaid Act, 42 U.S.C. §

1396b(d), waiving the federal government’s entitlement to

its portion of the MSA proceeds. This legislation was

described by the National Governor’s Association as the

Governors’ “number one legislative priority.”

46. The Amendment to section 1396b(d) did not alter

North Carolina’s legal obligation to disburse to Plaintiffs that

portion of the settlement monies received by the State that

exceeds the State’s Medicaid costs.

DEFENDANTS’ FAILURE TO COMPLY WITH

FEDERAL LAW

47. Defendants for some time have known that

manufacturers of tobacco products and certain other tobacco-

related organizations are third parties legally liable for

medical assistance payments made through North Carolina’s

Medicaid program.

48. This knowledge led the State to commence and settle

its lawsuit against the tobacco industry to recover “past and

future medical costs paid by North Carolina to medical

83a

assistance beneficiaries, State employees and others for

treatment of tobacco related illnesses.” The central element

of damages claimed by the State was medical costs paid by

the State.

49. These medical cost were also the central element of

State’s settlement with the tobacco defendants. The MSA

expressly declares that no settlement payments are made “in

settlement of an actual or potential liability for a fine, penalty

(civil or criminal) or enhanced damages or . . . the cost of a

tangible or intangible asset or other future benefit.”

50. Pursuant to the terms of the MSA, North Carolina has

forever waived its right to litigate any theories of Medicaid

recovery against the tobacco companies or to seek from them

any reimbursement of Medicaid payments made on behalf of

injured smokers, as assignee of Plaintiffs’ claims or

otherwise.

51. Plaintiffs allege that the State’s lawsuit against the

tobacco companies was, as it appears, an action seeking

recovery of hundreds of millions of dollars in medical

payments and that the State has violated federal law by

refusing to disburse a portion of the settlement monies

directly to Plaintiffs.

52. However, if North Carolina’s tobacco litigation were

not a Medicaid recovery action, the State has violated federal

law by failing to bring an action for the recovery of medical

payments from the tobacco companies as compelled by the

Medicaid Act and accompanying regulations. This action

has resulted in a taking of Plaintiffs’ rights, without due

process, to any excess funds that would have been recovered,

which is prohibited by the United States Constitution.

53. Whether the State is in violation of the Medicaid Act

by failing to seek the recovery of medical assistance

payments from the tobacco companies or by failing to

distribute to Plaintiffs, or make provision for the distribution

to Plaintiffs, a part of the tobacco litigation settlement, the

84a

state has illegally deprived and continues to deprive

Plaintiffs of their rights and property in violation of federal

law.

54. In addition, Defendants’ conduct threatens North

Carolina’s entitlement to federal Medicaid funds, endangers

Plaintiffs’ continued receipt of medical assistance benefits,

and jeopardizes the health and well-being of tens of

thousands of North Carolina’s poorest citizens, including

Plaintiffs.

CLASS ACTION ALLEGATIONS

55. Plaintiffs Hilda White, Estate of Robert Cornelison,

Maude C. Strickland, Estate of Robert W. Eltz, Estate of

Marvin King, Estate of Maggie Irving, Estate of Annis

Messer, Deborah Morey, and Estate of Hester Heatherly,

bring this action on behalf of themselves and all other

persons who have received medical assistance through North

Carolina’s Medicaid program for tobacco-related diseases or

injuries, or who are the heirs or guardians of such Medicaid

recipients.

56. This action is maintainable as a class action under

Rule of Civil Procedure 23, paragraphs (a), (b)(1)(a) and

(b)(2).

57. The class is so numerous that joinder of all members

is impracticable; there are questions of law and fact common

to the class; the claims of the named plaintiffs are typical of

the claims of the class; and the named plaintiffs fairly and

adequately represent the interests of the class.

58. The prosecution of separate actions by individual

members of the class would create the risk of inconsistent

adjudications, which would establish incompatible standards

of conduct for Defendants.

59. Defendants have acted or refused to act on grounds

generally applicable to all members of the proposed class,

thereby making declaratory and injunctive relief appropriate

with respect to the class as a whole.

SRG LAE LR AES EEE A LOLLY SANS TLD DA SAN LOE NEE AIO WS

> Shea ganic

LAREN IIE 7M

85a

FIRST CLAIM FOR RELIEF

(Declaratory Judgment 28 U.S.C. § 2201)

60. Plaintiffs reallege and incorporate by reference the

allegations set forth in the above paragraphs as if they were

restated herein.

61. There is an actual controversy between the parties.

Plaintiffs contend that Defendants have failed to comply

with the third-party recovery provisions of the Medicaid Act

and regulations, including those provisions requiring the

disbursement of recovered funds to Plaintiffs. Upon -

information and belief, Defendants contend that they have

complied with the law.

62. Plaintiffs have suffered, are continuing to suffer, and

are threatened with suffering irreparable injury.

63. Plaintiffs have no adequate remedy at law to redress

the violations of their interests alleged herein.

64. Plaintiffs are entitled to a declaration of their rights

and defendants’ obligations with respect to the integrity of

North Carolina’s Medicaid program insofar as Defendants’

failure to comply with federal law imperils the State’s

continued receipt of federal funds and endangers the public

assistance programs upon which Plaintiffs rely to maintain

their health and well-being.

