Tobacco manufacturer says distributor didn’t pay its bills – $5,257,644 Verdict

The plaintiff Virginia Brands is a cigarette manufacturer and produced cigarettes for the defendant Kingston Tobacco under a contract in which Kingston Tobacco agreed to pay for the cigarettes and associated regulatory charges incurred by Virginia Brands.

After Kingston Tobacco’s outstanding balance became delinquent, Virginia Brands terminated the parties’ agreement in January 2010 and filed suit against Kingston Tobacco in Halifax County Circuit Court.

Virginia Brands’ complaint sought $979,840 for unpaid cigarettes delivered pursuant to the parties’ contract and $176,649 for unused inventory and packaging, which the contract required Kingston Tobacco to pay upon termination. The complaint also alleged that Kingston Tobacco failed to pay various assessments charged by the federal government and states in connection with Virginia Brands’ manufacture of cigarettes, responsibility for which Kingston Tobacco assumed under the parties’ contract.

Those assessments included charges from the United States Food and Drug Administration, totaling $12,915, and escrow payments (estimated at the time to be $2,800,000) required under the 1998 tobacco Master Settlement Agreement with the states in which the cigarettes were sold.

Kingston Tobacco removed the case to the U.S District Court for the Western District of Virginia. Kingston Tobacco defended Virginia Brands’ claims by alleging that it had overpaid the state-required escrow payments between 2003 and 2008 and that it accordingly owed nothing to Virginia Brands.

Kingston Tobacco also asserted a counterclaim against Virginia Brands, seeking damages in the amount of at least $1,769,658 in overpayments for the state escrow requirements and seeking an accounting of the payments it made under the contract.

Kingston Tobacco also asserted at trial that it was entitled to damages associated with Virginia Brands’ termination of the parties’ contract and that it was entitled to a credit against any amounts it owed based on its purported ownership interest in the escrow accounts that Virginia Brands maintained pursuant to the Master Settlement Agreement.

After a two-day trial beginning Nov. 1, Judge Kiser ruled in favor of Virginia Brands. Kiser found that Kingston Tobacco failed to pay for the cigarettes that it ordered and was not entitled to an offset for overpayments. In fact, Judge Kiser found that Kingston Tobacco actually underpaid its Master Settlement Agreement-related obligations in the amount of $4,287,303.

The court also found that Kingston Tobacco failed to pay $919,865 in invoiced charges for cigarettes.
The court rejected Kingston Tobacco’s claim regarding the termination of the parties’ contract, finding that Virginia Brands properly terminated based on Kingston Tobacco’s refusal to pay for the invoiced cigarettes. The court rejected Kingston Tobacco’s claim to ownership of the escrow accounts, finding that Virginia Brands owned the accounts as a matter of law and that there was no evidence that Virginia Brands ceded its ownership interest to Kingston Tobacco.

[11-T-001]

Type of action: Breach of contract
Name of case: Virginia Brands LLC v. Kingston Tobacco Company Inc.
Court: U.S. District Court – Western District of Virginia
Case no.: 4:10CV00009
Date: Dec. 10, 2010
Tried before: Judge
Judge: Jackson L. Kiser
Verdict or Settlement: Verdict
Amount: $5,257,644
Attorneys for plaintiff: Bryan M. Haynes and Robert M. Luck, Richmond
Attorney for defendant: Joe Nanney, Raleigh, N.C.