October 2005

ADMINISTRATIVE LAW
Judicial Law

• Relocation Benefits. The Supreme Court decided that the city of Richfield owed relocation benefits to a private homeowner whose home was located in a redevelopment area. The city argued that it was not responsible for benefits because it contracted with a private developer to negotiate with the homeowner for the purchase of his home. The city believed that it had not therefore "undertaken" an "acquisition" of property within the meaning of the statute. The Court held that the activities of the private developer and the city were "sufficiently intertwined" to characterize them as a joint undertaking. The Court cited the city’s promise to use its power of eminent domain to acquire the property if negotiations failed as the most significant factor in its decision. The Court noted that the city had also encouraged property owners to negotiate with the developer and had financed the project with a tax increment finance district. The decision affirmed a Court of Appeals decision that had upheld an administrative law judge order. In Re Kenneth Wren, A04-207, (Minn. 07/28/05). www.lawlibrary.state.mn.us/archive/supct/0507/opa040207-0728.htm

• Error of Law/Arbitrary and Capricious. The Court of Appeals affirmed the adoption, by the Minnesota Public Utilities Commission (PUC), of standards for good faith efforts by a utility to implement technologies for removable energy reserves. The court found that the PUC's interpretation of the renewable energy statute did not constitute an error of law as urged by several environmental organizations. The court noted that the decision of an agency is accorded deference in its field of expertise. The court also held that the adoption of a plain language interpretation of the statute by the PUC reflected its judgment and not its will so that the decision was not arbitrary and capricious even though it rejected one point of view, namely, that if some level of discharge may be causally attributed to the impairment of the river, a permit must not be issued. In Re Detailing Criteria and Standards for Measuring an Electric Utility’s Good Faith Efforts, A04-1742, (Minn. App. 07/26/05). www.lawlibrary.state.mn.us/archive/ctappub/0507/opa041742-0726.htm

• Error of Law/Substantial Evidence. The Public Employees’ Retirement Association (PERA) denied disability benefits to a 911 operator employed by a Sheriff’s Department on the grounds that her depression and panic disorder were not duty-related, but were caused by her relationship with her employer. The Court of Appeals reversed, holding that PERA’s determination that duty-related disability benefits are limited to an act of duty that is uniquely hazardous to a jailor/dispatcher was in error, since the plain meaning of "any act of duty" included the stressful aspects of being a 911 operator. The medical evidence related the work stress directly to her disability. The court noted that an agency interpretation was only entitled to "great weight" when the meaning of a statute was doubtful. The court also held that PERA’s decision was not supported by substantial evidence in that the record did not support the agency determination that the applicant’s disability was caused by personal conflicts. In Re Application of Carol Hildebrant, A04-2127, (Minn. App. 08/09/05). www.lawlibrary.state.mn.us/archive/ctappub/0508/opa042127-0809.htm

• Statutory Authority. In 2003 the Minnesota Public Utilities Commission (PUC) established wholesale service quality standards to govern transactions between Quest and local exchange carriers that are allowed to interconnect with Quest’s telecommunications network. The Supreme Court held that the federal Telecommunications Act of 1996 did not preempt states from regulating local telecommunication competition and specifically allowed a role for state agencies in ensuring quality service and competition. The Court found that the fixed minimum performance standards adopted by the PUC were within its authority under the federal act because they ensure quality service, foster competition, and are competitively neutral. However, the Court also held that the PUC’s requirement that Quest make self-executing payments (penalties) to its competitors if it failed to meet the standards, was not authorized by the governing Minnesota statute. The Court observed that the Administrative Procedure Act limits fines established by rule to $700 per violation unless specific statutory authority exists. The PUC and the competitors argued that the payments were an enforcement mechanism and that authority for them could be inferred from the PUC’s broad authority to ensure high quality telecommunications service. The Court declined to read that authority into the statute and held that the agency exceeded its statutory authority. It noted that the payments could not properly be viewed as liquidated damages, but were in fact penalties. A dissent argued that the standards were invalid because the federal act had preempted the field. In Re Quest’s Wholesale Service Quality Standards, A03-1409, (Minn. 08/18/05). www.lawlibrary.state.mn.us/archive/supct/0508/opa031409-0818.htm

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

October 2005

ALTERNATIVE DISPUTE RESOLUTION
Judicial Law

• Jurisdiction; Post-Arbitration Filing; "First-Filed Rule." On the same day that an arbitrator awarded Ecolab over $200,000 in costs and attorneys’ fees, the losing party, S & L Enterprises, filed a "Motion to Partially Vacate or Modify the Arbitration Award" in the U.S. District Court for the Western District of Oklahoma. Ecolab filed a "Petition to Confirm the Arbitration Award" in the U.S. District Court of Minnesota seven days later, and one day following notice of the Oklahoma action. Applying the "first-filed rule," the Minnesota court granted the motion of S & L Enterprises to dismiss the matter and transferred the proceeding to the Oklahoma court. While conceding that "compelling circumstances" would allow the court to reconsider application of the well-established first-filed rule, Ecolab’s arguments about bad faith and forum shopping failed to persuade the Minnesota court to make an exception to the rule. Since the Oklahoma action was procedurally more advanced, policy concerns about judicial efficiency and the need to avoid conflicting rulings led the Minnesota court to yield jurisdiction of the matter to Oklahoma. Ecolab, Inc. v. S & L Enterprises, Inc., 2005 WL 1958069 (D. Minn. 08/12/05).

• "Sympathy Strike" Pending Arbitration; Injunction. This opinion was issued shortly before the strike by Northwest Airlines ("NWA") mechanics, and involved a potential "sympathy strike" by unionized mechanics working for Mesaba Aviation. Although a collective bargaining agreement between Mesaba and the Aircraft Mechanics Fraternal Association ("AMFA") contained a "no-strike" clause, AMFA contended that the provision did not apply to a situation where Mesaba’s mechanics would be forced to cross a picket line formed by NWA employees. Mesaba filed a grievance with the Mesaba/ AMFA System Board of Adjustment, and the dispute was set for arbitration on August 25, 2005. Also, Mesaba commenced a civil action on August 17, 2005, seeking an injunction to prevent a strike prior to arbitration and to preserve the status quo. Citing the Norris-LaGuardia Act, the U.S. District Court of Minnesota found that Mesaba had met all of the requirements for preliminary injunction, and enjoined the Mesaba mechanics from striking prior to arbitration. The grievance had been properly submitted under the terms of the collective bargaining agreement, and the dispute would move forward according to the findings of the arbitrator. Mesaba Aviation, Inc. v. Aircraft Mechanics Fraternal Assn., 2005 WL 2000173 (D. Minn. 08/19/05).

