STATE OF NORTH CAROLINA. IN THE GENERAL COURT OF JUSTICE WAKE COUNTY i SUPERIOR COURT DIVISION 16 CVS 12965 FRANCIS X. DE LUCA and Ry ‘THE NEW HANOVER COUNTY BOARD OF EDUCATION, Plaintiffs v. JOSH STEIN, in his capacity as Attorney General of the State of ORDER. North Carolina, and Defendant MEMORANDUM OF DECISION And NORTH CAROLINA COASTAL FEDERATION and SOUND RIVERS, ING., Intervenors ‘THIS MATTER comes before the undersigned upon cross-motions for summary judgment of the Plaintiffs! and Defendant. The Defendant is joined in this Motion for Summary Judgment by the Intervenors who, by order of the undersigned, have been allowed to intervene as a matter of right. ‘The Court, having considered the arguments of counsel, the amicus curiae brief of the North Carolina School Boards Association, and the record proper, concludes as follows: 1. This action arises out of an agreement entered between the Attorney General of North Carolina and Smithfield Foods, Inc. and a number of its corporate 1In a prior order of the Superior Court, the Honorable Robert Hobgood presiding, the Court found that Plaintiffs DeLuca and the New Hanover Board of Education each had standing. Although Defendant raises this issue anew in arguing the current motion, the prior order of the Court will not be revisited by the undersigned.subsidiaries on June 25, 2000 (“the Smithfield Agreement”). Smithfield Foods, Inc. and its subsidiaries owned and operated swine farms throughout North Carolina (‘the Smithfield Companies”). 2. The uncontested facts in this matter establish that the Smithfield Agreement requires Smithfield Companies, among other things, to commit $15 million for the development of Environmentally Superior Technologies for the management of swine waste in an environmentally sound manner and to “pay each year for 25 years an amount equal to one dollar for each hog in which the Companies . .. have had any financial interest in North Carolina during the previous year, provided, however, that such amount shall not exceed $2 million in any year.” The annual payments are to be deposited into an escrow fund, where the funds are made available to organizations and trusts for the purposes of “enhance[ing] the environment of the State, including eastern North Carolina, to obtain environmental easements, construct or maintain wetlands and such other environmental purposes as the Attorney General deems appropriate.” To administer these funds, the Attorney General established the Environmental Enhancement Grant Program (‘EEG"). Since 2000, the ENG program has awarded more than $24 million to 96 separate initiatives across North Carolina for purposes such as closing inactive animal waste lagoons, restoring wetlands, protecting wildlife habitats and improving water quality. [M. Shawn Maier Affidavit, 13] 3. The Plaintiffs contend that the annual funds paid by the Smithfield Companies pursuant to the Smithfiold Agreement are subject to the Civil Penalty | | | | | | | | | | | | | |and Forfeiture Fund as required by Article IX, Sec. 7 of the North Carolina Constitution, 4, Article IX, Sec. 7 of the North Carolina Constitution states that “the clear proceeds of all penalties and forfeitures and of all fines collected in the several counties for any breach of the penal laws of the State, shall belong to and remain in the several counties and shall be faithfully appropriated, and used exclusively for maintaining free public schools.” To implement Article IX, Sec. 7, the General Assembly, through N.C. Gen. Stat. § 115C-457.1, created the Civil Penalty and Forfeiture Fund to receive and disburse “civil penalties, civil forfeitures and civil fines” collected by State agencies. 5. In this action, Plaintiffs sock to enjoin the Attorney General from distributing payments made pursuant to the Smithfield Agreement other than to the Civil Penalty and Forfeiture Fund, and to compel the Attorney General to recover funds previously distributed by him through the Environmental Enhancement Grant Program for the past three years? 6. Plaintiff, in support of its motion, relies upon case law interpreting Article IX, Sec. 7 of the North Carolina Constitution, notably Craven County Board of Education v. Boyles, 343 N.C. 87 (1996) and N.C. School Board Association v. Moore, 359 N.C. 859 N.C. 474 (2008). Plaintiffs acknowledge that a three year statute of limitations applies. See N.C. Gen. Stat. 1-52; North Carolina School Board Association v. Moore, 160 N.C. App. 268, 284 rev. on other grounds 359 N.C. 474 (2005).7. In Boyles, the Director of the Division of Environmental Management assessed a civil penalty of $1,466,942.44 against Weyerhaeuser Company for violation of pollution control standards. Later, pursuant to a settlement agreement, Weyerhaeuser paid $926,000 to DEHNR. The settlement terms provided that the payment was for the “sole purpose of redressing any harm or risk, if any, to the environment or the public health of the people of North Carolina.” ‘The Craven County Board of Education brought suit, asserting that the money should instead be paid into the Civil Penalty and Forfeiture Fund as required by Axticle IX, Sec. 7. The Supreme Court held: [i}t is not determinative that the monies were collected by virtue of a settlement agreement, nor is it determinative that defendants and Weyerhaeuser stated that the payment not be construed as a penalty. ‘The monies were paid to settle the assessment of a penalty for violations