Suit may hurt tobacco payments to Texas
AUSTIN -- A pending lawsuit against the tobacco industry in Florida could force cigarette companies into bankruptcy and hold up the payment of hundreds of millions of dollars in tobacco settlement funds to Texas, state senators were warned Thursday.
First Assistant Attorney General Andy Taylor told a Senate finance subcommittee that his office was monitoring the case, in which a jury earlier this month awarded $12.7 million in compensatory damages to two smokers and the family of a third smoker, who died last year.
Taylor said punitive issues in the class action suit could go to trial as early as next month.
"Many observers have speculated that a punitive damage award could be anywhere from $100 to $300 billion," he told the senators.
The industry, which already has reached multi-billion-dollar settlements over smoking-related health care costs with Texas and other states, could be forced into bankruptcy if it is hit with a huge verdict and is forced to post an appeal bond, he added. Florida law would require the industry to post a bond in the amount of 120 percent of any award.
Taylor said the bonding requirement may be changed. But he said tobacco representatives have told him that "one or more" cigarette companies would file for Chapter 11 bankruptcy if the industry is slapped with a punitive judgment award of more than $10 billion.
A bankruptcy reorganization could delay further tobacco settlement payments to Texas and other states because the states would probably be considered unsecured creditors, the next-to-lowest priority -- right above company stockholders -- for claims, Taylor said.
"Obviously, this (bankruptcy) could have very severe effects on the annual (tobacco) payments to be made to the state," he said. "At a minimum, we believe that Texas could experience a delay of several years in its annual payments."
Texas' $17.3 billion settlement, which also includes payments to counties, was negotiated by former Attorney General Dan Morales and a team of outside lawyers in 1998. Texas is receiving payments each year, and the current budget includes $1.8 billion of settlement proceeds -- mostly in the form of endowments -- for health care needs.
Texas could be forced into a budget crisis, under Taylor's scenario, if cigarette companies were to file for bankruptcy before the end of the year. The current budget includes a $320 million tobacco payment scheduled to be made in December.
And Texas counties are to receive an additional $535 million in January, according to the state comptroller's office.
Because of a provision in the Texas tobacco settlement that calls for payments to be reduced if smoking decreases nationwide, state government already stands to receive $75 million to $90 million less from cigarette companies than initially anticipated for the current two-year budget period.
And counties will receive $128 million to $150 million less than expected through the end of 2001, the comptroller estimated.
In a related development, the lower-than-anticipated county tobacco payments were showing up Thursday in the Texas Department of Health's plan for dividing up a $100 million installment.
Harris County was awarded the largest share, $18.3 million, less than the $20 million than county officials had expected. Some 288 public hospitals, which treat indigent patients, will share the money.