• Mediator Immunity. Appellant-wife asked the Minnesota Court of Appeals to reverse a lower court’s decision that prevented her from purchasing real property pursuant to a Draft Mediation Agreement (DMA) with her husband. In order to prove that her husband had failed to meet a payment deadline specified in the DMA, the appellant subpoenaed both a mediator and an analyst present during the marital mediation session. The lower court, however, granted the mediator immunity from testimony and quashed the subpoena. The Minnesota Court of Appeals affirmed the lower court’s decision and indicated that the parties’ agreement under the Farmer-Lender Mediation Act stated that the mediator was not a witness to the negotiations and could not be required to testify. Further, the applicable Minnesota statutes referred only to testimony by the parties, not the mediator, so the mediator could not be subpoenaed. In re Marriage of Holasek, 2005 WL 2008721 (Minn. App. 08/23/05).

— Darin T. Allen
National Arbitration Forum

October 2005

CIVIL LITIGATION
Judicial Law

• Jury Instructions; Aggravation. Rowe claimed injuries resulting from a car accident in which she was rear-ended by Munye. At trial she requested that the jury be instructed using CIVJIG 91.4 because she claimed that her injuries from the accident aggravated preexisting injuries that predated the accident. Munye objected to the instruction on the grounds that it misstated Minnesota law and improperly shifted the burden of proof from plaintiff to defendant. The trial court gave the instruction as requested by plaintiff and the jury returned a verdict in plaintiff’s favor. Defendant moved for a new trial, but his motion was denied. On appeal, the Court of Appeals reversed and remanded. The Supreme Court affirms.

In a lengthy opinion with a separate concurrence and dissent, the Supreme Court summarizes Minnesota case law on the burden of proof and aggravation of preexisting injuries. In negligence actions it affirms that the plaintiff generally has the burden of proving, by a preponderance of the evidence, damages caused by the defendant. Where an accident involves aggravation of preexisting injuries, Minnesota law has required a defendant to pay only for the damages he or she caused over and above the consequences that would have occurred from the preexisting injury if the accident had not occurred. The cases have also explained that in such aggravation situations, the burden of proof does not shift to the defendant, but remains on the plaintiff.

The Supreme Court acknowledges one limited situation in which it has shifted the burden to the defendant, and this involves the single, indivisible injury rule, set forth in Mathews v. Mills, 288 Minn. 16, 178 N.W. 2d 841 (1970). In that case the plaintiff was injured in a highway chain collision involving multiple defendants. There the court held that where separate and independent acts, closely related in time, by multiple defendants who are jointly and severally liable, cause indivisible injuries to a plaintiff, then the burden shifts to the defendants to prove the apportionment of liability.

The Court also acknowledged that it applied Mathews in Canada by Landy v. McCarthy, 567 N.W. 2d 496, 507 (Minn. 1997), where it placed the burden of proving apportionment on a jointly and severally liable landlord in a lead paint poisoning case. The Court explains that it finds Mathews and Canada by Landy to be consistent with the Restatement (2nd) of Torts.

Finally, the Court rejects plaintiff’s invitation to expand and extend the law on the grounds that CIVJIG 91.4 is a better statement of the law than the previous instruction found at CIVJIG 163. Rowe v. Munye, 2005 WL 1981553 (Minn. 08/18/05).

• Jury Instructions; Aggravation; Collateral Source Offset. James Heine was involved in two separate car accidents, just four and one-half months apart, while in the course and scope of his employment. The first accident involved an uninsured motorist; the second accident was with Valerie Simon. Heine sued both parties jointly because he claimed that he could not apportion the damages caused by each defendant. Simon’s motion to sever was granted on the grounds that the two accidents were not part of the same series of occurrences, nor factually connected to each other. At the conclusion of the evidence Heine requested that the jury be instructed using CIVJIG 91.4. Simon objected and requested the predecessor instruction, CIVJIG 163. The district court instructed the jury using the old instruction. The jury returned a verdict finding Simon primarily at fault for the accident, and awarding plaintiff damages. Heine moved the court for a new trial on damages, or additur. Simon moved to reduce Heine’s award for past medical expense by the amount already paid by the worker’s compensation carrier. The district court denied plaintiff’s motions and granted Simon some, but not all, of the reduction which she sought. Both parties appealed and the Court of Appeals affirmed the district court in its entirety.

With respect to the aggravation instruction, the Supreme Court affirmed the district court’s use of the old instruction, holding that the issue is controlled by its companion opinion in Rowe v. Munye, summarized above. The Court agrees with the district court’s finding that the two accidents did not involve jointly and severally liable tortfeasors or a single indivisible injury. The claim against Simon involved a single defendant and an aggravation of preexisting injuries from the first accident.

With respect to the collateral source offset statute, Minn. Stat §548.36, the Supreme Court affirms the district court’s holding that the statute should apply to prevent double recovery, but it finds no factual support for the amount of offset applied by the district court. Therefore, the Supreme Court remands to the district court with the observation that the statute does permit a court to request additional written evidence in order to make an appropriate factual determination. Heine v. Simon, 2005 WL 1981565 (Minn. 08/15/05).

— Steven J. Kirsch
— Andrew T. Shern
Murnane Brandt

October 2005

CRIMINAL LAW
Judicial Law

• Post-Conviction Relief; Timeliness; Conditional Release. In 1997, appellant pled guilty to 4th-degree criminal sexual conduct, with an agreed-upon stay of execution of 36 months. Appellant was not made aware of the conditional release term required for sex offenders, in this case ten years. At the time of sentence, the court failed to inform the appellant of the conditional release term at the end of sentencing. In 1999, appellant’s probation was revoked, and he was given a 36-month executed sentence. At the probation revocation hearing, appellant was informed, for the first time in the process, that he would be subject to the mandatory ten-year conditional release term. Appellant completed his sentence in 2001. In 2002, appellant’s conditional release was revoked and he was again incarcerated. Eight months after he returned to prison, 22 months after the court amended the sentence, and 39 months after the court imposed the conditional release term, appellant filed a petition for post-conviction relief challenging, for the first time, the imposition of the ten-year conditional release term.