of environmental standards Boyles, supra at 92. As such, the Court held that summary judgment in favor of the Board of Education was proper because there was no genuine issue as to whether the clear proceeds constituted a penalty as that term is used in Article IX, Sec. 7. Id. 8. In Moore, the Supreme Court considered whether “payments by an environmental offender (the City of Kinston] to fund a Supplemental Environmental Project in lieu of paying a portion of a civil penalty assessed by DENR are subject to Article IX, Sec. 7.” Moore, supra at 508. Supplemental Environmental Projects (“SEP”) were “projects that are beneficial to the environment and/or to public health that the defendant agrees to perform as part ofa settlement to an enforcement action.” Id, The Court held that the fact that the payment “was made to a third party pursuant to a SEP incorporated into a settlement agreement does not change the nature of the payment, The payment would not have been made had DENR not-assessed a civil penalty against the City of Kinston for violating a water quality law.” Id. at 509 9. The Attorney General, in defense of this action, asserts that payments made under the Smithfield Agreement are not subject to the Article IX, Sec. 7 of the North Carolina Constitution because the payments are not “penalties, forfeitures or fines collected . . . for any breach of the penal laws of the State.” Notably, the Attorney General contends that the payments associated with the Smithfield Agreement were not triggered by any enforcement action of DENR, were not made in compromise or in lieu of any civil penalties, fines or forfeitures, and were not made in exchange for forbearance of future enforcement actions and, therefore, the payments were not within the scope of Article IX, Sec. 7. Moreover, in further support of its position, the Attorney General argues that the Smithfield Agreement was not made between the swine producers and DENR ~ the sole agency authorized to impose and/or compromise water quality pollution fines and penalties, and the Smithfield Agreement contained a specific “non-release” clause that recited that nothing in the Agreement limited or released any enforcement actions against the companies for past, present or future violations of law. 10. In support of this position, the Attorney General submits affidavit testimony stating the following:a, Affidavit of Alan S. Hirsch, Special Deputy Attorney General and the Director of Consumer Protection in the N.C. Department of Justice, “As the primary negotiator of the Agreement, I can state unequivocally that the Agreement was not reached in order to settle any cases in which a civil penalty had been issued or might later be issued. Rather, the Agreement was negotiated and entered in order to improve the manner in which the waste from North Carolina's large hog industry was handled for the benefit of North Carolina’s environment, and to make other environmental improvements.” [{[ 5] He further testified that “at no time during these negotiations were any civil penalties mentioned or otherwise considered.” 10] Finally, he testified that “[t]he Agreement also contains a ‘no-release’ clause Because the Attorney General did not regulate the environmental practices and conditions at the Smithfield farms, we had no authority to release any claims by NC DEQ, or for that matter any other entity, public or private."[¥ 14] Affidavit of Daniel C. Oakley, Director of Environmental Division of N.C. DENR, 1993-2001. “As a primary negotiator of this agreement, and as evidenced by the ‘Reservation of Rights,’ Section VI, of the agreement, I know that the agreement was not reached in order to settle any case in which a civil penalty had been assessed by DENR. As Director of the Environmental Division, I know that no civil penaltybeing defended by attorneys in my Division was settled, compromised, or in any way impacted by the negotiation or execution of the Smithfield Agreement.” [f 21]. He further testified that “although there were Notices of Violation and Civil Penalty Assessments issued to various hog farms from 1995 to 2001, any Civil Penalty Assessments were resolved by other means and'were not part of the Agreement.”[] 24) Finally, he testified that beginning in January 2001, the new Attorney General Roy Cooper “continued to implement the terms of the Smithfield Agreement, and a new Secretary of DENR, William G. Ross, . ensured that DENR continued its robust enforcement activity against those of the State’s hog farms that were not in compliance with laws and regulations for discharge and non-discharge operations and NPDES permit conditions.”[f 25]. Affidavit of M. Shawn Maier, Attorney, Environmental Division of the Attorney General’s Office. “In response to the present suit, the Environmental Division of the Attorney General's Office reviewed its records to identify files of enforcement actions handled by the Attorney General's Office from 1995-2003 against any of the companies that were signatories to the Smithfield Agreement. The Environmental Division examined all the available, relevant enforcement files and found no evidence that entering into the Smithfield Agreement changed the way the Attorney General's Office pursued enforcementactions against any of the companies that were signatories to the Smithfield Agreement. There was nothing to indicate that any civil penalty assessed by DENR was reduced, remitted or settled because of or in anyway related to the Smithfield Agreement."