Originally created 10/13/03

Attorneys general ask cigarette makers to make Phase II payments

RALEIGH, N.C. -- Attorneys general from 14 states, including South Carolina, have written to three cigarette makers asking them to make scheduled payments to a fund designed to benefit tobacco growers and quota holders.

R.J. Reynolds Tobacco, Lorillard and Brown & Williamson failed to make more than $51 million in quarterly payments late last month. The delay came because the tobacco companies said they are waiting to see whether Congress passes tobacco buyout legislation this year. That move could wipe out much of this obligation to the states.

At issue is Phase II money that goes to state funds created under Big Tobacco's 1998 settlement with the states. Payments totaling $5.1 billion over 12 years will be distributed to tobacco farmers and owners of tobacco quotas to compensate for reduced income from lower domestic tobacco consumption.

"By failing to pay, these companies are failing to keep their promise to North Carolina farmers and quota holders," North Carolina Attorney General Roy Cooper said. "We expect cigarette-makers to live up to their responsibilities and make their payments as they've agreed to do."

In addition to a letter sent Friday to the cigarette companies, the attorneys general also sent another letter asking J.P. Morgan Chase Bank - the Phase II trustee - to take legal action if needed to make sure that the payments are made.

In addition to Cooper, attorneys general from Alabama, Florida, Georgia, Indiana, Kentucky, Maryland, Missouri, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia and West Virginia made the request.

The three cigarette makers say any increase in federally mandated payments by the tobacco companies should reduce the companies' Phase II payments on a dollar-for-dollar basis.

"The trust clearly intends for there to be no double-payment for the same purpose. That is the premise by which we are withholding the payment," said Tommy Payne, an executive vice president for Reynolds Tobacco, based in Winston-Salem, which withheld $25 million.

The three companies said they will place their quarterly payments in escrow accounts until the end of the year, then release the money to be paid to growers and quota holders if no buyout legislation passes.

"We believe that we have a legitimate basis under the trust agreement for withholding these quarterly payments," Payne said.

But the attorneys general say that there is no provision in the trust agreement for the companies to place their payments in escrow.

The mere consideration of buyout legislation on Capitol Hill doesn't allow the companies to suddenly withhold their grower payments, the law officials said.

"A trigger is not a bill that is submitted in Congress," said J.B. Kelly in the North Carolina Attorney General's Office.

Philip Morris USA, the fourth major cigarette maker participating in Phase II, made its quarterly payment as scheduled last month.


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