Held, the 39-month delay was not untimely. A motion to withdraw a guilty plea after sentencing is governed by Minn. Stat. §590.01, which contains no guidance on how courts determine timeliness. Since the fact that the appellant had never had one substantive review of his case, the Supreme Court determined that the petition was timely.

The Court further determined that when a mandatory conditional release term has been omitted from the original plea agreement, and the subsequent addition of the term would exceed the upper limit of the sentence in the court-accepted plea agreement, the defendant is entitled to withdraw his guilty plea or have the sentence modified so that it does not exceed the upper limit of the plea agreement. Brian James v. State of Minnesota, A03-489 (Minn. 07/07/05). www.lawlibrary.state.mn.us/archive/supct/0507/opa030489-0707.htm

• Impeachment; Defendant on Probation; Cross-Examination Allowed. In this case of first impression, the Court of Appeals held that a defendant who testifies may be questioned about his probationary status on cross-examination even when such status is not raised on direct-examination. Following Davis v. Alaska, 412 U.S. 308, 94 S. Ct. 1105 (1974), which allows a state to cross-examine juvenile witnesses about their probationary status despite the juvenile’s interest in the privacy of their delinquency record, the court held that when a defendant takes the stand, he becomes like any other witness, and is subject to cross-examination in the same manner. The district court did not abuse its discretion by allowing the state to cross-examine the appellant about his probationary status to show that he had a motive to lie. Such cross-examination is permissible under Minn. R. Evid. 616, 401, 608 (b), and 609. State of Minnesota v. Travis Clayton Johnson, A04-838 (Minn. App. 07/05/05). www.lawlibrary.state.mn.us/archive/ctappub/0507/opa040838-0705.htm

• Felony Assault; Great Bodily Harm; Jury Instruction. Appellant was charged and convicted of 1st-degree assault, with the injury in question being a loss of a tooth. Over defense objection, the court instructed the jury that: "the loss of a tooth is a permanent loss of the function of a bodily member." This was reversible error, not harmless, because the instruction removed from the consideration of the jury the question of whether the loss of a tooth constitutes great bodily harm. Because the defendant was deprived of the right to have the jury determine every element of the charged offense, harmless error analysis is not applicable.

Second, it was error for the trial court to eliminate from the definition of 1st-degree assault the catch-all phrase "which creates a high probability of death." It is the better practice to include such alternative definitions in order to provide adequate context for the general terms of the instruction.

Third, it was error to allow an expert witness, a physician, to testify that, in his opinion, and based on his experience, the injury to the victim met the definition of great bodily harm, after having the witness review the legal definition of 1st-degree assault. While Minnesota Rule of Evidence 704 allows opinion testimony on ultimate issues under the "helpfulness" test, courts generally do not allow ultimate conclusion testimony for issues that are within the knowledge and experience of the jury. On remand, the physician may testify to the nature and extent of the injury, but testimony that the injuries meet the legal standard of serious bodily injury is not admissible. State of Minnesota v. John Walter Moore, A03-1237 (Minn. 07/14/05). www.lawlibrary.state.mn.us/archive/supct/0507/opa031237-0714.htm

• Double Jeopardy; Mid-Trial Judgment Not Permissible. Following the close of the prosecution’s case against the appellant for assault, the judge granted the motion for judgment of acquittal because the victims were not aware of the assault. After the jury returned, the appellant then testified and the defense rested. After the jury was excused, there was a brief discussion concerning State v. Hough, 585 N.W.2d 393 (Minn. 1998) (defendant may be guilty of assaulting victims who are unaware of defendant’s acts). The court immediately reinstated the four counts it had dismissed and submitted them to the jury, resulting in a conviction.

Following Smith v. Massachusetts, 125 S. Ct. 1129 (2005), the double jeopardy clause bars later reconsideration of a mid-trial dismissal, even in the course of the same trial. The three possible exceptions do not apply: the judge did not indicate that the ruling was provisional, there was no Minnesota rule or case law allowing for reconsideration, and the appellant testified in his own defense, prior to reconsideration of the ruling. State of Minnesota v. John Vang, A03-1242 (Minn. App. 07/12/05). www.lawlibrary.state.mn.us/archive/ctappub/0507/opa031242-0712.htm

• Appeal; Lack of Probable Cause; Dismissal Not Appealable. The state had charged the appellant with racketeering, involving several transactions between the appellant and his parents. The state offered the investigative reports, along with an original amended complaint. The trial court dismissed pursuant to Rule 28.04 subd. 1 (1)(a), which prohibits the state from appealing a pretrial dismissal if based solely on a factual determination. Here, the district court relied on a lack of evidence, and this cannot be converted into a dismissal based on a legal interpretation. The court notes that the state is free to reissue the complaint if the state later obtains evidence that establishes probable cause. State of Minnesota v. Jesus Antonio Estrela, A05-43 (Minn. App. 07/12/05). www.lawlibrary.state.mn.us/archive/ctappub/0507/opa050043-0712.htm

• Evidence; Hearsay; Victim Testifies; Statement to Nurse Implicating Defendant Admissible. In an assault charge, the state was allowed to introduce as substantive evidence victim’s statements made to an attending nurse in the hospital, locating appellant as slapping her and causing her an orbital fracture.

Because the victim testified, Crawford is not applicable. The district court erroneously admitted the victim’s statement pursuant to the medical diagnosis exception to the hearsay rule under 803(4). Identifying the appellant as the perpetrator of the injury was not relevant to diagnosis or treatment, but merely related to the cause or manner in which the injury occurred. Although there is a child abuse exception, there is no domestic abuse exception.

The statements to the nurse, however, are admissible under 801(d)(1)(C), as a statement of identification of a person after perceiving the person. Although the rule was originally designed for line-ups and photographic identifications, the language of the rule does not provide such limits.

