August 2005



In this month's "Notes & Trends:

ADMINISTRATIVE LAW
Judicial Law

• Equitable Estoppel. In the course of deciding that Minnetrista could redraw its Metropolitan Urban Services Area (MUSA) line as a part of a comprehensive plan update (and thereby place the appellant’s land outside the MUSA line), the Court of Appeals touched on the doctrine of equitable estoppel. The landowner argued that because the city collected a sewer assessment from a predecessor landowner, it was estopped from refusing MUSA status to the property. The court held that the landowner failed to show the requirements for estoppel, namely reliance (the landowner did not own the land when the sewer assessment was made), an act or omission by the city (the city only created on expectation of sewer hookup within the next 20 years), substantial change in position (little development on property) or affirmative misconduct by the city (none shown). Concept Properties, LLP, v. City of Minnetrista, A04-1414, __ N.W.2d __ (Minn. App. 04/19/05). www.lawlibrary.state.mn.us/archive/ctappub/0504/opa041414-0419.htm

Review By Certiorari. The Minnesota Supreme Court found a lack of subject matter jurisdiction to hear an attack on the validity of a zoning ordinance by way of a writ of certiorari. The Court noted that zoning decisions are legislative in nature and must be first litigated in district court by a declaratory judgment action. Review by certiorari is limited to review of the proceedings of a tribunal exercising judicial or quasijudicial functions under separation of powers principles. Dead Lake Association Inc. v. Otter Tail County, A03-750, __ N.W.2d ___ (Minn. 04/28/05). www.lawlibrary.state.mn.us/archive/supct/0504/opa030750-0428.htm

Arbitrary and Capricious. Where the Pollution Control Agency’s (PCA) issuance of a permit to the City of Princeton to construct a wastewater treatment plant that would discharge 1,905,000 gallons of waste per day into the Rum River was challenged, the Court of Appeals found that the record lacked substantial evidence that the city considered downsizing the treatment plant as an alternative. The court further found that the agency committed an error of law by failing to maintain high water quality, and that the PCA was arbitrary and capricious in not defining existing water quality before setting limits on the discharge. The court gave no deference to the PCA’s interpretation of the term "existing high quality" finding that the phrase was clear and capable of being understood, so that the agency’s expertise was not required to interpret it. Minnesota Center for Environmental Advocacy v. Commissioner of Minnesota Pollution Control Agency, A04-1324, __N.W.2d __ (Minn. App. 05/17/05). www.lawlibrary.state.mn.us/archive/ctappub/0505/opa041324-0517.htm

Notice. Two students were expelled from middle school for shooting a BB gun at another student near a bus stop. After expressing concern to school officials about the cost of legal representation, the parents signed a waiver of their right to a hearing. The commissioner of education affirmed the School Board’s expulsion of the students. The court first held that the commissioner had authority to review the matter even though it was not a decision following a hearing, since the hearing was waived. However, the court reversed the expulsion decision on the grounds that the waiver of the hearing was not knowing because the parents were not specifically advised in the Notice of Intent to Expel (as required by statute) that free or low-cost legal assistance may be available and that a legal assistance resource list is available from the Department of Education. The school did provide the parents with a copy of the statute that contained the legal assistance requirement in one of 17 sections, but the court concluded that that was not sufficient. In Re Expulsion of Z.K. and S.K., A04-1617, A04-1618, __ N.W.2d __ (Minn. App. 05/17/05). www.lawlibrary.state.mn.us/archive/ctappub/0505/opa041617-0517.htm

Burden of Proof. The PCA issued a wastewater treatment permit to the City of St. Cloud after determining (as recommended by an ALJ) that the Coon Rapids Dam pool was not a reservoir that would require a phosphorus discharge limit in the permit. The court determined that the agency’s decision that the dam was not a reservoir (and was not, therefore, included within the phosphorus rule) was not arbitrary even though the agency had changed a "rule of thumb" employed to determine whether a water body is protected by the phosphorus rule. The court allowed the PCA"considerable deference" in interpreting its own rule. The court also held that the agency (and the ALJ) had properly placed the burden of proof on the challengers to the decision (the MCEA). The challengers argued the city should have the burden since it sought the permit, but the court held that since the challengers sought to have a limit added to the permit, it was the party proposing action and had the burden of proof under an OAH rule. Minnesota Center for Environmental Advocacy v. Commissioner of Minnesota Pollution Control Agency, A04-1323, __N.W.2d __ (Minn. App. 05/24/05). www.lawlibrary.state.mn.us/archive/ctappub/0505/opa041323-0524.htm

Legislative Law

During the regular legislative session an omnibus state government bill, Chapter 156 (H.F. 1481/S.F. 1285), was adopted. Without much fanfare or attention, two very interesting APA-related amendments were added to this bill. These provisions essentially incorporate the provisions of H.F. 899/S.F. 1083 (state auditor rule suspension) and H.F. 116/S.F. 2114 (small business/small city rule exemption):

State Auditor Appellate Process. Article 2, sections 3 and 4 create a process for a local governmental unit (or a group thereof) to petition the state auditor to request an administrative rule waiver or a temporary suspension of a "procedural law" governing services delivered by that governmental unit. Before requesting a rule waiver, a formal APA waiver request must have been denied. This law sets up a detailed application and review process at the end of which the state auditor may waive a rule for between two and four years; a law is suspended until after the end of a legislative session following the year in which the exemption is granted. Any successful rule or law suspension is to be contained in an "agreement" reached between the state auditor and the petitioner.

Small Business/Small City Rule Exemption. Article 2, sections 9 and 10 create a new APA rulemaking exemption process which may allow a small business or a small city to elect to be exempt from certain rules. An agency must determine if the cost of complying with a proposed rule in the first year will exceed $25,000 for any single business with less than 50 employees or any single city with less than ten employees. If an agency so certifies (or an ALJ disapproves of an agency certification to the contrary) any small business or small city may file a statement with the agency claiming an exemption from the rule. The exemption is in effect until the rules are approved by a subsequent law, or the exemption is disapproved by an ALF Several circumstances are exempt from this process such as federal mandates, a governor’s exemption, MPUC rules, etc. This exemption process is applicable to any rules for which the record is still open on July 1, 2005.

— Hon. George Beck
Office of Administrative Hearings
— Michael Ahern
Dorsey & Whitney



August 2005



In this month's "Notes & Trends:

ALTERNATIVE DISPUTE RESOLUTION
Judicial Law

• Arbitration Provision Not An Opt-Out. Community Partners Designs, Inc. sued appellant, the City of Lonsdale, contending that the city breached an agreement to pay for engineering services. Appellant moved to compel arbitration under the terms of the contract between the parties and to stay the action, but the district court denied the motion. The Minnesota Court of Appeals held that where a contractual agreement contains a valid arbitration clause, a provision allowing either party to call for arbitration does not mean that either party can opt out of the agreement and negate the other side’s request for arbitration in order to bring its claims in district court. Where the parties’ agreement was valid and unambiguous, the dispute was within the scope contemplated by the arbitration agreement, and there was no waiver of the right to arbitrate, arbitration was required. Community Partners Designs, Inc. v. City of Lonsdale, 697 N.W.2d 629 (Minn. App. 2005).

• Email Notice of Arbitration Agreement. A former employee filed a state court action alleging he was discharged by General Dynamics Government Systems Corporation because of a medical condition, in violation of the Americans with Disabilities Act (ADA) and state law. The employer removed the case and sought to compel arbitration under the company’s new dispute resolution policy. The United States Court of Appeals for the 1st Circuit held under the peculiar circumstances of the case that the email announcement regarding the employer’s new dispute resolution policy was insufficient to put the employee on notice that the policy was a contract that extinguished the right to access a judicial forum for resolution of federal employment discrimination claims. While the use of email to notify employees satisfied the "written provision" requirement of the Federal Arbitration Act (FAA), the arbitration clause was not enforced because the email did not require the employee to acknowledge receipt and acceptance of the new policy or describe how the new policy affected the employee’s legal rights. Campbell v. General Dynamics Government Systems Corp., 407 F.3d 546 (1st Cir. (Mass.) 2005).

Arbitration Clause in Credit Card Agreements. Two Sears National Bank credit card holders brought an action in Alabama state court against the card issuer, alleging violations of the Fair Credit Billing Act (FCBA), as enforced by the Truth in Lending Act (TILA). Following removal, the card issuer moved to stay proceedings pending arbitration. Cardholders moved for jury trial on the question of whether agreements to arbitrate existed. Cardholders alleged that the arbitration agreement was unconscionable and could not be enforced because it prevents the pursuit of class action claims for violation of the FCBA and TILA. The United States District Court for the Middle District of Alabama denied all claims by the cardholders. The court found the arbitration provision enforceable even if it precludes cardholders from pursuing a class action claim under the FCBA and TILA. Also, the contract was not unconscionable because the arbitration agreement did not limit any of the substantive remedies under TILA that were available to the cardholders. Battels v. Sears National Bank, 365 F. Supp. 2d 1205 (M.D. Ala. 2005).

Darin T. Allen
National Arbitration Forum



August 2005



In this month's "Notes & Trends:

CIVIL LITIGATION
Judicial Law

Pierringer Release. Bunce, a 30-year iron worker, sued 14 asbestos product manufacturers, including API, for exposure resulting in mesothelioma. API brought a third-party action seeking contribution or indemnity from several other suppliers not sued directly by Bunce. Plaintiff severed the third-party action and was ready to proceed to trial against API and the other direct defendants, when on the morning of trial Bunce and API settled their case with a Pierringer release. Bunce died shortly after the settlement. The third-party defendants then moved for summary judgment on api’s claims for contribution, arguing that api’s Pierringer settlement with Bunce extinguished any claims for contribution. The district court denied the summary judgment motion but certified the issue as important and doubtful and the Court of Appeals consolidated the appeals of the third-party defendants.

