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A Miami Beach-based cigarette maker that participated in the huge tobacco industry settlement with 46 states has filed for Chapter 11 bankruptcy protection. It claims that unfair application of the settlement has driven it into bankruptcy court. But the company’s attorneys say that won’t keep Bekenton USA from paying millions of dollars it owes the states under the agreement, first implemented in 1998 and designed to reimburse the states for Medicaid costs related to treating sick smokers. Bekenton, which manufactures a brand of cigarettes called The Brave, filed for protection from creditors in Florida bankruptcy court last Friday, declaring $15.7 million in debts and $5.2 million in assets. In court filings, it said it has 32 employees in Florida and North Carolina. Bekenton owes at least $5.8 million to 16 states, court documents show. Miami Beach attorney Edward Bruce, who has represented the company in past legal matters, said those states may be among the top creditors. But he said that under the master settlement agreement with the states, which was signed by Bekenton in 2003, the company also owes money to the other 30 states participating in the landmark agreement. It’s unclear how much those other 30 states are owed. But California and New York are owed just over $1 million each, according to court records. Bekenton’s list of top 20 creditors shows that the company also owes just over $6 million to a tobacco importer, JTS of Orlando, and almost $2 million to Decoufle, a French company that manufacturers cigarette rolling machines. JTS principal Joe Machules declined to comment. The company’s bankruptcy attorney, Arthur Halsey Rice of Rice Pugatch Robinson & Schiller in Fort Lauderdale, said the debt is for foreign tobacco. Bekenton also owes tens of thousands of dollars to several vendors that provide basic materials such as filters and packaging elements, records show. Bekenton is a privately held company that started in Paraguay but moved its manufacturing plant to Mocksville, N.C., earlier this year. It is headquartered on Lincoln Road in Miami Beach. Repeated calls placed to Bekenton’s North Carolina offices seeking comment from the company’s president and sole shareholder, Stephen Falowski, went unreturned. STATES CAN SUE IN BANKRUPTCY The agreement bars litigation against participating tobacco companies by the participating states, as long as the companies pay certain fees — calculated by each company’s market share — to the 46 participating states and six U.S. territories. In return, the states agree not to pursue litigation against signatory companies. But the master settlement agreement specifies that states can sue participating cigarette makers to recover overdue MSA funds or can initiate litigation previously barred by the MSA if the company files for bankruptcy. Rice argued that unfair treatment of his client under the massive agreement led to the bankruptcy filing. “It just kills us,” Rice said of the situation. Rice alleges that Bekenton’s competitors have a different payment scheme under the MSA, which puts his client at a business disadvantage. In addition, Rice said, Bekenton has struggled with the costs of litigating the issue of the allegedly unfair payment arrangement. The cost of the litigation, which is pending in California, Kentucky and Puerto Rico, “is just staggering,” he said. “The main problem is that this company is not being treated fairly and equally with its competitor and therefore the competitor enjoys a huge competitive advantage,” Rice added. “And that is incompatible with the master settlement agreement and the notions of justice and fair play that we as Americans hold dear.” In a lawsuit filed this summer in U.S. District Court in Puerto Rico, Bekenton claimed that three cigarette makers — Premier Manufacturing Inc., Farmers Tobacco Co. and General Tobacco — were given special arrangements to pay their debts, while Bekenton was not given equal concessions. “The company wants to live up to its obligations under the MSA but under equal terms as its competitors,” Rice said. An August article published in the Bond Buyer newsletter reported that Bekenton won a challenge on a similar issue in Iowa involving General Tobacco. Earlier this year, the article reported, Bekenton won a temporary injunction that allowed it to continue selling cigarettes in Iowa even though the company owes the state government millions in MSA payments. No federal court cases filed by Bekenton could be located in California, but Bekenton filed a state contract suit in San Diego in June against the state of California. Those documents were not immediately available. No federal or state lawsuits could be located in Kentucky. Under the MSA, participating cigarette makers, including the nation’s five largest, are prohibited from targeting underage smokers, using cartoon mascots and sponsoring certain types of events. Every state adopted the MSA except Florida, Minnesota, Texas and Mississippi. Each of those four states settled with tobacco companies individually. STATES ‘MERE CREDITORS’ Rice said most of the price of a pack of cigarettes goes to MSA payments. Therefore, he said, if Bekenton’s competitor pays less money per pack of cigarettes it can undercut Bekenton’s sales with cheaper prices. Edward Bruce said the states making creditor claims in Bekenton’s Chapter 11 case will be treated the same as all other creditors because the states’ claims are based on contract rights derived from the MSA. “People lose sight of the fact that contract law applies,” he said. “And the states are mere creditors.” Bruce is also the principal of Big Sky Tobacco Co., which markets The Brave cigarettes. Bruce and his company share Bekenton’s corporate offices on Lincoln Road. Tina Talarchyk, president of the Bankruptcy Bar Association for the Southern District of Florida and the head of the bankruptcy group at Hodgson Russ in Boca Raton, said this case will likely involve lots of litigation to determine how much each state is owed. “If the debtor’s going to propose a plan, the debtor has to know how much he or she owes everybody,” Talarchyk said. Chief U.S. Bankruptcy Judge Robert A. Mark in Miami is presiding over the case. No U.S. trustee has been appointed to the case and a creditors’ committee has not yet been formed. Bekenton issued a news release earlier this year announcing it was moving operations from Paraguay to North Carolina and touting the efficiency of four new Decoufle cigarette rollers it had purchased. It’s unclear if the $1.9 million owed to Decoufle is an overdue payment for the machines. A spokesman for Decoufle, located near Paris, was unavailable for comment. Bekenton also owes more than $350,000 to the owner of its Mocksville plant, Alternative Brands Inc., filings show. Alternative Brands counsel Cris Stanley would only confirm to the Review that Bekenton leases the plant from Alternative Brands. Court filings show Bekenton’s lease with Alternative ends on Nov. 30; the company began construction on a new plant in Mocksville on Oct. 1. The company asked the bankruptcy court to allow it to continue making payments for the plant construction. Bekenton said in court filings it owes at least $372,000 for construction costs and without completion of the new facility, “the debtor will be unable to manufacture its product resulting in catastrophic interruption in the Debtor’s ability to meet demand for its product and thus generate revenue.” Bekenton also asked the court to continue paying its 32 workers, and asked to continue its marketing agreement with Big Sky Tobacco Co. Bekenton was incorporated in March 2004 in Delaware. A February 2005 article on the cigarette industry Internet site World Tobacco reported the company had severed all ties with its former principals in Paraguay before moving to the United States.

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