Finally, the statement is also admissible under the catch-all exception, following State v. Ortlepp, 363 N.W.2d 39 (Minn. 1985). State of Minnesota v. Andre Robinson, A04-840 (Minn. App. 07/19/05). www.lawlibrary.state.mn.us/archive/ctappub/0507/opa040840-0719.htm

• Regulation of Farm Products; Unlicensed Sales Required to be Inspected. Art. XIII, Sec. 7 of the Minnesota Constitution allows any person to sell products of a farm or garden, occupied and cultivated by the farmer, without obtaining a license for sale. The Supreme Court extends the definition of "product" to include meat and custom-processed meat which is returned to the farmer for sale. This exemption from licensure, however, does not also exempt farmers from the meat inspection requirements of Minn. Stat. §31A. Hence, the appellants may be convicted for violation of the meat inspection laws of this state. State of Minnesota v. Diane Marcella Hartmann, et al., A03-1674 (Minn. 07/28/05). www.lawlibrary.state.mn.us/archive/supct/0507/opa031674-0728.htm

• Marital Privilege: Testimonial Statements: Acts Versus Statements: Waiver By Third Party Presence: A trial court correctly admitted the testimony of the appellant’s former wife, who had overheard the appellant and accomplice discuss facts of a murder recently committed; she also observed blood-like spatters on the appellant’s body and clothing. Under Minn. Stat. §595.02, Subd. 1(a) (2004), appellant’s statements to his accomplice were not "inter-spousal communications." Also, the presence of a third party operates as a waiver of the spousal privilege. The blood spatters were simple observations, devoid of any assertive conduct. State of Minnesota v. Anthony John Palubicki, A04-1318 (Minn. 07/28/05). www.lawlibrary.state.mn.us/archive/supct/0507/opa041318-0728.htm

• Prosecutorial Misconduct: Injection Of Race Into Closing: Reversible Error: It was reversible error for the prosecution to allude to certain witnesses as "young black men who must be in gangs," and to state that the defense was being racist by making references to a "big strong black man." Defense objected, stating that: "it was never our intention to be racist in this case." In fact, the defense never alluded to race during the trial. Conviction is reversed. State of Minnesota v. Christopher Fausto Cabrera, A04-1306 (Minn. 07/28/05). www.lawlibrary.state.mn.us/archive/supct/0507/opa041306-0728.htm

• Sex Offender Registration; Civil/Regulatory. Minnesota’s Predatory Offender Registration Statute, Minn. Stat. §243.166 (2002), is civil/regulatory in nature and therefore the state of Minnesota does not have the jurisdiction to apply law to a Native American tribal member residing on an Indian reservation. State of Minnesota v. Peter John Jones, A05-365 (Minn. App. 07/26/05). www.lawlibrary.state.mn.us/archive/ctappub/0507/opa050365-0726.htm

• Crawford: Not Retroactive; Not a Watershed Rule. Because the rule set forth in Crawford v. Washington, 541 U.S. 36, 124 S. Ct. 1354 (2004) is not a watershed rule of criminal procedure that implicates the fairness and accuracy of the criminal proceeding, the case does not apply retroactively. In this case, at the appellant’s trial in 1996, the jury was shown a videotaped interview of the child victim who had been ruled unavailable to testify, and whom the appellant had never had the opportunity to cross-examine. The Court of Appeals notes that five of the six federal circuits (including the 8th) have held that Crawford is not retroactive. Only the 9th Circuit disagrees. Stephen Danforth v. State of Minnesota, A04-1993 (Minn. 07/26/05). www.lawlibrary.state.mn.us/archive/ctappub/0507/opa041993-0726.htm

— Frederic Bruno
Frederic Bruno & Associates

October 2005

EMPLOYMENT & LABOR LAW
Judicial Law

• Employment Contracts. A 25-mile, three-year noncompete clause contained in contracts of a pair of veterinarians working at a clinic was scaled back to one year by the Minnesota Court of Appeals. Confirming a ruling of the district court, the appellate tribunal held that the temporal duration prescribed by the parties was unreasonable, primarily because the former clinic could find replacement personnel and train them to the level of the departing vets within six months to a year. The court also affirmed an award of costs to the vets on grounds that they were deemed to be the "prevailing parties" by the trial court. Head v. Morris Veterinary Center, Inc., 2005 WL 1620328 (Minn. App. 2005) (unpublished).

In a second contracts case, the appellate court ruled that an oral extension of a written employment contract after it expired was proved by a preponderance of evidence. There was sufficient evidence for the jury to find that the parties orally, and by their conduct, continued the arrangement after its term expired. Since the contract allowed termination of the employee only for "cause," his subsequent discharge without breached the agreement. Accordingly, a jury verdict of $1,368,000 was upheld for breach of contract, plus attorney’s fees pursuant to a fee-shifting provision in the agreement. Bolander v. Bolander, 2005 WL 1869475 (Minn. App. 2005) (unpublished).

• Public Employment. A jail dispatcher was entitled to work-related disability benefits for stress-related afflictions resulting from handling a 911 call. Because her illness arose out of her job duties, she is entitled to benefits under Minn. Stat. §353E.06, Subd. 1, which provides disability and retirement benefits for public sector employees. The injuries need not be related to "uniquely hazardous" activities to be covered by the disability fund, which provides coverage for afflictions arising out of "any act of duty" by a public sector employee. In re Application of Carol Hildebrandt, 701 N.W.2d 293 (Minn. App. 2005).

A provision in a collective bargaining agreement between management and a multi-employer group establishing a ratio for retaining older employees in the workforce was deemed violative of the Minnesota Human Rights Act by the 8th Circuit Court of Appeals. The clause, which was intended to protect older employees in the construction trade, required that one of every five employees be 50 years old or older. Affirming a ruling of U.S. District Court Judge Paul Magnuson in Minnesota, the court deemed the clause violative of the age discrimination provision of the state law which, unlike its federal counterpart, the Age Discrimination in Employment Act (ADEA), contains no age threshold. Whereas the federal act bars discrimination only against older workers, the Human Rights provision more broadly forbids any age-based decision making. Ace Electrical Contractors, Inc. v. IBEW, Local 297, 2005 WL 1639458 (8th Cir. 2005).