Held, under the Pierringer release, API did not pay more than its fair share of common liability and cannot pursue claims for contribution against nonsettling third-party defendants. Reversed. Bunce v. API, Inc., A04-1348, A04-1394, 696 N.W. 2d 852 (Minn. App. 2005). www.lawlibrary.state.mn.us/archive/ctappub/0506/opa041348-0607.htm

Collateral-Source Offset. Martin Tezak was seriously injured while riding as a passenger in a car driven by defendant Bachke. He incurred more than $100,000 in medical expenses. His health insurer settled all claims for medical expenses related to the accident for $32,000. However, plaintiff purchased the health carrier’s subrogation rights and sued for special damages, including the full amount of medical expenses billed to plaintiff by his medical providers. The issue was submitted to the trial court on stipulated facts and the court determined that plaintiff could recover the full amount of the medical expenses billed.

The Court of Appeals recognized that the precise issue presented was one of first impression in Minnesota, but cited several analogous Minnesota cases in support of the district court’s award of the full amount of the medical expenses billed. Tezak v. Bachke, A04-2134, 698 N.W. 2d 37 (Minn. App. 2005). www.lawlibrary.state.mn.us/archive/ctappub/0506/opa042134-0621.htm

— Andrew T. Shern
Murnane, Conlin, White & Brandt PA



August 2005



In this month's "Notes & Trends:

CRIMINAL LAW
Judicial Law

Miranda; Juvenile; Waiver; Request for Parents. Under the totality of the circumstance approach, the Supreme Court finds that the appellant’s waiver of his Miranda rights was not knowing, intelligent, and voluntary. While in custody for a homicide investigation, the appellant asked for his mother three times before receiving a Miranda warning and ten times afterward. The appellant’s mother had, indeed, arrived at the station to inquire about the circumstances of her son’s arrest. Prior to securing the appellant’s statement, police engaged in some mischaracterizations of statements from codefendants. The evidence concerning the appellant and his mother showed that they had a close relationship, that she attempted to shield him from gang-related influences, and that she was a trusted and respected parent. While the Court reiterates that there is no per se rule in Minnesota requiring a parent’s presence before a juvenile waives his Miranda rights, the circumstances of this case suggest that the appellant’s repeated request for his parent were enough to render his Miranda warning ineffective. When combined with mischaracterizations as to codefendant information, the Supreme Court concludes that the police "crossed the line when securing a waiver from this juvenile suspect …". State of Minnesota v. Myron Demarlo Burrell, A03-1293 (Minn. 05/19/05). www.lawlibrary.state.mn.us/archive/supct/0505/opa031293-0519.htm

Evidence; Inappropriate Vouching By Expert. In a murder trial, testimony was elicited from a jailhouse snitch that he had heard the appellant confess to a shooting. The snitch suffered from mental illness. On cross-examination, a forensic psychiatrist who had examined the snitch was asked whether the snitch "would be capable of" confusing the appellant’s jailhouse comments. On redirect examination, the psychiatrist was asked whether, in her professional opinion, the snitch made up any of the information he provided to the police, to which the psychiatrist responded that the snitch was "being truthful."

Held, this was improper and inadmissible vouching testimony. Defense had not opened the door by asking whether the snitch was "capable" of confusing the information received from the appellant: such an inquiry was to competence, and not credibility, and the door to truthfulness had not been opened. From an expert, the prejudicial effect is heightened, especially in a criminal trial, where the court has a duty to monitor expert testimony. State of Minnesota v. Burrell, supra.

Evidence; Bruton Rule. The Minnesota Supreme Court clarifies the Bruton Rule, apparently agreeing with, without expressly adopting, the rule in U.S. v. Logan, 210 Fed.3d 820 (8th Cir. 2000), where substitution of the phrase "another individual" is employed, rather than the redaction disapproved in Gray v. Maryland, 523 U.S. 185 (1998). While redactions often draw undue attention to the defendant, other alterations of codefendants’ confessions will be examined on a case-by-case analysis to specifically determine the prejudice which the confessing codefendant’s offending statement causes the other defendant. State of Minnesota v. Kawaskii Blanche, A03-826 (Minn. 05/26/05). www.lawlibrary.state.mn.us/archive/supct/0505/opa030826-0526.htm

Crawford; Not Applicable to Exigent Circumstances/Excited Utterances. In a confrontation with police, the appellant’s wife was given a telephone to speak with her suicidal husband, the appellant. With coaching from the deputy, appellant’s wife attempted to dissuade the appellant from suicide. Appellant’s answers to appellant’s wife were repeated to the deputy. At trial, the district court permitted the deputy to testify regarding the appellant’s wife’s phone conversation with appellant during the confrontation. Appellant later called his wife to testify, apparently to rebut statements made by the deputy.

Held, Crawford’s definition of "testimonial" statements does not extend to the present circumstances. The statements of the appellant’s wife were made under exigent circumstances, were not police interrogation, and no objective witness would contemplate that such expressions would later be used at trial. Secondly, appellant waived his Crawford objection, as well as spousal privilege, by calling his wife to testify at trial. Finally, statements made by the appellant to his wife are excluded from the definition of hearsay because they are statements by a party opponent and statements made by appellant’s wife to the deputy also are admissible as excited utterances. State of Minnesota v. Jeffrey Allen Lasnetski, A04-785 (Minn. App. 05/17/05). www.lawlibrary.state.mn.us/archive/ctappub/0505/opa040785-0517.htm

Crawford; Child Victim Statements to Medical Professional. A five-year-old girl was brought to the police by foster parents, who suspected the appellant (the child’s father) of inappropriate touching. In response to a child protection report, Willmar police decided to have the child interviewed at Midwest Children’s Resource Center (MCRC) by a nurse practitioner, while a Willmar detective observed the interview and examination from another room. During the interview, the child incriminated the respondent.

Held, statements given by the five-year-old child during the MCRC examination and interview are not within the three types of statements barred by Crawford. The only category into which they fall is the third and broadest formulation of Crawford: statements made under circumstances which would lead an objective witness reasonably to believe that the statement would be available for use at a later trial. Construing the "objective witness" to be the five-year-old child, the Court of Appeals holds that there is "no indication that T.L.K. thought her statements might be used in a later trial," notwithstanding the fact that the examination may have been arranged by both the police and the child protection worker. In a very strong dissent, Judge Crippen notes that the "objective witness" standard appears to be "still more mischief that the state argues." Judge Crippen argues that by substituting the actual five-year-old in this case for an objective witness, as required by Crawford, the decision in this case constitutes a "far reaching and unwarranted rejection of the fundamental implications of the confrontation clause." State of Minnesota v. Edward Richard Krasky, A04-2011 (Minn. App. 05/24/05). www.lawlibrary.state.mn.us/archive/ctappub/0505/opa042011-0524.htm

Discovery; Codefendant Plea Bargains; In-Camera Analysis Required. It was error for the court to deny the defendant’s request to compel discovery of the state’s plea negotiations with codefendants. No attorney/client privilege attaches to communications between codefendants and the state. The defendant has a due process right, under Minnesota’s broad rules of discovery, to Brady/Giglio material. The court characterizes the appellant’s inquiry as to the codefendant’s plea negotiation "not as a discovery request, but as in invocation of his due process right." Following procedures used in reviewing traditionally confidential material such as trade secrets and medical records, the Minnesota Supreme Court suggests an in-camera review, with potential dissemination to defense counsel, pursuant to State v. Paradee, 403 N.W.2d 640 (Minn. 1987). State of Minnesota v. Burrell, supra.

Dual Representation; Duty to Inquire Insufficient; Prejudicial Conflicts Require Reversal. Appellant was a codefendant with his wife, both of whom were charged in a scheme to defraud their employer. At the request of the codefendants, the cases were consolidated for trial. Prior to trial, the wife’s attorney withdrew. On the first day of trial, the parties moved to allow the appellant’s attorney to jointly represent them, and a district court granted that request. The court did not engage in the "affirmative inquiry" required by Minn. R. Crim. Proc. 17.03 subd. 5. Instead, the trial judge allowed defense counsel to ask leading questions of the defendants simultaneously. When this error occurs, the burden shifts to the state to demonstrate beyond a reasonable doubt that no prejudicial conflict of interest existed. In examining whether a conflict existed, a review in court may engage in "informed speculation" with respect to prejudice. From the facts in this case, defense counsel was constricted in his efforts to the prejudice of the appellant, who lost the benefit of such defenses as being an unknowing participant, passive acquiescence, and inability to differentiate the roles of the parties against the prosecution’s theory of "package deal" guilt. State of Minnesota v. Charles Robert Walker, A04-1099 (Minn. App. 05/17/05). www.lawlibrary.state.mn.us/archive/ctappub/0505/opa041099-0517.htm

DWI/Implied Consent; Felony DWI; Qualified Predicate Convictions. The Supreme Court holds that in sentencing the appellant for felony DWI, qualified criminal predicate convictions must first be allocated for the purpose of enhancement of the current driving-while-impaired felony charge, and the same predicate convictions cannot be used a second time in determining the offender’s criminal history score. Qualified criminal predicate convictions in excess of those used for enhancement are available in the computation of the offender’s criminal history score on the felony DWI offense. Appellant’s sentence is modified downward accordingly, from 72 months to 66 months. Also, the Supreme Court effectively reverses the Court of Appeals’ decision that at sentencing, a prosecutor can select from the qualified prior impaired-driving incidents those to be used to enhance the current offense level and those that remain for criminal history computation; this the Court found "fraught with potential for inconsistent application and manipulation." Where there are multiple qualified criminal and civil prior impaired-driving incidents available for calculating the sentence, prior criminal convictions should be used before qualified civil incidents. State of Minnesota v. Robert S. Zeimet, A03-273 (Minn. 05/26/05). www.lawlibrary.state.mn.us/archive/supct/0505/opa030273-0526.htm

Sex Offender Registration; Right to Stipulate to Status; "Predatory Offender" Language Improper. In a prosecution under Minn. Stat. §243.166, appellant stipulated to two of the four elements of the offense: (1) he was a person required to register as a predatory offender and (2) the time period during which he was required to register had not lapsed. Appellant did not stipulate to the element that he knowingly violated any of the predatory sex offender registration requirements. At trial, the state introduced into evidence prior predatory offender registration documents, some of which did mention his underlying conviction. Nineteen exhibits were "predatory offender information forms," completed by appellant and signed by a probation officer. Appellant objected to the admission of the documents.

