United States District Court, M.D. Tennessee, Nashville Division
WAVERLY D. CRENSHAW, JR. CHIEF UNITED STATES DISTRICT JUDGE.
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.
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).
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).
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).
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).
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).
The Sudamax Litigation
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.)
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. (Id.) In 2013, certain actors
at Tantus committed unrelated criminal misconduct and Tantus
stopped selling cigarettes in Tennessee. (Id.)
Xcaliber Purchases “Berkley” and
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.)
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