After NHCS’ state Supreme Court loss, millions in Smithfield fees headed to treasury

A multi-million dollar funding "gift" from Smithfield Foods will get redirected from the Attorney General to the state treasury as a result of a lawsuit from New Hanover County Schools. (Port City Daily/File)
A multi-million dollar funding “gift” from Smithfield Foods will get redirected from the Attorney General to the state treasury as a result of a lawsuit from New Hanover County Schools. (Port City Daily/File)

NEW HANOVER COUNTY — After a years-long court battle, New Hanover County Schools may end up getting a smidgen of funding out of a 20-year-old, $50-million Smithfield Foods Inc. and N.C. Attorney General agreement.

Instead of remaining under the control of the attorney general, the funds will be redirected to the state treasury, as mandated by a 2-1 N.C. Court of Appeals decision issued Tuesday.

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The original legal case surrounds whether or not millions that arose out of a July 2000 agreement between then-Attorney General Michael Easley and Smithfield Foods and its subsidiaries actually belonged to the public school system.

Under the N.C. Constitution, penalties must be remanded to public schools in the region being impacted by the violation. But under the legal agreement, Easley directed funds to be held in an escrow account, controlled and administered by his office to approved environmental causes.

A root issue in the case was whether the millions constituted a penalty. The state’s defense centered around the claim the money was offered “voluntarily.” NHCS argued the payments were punitive.

If it was ruled a penalty payment, the schools would get the money; if it wasn’t, the requirement to route the funds to public schools wouldn’t apply.

In April, the N.C. Supreme Court sided 6-1 with the attorney general, ruling the fees didn’t constitute a penalty, as explicitly stated in the original agreement. Because the legislature passed a new law the day before oral arguments before the N.C. Supreme Court in July 2019, the Court of Appeals addressed the applicability of the new law that redirected the funds away from the AG and to the state treasury.

The case

In the mid-to-late 1990s, flooded hog lagoons spilled millions of gallons of waste into public waterways. The N.C. Department of Justice had filed multiple lawsuits on behalf of the state against Smithfield Foods, and after months of negotiations, entered into a July 2000 agreement.

Part of the agreement involved a $50-million commitment to environmental enhancement activities, to be paid for 25 years. The agreement included the donation of $1 each hog that Smithfield had financial interest in the previous year, not exceeding $2 million a year.

AG Easley stipulated the funds would be deposited into an escrow account and office would control its dispersement. Then-Attorney General Roy Cooper established the Environmental Enhancement Grants Program in 2003, creating a panel that reviewed and made recommendations for funding environmental projects. In all, the AG’s office has awarded $25 million through the program.

New Hanover County Schools sued the attorney general in Jan. 2017 (taking over as plaintiff from the former plaintiff, who originally filed the case, Fancis De Luca) alleging the funds should have been given to the school system.

Article IX section 7 of the N.C. Constitution stipulates that penalties, forfitures, or fines collected for breach of penal laws of the state must belong and remain in the counties where the breach occurred, to be used exclusively for maintaining free public schools. It goes on to direct the N.C. General Assembly to place the fines in a state fund, to be distributed on a per-pupil basis in the affected counties.

Early on in the case, the N. C. Coastal Federation and Sound Rivers Inc motioned to intervene, citing support for the AG. The N.C. School Board Association filed a motion in support of NHCS. In July 2017, a district judge sided with NHCS and issued a preliminary injunction, demanding the AG stop distributions.

But in October 2017, a trial court sided with the AG. NHCS appealed, and in Sept. 2018, a divided Court of Appeals reversed the trial court’s decision, siding with the school system. The N.C. Supreme Court sided with the AG, reversing the Court of Appeals judgment.

At the time, New Hanover County Schools’ case heavily relied on the AG’s characterization of the agreement as a “settlement” in press releases. However, the N.C. Supreme Court relied on case law, stating “the label attached to the money” isn’t determinative — whether or not it’s a penalty.

The N.C. Supreme Court didn’t find any of the school system’s arguments persuasive, according to the order. The court described that the AG’s office went “light” on Smithfields after the agreement as “speculation and conjecture.”

Ultimately, the N.C. Supreme Court relied on the explicit language in the Smithfield-Easley agreement, which does not relieve Smithfield from enforcement action.

“The language in which the agreement is couched clearly demonstrates that the payments at issue in this case were not intended to punish Smithfield and its subsidiaries for any specific environmental violation or to deter them from committing any future environmental violation,” the April order concludes.

According to the order, the agreement was not tied to any particular violations. The N.C. Supreme Court majority did not opine on whether the AG lacked the authority to enter into the agreement in the first place — a point raised by NHCS — though, it did note the argument was an interesting one.

Justice Paul Newby (who was just elected Chief Justice in a lengthy and controversial race against incumbent Chief Justice Cheri Beasley) filed the lone dissent. Newby argued the settlement was drafted to circumvent the N.C. Constitution and violates state separation of powers principle by setting precedent that constitutional officers, like the AG, can “create and manage programs funded by ‘gifts’ received by the companies they police.”

To the treasury

Signed into law the day before oral arguments to the N.C. Supreme Court, § 147-76.1 directs “all cash gifts” be deposited into the state treasury.

In this week’s ruling (as remanded by the N.C. Supreme Court to consider any additional proceedings not inconsistent with its opinion) the Court of Appeals directed the funds to the treasury.

According to the Carolina Journal, both the plaintiff and defendant’s counsel agree the new ruling means an end to the AG’s so-called “slush fund.”

With the Court of Appeals’ 2-1 mandate that the funds get directed into the treasury, the AG loses oversight and control over them. More than one-third of the state’s general fund gets designated to schools, meaning the school system will get some portion of the funds.

It’s still possible the AG could repeal the order, according to the Carolina Journal, which would force justices to choose between funding for environmental causes or the public school system.

Read the orders below:

State Supreme Court April 2020 ruling by Johanna Ferebee Still on Scribd

State Court of Appeals December 15 2020 order by Johanna Ferebee Still on Scribd


Send tips and comments to Johanna Ferebee Still at johanna@localdailymedia.com

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