Held, appellant has a right to stipulate to the prior conviction which creates a duty for him to register. Hence, the state was required to prove only that the appellant knowingly failed to register his new address. The predatory offender information forms, however, tend to prove that the appellant had knowledge of his duty to register and do not underline the stipulation. The captions used in these documents, however, such as "predatory offender," or "sex offender," tended to undermine the stipulation, and it was an abuse of discretion for the trial court to allow these captions to be submitted, unredacted, as well as to allow any use of these terms by the prosecution. The error, however, is deemed to be harmless. State of Minnesota v. Richard Robert Wemyss, A04-1001 (Minn. App. 05/24/05). www.lawlibrary.state.mn.us/archive/ctappub/0505/opa041001-0524.htm

Sentencing; Blakely; Stay of Imposition; Retroactivity. Appellant was convicted in 2002 for a felony offense, and received a stay of imposition. In 2004, at a probation revocation hearing, appellant admitted his violation, and was given a 36-month executed sentence, which included upward durational departures based on three aggravating factors.

Held, Blakely applies retroactively to the appellant’s pending appeal of the sentence imposed. Because the district court stayed imposition of the appellant’s sentence, appellant could not challenge the duration of the sentence until his sentence was imposed at the probation revocation hearing. Because the district court imposed a sentence which was an upward durational departure, the appellant’s 6th Amendment rights to a jury trial were violated. State of Minnesota v. Anthony J. Beaty, A04-1798 (Minn. App. 05/24/05). www.lawlibrary.state.mn.us/archive/ctappub/0505/opa041798-0524.htm

Sentencing; Pretrial Admission; Jury Waiver. In a conviction for first-degree criminal sexual conduct, involving particular cruelty, the defendant pled guilty and received an upward duration departure of 216 months in prison. In examining the "admission exception" to the general rule in Blakely, the Court of Appeals finds that any such admission must be accompanied by a "full scale, on the record oral or written" waiver regarding such rights. Although the appellant did admit to the rather severe aggravating acts of sexual assault in this case, the district court did not specifically inform him of the right to a jury determination on those aggravating facts which would support that upward durational departure. Because the appellant did not expressly waive such rights, his admissions at a plea hearing should not be considered to fall within the exception to the rule in Blakely. Sentence is reversed and remanded. State of Minnesota v. Douglas A. Detman, A04-975 (Minn. App. 05/24/05). www.lawlibrary.state.mn.us/archive/ctappub/0505/opa040975-0524.htm

Sentencing; Felon in Possession; Not Crime Against Person; Consecutive Sentence Reversed. Appellant had been charged with a string of aggravated robbery counts, involving multiple movie theaters, using a hand gun. In 2000, appellant pleaded guilty to one count of first-degree aggravated robbery and one count of felon in possession of a firearm. As part of the plea agreement, appellant was informed that he would be sentenced to 108 months for the aggravated robbery charge and 60 months consecutively for the felon-in-possession charge. Without deciding appellant’s underlying post conviction claim, the Court of Appeals holds that possession of a firearm is not a "crime against a person" which would allow for the permissive imposition of consecutive sentences under the guidelines. The guidelines themselves do not define what constitutes a crime against a person. Minnesota case law makes this determination depending upon the nature of the underlying conduct, not how the crime is nominally classified. For example, under Minn. Stat. §64.713, being a felon in possession is considered a violent crime for purposes of increased sentences. Byron Kendall Lewis v. State of Minnesota, A04-1476 (Minn. App. 06/13/05). www.lawlibrary.state.mn.us/archive/ctappub/0506/opa041476-0614.htm

Sentencing; Patterned Sex-Offender. The Court of Appeals holds that Blakely is applicable to Minnesota’s Patterned Sex-Offender Law under Minn. Stat. §609.108, Subd. 1. Under that law, the court must impose a sentence of not less than double the presumptive sentence under the Guidelines if the court finds that the following three factors are met: (1) That it reasonably appears that the crime was motivated by the offender’s sexual impulses or was a part of a predatory pattern of behavior that had criminal sexual conduct as its goal; (2) the offender is a danger to the public safety; and (3) based on a professional assessment, the offender needs long-term treatment beyond the presumptive term of imprisonment and supervised release. Because a jury did not find these factors, the sentence is reversed. State v. Charles Edward Boehl, A04-583 (Minn. App. 06/07/05). www.lawlibrary.state.mn.us/archive/ctappub/0506/opa040583-0607.htm

Sentencing; Life Without Parole; Prior Heinous Crime Subject to Blakely. Appellant was convicted of first-degree murder, for which the presumptive sentence is life with the possibility of parole. For Blakely purposes, that is the "statutory maximum." However, when sentencing for first-degree murder when the defendant has a prior "heinous crime," committed with "force of violence," Minn. Stat. §609.106, Subd. 1(3) requires a sentence of life without parole. Held, a judge cannot enhance a defendant’s sentence beyond life based on a prior conviction alone, unless it is clear that the jury found or the defendant admitted that the prior crime was committed with force or violence. In this case, the court used the appellant’s own admission from his prior plea hearing to establish the element of force: Blakely therefore is satisfied. State v. Pierre Leake, A04-57 (Minn. 06/23/05). www.lawlibrary.state.mn.us/archive/supct/0506/opa040057-0623.htm

Search and Seizure; Dog Sniff; Storage Area "Search Requiring Reasonable Suspicion." A BCA agent had observed suspicious activity at a mini storage unit including the following: a white car bearing no license plate entering the facility left and reentered as the driver stared at police who were dressed in "raid gear." An SUV appearing at the same time displayed plates belonging to appellant’s brother, Benjamin Carter, whom a St. Paul police officer recognized from a drug-related investigation. The officer contacted the mini storage manager, who stated that the appellant and Benjamin Carter each rented two units at the facility, and sometimes visited the unit several times a day. Four weeks after the initial observation by the BCA agent, St. Paul police arranged for a dog sniff, securing permission from the management to enter the fenced area immediately outside of appellant’s units, where a dog sniff indicated the presence of a controlled substance inside one of the units.

Held, within the meaning of Article 1, Section 10 of the Minnesota Constitution (as opposed to the 4th Amendment), a dog sniff outside of a self-storage unit is a search. Although the typical standard for suspicion necessary to support a search is probable cause to believe that a crime is committed, the Minnesota Supreme Court follows Pennsylvania and adopts the following: a dog may be deployed to check outside of a storage unit if the police are able to articulate reasonable grounds for believing that drugs may be present in the place they seek to test, and the police are lawfully present in the place where the canine sniff is conducted. Because police in this case did not articulate reasonable suspicion that drugs were present in the appellant’s storage unit, the Supreme Court holds that deployment of the drug detection dog in this case was an unreasonable search under the Minnesota Constitution, and the evidence is suppressed. State v. Andre Lashon Carter, A03-1215 (Minn. 06/09/05). www.lawlibrary.state.mn.us/archive/supct/0506/opa031215-0609.htm

Search and Seizure; Parked Car; Emergency Lights; Partial Block; Seizure. Police responded to a call from several customers to a Kohl’s Department Store that someone was unconscious in a car legally parked in the store’s lot. An officer arrived, activated her emergency lights, and partially blocked appellant’s vehicle. Neighboring parking spaces were vacant and the officer testified that the appellant would have been able to leave by backing up. Upon approaching the vehicle, the officer noticed that the appellant was sitting in the driver’s seat, apparently unconscious. Her head was against the window, her hands were in her lap, and she was breathing. The officer had to pound on the window several times to arouse the appellant. Upon opening the door, the officer observed indicia of intoxication and arrested appellant.

Held, appellant was legally seized when this uniformed officer used emergency lights to partially block movement, awoke the occupant, and instructed her to unlock the door. The officer acted reasonably in conducting a limited emergency check on the welfare of the occupant when he received citizen reports of an unconscious occupant in a vehicle. Evidence of criminal activity that was reasonably apparent in conducting the emergency welfare check is not the result of an improper search or seizure and is admissible. State v. Christine Louise Lopez, A04-1136 (Minn. App. 06/07/05). www.lawlibrary.state.mn.us/archive/ctappub/0506/opa041136-0607.htm

Conspiracy; Mistake of Law; Reliance on Advice of Counsel; Reliance on Official Interpretation. Following Cheek v. United States, the Minnesota Supreme Court holds that in a prosecution for conspiracy to procure unlawful voting and conspiracy to commit forgery, appellant has a right to present evidence that he relied on his attorney’s advice and on the Dakota County Attorney’s letter, with an official interpretation, regarding unrelated voter registration by a Minneapolis police officer. In this case, appellant had arranged for 93 employees to list on their voter registration cards their place of employment, a strip bar. In the Minneapolis police officer case, the Dakota County Attorney had found that there was no violation of election law for Minneapolis police to list their place of employment as their residence. The court specifically notes, following Cheek, that there is no requirement that the appellant’s belief be objectively reasonable in order for it to be presented to the jury. State v. Richard Joseph Jacobson, A03-1782 (Minn. 06/09/05). www.lawlibrary.state.mn.us/archive/supct/0506/opa031782-0609.htm

Conditional Release; Prior Juvenile Adjudication. A prior juvenile adjudication is not a previous sex-offense "conviction" mandating a ten-year conditional release term under Minn. Stat. §609.109, Subd. 7. That subdivision does not define "conviction"; however Minn. Stat. §609B.245, Subd. 1 states that no adjudication upon the status of any child in the jurisdiction of the juvenile court shall be deemed a conviction of crime. Because the Legislature has specifically included both convictions and juvenile adjudications while drafting other provisions of the law, this suggests that the Legislature did not intend to include juvenile adjudications in the context of mandatory conditional release for sex-offenders. State v. Boehl, supra.

Verdict; 1st Degree Murder vs. 2nd Degree Murder; Not Legally Inconsistent. Following a jury trial, the appellant was found guilty of first-degree premeditated murder, and not guilty of second-degree intentional murder. The Supreme Court finds that these verdicts are not legally inconsistent, while also noting that "nothing in the Constitution requires consistent verdicts." State v. Leake, supra.

