King Mountain Tobacco Company, Inc. – $75mn Federal Excise Tax Bill Propels Native American Tobacco Grower into Chapter 11

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September 25, 2020 – King Mountain Tobacco Company, Inc. (“King Mountain” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Eastern District of Washington, lead case number 20-01808 (Judge Holt). The Debtor, a Native American owned and operated tobacco manufacturer, is represented by James L. Day of Bush Kornfeld LLP. 

The Debtor's petition notes between 50 and 100 creditors, estimated assets of $28.6mn and estimated liabilities of $92.4mn. Documents filed with the Court list the Debtor's five largest unsecured creditors as (i) The Department of the Treasury: Tobacco Tax &Trade Bureau ($75.5mn FET claim), (ii) The  Department of Agriculture ($5.6mn claim re judgment in U.S. District Court, E.D. Wash.) (iii) the State of Indiana ($3.5mn settlement agreement claim), (iv) The Food and Drug Administration ($2.9mn claim in respect of "Tobacco User Fees") and (v) the State of South Carolina ($2.5mn settlement agreement claim).

Goals of the Chapter 11 Filings

Having received a final notice and demand for the repayment of $75.5mn in outstanding federal excise taxes ("FET") within 30 days of receipt of that notice, and unable to repay the demanded amount, "the Debtor therefore made the difficult decision to commence this case, to provide it with an opportunity to address its outstanding obligations in a manner that allows it to remain in operation going forward."

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Thompson Declaration”) [Docket No. 4], Truman J Thompson, the Debtor's Chief Executive Officer, detailed the events leading to King Mountain’s Chapter 11 filing. The Thompson Declaration cites "hurdles" to business development on Native American Reservations, the dominant role of Big Tobacco in the marketplace, unscrupulous business partners and its "firmly held belief" in its tax exempt status under a Native American tax treaty as leaving it unable to pay a $75.5mn FET bill. 

The Thompson Declaration provides: “In establishing King Mountain, the Wheelers faced all the hurdles that make business development on Native American Reservations challenging

In February 2007, the Debtor received its permit to manufacture cigarettes from the Alcohol and Tobacco Tax and Trade Bureau (the 'TTB').

From the start, however, it was (and remains) difficult for King Mountain to secure distributors. The 'Big Tobacco' manufacturers have significant control over distribution channels, and generally bar their distributors from carrying lower priced competitors’ products.

As the Debtor sought to identify available distribution channels, it entered into agreements with individuals that were unable to deliver on promised levels of purchasing. This in turn led to cash flow difficulties in about 2009, which were exacerbated in late 2010 and early 2011 when the Debtor shipped 11 truckloads of product to a distributor in South Carolina for which the Debtor was never paid. This resulted in a loss to King Mountain of nearly $16 million in immediate cash flow.
These cash flow issues, combined with advice of counsel and the Debtor’s firmly held belief regarding the protections guaranteed in the Yakama Treaty, led to its very first failure to pay federal excise taxes ('FET'). [NB: The Debtor argues that the Treaty with the Yakamas of 1855 renders it "not subject to taxation;" see further below].

As of today, the amount owed totals about $75 million of principal, interest and penalties.

King Mountain has entered into final settlement agreements with Indiana, South Carolina and the Food and Drug Administration for prior unpaid taxes. King Mountain has also entered an interim repayment plan with the United States Department of Agriculture for outstanding taxes. King Mountain has remained current on all payments per the various settlement agreements. The amount owed related to unpaid FET is the only amount that has not been settled.

On behalf of the TTB, on August 25, 2020, the Department of the Treasury sent the Debtor a final notice and demand for repayment of the outstanding FET. According to the government’s calculation, the amount owed is $75,467,193.24, consisting of $38,330,298.27 of principal, $18,336,086.92 of interest, $9,135,348.90 for failure to file timely and $9,665,459.15 for failure to pay timely.

The government threatened to levy against the Debtor’ assets if payment was not made within thirty days of the Debtor’s receipt of the demand letter.
The Debtor is not in a financial position to repay the $75.5 million owed to TTB and a levy of the Debtor’s assets would likely result in the cessation of the
Debtor’s operations and the loss of jobs on the Yakama Nation Reservation. The Debtor therefore made the difficult decision to commence this case, to provide it with an opportunity to address its outstanding obligations in a manner that allows it to remain in operation going forward.”

The Yakama Nation Treaty

The Debtor's website prominently features its arguments as to tax exempt status; an argument which the Debtor has resoundingly lost; the U.S. Supreme Court refusing to hear the case which was decided in the Eastern District of Washington and affirmed by the Ninth Circuit Court of Appeals.

Nonetheless the Debtor provides: "As far back as Yakama’s history has been recorded the territory now referred to as the Cascade Mountain Range to the Columbia river and beyond, has been a part of the Yakama Nation ancestral holdings, this qualifies them as original owners of these territories.    

At the signing of the Treaty of 1855, which took place near present day Walla Walla, Washington, 14 tribes and bands were confederated into the Yakama Indian Nation. Of the original 10.8 million acres of Yakama domain, 1.3 million acres were set aside by the treaty of 1855 as the Yakama reservation. Today the Yakama nation consists of 10,200 enrolled tribal members.    

A distinct attribute of the Yakama Nation Treaty of 1855 is the specific language that was included within the minutes of the Treaty regarding the trade of tobacco. Trade not only Native to Native, but also Native to Non-Native. This allows the Yakama Nation, as well as its membership exclusive rights protected within our Treaty to continue on with tobacco trade free of injury.    

Due to the Nature of our Treaty language, King Mountain Tobacco takes an aggressive stand in exercising the right to travel and trade tobacco, 'Border to Border – Ocean to Ocean.' In 1855 Chief Kamiakin, when asked if Yakama’s wanted to trade for the non-indian tobacco he stated, 'we the Yakama people have our own tobacco, and we shall reserve the right to trade our tobacco, and the non-indian tobacco fee-less'."

About the Debtor

According to the Debtor: “King Mountain Tobacco Company Inc. is a Native American owned and operated tobacco manufacturer based in White Swan, Washington within the boundaries of the Yakama Nation. Delbert Wheeler, a Yakama tribal businessman, had a dream to manufacture premium tobacco products at an affordable price."

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