• Arbitration. Although polygraphs, or lie detectors, are not usable in court proceedings, the Minnesota Court of Appeals recently upheld an arbitration decision reinstating a discharged police officer based, in large part, on his passing a polygraph test. The court affirmed a decision of the St. Louis County District Court confirming an arbitration decision reinstating a police officer who, after he had been acquitted of a criminal charge, had been discharged for assaulting a woman. The arbitrator allowed into evidence a polygraph test that the officer passed. The city challenged the arbitration decision on grounds that the arbitrator exceeded his powers and violated public policy by relying on the polygraph, which is inadmissible in judicial proceedings. But the appellate court rejected the argument, holding that, while not admissible in "court cases," the polygraph could be used, in the discretion of the arbitrator, in the arbitral proceeding. City of Duluth v. Duluth Police Local, 2005 WL 162352 (Minn. App. 2005) (unpublished),

An employee was not obligated to arbitrate a dispute over elimination of discounted health insurance benefits for retired members of a labor union. The arrangement was not arbitrable, according to the 8th Circuit Court of Appeals, because it was contained in a separate side letter to the collective bargaining agreement and, thus, was not covered by the grievance-arbitrator provision in the labor contract. United Steelworkers of America v. Duluth Clinic, 2005 WL 1569462 (8th Cir. 2005) (unpublished).

• Unemployment Compensation. An employee who falsely represented herself as a supervisor was disqualified due to "misconduct" from receiving unemployment compensation benefits. The sending of a letter on behalf of a coworker incorrectly identifying herself as a supervisor constituted disqualifying "misconduct." Smith v. Reliastar Life Ins. Co., 2005 WL 1669399 (Minn. App. 2005) (unpublished).

An employee who transported disabled clients in vehicles was deemed ineligible for benefits on misconduct grounds because she disobeyed a warning from her boss to secure the passengers with seatbelts. Conflicting accounts whether a seatbelt was used for a passenger in a van were resolved against the employee, who previously had been admonished to use seat belts and told the failure to do so would be grounds for discharge. Trigo v. Lakes Medi-Van, Inc. 2005 WL 1669164 (Minn. App. 2005) (unpublished).

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

October 2005

ENVIRONMENTAL LAW
Judicial Law

• Clean Water Act; Discharges to Impaired Waters. In an opinion issued on August 9, 2005, the Minnesota Court of Appeals held that a permit for discharges from a new wastewater treatment facility was improperly issued where phosphorus in the discharges would contribute to excessive nutrient levels in waters that have already been identified as impaired under the Clean Water Act, despite the fact that improvements elsewhere would more than offset the additional phosphorus discharges.

The cities of Annandale and Maple Lake jointly proposed to build a new wastewater treatment plant that would discharge 2,200 more pounds of phosphorous per year into the North Fork of the Crow River than the cities currently discharge. The North Fork flows into the Mississippi River and contributes to the Lake Pepin watershed. Lake Pepin has been identified as impaired under Section 303(d) of the Clean Water Act because of excessive nutrient levels. Total Maximum Daily Loads (TMDL) have not been established for Lake Pepin.

Regulations promulgated under the Clean Water Act prohibit issuance of a permit for a new source if the discharge "will cause or contribute to the violation of water quality standards." 40 C.F.R. §122.4. The Minnesota Pollution Control Agency (MPCA) issued an NPDES permit for the plant on grounds that a new wastewater treatment facility to be built by the city of Litchfield would reduce phosphorous discharges to the North Fork by more than 53,000 pounds per year. This reduction would more than offset the additional 2,200 pounds to be discharged by the Annandale/Maple Lake facility.

The Court of Appeals rejected the MPCA’s rationale, holding that the plain reading of 40 C.F.R. §122.4 prohibits issuing the permit because the proposed facility would undeniably contribute to excess nutrient levels in Lake Pepin and therefore contribute to violations of water quality standards. Moreover, the court noted, five years ago the Environmental Protection Agency (EPA) considered changes to the regulations that would have allowed offsets such as those relied upon by the MPCA, but the EPA ultimately rejected the changes as unworkable. In re Cities of Annandale and Maple Lake, 2005 WL 1869496 (Minn. App. 2005).

—Robert Devolve
Leonard, Street and Deinard

FEDERAL PRACTICE
Judicial Law

• ECF Notification Failure; Presumption of Delivery; Burden of Proof. As more and more federal courts move to the electronic case filing (ECF) system, delivery and notification issues are bound to arise. In a recent decision, the 8th Circuit established some guidelines for disputes relating to ECF delivery and notification issues.

Plaintiff sued several defendants in the Eastern District of Missouri, which transitioned to the ECF system while the case was pending. The court awarded summary judgment to the United States, and the plaintiff brought a timely motion to amend the judgment. That motion was denied on November 5, 2003, but plaintiff’s counsel claimed that they never received email notification of the decision, and did not in fact learn of the denial of the motion until March 4, 2004, well after the plaintiff’s time to appeal had run. Plaintiff then brought a motion to reopen the time to file an appeal pursuant to Fed. R. App. P. 4(a)(6). That motion was denied based on the court’s determination that plaintiff’s counsel had received timely notice of entry of the November 5 order. Two subsequent motions for reconsideration were also denied.

Reviewing the district court’s denial of the motion to reopen for abuse of discretion, and despite acknowledging that a presumption of delivery should apply to ECF -related emails, the 8th Circuit nevertheless found that plaintiff’s counsel had made a sufficient showing of nondelivery to be entitled to an evidentiary hearing on the issue of whether they could adequately rebut the delivery presumption. Of particular import is the 8th Circuit’s statement that "where several intended recipients, most of whom are officers of the court, all say that they did not receive notice, there is enough evidence to warrant an evidentiary hearing on the rebuttal of the presumption of delivery and receipt." American Boat Co. v. Unknown Sunken Barge, ___ F.3d ___ (8th Cir. 2005).

• Rule 11 and Inherent Powers Sanctions; Order to Show Cause. A recent opinion from Chief Judge Rosenbaum may cause parties to think twice before attempting to relitigate previously decided claims.

Plaintiffs brought a quiet title action in the Minnesota courts in 1997. They lost in the trial court, lost again in the Minnesota Court of Appeals, and had review denied by the Minnesota Supreme Court. Plaintiffs then unsuccessfully sought to vacate the trial court’s order in April, 2002.