Right to Silence; Waiver; Should Be on Record. Although Minnesota does not require a trial court to confirm with the defendant on the record that his or her waiver of the right to counsel is knowing and voluntary, "We repeat this cautionary instruction. With adult defendants and even more so with juveniles, even after the attorney has laid the proper record, district courts should get the defendant’s personal acquiescence to the waiver on the record (in-camera or open court; whatever the district court decides)." In Re C.J.W.J., A04-1200 (Minn. App. 06/21/05). www.lawlibrary.state.mn.us/archive/ctappub/0506/opa041200-0621.htm

— Frederic Bruno
Frederic Bruno & Associates



August 2005



In this month's "Notes & Trends:

EMPLOYMENT & LABOR LAW
Judicial Law

Unemployment Compensation. The Minnesota Court of Appeals recently ruled upon two cases involving unemployment compensation benefits for commissioned sales personnel.

In the first, the court held that the provision of the unemployment compensation statute that bars benefits for an employee who was paid "solely" on commissions does not apply if the employee receives fringe benefits in addition to commissions. Minn. Stat. §268.035, subd. 20(26). The employee’s compensation was based solely on commission, but he also received a number of fringe benefits valued at approximately $8,400. Because of the fringe benefits, he was not compensated "solely" on commission and, therefore, was not disqualified from receiving unemployment benefits after his employment terminated. Samuelson v. Prudential Real Estate, 696 N.W.2d 830 (Minn. App. 2005). www.lawlibrary.state.mn.us/archive/ctappub/0505/opa041416-0531.htm

The modification of a sales person’s compensation from straight salary to commission constituted a "good reason" for the employee to quit and receive unemployment compensation benefits in a second case. Although the employee may have received more compensation under the commission arrangement, depending upon the volume of sales, a revision of the pay package created a "transfer of risk," which justified the employee’s resignation while entitling him to receive unemployment benefits. D & D Associates, Inc. v. Skjod, A04-1544, 2005 WL 1331227 (Minn. App. 2005) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0506/opa041544-0607.htm

Discrimination. The doctrine of equitable tolling revived a claim of age and sex discrimination by a former air traffic controller in Minnesota. The controller, a man, had been fired in 1981 by President Reagan due to participating in an unlawful strike. He claimed that he was wrongfully passed over when President Clinton lifted a rehiring ban on former strikers. But he did not assert an internal claim of discrimination within the required 45 days of the alleged discrimination in 1998. The 8th Circuit reversed dismissal of the lawsuit, holding that his filing of a charge of discrimination four years later may be timely because he did not know that rehiring was taking place until four years later. The case was remanded to the district court in Minnesota for an evidentiary hearing. Coons v. Mineta, 410 F.3d 1036. (8th Cir. 2005). http://caselaw.lp.findlaw.com/data2/circs/8th/043065p.pdf

An award of actual damages and front pay for a disability discrimination claimant with multiple sclerosis was reversed by the 8th Circuit. While liability was upheld for failure to accommodate under the Americans with Disability Act (ADA), the employee is entitled only to nominal damages and reinstatement, rather than any compensatory damages or front pay, and reduced attorney’s fees due to the "limited success on the merits." Voeltz v. Arctic Cat, Inc., 406 F.3d 1047 (8th Cir. 2005).

Contracts. A noncompete clause in connection with the sale of a business was construed narrowly to bar a claim of improper competition but remanded to determine if there was an inappropriate divulgence of confidential information. The son of the former owner of a weed removal business was not barred from engaging in retail sales of weed-related products because the contract unambiguously applied only to application of weed removers, not sale of goods. But summary judgment for the former owner was reversed and the Duys violated a provision of the sales contract prohibiting them giving out customer information that may be used for competitive purposes. Duy v. Lake Weed-A-Way, Inc., A04-1721, 2005 WL 1154291 (Minn. App. 2005) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0505/opa041721-0517.htm

But an employment agreement was held to be ambiguous and a resigned employee, thus, entitled to more compensation than was called for in the agreement. The documentation stating that the employee’s compensation package would be a certain amount was ambiguous because the company added terms to it that the employee never saw. But the employee is not entitled to attorney’s fees under Minn. Stat. §181.14, the "prompt payment" statute, because he did not make a "post-resignation" demand for payment. Outdoor Environments, Inc. v. Maro, A04-1332, 2005 WL 102898 (Minn. App. 2005) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0505/opa041332-0503.htm

A technician at a veterinary clinic was entitled to unemployment compensation benefits after she was fired in retaliation for refusing to sign a waiver of a deferred compensation agreement. The technician, who was a 50 percent investor in the facility, was compensated through a deferred compensation agreement since she was not entitled to be an owner of the business because she was not licensed. However, when the business was put up for sale, she refused to sign a waiver of the deferred compensation agreement, which led to her discharge. Reversing the decision of the commissioner of the Department of Economic Development, the appellate court held that she was retaliated against for refusing to sign the waiver, rather than for substandard performance as claimed by the employer, and thus was entitled to unemployment compensation benefits. Walters v. Midway Animal Hospital, A04-1600, 2005 WL 1389390 (Minn. App. 2005) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0506/opa041600-0614.htm

Whistleblowing. A common law cause of action for wrongful termination in violation of "public policy" exists under Minnesota law, independent of the whistleblower statute, according to a ruling of the Minnesota Court of Appeals. Reexamining prior case law, the court held that the "public policy" tort, which preceded enactment of the whistleblower statute, is still legally cognizable if an employee is terminated for refusing to follow an illegal directive. But the complaint in this case was dismissed because the employee, who alleged that he was terminated because of his role as a "member" in the nonprofit corporation, did not state that he had been terminated because he failed to perform an illegal act directed by management. Nelson v. Productive Alternatives, Inc. 696 N.W.2d 841, 844 (Minn. App. 2005). www.lawlibrary.state.mn.us/archive/ctappub/0505/opa041691-0531.htm

— Marshall H. Tanick
Mansfield, Tanick & Cohen, PA



August 2005



In this month's "Notes & Trends:

ENVIRONMENTAL LAW
Judicial Law

• Site Cleanup; State Action Deferred Pending Active EPA Proceedings. The U.S. District Court sitting in Minnesota granted defendant’s Motion to Stay Proceedings after the EPA showed clear intent to initiate cleanup activities at the contaminated site, thereby partially resolving the underlying dispute.

Sixty-seven acres of land located in Cass Lake, Minnesota were the site of wood processing operations from the 1950s until 1985. The processing and chemical treatment of wood led to the release of numerous hazardous substances into the soil, groundwater, and air, and created various toxic waste byproducts. In 1984 the EPA placed the site on the National Priorities List and ordered International Paper Company, which operated the wood treatment facilities, to conduct remediation and monitoring activities. In August 2004, after years of removal, restoration and testing activity by International Paper, the EPA issued a Unilateral Administrative Order citing ongoing health and ecological concerns as well as requiring International Paper to perform additional testing and produce a Risk Assessment Report.

Plaintiffs, current owners of portions of the contaminated land, brought suit against the former landowners, chemical manufacturers and paper processors seeking site remediation and damages. While the suit was pending, the EPA proposed site cleanup activities involving approximately 40 homes located near the contaminated site.

Determining that the EPA s recent proposed site cleanup of the affected homes and International Paper’s imminent Risk Assessment Report could have a significant impact on the pending litigation, the district court granted defendant’s motion to stay the proceedings until after International Paper completes the Risk Assessment Report and the EPA responds. Bennett v. Int’l Paper Co., 2005 WL 1459656 (D. Minn. 2005).

Judicial Review of EPA Decision; EPA Bacteria Limit Violates Clean Water Act. In an opinion issued June 23, 2005, the U.S. District Court in Minnesota ruled that the EPA improperly approved a faulty revision of the Total Maximum Daily Load ("TMDL") of fecal coliform bacteria for 20 polluted southeastern Minnesota waterways and remanded the matter to the EPA to recalculate the water quality standards.

Pursuant to its duties under the Clean Water Act, the Minnesota Pollution Control Agency ("MPCA") developed a TMDL for 20 polluted water segments throughout the Lower Mississippi River Basin that violated the fecal coliform bacterial quality standard. The Minnesota Center for Environmental Advocacy ("MCEA") challenged the methodology used to calculate the TMDL and requested a contested hearing. The MPCA denied the hearing request and submitted the TMDL to the EPA , which approved it.

The MCEA filed suit alleging that the TMDL was calculated incorrectly and did not return the waterways to the quality standards required by the Clean Water Act.

On the MCEA’s motion for summary judgment, the district court agreed with the MCEA’s position that the TMDL was calculated incorrectly using basin-wide average readings instead of waterway-by-waterway figures, the phased implementation approach was not authorized by the Clean Water Act, the TMDL did not include a required margin of safety for unknown factors, and improperly accounted for straight pipe sewage disposal systems. MCEA’s motion for Summary Judgment was granted with an order for the EPA to revise the TMDL. Minnesota Center for Environmental Advocacy v. United States Environmental Protection Agency, 2005 WL 1490331 (D. Minn. 2005).

Enforcement; New Source Review. A federal appeals court alternately upheld, vacated, and remanded various portions of the EPA s 2002 ruling determining when power plants and refineries must install newer pollution control equipment.

Industry challengers alleged that the EPA s ruling interpreted the term "modification" too broadly, while government and environmental challengers argued that the term was interpreted too narrowly. The court upheld the majority of the 2002 ruling but found that two provisions were based on "impermissible interpretations" of the Clean Air Act. These provisions, concerning the method of measuring changes in emissions and exemption of certain projects from New Source Review, were vacated by the court. Additionally, the court determined that the agency acted arbitrarily and capriciously when it exempted some pollution sources from emissions record-keeping requirements and remanded these provisions to the EPA for further clarification. State v. E.P.A., 02-1387, ___ F.3d ___ (D.C. Cir. 2005).

