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Xcaliber International, Ltd., LLC v. Gerregano

United States District Court, M.D. Tennessee, Nashville Division

February 26, 2018

XCALIBER INTERNATIONAL, LTD., LLC, Plaintiff,
v.
DAVID GERREGANO and HERBERT SLATERY, Defendants.

          MEMORANDUM OPINION

          WAVERLY D. CRENSHAW, JR. CHIEF UNITED STATES DISTRICT JUDGE.

         The Tennessee Department of Revenue is attempting to collect a default judgment it obtained against a third party from Xcaliber International, Ltd., LLC (“Xcaliber”). Xcaliber does not believe it owes the Department of Revenue for the default judgment, and the parties are currently litigating this matter in an administrative hearing with the Department of Revenue and in the Davidson County, Tennessee, Chancery Court. Unsatisfied with the way discovery is progressing in the state proceedings, Xcaliber filed this action against David Gerregano and Herbert Slatery in their official capacities (hereinafter, the “State”). Before the Court is the State's Motion to Dismiss. (Doc. No. 12.) For the following reasons, the Motion is granted in part and denied in part.

         I. ALLEGATIONS

         In 1998, Tennessee, among other states, settled a lawsuit with certain large tobacco product manufacturers that claimed the manufacturers hid evidence and misrepresented the effects of smoking. (Doc. No. 1 at 4.) As part of the settlement agreement, those large tobacco product manufacturers must pay Tennessee in perpetuity (the “Settling Manufacturers”). (Id. at 5.) In return, Tennessee passed an escrow statute, creating escrow accounts for tobacco product manufacturers who were not parties to the lawsuit (“Non-Participating Manufacturers”) to pay into. (Id.); Tenn. Code Ann. § 47-31-103(a)(2)(A). The escrow statute requires the Non-Participating Manufacturers to pay into an escrow account an amount substantially similar to the amount that the Settling Manufacturers have to pay under the settlement agreement. (Doc. No. 1 at 5); Tenn. Code Ann. § 47-31-103(a)(2)(A). This money is used to offset the increased costs for the Settling Manufacturers and can to be used to pay settlements for future lawsuits. (Doc. No. 1 at 5); Tenn. Code Ann. § 47-31-103(a)(2)(D). The Non-Participating Manufacturers receive the benefit of interest and appreciation from their deposited funds, and those funds get refunded after twenty-five years if the funds are not used to pay a settlement. (Doc. No. 1 at 5); Tenn. Code Ann. § 47-31-103(a)(2)(D).

         Both the Settling and Non-Participating Manufacturers must certify annually that they are in compliance with the escrow statute or the settlement agreement. Tenn. Code Ann. § 67-4-2602(a). The Commissioner of the Department of Revenue creates a directory “listing all tobacco product manufacturers that have provided current and accurate certifications conforming to the requirements of subsection (a) and all brand families that are listed in such certifications.” Id. at (b). If a tobacco product manufacturer is not included in the directory, it cannot sell cigarettes in Tennessee. Id. at (c)(2).

         The Commissioner cannot include in the directory a non-participating manufacturer nor brand family if the brand family, “whether or not listed by such non-participating manufacturer, has not fully paid into a qualified escrow fund governed by a qualified escrow agreement that has been approved by the attorney general and reporter.” Id. at (b)(2)(A). It also cannot include the non-participating manufacturer or brand family if there is an outstanding final judgment that “has not been fully satisfied for such brand family or such manufacturer.” Id. at (b)(2)(B).

         If the Commissioner removes a brand family or tobacco product manufacturer from the directory, the Commissioner must give fifteen days notice to the manufacturer and post public notice in the directory. Tenn. Code Ann. § 67-4-2606(a). That decision is subject to review as provided in Tennessee Code Annotated § 67-1-105 and the Uniform Administrative Procedures Act. Id. Under Tennessee Code Annotated § 67-1-105(a), the aggrieved party may request a hearing before the Commissioner within ten days of the removal from the directory. The Commissioner or a hearing officer shall allow the aggrieved party to present evidence at a hearing and issue findings of fact and conclusions of law. Id. at (b)-(d).

         The aggrieved party may then seek judicial review in the Davidson County Chancery Court. Tenn. Code Ann. § 4-5-322(b)(1)(A). Either party may ask to present additional evidence, and the court may grant that request if the party presents good reasons for failure to present that evidence before the agency. Id. at (e). If neither party presents additional evidence, the Chancery Court confines its review to the record created before the agency. Id. at (g). The court may reverse or modify the decision of the agency if, among other reasons, the agency's decision violates the constitution or a statute. Id. at (h). The reviewing court shall issue written findings of fact and conclusions of law on its decision. Id. at (j).

         1. The Sudamax Litigation

         In 2003, Sudamax manufactured the “Berkley” brand of cigarettes. (Doc. No. 1 at 6.) Sudamax used a different company, Samurai Industria e Comercio de Cigarros, Ltda. (“Samurai”), to import the cigarettes to the United States and sell the cigarettes in Tennessee. (Id.) A third company, Tantus, marketed the “Berkley” cigarettes. (Id.) Tantus deposited money into a Tennessee escrow account in 2003, pursuant to an agreement with Sudamax, but no further escrow payments were made. (Id.) The State sued Sudamax and Samurai in state court for the escrow payments through 2006. (Id.; Doc. No. 1-3.) Also named in the lawsuit is Centurian Industria e Comercio de Cigarros, Ltda. (“Centurian”), which certified itself as the manufacturer of the “Kingsley” brand of cigarettes, although Sudamax actually manufactured them. (Doc. No. 1 at 6; Doc. No. 1-3.) Tantus was not named in the lawsuit. (Doc. No. 1 at 6; Doc. No. 1-3.) Through this lawsuit, the State obtained a default judgment of $1, 864, 549.20 in unpaid escrow, $5, 593, 649.60 in penalties, and $48, 581.76 in attorney's fees. (Doc. No. 1 at 6-7; Doc. No. 1-6.) Sudamax was also prohibited from selling cigarettes in Tennessee for a period of two years. (Doc. No. 1 at 7; Doc. No. 1-6.)

         Eventually, Tantus began manufacturing the “Berkley” cigarettes in addition to selling “24/7” cigarettes in Tennessee. (Doc. No. 1 at 12.) The State did not pursue Tantus for payment of the default judgment it obtained against Sudamax.[1] (Id.) In 2013, certain actors at Tantus committed unrelated criminal misconduct and Tantus stopped selling cigarettes in Tennessee. (Id.)

         2. Xcaliber Purchases “Berkley” and “Berley”

         In July 2016, Xcaliber purchased from Tantus the right to produce several brands of cigarettes, including “Berkley” and “Berley.” (Doc. No. 1 at 12-13.) That month, the State asked Xcaliber if it intended to satisfy Tennessee's judgments against Sudamax, to which Xcaliber responded that it was not required to do so. (Doc. No. 1 at 13.) Xcaliber has not sold any “Berkley” or “Berley” cigarettes in Tennessee, although it sells “Echo” and “Edgefield” brands in the state. (Id.)

         On December 5, 2016, Xcaliber received a letter from the Department of Revenue notifying that Xcaliber would not be able to sell cigarettes in Tennessee effective December 16. (Id. at 14.) On December 19, Xcaliber filed a “Petition for Contested Case Hearing and Stay of Department Action with the DOR.” (Doc. No. 1 at 15; Doc. No. 1-33.) Tennessee law allows a tobacco manufacturer who is removed from the directory by the Department of Revenue to ask for review, under the procedures in Tennessee Code Annotated § 67-1-105, pursuant to the Uniform Administrative ...


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