Represented by new counsel, plaintiffs then commenced a new state court action in October, 2002. The action subsequently was dismissed with prejudice based on res judicata and collateral estoppel, plaintiffs were found to be in contempt of the prior order, and sanctions were imposed against plaintiff’s new counsel. Plaintiffs attacked the underlying order again in June, 2004, and were again held in contempt.

Not content to stop there, plaintiffs, represented by the same new attorney, commenced a Section 1983 action in the District of Minnesota. Judge Rosenbaum had little trouble dismissing plaintiffs’ claims under the Rooker-Feldman doctrine and under principles of collateral estoppel. But Judge Rosenbaum did not stop there, ordering plaintiff’s counsel:

Willhite v. Collins, ___ F. Supp. 2d ___ (D. Minn. 08/25/05).

• Other Noteworthy Decisions. The 8th Circuit affirmed on the merits Judge Ericksen’s denial of a Batson-type challenge based on the sexual preference of a panel member, while expressing "serious[] doubt" that "Batson and its progeny extend federal constitutional protection to a venire panel member’s sexual orientation." United States v. Ehrmann, ___ F.3d ___ (8th Cir. 2005).

Judge Doty denied defendants’ request for statutory attorney fees in a copyright case in which defendants had previously been sanctioned, and castigated defendants’ counsel for their "deviant and unprofessional belief" that sanctions are the "natural and probable result" of "lengthy and contentious" litigation. Rottlund Co. v. Pinnacle Corp., 2005 WL 2105549 (D. Minn. 08/31/05).

The 8th Circuit affirmed a district court’s determination that it had diversity jurisdiction, finding "overwhelming evidence" that the plaintiff was domiciled in Pennsylvania at the time he filed his action in the Iowa courts. The decision is particularly useful for its recitation of a long list of factors to be considered in determining a party’s domicile. Altimore v. Mount Mercy College, ___ F.3d ___ (8th Cir. 2005).

Where the plaintiff sought reconsideration of the denial of a motion for injunctive relief in a noncompete case and offered some additional evidence, Judge Magnuson held that so long as a dispute remained as to the enforceability of the noncompete agreement, the plaintiff had failed to establish the "compelling circumstances" necessary to justify a motion for reconsideration under Local Rule 7.1(g). Prime Vest Financial Services, Inc. v. Ruxer, 2005 WL 1959505 (D. Minn. 08/15/05).

— Josh Jacobson
Law Office of Josh Jacobson

October 2005

INTELLECTUAL PROPERTY
Judicial Law

• Patent Damages; Royalty Rate. In a case of first impression, the Court of Appeals for the Federal Circuit held that in determining a reasonable-royalty rate for patent damages, the rate to apply is the one that would have been in effect during the period of damages. The holding is a surprise because the law, which did not change, requires consideration of a hypothetical negotiation by the parties of the royalty rate on the date of first infringement — regardless of whether the damages period reaches back that far. For example, in this case, the parties agreed that the date of first infringement was January 1, 1992. The damages period began on August 17, 1998, however, due to notice requirements in the patent statute. There was evidence that a hypothetical negotiation on January 1, 1992, would have resulted in a royalty rate of 1.75 percent. However, there was also evidence that the parties would have reduced the royalty rate to 0.5 percent in 1997. Because no damages accrued before 1998, despite infringement beginning in 1992, the Court of Appeals applied only the lower royalty rate. The court reasoned that because its case law did not preclude reliance on events occurring after the hypothetical negotiation on the date of first infringement, the "highest royalty rate that the evidence supports for the 1998 – 2000 damages period is 0.5 percent." Harris Corp. v. Ericsson Inc., No. 03-1625, -1626 (Fed. Cir. 08/05/05).

• Patent Claim Construction; Expert Witness. The recent en banc decision in Phillips v. AWH Corp. has generated a lot of discussion about many aspects of patent claim construction. One recent case provides some insight into the post-Phillips role of expert witnesses in claim construction. tap Pharmaceuticals sued Owl Pharmaceuticals for infringement of a number of drug patents; claim construction and dispositive motions all occurred before the decision in Phillips. However, the appellate decision, written after Phillips, affirmed a claim construction that relied, in part, on the testimony of Owl’s expert witness — Dr. Pitt. The claim term was "containing." tap complained that the district court improperly relied on extrinsic evidence — Dr. Pitt’s testimony — in construing such a nontechnical term. Reiterating the main point of Phillips, that claim construction must be from the perspective of the skilled artisan, the court said: "While the term ‘containing’ is not a technical term, the term is essential in helping to describe the patented technology. As a result, the term cannot be defined by some ordinary meaning isolated from the proper context, and it was appropriate for the district court not only to consider the intrinsic evidence, but also to consider Dr. Pitt’s interpretation of that evidence, both in the context and from the perspective of a person of ordinary skill in the art." TAP Pharma. Prods., Inc., et al. v. Owl Pharmas., L.L.C., et al., No. 03-1634, -1635 (Fed. Cir. 08/18/05).

• Trademark Infringement; Functionality Defense. The 8th Circuit Court of Appeals does not clown around when it comes to the functionality defense to trademark infringement. Frosty Treats appealed a trial court’s holding that its Safety Clown graphic (Bozo-style clown with disjointed hand and extended finger) was functional, and therefore not eligible for trademark protection, because it served the purpose of directing children to the rear of a treat vehicle bearing the graphic. The functionality defense prevents trademark protection only for a feature that is essential to the use or purpose of the article — usually the subject of patent protection. Treating Frosty to a reversal, the Court of Appeals reasoned that the error occurred because the trial court applied "the colloquial meaning of ‘functional’ rather than the specialized meaning that it has in trademark law." Frosty Treats, Inc. et al. v. Sony Computer Entertainment America, Inc., No. 04-2502 (8th Cir. 08/25/05).

— Tony Zeuli
Merchant & Gould

Juvenile Law
Judicial Law

• Termination of Parental Rights. Where the district court terminated the mother’s parental rights to her four children and the Court of Appeals reversed on grounds that the county failed to make reasonable efforts towards family reunification, the Supreme Court, noting that only one ground must be proven for termination to be ordered, concluded that the district court’s findings supported termination of the mother’s parental rights based on palpable unfitness.

