Philip Morris Loses Bid to Cut $12-Billion Bond

Tobacco giant Philip Morris USA on Thursday lost a round in its battle to avoid paying a $12-billion bond in an Illinois consumer fraud case when state lawmakers rejected a bill to cap the cost of appealing huge damage awards.

The 7-3 vote by the executive committee of the Illinois Senate highlighted another day of intense maneuvers triggered by a $10.1-billion damage award last month in Madison County, Ill. The award included a court order that Philip Morris put up $12 billion to guarantee the judgment, plus interest, if it fails in its appeal. The bond is the largest required by a U.S. court.

The top U.S. cigarette maker says it can’t post the bond and pay the states $2.6 billion by April 15 as it must under terms of the 1998 legal settlement between the industry and state attorneys general.

The result has been a high-stakes game of chicken in which plaintiffs and anti-smoking groups have urged authorities to call the company’s bluff. State attorneys general simultaneously are vowing to sue the company and to ask trial Judge Nicholas G. Byron to lower the appeal bond.

Tobacco company debt ratings have been lowered and bond sales canceled since the March 21 verdict, as the financial repercussions have overshadowed legal issues in the Illinois class-action case, which was the first to accuse cigarette makers of deceptively marketing low-tar cigarettes.

In further fallout Thursday, California officials temporarily shelved plans to sell $2.3 billion in bonds backed by future tobacco settlement receipts. Missouri also scrapped a bond sale.

Fitch Ratings downgraded debt of Philip Morris parent Altria Group Inc. and its Kraft Foods subsidiary, as ratings firm Moody’s Investor Services had done earlier in the week.

Altria shares dipped 11 cents to $29.54 in after-hours trading on the New York Stock Exchange.

In more bad news for Philip Morris and No. 3 cigarette maker Brown & Williamson Tobacco Corp., a state court jury in St. Petersburg, Fla., on Thursday found them liable in a case filed by John F. Eastman, 74, a longtime smoker who suffers from emphysema. It appeared the $6.54-million verdict would be halved based on a finding that Eastman was 50% at fault. The firms said they would appeal.

The bill rejected Thursday by the Illinois Senate committee would have capped appeal bonds at 10% of any damage award above $1 billion. By that formula, Philip Morris’ bond in the “light” cigarette case would be lowered to just over $1 billion.

The company has pushed for a cap of no more than $100 million.

Since 2000, 16 states have adopted appeal bond caps of $25 million to $100 million, saying they did so to ensure that a huge verdict will not interrupt the flow of payments from the tobacco settlement of 1998.

Illinois may yet institute its own cap, some observers said.

There is “the opportunity for other language, other proposals” to be considered before the legislature adjourns in two weeks, said John Charles, an aide to state Sen. James F. Clayborne Jr., who sponsored the failed bill.

Philip Morris’ next best hope will be persuading Judge Byron or an appeals court to lower the bond. The company is expected to file its appeal of the verdict and the bond as early as today.

Some analysts say that although Philip Morris may be unable to pay the bond and the states, Altria certainly could.

“It may be literally true that Philip Morris alone” can’t pay the $12 billion, said Charles Linke, an emeritus professor of finance at the University of Illinois who is a consultant to plaintiffs lawyers in the light-cigarette case. But “Altria certainly can post the bond of $12 billion,” Linke said.

Last year Altria spent $11.5 billion to pay dividends and repurchase stock, and could suspend those activities several months if it had to, Linke said.

“For a large public firm to discontinue payments ... of its dividends is a very disruptive act, but on the other hand the case was lost and when you lose there are serious consequences.”