Administrative Action

Enforcement; EPA Seeks End to National Park Haze. The EPA announced steps to curb emissions from power plants and other sources that have shrouded national parks and wilderness lands in a health-impairing, visibility-limiting haze. Under the new rules power plants located in the 28 easternmost states and the District of Columbia will have the option of following the less stringent, Clear Air Interstate Rule while pollution sources located in the other states will be required to install the best available retrofit technology to control emissions. Compliance is required by 2018 in accordance with plans available by 2007.

— Robert Devolve
Leonard, Street and Deinard



August 2005


FEDERAL PRACTICE
Judicial Law

• Supplemental Jurisdiction; Pendent Parties; Diversity. In December, 2004, this column noted the Supreme Court’s grant of certiorari in Ortega v. Star-Kist Foods, Inc. and Allapattah Services, Inc. v. Exxon Corp. to determine the scope of supplemental jurisdiction under 28 U.S.C. §1367 in diversity cases.

In Ortega, the dispute involved so-called pendent plaintiffs whose claims were for less than $75,000. At issue in Allapattah Services, Inc. were claims by members of a plaintiff class in a diversity class action where some class members’ claims were for less than $75,000. A 5-4 Supreme Court majority recently held that the federal courts had jurisdiction over the claims asserted by both sets of plaintiffs under 28 U.S.C. §1367 on the basis that "[w]hen a well-pleaded complaint contains at least one claim that satisfies the amount-in-controversy requirement … the district court, beyond all question, has original jurisdiction over that claim … . If the court has original jurisdiction over a single claim in the complaint, it has original jurisdiction over a ‘civil action’ within the meaning of §1367(a)."

Four dissenters, led by Justice Ginsburg, argued that 28 U.S.C. §1367 had not been intended by Congress to disturb the jurisdictional status quo, which did not permit pendent plaintiff jurisdiction.

The decision has wide-reaching implications for federal court jurisdiction over claims by additional plaintiffs, and it would not be surprising to see many more seemingly minor claims litigated in the federal courts in the years to come. Exxon Mobil Corp. v. Allapattah Services, Inc., __ S. Ct. __ (2005).

Other Noteworthy Decisions. Judge Montgomery granted the plaintiff’s request for leave to file a motion for reconsideration and subsequently vacated a portion of a previous order granting summary judgment to the defendant. The opinion is most remarkable for Judge Montgomery’s acknowledgment that "the standard for reversing a decision on a motion to reconsider is unclear," and her admission that "[s]ince this Court owes no deference to itself and knows it makes mistakes, motions to reconsider will be granted and a change made when convinced an error has been made, manifest or not." Vosdingh v. Qwest Dex, Inc., 2005 WL 1323007 (D. Minn. 06/02/05).

Judge Ericksen struck both of a product liability plaintiff’s experts under Daubert and awarded summary judgment to the defendants, finding that the plaintiff could not demonstrate that the defendants’ product was defective in the absence of expert testimony. Wagner v. Hesston Corp., 2005 WL 1540135 (D. Minn. 06/30/05).

Magistrate Judge Erickson slashed plaintiffs’ request that defendants compensate one of their experts for 46 hours of preparation time in advance of approximately five hours of deposition testimony, finding that a preparation-to-testimony ratio of approximately two-to-one was reasonable. Fee v. Great Bear Lodge of Wisconsin Dells LLC, 2005 WL 1323162 (D. Minn. 03/03/05).

Judge Tunheim affirmed an order by Magistrate Judge Noel denying the defendant’s motion to strike plaintiff’s rebuttal testimony by two of its employee under Fed. R. Evid. 701 for their alleged failure to comply with the expert disclosure requirements of Fed. R. Civ. P. 26, finding that employees were fact witnesses to whom Rule 26’s expert disclosure requirements did not apply. C.H. Robinson Worldwide, Inc. v. Ghirardelli Chocolate Co., 2005 WL 1432199 (D. Minn. 05/23/05).

Judge Frank found that the defendant’s summary judgment motion in a patent case was "premature" when it was brought prior to the Markman briefing and hearing. Digi Int’l, Inc. v. Lantronix, Inc., 2005 WL 1397010 (D. Minn. 06/13/05).

Judge Tunheim declined plaintiffs’ invitation to take judicial notice of 42 documents on a motion to dismiss, describing the request as "highly unusual." In Re Retek Inc. Sec. Lit., 2005 WL 1430296 (D. Minn. 03/07/05).

— Josh Jacobson
Law Office of Josh Jacobson



August 2005



In this month's "Notes & Trends:

INTELLECTUAL PROPERTY
Judicial Law

• Lanham Act; False Advertising; Animal Feed Additive. The 8th Circuit reversed the district court’s dismissal of plaintiff Alpharma’s Lanham Act and false advertising claims against Pennfield, who advertised an animal feed additive as having FDA approval for a variety of uses. Alpharma alleged that although Pennfield had received FDA approval for certain uses of the additive, Pennfield violated the Lanham Act and state laws by advertising that it had received fda approval for a number of additional uses, for which only Alpharma’s additive had been approved by the FDA. The district court had granted Pennfield’s motion to dismiss the claims, reasoning that Alpharma failed to exhaust administrative remedies with the FDA. However, the court of appeals held that since the fda provides no procedures for administrative resolution of false advertising claims and has no authority to award damages, Alpharma’s claims may proceed. Although the court of appeals rejected Alpharma’s argument that federal district courts have exclusive jurisdiction over Lanham Act claims, the court of appeals also held that the FDA did not have primary jurisdiction over the question of whether Pennfield’s additive has already received FDA approval for certain uses because the question did not require the FDA’s scientific expertise. Alpharma, Inc. v. Pennfield Oil Co., No. 04-2958 (8th Cir. 06/17/05). http://caselaw.lp.findlaw.com/data2/circs/8th/042958p.pdf

Patent Invalidity; Prior Disclosure; "Printed Publication." Judge Frank granted defendants’ Motion for Summary Judgment of patent invalidity based on an earlier admission by plaintiff Bruckelmyer. While Bruckelmyer claimed that defendants infringed his patents, defendants argued that Bruckelmyer’s patents were invalid because the invention was disclosed in the contents of a Canadian patent application. Because U.S. patent law requires patents to be novel, a patent can be held invalid if the invention was disclosed in a printed publication (anywhere in the world) more than one year before the patent application was filed in the U.S. The court found as a matter of law that the contents of the Canadian patent application constituted a printed publication. Bruckelmyer had admitted in an earlier court document that if the contents of the patent application were considered to be a printed publication, then his patents were invalid. The court ruled that Bruckelmyer’s admission constituted a sufficient basis upon which to grant defendants’ Motion for Summary Judgment of Invalidity. Bruckelmyer v. Ground Heaters, Inc., et al., Civ. No. 02-1761 (D. Minn. 05/13/05).

Patent Claim Construction; "Depressions." Construing patent claim terms, the district court relied heavily on the express language of the claims, the specification, and dictionary definitions. For example, Judge Tunheim construed the term "depressions" by first looking to claim language and dictionary definitions to arrive at the ordinary meaning: "a depressed or sunken place or part." Next, the court considered whether the specification narrowed the meaning to require that the depressions be empty or not yet filled. Rejecting the narrower meaning, the court found that "nothing in the intrinsic evidence of the patent requires" importing the limitation that the depressions be empty. The court’s claim construction methodology finds support in Phillips v. AWH Corp., No. 03-1269, 2005 U.S. App. lexis 13954 (Fed. Cir. 07/12/05), the recent en banc decision by the Court of Appeals for the Federal Circuit. 3M Innovative Props., Co., et al., v. Avery-Dennison Corp., Civ. No. 01-1781 (D. Minn. 06/20/05).

— Tony Zeuli
— Melanie Reichenberger
Merchant & Gould



August 2005



In this month's "Notes & Trends:

REAL PROPERTY
Judicial Law

• Relocation Payments; Interest. In this case, the Minnesota Court of Appeals determined that interest need not be paid on relocation claims. The Chaska Economic Development Authority (EDA) exercised its power of eminent domain and took property owned by River City Woodworking (RCW). In connection with the taking, the EDA was required to pay certain relocation expenses. RCW challenged the amount of payment before a hearing officer. The hearing officer awarded additional sums, but denied most of RCW’s claims. On appeal, among other issues, RCW challenged the hearing officer’s rejection of RCW’s claim for pre- and post-judgment interest. The court recognized that Minn. Stat. Chapter 117 contemplates the payment of interest on damages, but observed that the damages appeared tied only to "land condemnation proceedings." The court held that a hearing on the relocation claims deals only with personal property and the requirement of the payment of interest does not apply. Affirmed. In re River City Woodworking, Inc., A04-2106 (Minn. App. 06/21/05). www.lawlibrary.state.mn.us/archive/ctapun/0506/opa042106-0621.htm

Statute of Repose; Gas Pipeline Replacement. The Minnesota Court of Appeals recently held that a gas pipeline, when considered in relation to its owner, is not an improvement to real property for purposes of the statute of repose. In 1990, Aquila, Inc. contracted with Northern Pipeline Construction (Northern) to replace Aquila’s natural gas pipeline. Over a decade later, the pipeline leaked causing an explosion. The damaged property owners brought suit against Aquila and Northern. Aquila and Northern defended the action in part based on the statute of repose, which provides that actions arising from improvements to real property must be brought within ten years after the construction. The Court of Appeals agreed with the property owners that the pipeline was simply an addition to Aquila’s gas distribution system and, accordingly, was not an improvement to real property. In so holding, the court focused heavily on Aquila’s ownership of the pipeline. In contrast, the pipeline was an improvement to real property for the purposes of Northern, which relinquished all ownership and control of the pipeline following installation.