The district court found that the mother was unable to provide appropriate care for her children because she refused to acknowledge her responsibility to protect her children from abuse by others and had not taken any steps to help the children understand that they were not responsible for the past abuse they suffered. The Supreme Court held these findings were supported by the evidence and supported the district court’s decision to terminate parental rights.

Turning to the issue of whether the county made reasonable efforts to reunite the mother with her children, the Supreme Court first established that the crux of the trial court’s decision to terminate parental rights was the mother’s refusal to acknowledge her duty to protect the children from abuse, not her drug use, which constituted a failure to comply with her case plan. The Court of Appeals had concluded that the county had not made reasonable efforts because it failed to provide the mother with chemical dependency treatment earlier in the proceeding. But the Supreme Court found there was nothing in the record of the district court’s findings to support a conclusion that the mother’s drug use caused or contributed to her parenting deficiencies. Because there was no causal relationship established between the mother’s drug use and her inability to parent her children, the county’s failure to provide drug treatment did not support a conclusion that the county failed to make reasonable efforts where termination was not based on the mother’s drug use. The Supreme Court held that the district court’s findings that the county made reasonable efforts to reunite were supported by clear and convincing evidence in the record and the Court of Appeals decision was reversed. In the Matter of the Children of T.A.A., A04-1345 (Minn. App. 08/04/05). www.lawlibrary.state.mn.us/archive/supct/0508/opa041345-0804.htm

• Termination of Parental Rights. In an unpublished decision, the Minnesota Court of Appeals affirmed the district court’s decision to terminate a mother’s parental rights to her special needs child. The mother has a history of mental health problems, including both bipolar disorder and schizoid personality disorder, which adversely affect her ability to parent. Her parental rights to four other children had been involuntarily terminated prior to this proceeding.. The appellate court held that the district court did not err in determining that the mother failed to rebut the statutory presumption favoring termination based on the previous terminations of her rights to her other children. Although the mother had made a commendable effort to deal with the conduct and conditions that led to the prior terminations, she was found to be palpably unfit to be a party to the parent/child relationship. In the Matter of the Welfare of the Child of K.L., A05-185 (Minn. App. 08/16/05). www.lawlibrary.state.mn.us/archive/ctapun/0508/opa050185-0816.htm

• Juvenile Delinquency. In a Special Term opinion, the Court of Appeals considered the timeliness of an appeal from an order revoking a minor’s probation in an extended jurisdiction juvenile (E.J.J.) proceeding and executing the adult sentence. The Court of Appeals concluded that the appeal was timely filed, and because there were no other grounds for dismissal, denied the county’s motion to dismiss. The decision hinged on Rule 19.11, subd. 3 (E), of the Juvenile Delinquency Rules. This rule states that a party may appeal from the court’s decision revoking E.J.J. probation according to the procedure provided by Minn. R. Crim. P. 28.05, which gives a party 90 days to appeal a sentence. The reference in Rule 19.11 to the "procedure" provided in Rule 28.05 of the Rules of Criminal Procedure extends the time allowed for appeal. In this case, the appeal was filed 61 days after the order, and therefore well-within the 90 day limit. The appellate court further stated that even if the rule were ambiguous, there was no other authority to apply the deadline that applies to other juvenile delinquency appeals. Once the adult sentence is executed, the jurisdiction of the juvenile court terminates. At that point, the need to adhere to the policy of expedited handling of juvenile delinquency appeals is diminished. In the Matter of the Welfare of J.L.P., Child, K5-03-8948 (Minn. App. 08/05/05).

• Evidence; Battered Child Syndrome. The Minnesota Supreme Court recently ruled that the admissibility of expert testimony on battered child syndrome should be determined through application of Minnesota Rule of Evidence 702 rather then through the Frye-Mack standard. The case involved a 17-year-old who shot and killed his father in their St. Cloud home. The minor claimed that he committed the crime in self-defense and asked the trial court judge to admit expert testimony regarding battered child syndrome to demonstrate his state of mind at the time of the shooting. The district court judge declined, reasoning that the defendant had not met his burden under the Frye-Mack standard of admissibility.

The Minnesota Supreme Court concluded that the trial court judge had erred using the Frye-Mack standard to exclude the evidence. The Court reasoned that the judge should have used as the test of admissibility Minnesota Rule of Evidence 702, which has been used to determine the "helpfulness" of syndrome evidence to explain behavior. Experts on "syndromes" — including battered child syndrome— are permitted to testify about the syndrome only in a general manner, providing that the testimony is helpful to the jury; they may not testify about whether a particular defendant actually suffers from a syndrome.

Despite holding that the district court erred in analyzing the syndrome evidence under the Frye-Mack standard, the Supreme Court nonetheless found that the trial court properly excluded the testimony. The Court held that the offer of proof submitted by the defendant and evaluated by the district court does not support the admission of expert testimony on battered child syndrome under the Minn. R. Evid. 702. Minnesota v. MacLennan, A03-2048 (Minn. 08/18/05).

— Gary A. Debele
Walling, Berg & Debele

October 2005

REAL PROPERTY
Judicial Law

• Slander of Title; Advice-of-Counsel Defense. In this unpublished decision, the Court of Appeals addressed for the first time the availability of the advice-of-counsel defense to a slander of title claim. Lazniarz filed a mechanic’s lien that misrepresented the amount owed and that services were provided within the 120-day period prior to the filing, a timing prerequisite to filing the lien. As a defense to a subsequent slander of title action, Lazniarz claimed that he had filed the lien on the advice of his attorney, at least with respect to the amount owed. The district court implicitly rejected the defense, observing that the advice of counsel furthered the finding of malice necessary to support a slander of title claim, and granted summary judgment in favor of the property owner. The Court of Appeals disagreed, holding that reliance on the advice of counsel is evidence of an absence of malice as long as the defendant has fully and fairly informed counsel of the pertinent facts. The court nevertheless affirmed the district court’s decision because there was no evidence that Lazniarz informed his counsel that he had not provided services within the 120-day period preceding filing and there was no evidence of good faith in that regard. Affirmed. Bridgeplace Associates, L.L.C. v. Lazniarz, A04-2218 (Minn. App. 08/09/05) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0508/opa042218-0809.htm