[f 5]. Affidavit of Dennis Ramsey - Supervisor of Non-Discharge Branch of the Water Quality Section of the Division of Water Quality of DENR. 1985-2003; “As Supervisor of the Operations (Non-Discharge) Branch, I was aware of penalties assessed and other enforcement actions taken against owners and operators of swine farms. . . . Generally recommendations for assessments of a civil penalty originated with DENR’s Regional Offices and routed through DENR’s Central Office. During the period of 1995 to mid-2001, penalties were assessed by the Director of the Division of Water Quality. I made recommendations to the Division Director. Settlement authority was with the Division Director or the Environmental Management Commission through the remission process. Iwas made aware of cases that were settled and the terms of the settlements.” [ff 7] “I was never asked to modify DENR enforcement activities to address violations of laws and rules governing animal feeding operations or the unlawful discharge of hog waste to surface water as part of the Smithfield Agreement. To the best of my knowledge, the Smithfield Agreement was entirely separate from, and in no way related to, any pending or anticipated enforcement1. activity by DENR against any of the signatories to the Agreement.” [f 11) He further testified that “I am not aware of any instance where a civil penalty assessed by the Director of the [Division of Water Quality] was reduced, remitted or settled because of the Smithfield Agreement. Tam not aware of any instance where a Notice of Deficiency or Notice of Violation was withdrawn because of, or in any way related to, the Smithfield Agreoment. I am not aware of any instance where the Director decided not to assess a civil penalty because of, or in any way related to, the Smithfield Agreement.” [{] 12]. Christine Lawson, Program Manager for Department of Environmental Quality Animal Feeding Operations Program. Ms. Lawson's affidavit authenticates enforcement files maintained by DENR that are attached to the affidavit that tend to show that DENR assessed ninoteon civil penalties against the Smithfield Agreements signatories during tlie year before and year after the Smithfield Agreement was signed. The affidavit testimony tends to show that of the nineteen civil penalties assessed, eight came after the Smithfield Agreement was signed, and were based upon issues identified in Notices of Violation issued before the Smithfield Agreement was signed. See Lawson Aff. | 8, Tab B, Maier Aff. {{j 17, 18, Exhibits B & C. ‘The Court concludes that the Defendant, through these affidavits, has presented sufficient evidence to establish its right to judgment as a matter of lawthat, unlike the circumstances before the Court in Boyle and Moore, the payments made by the Smithfield Companies under the Smithfield Agreement were not “penalties,” “forfeitures,” or “fines” collected for “any breach of the penal laws of the State” and thus not within the scope of Article IX, Sec. 7 of the N.C. Constitution, 12. Because the Attorney General has presented sufficient evidence to establish his right to judgment as a matter of law, the burden shifts. Plaintiffs, in defending against the Defendant's motion for summary judgment, must present a forecast of the evidence which will be available for presentation at trial and which will tend to support their claim for relief. ° See, e.g. Campbell v. Board of Education, 16 N.C. App. 495 (1985) 13. The Court, upon a careful reading of the record, concludes that the Plaintiffs have failed to meet their burden of establishing their own entitlement to judgment or to forecast the existence of facts that support their claim or that rises to the level of creating a genuine issue of fact. Specifically, the Plaintiffs’ proffers are summarized as follows: a, ‘The Plaintiffs argue that the Smithfield Companies were “environmental violators” and that “there is no persuasive rational why the Companies would enter into such an agreement if not to avoid fines or penalties, which they had consistently been subject to for years.” (Pl. memorandum at p. 14) Plaintiffs further argue that “clearly the Smithfield Agreement reflects the purpose of the Companies to decrease the number of, to avoid entirely, or to reduce 10the consequences of enforcement actions in the future.” [Jd. at p. 13}. ‘As support for this, Plaintiffs proffer a letter written by counsel for the Smithfield Companies several months after the Smithfield Agreement was exeented stating that “Smithfield benefits because it is an opportunity to avoid enforcement actions by correcting deficiencies before they become enforcement problems.” [Id at p. 13] Plaintiffs also proffer press releases of the Attorney General announcing the first award of EEG grants stating'that “[t]he grants are part of a larger settlement reached with Smithfield Foods.” [Id (emphasis added by Plaintiffs).] Further, the Plaintiffs assert “there is little in the way of reasonable consideration for the Companies to commit to pay approximately $50 million for environmental enhancement if the ‘Agreement did not function as a settlement of something.” Plaintiffs point out that in the Smithfield Agreement, “the Attorney General only committéd to (1) pursue the implementation of Environmentally Superior Technologies...; (2) use his influence to expedite the permitting process, and (8) not to undertake any