As an alternative basis, the district court had granted summary judgment in favor of Aquila, ruling that there was no evidence of negligence because there was no evidence that Aquila had any notice of a problem with the pipeline. The Court of Appeals reversed that decision as well. The appellate court apparently concluded that summary judgment was precluded by the presumption that "[i]n the ordinary course of things, gas does not escape if those responsible for its management use proper care." Affirmed in part, reversed in part and remanded. State Farm Fire & Cas. v. Aquila, Inc., A04-1816 (Minn. App. 06/14/05). www.lawlibrary.state.mn.us/archive/ctappub/0506/opa041816-0614.htm

Deed Tax. According to the Minnesota Tax Court, a deed in lieu of foreclosure is not exempt from deed tax, but the tax may be limited based on the amount of liens remaining. ZIRP-IC owned two properties in downtown Minneapolis on which it had taken multimillion dollar nonrecourse loans. When ZIRP-IC was unable to repay the loans, it entered into an agreement with its lender to provide a deed in lieu of foreclosure. The lender did not forgive the indebtedness, but rather allowed the assignment of loan documents to another company. Hennepin County contended that a deed tax was due and owing for the deed. On appeal, ZIRP-IC contended that the deed in lieu should be exempt because it is akin to acquiring property in foreclosure or redeeming property in foreclosure, both of which are exempt. The tax court disagreed, ruling that the deed in lieu is different from the exempt transactions and requiring express and specific exemption language in the statute. Nevertheless, the tax court noted that the amount of tax must be based on the net consideration, which requires a reduction by the amount of the liens remaining on the property. Because the liens remaining in this case exceeded the consideration paid (arguably the indebtedness relieved), the deed tax was only a nominal figure. Motion granted in part. ZIRP-IC, LLC v. Hennepin County, Nos. 31282, 04-02759 (Minn. Tax 04/21/05).

— C.J. Deike
Edina Realty Home Services



August 2005



In this month's "Notes & Trends:

TAX
Judicial Law

• Withholding Tax: Corporation’s Officer Personally Liable. The Minnesota Tax Court found that a taxpayer, in his capacity as an officer, shareholder, and member of the board of directors is personally liable for withholding taxes that were not paid to the state of Minnesota due to the corporation’s financial problems. The court reasoned that although Minn. Stat. §270.101, subd. 1 has changed since Benoit v. Commissioner of Revenue, 453 N.W.2d 336 (Minn. 1990) was decided that the factors relied upon in Benoit were still informative in determining whether an officer is personally liable for a corporation’s unpaid withholding taxes. James F. Jensen v. Commissioner of Revenue, Docket No. 7581-R (Minn. T. Ct. 06/01/05).

Foreign Sales Corporations in Minnesota. Under the plain language of Minn. Stat. §290.01, subd. 6b (1998), a foreign sales corporation (FSC) can qualify as a foreign operating corporation (FOC) if it meets the statutory requirements. Where the Minnesota Tax Court determined that the parent corporation had provided services to and received or accrued "royalties, fees, or other like income" from its FOC subsidiary, Minn. Stat. §290.01, subd. 19d(11) (1998) allows the parent corporation to subtract from its federal taxable income 80 percent of these fees. The plain language of Minn. Stat. §290.21, subd. 4(e) (1998) denies a dividend-received deduction for dividends of FSC, but that construction violates the Foreign Commerce Clause of the U.S. Constitution by discriminating against foreign subsidiaries. Therefore, in preserving the constitutionality of the statute, the Minnesota Supreme Court construed the statute so that the denial of the dividend-received deduction applies to dividends actually paid by FSCs but not to dividends deemed paid for FSCs that are FOCs. Hutchinson Technology, Inc. v. Commissioner of Revenue, A04-1245; A04-1247 (Minn. 06/09/05). www.lawlibrary.state.mn.us/archive/supct/0506/opa041245-0609.htm

MinnesotaCare Tax. Minn. Stat. §295.53, subd. 1(a)(4)-(5) (2000), which grants an exemption from the MinnesotaCare tax on the gross revenues of a health-care provider for revenue received from another health-care provider who is also subject to the MinnesotaCare tax, does not facially discriminate against interstate commerce. The MinnesotaCare tax revenue exemption is internally consistent and therefore fairly apportioned under the Commerce Clause of the United States Constitution. Mayo Collaborative Services, Inc., v. Commissioner of Revenue, A04-2190 (Minn.06/30/05). www.lawlibrary.state.mn.us/archive/supct/0506/opa042190-0630.htm

Homes Sold by Estate Beneficiary Remained Subject to Federal Estate Tax Liens. A district court has held that the special estate tax lien of Code Sec. 6324(a)(1) did not divest from homes left in an estate when they were sold by the decedent’s daughter after she had titled them in her and her husband’s name pursuant to a power given her by a state court in her capacity as personal representative. The court granted summary judgment to IRS in a dispute with title insurance companies which paid estate tax after purchasers of the homes received letters from IRS informing them that the homes would be sold to pay estate tax. Thus, the title companies could not recover the estate taxes they paid after the distressed homeowners gave them the letters from IRS . First American Title Insurance Co., et al. v. U.S., (DC WA) 95 AFTR 2d, 2005-2460.

Married Taxpayers: IRA Contribution Deductions. Married taxpayer wasn’t entitled to IRA contribution deduction. Taxpayer, who was active participant in employer-sponsored Code Sec. 403(b) plan, exceeded Code Sec. 219(g)’s modified AGI limit, as calculated using his and wife’s combined income. Taxpayer’s argument that AGI limit should be based on his income alone was countered by clear statutory implication to use combined income for spouses filing jointly. Gloria Yuen-Mee Ho, et vir. v. Commissioner, (2005) TC Memo 2005-133.

Exempt Status: Credit Repair Organizations Act. District court improperly determined that credit counseling organization that had received Code Sec. 501(c)(3) exempt status determination fell within provision of CROA excluding nonprofit tax-exempt organizations from consumer suits. Nonprofit and tax-exempt criteria were two independent criteria, which both had to be met to qualify for exclusion from suit. Allegations that key executives were drawing exorbitant salaries and operating organization in for-profit manner were sufficient to raise question as to its for-profit/nonprofit status and to allow suit to go forward. Zimmerman v. Cambridge Credit Counseling Corp., (1st Circuit 2005), 95 AFTR 2d.

Losses: Classic Automobiles. Affiliated corporations properly reported losses on auto dealership’s classic car sales as ordinary, not capital. Cars were held primarily for sale in ordinary course of business, not as capital assets for investment, where they were sold with regular frequency for profit, weren’t held for extended periods or merely as museum pieces, were regularly advertised and promoted for sale, and were consistently treated and reported as ordinary sales for both book and tax purposes. David Taylor Enterprises, Inc. Subsidiaries v. Commissioner, (2005) TC Memo 2005-127.

Innocent Spouse Relief: Tax Court Jurisdiction; Proof Requirements. Tax Court had jurisdiction to hear taxpayer’s claim for Code Sec. 6015(b) innocent spouse relief. Claim raised as affirmative defense in petition for deficiency redetermination was proper and required no additional jurisdictional plea. Taxpayer was entitled to Code Sec. 6015(b) relief from liability for deficiency arising from her and husband’s tugboat S corporation’s false interest deduction. Taxpayer didn’t actually know about deduction where it was reported only on corporation’s return that she neither reviewed nor signed, husband admittedly caused and hid false reporting from taxpayer, taxpayer played only limited role in family finances and corporation’s operations, and family lifestyle didn’t significantly change because of deduction. Also, taxpayer didn’t have duty to inquire into or reason to know about deduction given her limited involvement in financial affairs and nonparticipation in corporation’s return. And, although she financially benefited from deduction, it would be inequitable within meaning of Code Sec. 6015(b)(1)(D) to hold her liable because that benefit was used to compensate her for past underpaid services to corporation and because her husband caused and concealed false deduction from her. Eugene McClelland, et ux. v. Commissioner, (2005) TC Memo 2005-121.

Failure to Timely File Returns Penalties. Failure to timely file returns penalties were upheld against sole proprietor. IRS met its burden of production with proof that taxpayer filed late for subject years, and his alleged difficulty in finding bookkeeper or accounting advice wasn’t reasonable cause for his delinquency. James S. Sparkman, et al. v. Commissioner, (2005) TC Memo 2005-136.

Trust’s Investment Adviser Fee Deduction. The Tax Court has held that fees that a testamentary trust paid for investment management advice are deductible only to the extent that they exceed 2 percent of the trust’s adjusted gross income. The Tax Court noted that there is a split in authority on the issue and that the 2nd Circuit, to which the appeal of the case would lie, has not yet decided the issue. The 6th, 4th, and Federal circuits have addressed the issue. The court agreed with the reasoning the Federal Circuit and 4th Circuit applied. Both circuits rejected the notion that a trust expense incurred as a result of a fiduciary duty was one that was not subject to the 2 percent floor. Such an interpretation, noted the circuit courts, would render the limitation’s purpose meaningless. Based on the other courts’ interpretation, the Tax Court found that it correctly interpreted the applicability of the limitation in its 1992 O’Neill decision, where it held that only those costs that are unique to the administration of a trust may be deducted without being subject to the 2 percent floor. Therefore, the court here held that investment advisory fees are not unique to administering the trust and are limited by the floor. William K. Rudkin Testamentary Trust et al. v. Commissioner, 124 T.C. No.19 (No. 3297-04).

Former IRS Agent Turned Tax Protester Acquitted of Tax Fraud. A northern California jury acquitted former IRS agent Joseph R. Banister of tax fraud on June 23. A former Criminal Investigation Division special agent who left the IRS in 1999 over disagreements about the validity of the federal income tax, Banister was exonerated of conspiring to defraud the IRS and of helping Cencal Aviation Products proprietor Walter A. "Al" Thompson file false returns for tax years 1996-1998. Thompson was found guilty of tax evasion and failure to withhold in January 2005 and was sentenced to six years in prison. Banister believes the tax laws are invalid because of myriad defects in the Internal Revenue Code. He and other tax protesters have spent decades advancing many and sometimes conflicting constitutional arguments, often with minimal interference by the IRS . The Banister case now joins the 1991 Supreme Court decision in United States v. Cheek (498 U.S. 192), the 1993 Eastern District of Tennessee decision in United States v. Lloyd R. Long (CR-1-93-1), and the 2003 Western District of Tennessee decision in IRS v. Kuglin as the preeminent decisions shielding tax protesters.