65. Plaintiffs are also entitled to a declaration of their

rights and Defendants’ obligations with respect to the

provisions of the Medicaid Act governing the recovery of

medical assistance payments from responsible third parties,

such as the tobacco companies, and the proper disbursement

of amounts recovered.

SECOND CLAIM FOR RELIEF

(Deprivation of Property Without Due Process)

Fourteenth Amendment to the U.S. Constitution

86a

66. Plaintiffs reallege and incorporate by reference the

allegations set forth in the above paragraphs as if they were

restated herein.

67. Defendants have deprived Plaintiffs of their property

without notice, hearing, and other due process required by

the Fourteenth Amendment to the United States Constitution.

68. Among other things, Defendants have deprived

Plaintiffs of: (a) that portion of the tobacco litigation

settlement that rightly belongs to Plaintiffs by virtue of the

requirements of the Medicaid Act and federal regulations;

(b) Plaintiffs’ property interest in their claims — or causes of

action — for payment of that portion of the litigation

settlement that rightly belongs to them by virtue of the

requirements of the Medicaid Act and federal regulations,

and (c) the value of the rights assigned by Plaintiffs to the

State as a condition of Medicaid eligibility, which value

includes, but is not limited to, all amounts recovered by the

State in excess of its tobacco-related Medicaid expenditures

by virtue of such assignments.

THIRD CLAIM FOR RELIEF

(Taking of Property Without Just Compensation

Fifth and Fourteenth Amendments to the U.S. Constitution

69. Plaintiffs reallege and incorporate by reference the

allegations set forth in the above paragraphs as if they were

restated herein.

70. Defendants have taken Plaintiffs’ property without

just compensation in violation of the Fifth and Fourteenth

amendments to the United States Constitution.

71. Among other things, Defendants have deprived

Plaintiffs of: (a) that portion of the tobacco litigation

settlement that rightly belongs to Plaintiffs by virtue of the

requirements of the Medicaid Act and federal regulations;

(b) Plaintiffs property interest in their claims - - or causes of

action - - for payment of that portion of the tobacco litigation

settlements of the Medicaid Act and federal regulations, and

87a

as a condition of Medicaid eligibility, which value includes,

but is not limited to, all amounts recovered by the State in

excess of its tobacco-related Medicaid expenditures by virtue

of such assignments.

72. Defendants’ decision to take Plaintiffs’ property is a

final decision.

73. The MSA having become final, and the State’s

tobacco lawsuit having been dismissed with prejudice, no

available State procedures or adequate State process exists

for Plaintiffs to seek just compensation.

FOURTH CLAIM FOR RELIEF

(Violation of the Medicaid Act’s Disbursement

Requirements) '

74. Plaintiffs reallege and incorporate by reference the

allegations set forth in the above paragraphs as if they were

restated herein.

75. Defendants have violated and are violating federal

law by failing to disburse properly funds that North Carolina

has recovered from the tobacco companies, as compelled by

the Medicaid Act and governing federal regulations.

FIFTH CLAIM FOR RELIEF

(Violation of the Medicaid Act’s Recovery Requirements)

76. Plaintiffs reallege and incorporate by reference the

allegations set forth in the above paragraphs as if they were

restated herein.

77. To the extent Defendants claim that North Carolina’s

lawsuit against the tobacco companies was not a Medicaid

recovery action as compelled by the Medicaid Act,

Defendants have violated and are violating federal law by

failing to seek reimbursement of medical assistance

payments made through the State Medicaid program from

known legally responsible tobacco companies, pursuant to

88a

the requirements of the Medicaid Act and governing federal

-regulations.

PRAYER FOR RELIEF

WHEREFORE, Plaintiffs pray for judgment as follows:

1. For entry of an order certifying the class described

above;

2. That as to the amount the State is entitled to receive

pursuant to the tobacco litigation settlement, for entry of an

order declaring that any portion of such amount which is in

excess of the State funds expended through the Medicaid

program for Plaintiffs’ medical care for tobacco-related

illnesses, must be paid to Plaintiffs;

3. For entry of an order declaring that the scheme for

distribution of the tobacco litigation settlement funds as

codified in Senate Bill 6 is ineffective and invalid as to that

portion of those funds which are in excess of the State funds

expended through the Medicaid program for Plaintiffs’

medical care for tobacco-related illnesses;

4. For preliminary and permanent injunctive relief

mandating that Defendants disburse to Plaintiffs, or cause the

disbursement to Plaintiffs of, those portions of the tobacco

litigation settlement payments which belong to Plaintiffs

before such payments are deposited in the State treasury or

are in the possession, custody, or control of the State treasury

or are in the possession, custody, or control of the State or

Defendants;

5. Alternatively, for preliminary and permanent

injunctive relief mandating either that Defendants return to

Plaintiffs any and all property rights taken from them or that

Defendants provide just compensation to Plaintiffs for the

value of the property or property rights taken;