action in conflict with tho Agreement,” and that this, Plaintiffs claim, would be “insufficient consideration” unless there were some implicit or tacit agreement, although not recited, to forebear or settle enforcement actions [Id at p. 14). i4. The Plaintiffs argue that the payments required by the Smithfield Agreement are functionally indistinguishable from payments made to the Supplemental Environmental Project fund by the City of Kinston in Moore, supra at 608, which the Supreme Court found to be within the scope of Article IX, Sec. 7. [Pl. memorandum at p. 15] ‘The Plaintiffs argue that the Smithfield Agreement itself exceeds the constitutional powers and duties of the Attorney General and circumvents the statutory and constitutional provisions that provide the General Assembly the authority to spend public money and, therefore, the Agreement should be construed to require payment of those funds only to the Civil Penalty and Forfeiture Fund established under Article IX, Sec. 7 of the N.C. Constitution. [Pl. memorandum at p. 17-19) ‘The Court, in considering these arguments, finds them to be either unsubstantiated by coimpetent evidence, contrary to settled law, or not relevant. In particular: a. ‘The speculation that the Smithfield Companies entered Smithfield Agreement with hopes of avoiding future fines and penalties is simply that — speculation — and, even if true, would not be sufficient, as a matter of law, to recast the payments made under the Smithfield Agreement as “penalties,” “forfeitures” or “fines” collected “for any breach of the penal laws of the State.” Article IX, Sec. 7, The fact that 12the Attorney General in press releases labeled the payments as “part ofa larger settlement” does not convert the funds into payments within the scope of Article IX, Sec. 7. (‘It is neither the label attached to the money” nor “the [collection] method employed,” but “the nature of the offense committed that determines whether a payment constitutes a penalty.” Boyles at 92.) Here, there is simply no proffer of competent evidence by the Plaintiffs that' the payments made under the Smithfield Agreement were made to reduce, settle, remit or compromise any threatened or pending violation or to obtain forbearance by DENR of any anticipated enforcement action or that the payments had such an effect on any enforcement activity of DENR towards the Smithfield Companies. The payments made by the City of Kinston in Moore, namely to a Supplemental Environmental Project, and the payments made by the Smithfield Companies are distinct in one critical way: the City of Kinston was paying to settle a civil penalty already assessed against the City for violating a water quality law. Moore, supra at 509. This distinction is unrebutted by any proffer of evidence by the Plaintiffs. ‘The assertion that the Attorney General exceeded his constitutional authority seventeen years ago when the Smithfield Agreement was consummated is not pled in Plaintiffs’ amended complaint and, of course, the Defendant vigorously denies the Plaintiffs’ standing to 13assert such a challenge now and contests the legal basis of the challenge. But, even if the Defendant’s objections were overcome, it does not logically follow that the payments made under the Smithfield Agreement, if made pursuant to an agreement in excess of the Attorney General’s authority, would fall under the scope of Article IX, Sec. 7 of the North Carolina Constitution. The Court concludes this argument fails as a matter of law. 15. _"[W]hen the moving party presents an adequately supported motion, the opposing party must come forward with facts, not mere allegations, which controvert the facts set forth in the moving party's case, or otherwise suffer a summary judgment." Conner Co. v. Spanish Inns, 294 N.C. 661, 675, 242 S.E. 2d 785, 798 (1978). 16. The Court concludes that in response to the Defendant's adequately supported motion, the Plaintiffs have failed to meet their burden of coming forward with facts or a forecast of the evidence that would tend to support an essential element of their claim for relief, namely that the payments made under the Smithfield Agreement are “penalties,” “forfeitures” or “fines” “collected . . . for any breach of the penal laws of the State” or otherwise subject to requirements of Article IX, Sec. 7 of the North Carolina Constitution. 17. As such, the Court concludes that there are no genuine issues of material fact, and that the Defendant is entitled to judgment as a matter of law in the Defendant's favor. The Plaintiffs’ Cross Motion for Summary Judgment is 14denied. ‘The Plaintiffs’ Complaint is dismissed with prejudice. “The Preliminary Injunction previously entered is ordered dissolved. SO ORDERED, this the t2%" day of October, 2017. Paul G, Ridgeway, Superioi| Court Judg: 15Certificate of Service ‘The undersigned certifies that the foregoing was served upon all parties by depositing the same in the custody of the United States Postal Service, first class postage prepaid, addressed as follows: Paul Stam 510 W. Williams Street Apex, NC 27502 Jennie Wilhelm Hauser Special Deputy Attorney General P.O. Box 629 Raleigh, NC 27602 Brooks Rainey Pearson Southern Environmental Law Center 601 West Rosemary Street, Suite 220 Chapel Hill, NC 27516-2356 Deborah R. Stagner ‘Tharrington Smith, LLP P.O. box 1151 Raleigh, NC 27602 Allison B. Schafer P.O. Box 97877 Raleigh, NC 27624-7877 This the /2 day of October, 2017