Federal Jurisdiction. IRS seized real property owned by petitioner Grable to satisfy a federal tax delinquency and gave Grable notice by certified mail before selling the property to respondent Darue. Grable subsequently brought a quiet title action in state court, claiming that Darue’s title was invalid because 26 U.S.C. §6335 required the IRS to give Grable notice of the sale by personal service, not certified mail. Darue removed the case to federal district court as presenting a federal question because the title claim depended on an interpretation of federal tax law. The district court declined to remand the case, finding that it posed a significant federal-law question, and it granted Darue summary judgment on the merits. The 6th Circuit affirmed, and the Supreme Court granted certiorari on the jurisdictional question. The Court held that a federal court may exercise federal question jurisdiction over a state quiet title action that turns on a contested interpretation of the Internal Revenue Code’s notice requirements for selling property at a tax sale. The substantial interest in providing a federal forum for resolving federal tax law issues warrants characterizing the state law case as "arising under" federal law. Grable & Sons Metal Products Inc. v. Darue Engineering & Manufacturing, No. 04-603 ___ U.S. ___ (06/13/05).

Intrastate Trucking Fee Does Not Violate Commerce Clause. The Supreme Court has upheld Michigan’s intrastate trucking fee and ruled that it does not violate the dormant Commerce Clause, finding that the fee is imposed only on intrastate activity and citing a lack of evidence that it burdens interstate trade. The Michigan Motor Carrier Act statute imposes a flat fee on trucks conducting business within the state. MCL 478.2(1) requires owners of vehicles to pay $100 per vehicle per year to make commercial deliveries within the state. The fee funds safety measures that include enforcing vehicle and driver requirements and regulating the movement of hazardous waste. American Trucking Associations Inc. et al. v. Michigan Public Service Commission et al., No. 03-1230 ___ U.S. ___ (06/20/05).

Administrative Matters

Procedures on Installment Payment Plans. The Minnesota Department of Revenue has issued a fact sheet explaining when it will enter into an installment payment plan with a taxpayer for past-due tax liability or debt. The fact sheet also covers the requirements of the payment plan and when they can be terminated. The statutory authority for entering into an installment payment agreement is Minn. Stat. §270.67. Collection Fact Sheet 2, 05/1/2005. Payment agreements.

Adoption Expenses: Safe-Harbor for Finality of Foreign-Born Child’s Adoption. As announced in Announcement 2005-45, 2005-27 IRB, IRS finalized guidance first proposed in Notice 2003-15 2003-1 cb 540 that is intended to establish safe harbor for determining finality of adoption of foreign-born child who holds "immediate relative" visa. Finality of adoption is used to determine entitlement to Code Sec. 23 adoption credit and Code Sec. 137 exclusion for employer-provided assistance for qualified adoption expenses (QAE). For purposes of credit and exclusion for employer-provided assistance for QAE, adoption of foreign-born child will be treated as final if competent authority for sending country has entered decree of adoption or has authorized child to leave country under guardianship or legal custody arrangement, and child receives IR visa from State Dept. Although effective for QAE paid or incurred after 6/15/2005, IRS won’t challenge time of finality by taxpayer who applies this Rev Proc or Notice 2003-15 2003-1 cb 540 to QAE paid or incurred before that date in tax year for which period of limitation hasn’t expired.

Electing Out of GST Deemed Allocations. The IRS has issued final regulations (T.D. 9208) on making the section 2632(c)(5)(A)(i) election to not have the deemed allocation of unused generation-skipping transfer (GST) tax exemption apply to some transfers to a GST trust. The regs also provide guidance on making the section 2632(c)(5)(A)(ii) election to treat a trust as a GST trust. Effective June 29, 2005, the final regs adopt the proposed regs (reg-153841-02) with several changes. Among the changes, the final regs provide more options for electing out of the automatic allocation rules and confirm that an election out for future years is limited to automatic allocations under section 2632(c). They also clarify that an affirmative partial allocation of GST exemption is treated as an election out of the automatic allocation rules for the balance of the specific transfer.

Golden Parachute Payments. For purposes of determining whether change in ownership or control has taken place, employee will be considered owner of unvested shares of restricted stock for which Code Sec. 83(b) election to include in gross income in year of transfer has been made and those shares are treated as outstanding stock. Regs under Code Sec. 83(b) regard stock transferred to employee in connection with performance of services as substantially vested when that election is made, and employee is considered owner. However, restricted stock for which this election has not been made is not considered outstanding. To determine amount of stock held by shareholder for purposes of testing whether shareholder is "disqualified individual" within meaning of Code Sec. 280G, unvested shares for which Code Sec. 83(b) election has been made are also treated as outstanding stock. Rev Rul 2005-39, 2005-27 IRB

S Corporations. An S corporation’s status will be effective from its date of incorporation, if Form 2553 is filed within 60 days from date this letter was issued, where corporation had reasonable cause for failing to make timely S election. PLR 200522001. Corporation’s S election was ineffective for stated taxable year because of ineligible shareholder, but corporation was entitled to relief under Code Sec. 1362(f) and would be treated as S corporation from that date and thereafter provided that its S election was otherwise valid and did not otherwise terminate under Code Sec. 1362(d). PLR 200522007.

Corporate Reorganizations. Several Private Letter Rulings have been issued regarding corporate reorganizations. Provided a subsidiary’s merger qualifies as statutory merger under applicable state law, its merger into a wholly owned single member llc will constitute reorganization under Code Sec. 368(a)(1)(A). And, common parent sub and sub will each be "party to reorganization" within meaning of Code Sec. 368(b), and neither will recognize gain or loss from transfer and receipt of assets. PLR 200524003, PLR 200524004, PLR 200524005, PLR 200524006, PLR 200524007, PLR 200524008, PLR 200524009, PLR 200524010, PLR 200524011, and PLR 200524012.

Circular 230 Changes. Circular 230 revisions have gone into effect as of June 20, 2005. The new rules are designed to crack down on abusive tax shelters and require law firms and any other tax advisers to create internal advisory committees to ensure compliance. The new rules will require attorneys to report client information more often to the IRS , particularly when giving advice on tax avoidance. Under the new rules, certain types of opinions will either have to include a caveat saying that the client cannot rely on the opinion, or the tax adviser will have to conduct an investigation of the client’s representations and fully vet the claims before offering an opinion. The Legal Intelligencer, Vol. 232, No. 109, 06/07/05.

Disaster Grants Not Excludable From Gross Income. The IRS has ruled that grants a business received under a state reimbursement program for property loss from a disaster are not excludable from gross income under the general welfare exclusion, as a gift, as a qualified disaster relief payment, or as a contribution to capital, but the business may defer gain under section 1033. Rev Rul 2005-46.

Quarterly Interest Rates. IRS announced interest rates for the third quarter of 2005, which are reflected in Rev Rul 2005-35, 2005-24 IRB Rates will remain the same as in second quarter of 2005. IR 2005-65. For calendar quarter beginning 7/1/2005, interest rates remain at 6 percent for noncorporation overpayments and underpayments and corporation underpayments, 5 percent for corporation overpayments, 8 percent for large corporation underpayments, and 3.5 percent for the portion of corporation overpayments exceeding $10,000. Rev Rul 2005-35, 2005-24 IRB.

Low-Income Housing Credit Safe Harbor. The IRS has provided a safe harbor for housing credit agencies and project owners to meet the extended low-income housing commitment requirements of section 42(h)(6)(B)(i), as described in earlier guidance. Effective June 21, 2005, the safe harbor provides a procedure for satisfying the commitment review requirements of Q&A-5 under Rev. Rul. 2004-82. Rev. Proc. 2005-37.

Environmental Clean Up Costs Allocable To Inventory. The IRS has extended an earlier ruling that environmental remediation costs incurred to clean up land contaminated in the course of a company’s manufacturing activities are properly allocable to inventory under section 263A. Extending Rev. Rul. 2004-18, the Service concluded that the environmental remediation costs discussed are more in the nature of repairs than capital improvements and are allocable to the inventory produced in the tax year during which the costs are incurred. Rev. Rul. 2005-42.

Single Insurer Arrangements. The IRS has issued guidance clarifying that the elements of risk shifting and risk distribution must be present for an arrangement to be considered insurance for federal income tax purposes. Significantly, the revenue ruling concluded that an arrangement with an entity that insures the risks of only one policyholder does not qualify as insurance for tax purposes because the risks are not distributed among other policyholders. The guidance, which relies on Supreme Court rulings dating to 1941, pertains primarily to taxpayers who are parties to small one-on-one arrangements rather than the majority of contracts issued by commercial insurers. The IRS noted that the proper characterization of an arrangement may determine whether the issuer qualifies as an insurance company and whether amounts paid under the arrangement may be deductible. Rev. Rul. 2005-40; 2005-27 IRB 1.

Looking Ahead

Assistance Centers to Close. The Internal Revenue Service has announced that it will close a number of its taxpayer assistance centers as part of its efforts to be more efficient, modernize operations, and reduce costs. The 400 taxpayer assistance centers provided walk-in service for an estimated 7,698,000 taxpayers in the 2004 fiscal year. The agency will close 68 of those locations this fall, following an extensive review. The Minneapolis office is on the list of offices to be closed. Other Minnesota walk-in offices are not currently slated to be closed.

House Passes IRS Funding Bill. The House on June 30 passed a Treasury appropriations bill providing the IRS $10.5 billion in fiscal 2006. The bill (H.R. 3058) sailed through the House with a bipartisan 405-18 vote but not without complaints from the White House. A statement of administration policy released just before the vote said the White House "strongly urges Congress to support the $446 million increase requested for IRS tax enforcement. This increase, supported in the Congressional Budget Resolution, is needed to address the tax gap." The tax gap is the difference between taxes owed and taxes paid. The House set aside for the IRS $10.5 billion for the next fiscal year, a $313 million increase over 2005 but $130 million below the White House’s request. The $10.5 billion includes $4.5 billion for enforcement, up $218 million from the fiscal 2005 IRS budget.