6. Alternatively, for preliminary and permanent

injunctive relief mandating that Defendants provide to

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Plaintiffs due process of law concerning all property rights

that have been taken from Plaintiffs;

7. Alternatively, for preliminary injunctive relief

mandating that Defendants cause all past and future tobacco

litigation settlement payments to be made to the Clerk of

Court rather than Defendant Doe pending entry of further

orders of final judgment in this case;

8. Alternatively, for entry of an order declaring that

Defendant s are required by the Medicaid Act and federal

regulations to seek reimbursement of Medicaid payments

made through the State Medicaid program from known

legally third-parties, such as those tobacco companies

already identified by the State, and to disburse all amounts

recovered in such third-party reimbursement actions

according to the requirements of the Medicaid Act,

including, but not limited to, disbursement to Plaintiffs of

any amounts recovered in excess of payments made through

the State Medicaid program.

9. Fora trial by jury;

10. For costs and reasonable attorneys’ fees; and,

11. For such further relief as the Court deems just and

proper.

This 26" day of January, 2000.

ATTORNEYS FOR PLAINTIFFS:

Van Winkle, Buck, Wall, Starnes and Davis, P.A.

/s/

Larry McDevitt, N.C. Bar #5032

W. Perry Fisher, N.C. Bar #14153

W. Carleton Metcalf, N.C. Bar #24415

Post Office Box 7376

Asheville, N.C. 28802

828/258-2991

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APPENDIX H

UNITED STATES DISTRICT COURT

DISTRICT OF SOUTH CAROLINA

Civil Action No. 6:00-324-24

STEPHEN ALBERT JOSEPH, JR.; SELMA CHARLENE HATFIELD;

HOWARD S. MILLER; ANNIE SAMS MOSTELLER; DEBORAH

KAY MULLINS; MAMIE BREWER, PERSONAL REPRESENTATIVE

OF THE ESTATE OF CALVIN BREWER; BRENDA CARSON,

PERSONAL REPRESENTATIVE OF THE ESTATE OF BONDALE

CARSON MILER; MARGARET RENEE FLEMING, PERSONAL

REPRESENTATIVE OF THE ESTATE OF ERNESTINE FLEMING;

LAURA KELLY, PERSONAL REPRESENTATIVE OF THE ESTATE

OF ELIZABETH MCABEE; ALFORD WELBORNE, INDIVIDUALLY

AND ON BEHALF OF THE OTHERS SIMILARLY SITUATED;

' Plaintiffs,

CHARLES M. CONDON, ATTORNEY GENERAL, IN HIS OFFICIAL

CAPACITY AS ATTORNEY GENERAL; SAM GRISWOLD,

DIRECTOR, DEPARTMENT OF HEALTH AND HUMAN SERVICES,

IN HIS OFFICIAL CAPACITY AS DIRECTOR, DEPARTMENT OF

HEALTH AND HUMAN SERVICES; CITIBANK, N.A., IN ITS

OFFICIAL CAPACITY AS ESCROW AGENT,

Defendants.

AMENDED

CLASS ACTION COMPLAINT

1. This action is brought by and on behalf of the

poorest, weakest, and most infirm citizens of the State of

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South Carolina-a voiceless group with virtually no political

or economic power. This group of poor people have suffered

sickness, injury, and/or death as a result of their use of

tobacco and are dependent upon the Medicaid program to

pay for their medical care.

2. South Carolina receives hundreds of millions of

dollars in federal funds by virtue of its participation in the

Medicaid program. Federal law requires that in order to

participate in the Medicaid program, South Carolina comply

with the requirements of the Medicaid Act as well as related

federal regulations.

3. Specifically, federal law requires the agency

administering the South Carolina Medicaid program: (a) to

attempt to recover the amount of the medical assistance

payments from third parties who are responsible for causing

the Medicaid recipients’ sickness, injury, and/or death, and

(b) to disburse to the injured Medicaid recipients any portion

of the funds collected from those responsible third parties in

excess of the amount of the medical assistance payments

made by South Carolina.

4. This case arises following a successful lawsuit by

South Carolina against manufacturers of tobacco products

filed in the Court of Common Pleas of Richland County

South Carolina on May 12, 1997. See South Carolina v.

Brown & Williamson Tobacco Corp., 97-CP-40-1686 (Ct.

Common Please, Richland County, S.C. filed May 12, 1997).

In the course of that litigation, in numerous pleadings filed

with the court and in countless public pronouncements,

South Carolina officials including Defendant Attorney

General Charles M. Condon (“Condon”) identified the

tobacco-company defendants as third parties legally liable

for causing Medicaid recipients’ sickness, injury and/or

death.

5. Once South Carolina identified the tobacco

companies as responsible third parties within the meaning of

The Medicaid Act, federal law compelled the state to seek

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from those companies reimbursement of all monies paid

through the State Medicaid program on behalf of persons

injured by tobacco use. In its Memorandum in Opposition to

Defendants’ Motion to Dismiss Pursuant to Rule 12(b)(6),

for example, South Carolina acknowledged the force of its

Medicaid obligation by stating “The plain language of [the

Medicaid Act] ... simply states that if [a state] wants to

receive Medicaid funds, the State must

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