Original Tax Court Report Found No Fraud Against Kanter, Ballard. The Tax Court has released the long-sought first opinion of the special trial judge in the fraud case against tax attorney Burt Kanter and two insurance executives, Claude Ballard and Robert Lisle. In the original report sent to the Tax Court chief judge, the special trial judge had cleared all three taxpayers of fraud charges and income tax liability on an alleged kickback scheme. But in the Tax Court’s published opinion in Investment Research Associates Ltd., et al. v. Commissioner, T.C. Memo. 1999-407, Tax Court Senior Judge Howard A. Dawson Jr., "adopting the opinion of Special Trial Judge D. Irvin Couvillion," held that Kanter, Ballard, Lisle, and a corporation had committed fraud in failing to report more than $13 million in income, upheld substantially all of the IRS s liability determinations, and found that the three individuals had intended to evade taxes. The Tax Court produced the September 1998 report and recommendation of Special Trial Judge Couvillion on May 26, 2005, as directed by the 11th Circuit in the Ballard case, which is on remand from the Supreme Court. Revelation of the more-than-300-page report not only vindicates the three taxpayers (of whom only Ballard survives) but also their lawyers, who maintained to three different appeals courts and finally the U.S. Supreme Court that the trier of fact’s original report did indeed exist and held for the taxpayers.

Proposed Settlement of H&R Block Refund Loan Suit Halted. U.S. District Judge Elaine E. Bucklo has quashed the $360 million refund anticipation loan (RAL) settlement proposed by H&R Block in early May, leaving open the mounting class action suits brought against the tax preparer and its financial partners. Block was forced to terminate the proposed settlement in the suit after Bucklo denied a motion for preliminary approval of the deal on May 25. The settlement would have returned $360 million — $110 million in cash and $250 million in tax prep coupons — to the roughly 28 million customers estimated to have purchased the refund loan products from January 1987 through April 2005. In her decision, Bucklo said she rejected the offer because of a lack of information about (1) the potential payout to individual class members; (2) a coordinated notification scheme; and (3) the proposed injunctive relief. The case is scheduled for trial in October. Lynne A. Carnegie, et al. v. Household International, Inc., H&R Block, Inc., et al., 371 F.Supp.2d 954 (N.D. Ill., 2005).

Nonprofit Panel Recommends Transparency, Mandating E-Filing. A report by the Panel on the Nonprofit Sector, presented to members of the Senate Finance Committee and IRS Commissioner Mark Everson June 22, called for increasing transparency and mandating electronic filing in the charitable sector. The panel’s final report recommended enacting legislation that would require any charity with more than $1 million in annual revenue to conduct an audit of its financial statements and operations and would require charities with finances ranging from $250,000 to $1 million to consult with an independent accountant.

Tax On Alaska Native Corporation Dividends. The growing profitability of Alaska Native corporations and the nation’s growing "tax gap" has led the IRS to end an informal policy of exempting dividends issued to the corporations’ 57,000 shareholders from tax levies. The new policy took effect on June 1.

— Michelle Marshall
— Kathryn Sedo
University of Minnesota Law School



August 2005



In this month's "Notes & Trends:

TORTS & INSURANCE
Judicial Law

• Employment Law; Causes of Action; Wrongful Discharge. An employee who is discharged for refusing to participate in an activity that the employee, in good faith, believes violates any state or federal law, or rule or regulation adopted pursuant to law, may bring a common law action for wrongful discharge. Minnesota’s Whistleblower Act does not abrogate or otherwise displace the common law tort action for wrongful discharge.

Nonetheless, the Minnesota Court of Appeals noted the scope of the common law action did change after enactment of the act. Before the act, an employee had a claim for wrongful discharge if the discharge "violated a clear mandate of public policy, either legislatively or judicially recognized." But after the act, the standard was modified, and there remained no viable claim unless the discharge was "for refusing to participate in an activity that he, in good faith, believed violated any state or federal law or rule or regulation adopted pursuant to law." The court affirmed the dismissal because plaintiff’s claim did not qualify under the applicable standard. Chris Nelson v. Productive Alternatives, Inc., A04-1691 (Minn. App. 05/31/05). www.lawlibrary.state.mn.us/archive/ctappub/0505/opa041691-0531.htm.

Effect of Pierringer Release on Third-Party Defendants. Plaintiff brought a personal-injury suit against various defendants, and one of the defendants commenced third-party claims for contribution and indemnity. After the defendant/third-party plaintiff settled with plaintiff on a Pierringer basis, the third-party defendants moved for summary judgment, arguing that under the release defendant no longer had contribution or indemnity rights. The district court denied the motion but certified the two questions as "important and doubtful": (1) whether a defendant can pursue claims against nonsettling third-party defendants after executing a Pierringer release with the plaintiff, and (2) whether the doctrine of claim preclusion, or a plaintiff’s subsequent death, changes the effect of the Pierringer release on the defendant’s claims for contribution and indemnity.

Reversing the denial of summary judgment, the Minnesota Court of Appeals answered "no" to both questions. It held the Pierringer release precluded the defendant’s claims against nonsettling third parties. Under a Pierringer release, a plaintiff is able to settle with one defendant without releasing nonsettling defendants from liability. Ordinarily, the settling defendant is dismissed with prejudice and all cross-claims for contribution between it and other defendants are also dismissed. Under a Pierringer, the settling tortfeasor will never pay more than its fair share, and neither will nonsettling tortfeasors. Thus, no claim by the settling defendant for contribution or indemnity will ever accrue. The court also held that neither claim preclusion nor a plaintiff’s subsequent death changes the effect of a Pierringer release. Larry Bunce v. A.P.I., Inc., et al., A04-1348, A04-1394 (Minn. App. 06/07/05). www.lawlibrary.state.mn.us/archive/ctappub/0506/opa041348-0607.htm

Contracts; Enforcement of Arbitration Provision. The parties’ contract included an arbitration clause, which stated that either party shall have the option to arbitrate. Plaintiff alleged defendant failed to pay for services performed under the contract and sued. Defendant brought a motion to stay the action and compel arbitration. The district court denied the motion without explanation. The Minnesota Court of Appeals reversed, holding that (1) the arbitration agreement was clear, valid, and unambiguous; (2) the claim fell within the scope of the agreement; and (3) defendant did not voluntarily or intentionally waive its right to arbitrate. Community Partners Designs, Inc. v. City of Lonsdale, A04-1919 (Minn. App. 06/14/05). www.lawlibrary.state.mn.us/archive/ctappub/0506/opa041919-0614.htm

Spoliation of Evidence; Damages; Collateral Sources. The district court has broad discretion to determine what sanctions, if any, to impose for spoliation of evidence, and the court may exclude evidence regarding the circumstances surrounding the spoliation if it is more prejudicial than probative. Also, a collateral-source reduction will not be given for the discounted portions of medical bills not paid by medical insurers or their insureds.

Plaintiffs were injured in a motor-vehicle accident with defendant. After ordering plaintiffs to produce their computer in discovery, the district court found plaintiffs had permanently deleted files from their computer, including child pornography and illegal downloads of intellectual property. The district court granted defendants’ request for sanctions for spoliation of evidence and read an adverse-inference instruction to the jury. But the court also ruled that any evidence of bad acts found on the computer was inadmissible because it was unnecessarily confusing and was more prejudicial than probative.

Following a jury verdict apportioning 80 percent fault to defendants and 20 percent to plaintiffs, defendants moved for a collateral-source setoff for the discounted portion of medical bills that were not paid by plaintiffs or their medical insurer. The district court denied the motion.

Defendants appealed, arguing that the only appropriate sanction for spoliation was dismissal, that the bad-acts evidence on the computer should have been admitted at trial, and that the court should have set off the discounted portion of the medical bills. The Minnesota Court of Appeals affirmed, holding that determining the appropriate sanction for spoliation of evidence and excluding evidence as more prejudicial than probative are within the court’s broad discretion. The Court of Appeals also affirmed the denial of the requested setoff for the discounted portion of medical bills that were not paid by plaintiffs or their insurer. The court agreed with the district court’s reasoning that the discounted amount should remain with plaintiffs because they indirectly paid for the discount through insurance premium payments. Jeffrey L. Foust, et al. v. John R. McFarland, et al., A04-760, A04-1956 (Minn. App. 06/14/05). www.lawlibrary.state.mn.us/archive/ctappub/0506/opa040760-0614.htm

Statute of Repose; Improvement to Real Property. The Minnesota Court of Appeals has held that replacing an existing natural gas pipeline is not an "improvement to real property" — and thus does not trigger the ten-year statute of repose in Minn. Stat. §541.051 — as to a utility company which continues to own the pipeline. Rather, the pipeline is considered an addition to the utility’s distribution system. But replacing an existing pipeline is an "improvement to real property" as to the pipeline installer when the installer relinquishes all ownership and control after installation.

The court also held that plaintiff could make a prima facie case of negligence, and thus survive summary judgment, by showing that the utility company owned and controlled the pipeline that was involved in the explosion. Notice of a defect or dangerous condition was not required. State Farm Fire & Casualty, et al. v. Aquila Inc. d/b/a People’s Natural Gas, f/k/a UtiliCorp United Inc., d/b/a People’s Natural Gas/Energy One, et al., A04-1816 (Minn. App. 06/14/05). www.lawlibrary.state.mn.us/archive/ctappub/0506/opa041816-0614.htm

No-Fault Automobile Insurance; Accrual of Interest. An insured must provide actual notice of loss to the no-fault insurer to be eligible for mandatory interest when the insurer stops payment of no-fault benefits based on an independent medical examination. The Minnesota Supreme Court held that under the plain language of the No-Fault Act, a plaintiff must provide actual notice of additional loss. Because the no-fault insurer did not receive such notice until the plaintiff filed the arbitration petition, interest did not begin to accrue until 30 days after the arbitration petition was filed. American Family Insurance Group v. Mark Kiess, A03-1764 (Minn. 06/16/05). www.lawlibrary.state.mn.us/archive/supct/0506/opa031764-0616.htm

— Michael A. Klutho
— David A. Turner
Bassford, Remele, A Professional Association