• Land Use; Nonconforming Uses. Property owner and dog kennel operator Reinke was charged with violating a township ordinance prohibiting an owner from keeping three or more dogs on the property. Reinke defended, in part, on the basis that her use of the property as a dog kennel predated the dog ordinance and, therefore, was a nonconforming use legally entitled to remain in existence. The Court of Appeals rejected Reinke’s defense. The court noted that the operation of a dog kennel in Reinke’s zoning district was a conditional use. But because Reinke had no conditional use permit, the use of the property as a kennel was an illegal use prior to the township’s dog ordinance. Accordingly, that use did not constitute a nonconforming use. Affirmed. State v. Reinke, A04-2219 (Minn. App. 08/23/05). www.lawlibrary.state.mn.us/archive/ctappub/0508/opa042219-0823.htm

• Fair Housing Act. A city’s approval of housing for disabled persons ("supportive housing") by itself does not constitute a Fair Housing Act (FHA) violation, despite claims that the effect of the approval will be to promote racial segregation. In approving the housing project, the city waived a requirement that new supportive housing be spaced at least one-quarter mile from existing supportive housing. A neighborhood association filed suit contending that the approval violated the FHA because the new construction would result in a further concentration of supportive housing, which would in turn result in the segregation of minorities, the primary residents of such housing. The federal district court dismissed the association’s claims and the 8th Circuit Court of Appeals affirmed. The FHA prohibits refusing, denying or otherwise making unavailable a dwelling to a person in a protected class. Because the city was approving housing — not making housing unavailable — this, by itself could not be considered a violation of the FHA. The court indicated that if the city approved projects in mainly minority neighborhoods while denying projects in predominantly white areas, a claim could arise. But the association presented no evidence that this was the case. Affirmed. Ventura Village, Inc. v. City of Minneapolis, No. 04-2546 (8th Cir. 08/17/05). http://caselaw.lp.findlaw.com/data2/circs/8th/042546p.pdf

• Mechanic’s Lien; Form of Prelien Notice. In order to fulfill the statutory prelien notice requirements for mechanic’s liens, the notice must appear (1) if typewritten, in capital letters, or (2) if printed, in at least 10-point bold font. Interspace prepared a prelien notice on a computer that was in at least 10-point bold font. The district court ruled that the notice was fatally deficient because it was not in all capitals. The Court of Appeals reversed, holding that the notice was proper. In so holding, the court observed that the distinction in the statute (adopted in 1973) was based on the fact that typewriters produced only a single-size font and that the "all capitals" requirement was needed so that the typewritten language would be conspicuous. Because computers can produce text in fonts of different sizes and weights, their output is more akin to a "printed" document. The court’s decision has the likely effect of making the "all capitals" requirement applicable only to notices prepared on a typewriter. Reversed and remanded. Wong v. Interspace-West, Inc., A04-2409 (Minn. App. 08/09/05). www.lawlibrary.state.mn.us/archive/ctappub/0508/opa042409-0809.htm

• Contract for Deed v. Equitable Mortgage. A married couple purchased real property with funds lent to them by the husband’s father. The couple quitclaimed the property to the father who then conveyed it back to the couple on a contract for deed. In litigation concerning the father’s attempt to cancel the contract for deed, the evidence was disputed as to whether the parties intended a true contract for deed relationship as opposed to an equitable mortgage. The district court determined that the father was an equitable mortgagee, not a contract for deed vendor. The Court of Appeals affirmed, concluding that the district court’s finding that the parties intended to create an equitable mortgage was not clearly erroneous. On appeal, the father argued that there could not be an equitable mortgage where title to the property originates with the party lending funds. The court agreed with this rule, but noted that the facts of this case did not fall within it. Here, the couple held title to the property, albeit very briefly, and then conveyed the property to the father. According to the court, had the father been the initial purchaser of the property and then conveyed it to the couple, the outcome would have been different. Affirmed. Fraser v. Fraser, A04-2138 (Minn. App. 08/16/05). www.lawlibrary.state.mn.us/archive/ctappub/0508/opa042138-0816.htm

— C.J. Deike
Edina Realty Home Services

October 2005

TAX
Judicial Law

• Income Tax: Stock Options as R&D Expenses. The taxpayer entered into an agreement with a foreign subsidiary to develop certain intangibles. It paid the employees performing the research and development in part with stock options. The taxpayer did not include these stock options in its research and development costs. The IRS issued a Notice of Deficiency determining that the spread or grant date value of the stock options should be included as a research and development cost. The Tax Court agreed with the taxpayer, finding that the IRS allocations were arbitrary and capricious. Xilinx Inc and Subsidiaries v. Commissioner, 125 T.C. No. 4 (08/30/05).

• Innocent Spouse Relief Granted; No Finding of Financial Hardship. The Tax Court granted equitable relief under IRC 6015(f) to taxpayer for three years. The Tax Court found that all of the factors to be considered weighed in taxpayer’s favor except constructive knowledge and substantial financial hardship. The court found that while the returns indicated a balance owing, petitioner believed her husband would pay the amounts indicated as owing. The court further found that the substantial economic hardship factor could not be determined on the record as no information as to petitioner’s assets had been presented. Petitioner is a medical doctor with significant yearly income. Despite this, the Tax Court found it would be inequitable not to award relief in this case. Ruth E. Neal v. Commissioner, T.C. Memo 2005-201.

• Collection Due Process: Settlement Officer Deadline Not Met. Taxpayer had requested a Collection Due Process Hearing. The settlement officer asked the taxpayer to provide financial information. The taxpayer did not do so before the deadline and offered to the settlement officer no request to extend the deadline or reasons why it could not be met. The Tax Court held that the settlement officer was entitled to set deadlines and upheld the levy. Francis A. Morlino v. Commissioner, T.C. Memo 2005-203.

• Collection Due Process: Notice of Determination was Abuse. Taxpayers requested a Collection Due Process Hearing after receiving a Notice of Intent to Levy. The taxpayers offered to pay $1200 per month and this was rejected by settlement officer. The Notice of Determination indicated that taxpayers had more than $2700 per month of "excess" income and therefore the proposed amount was too low. Before trial, IRS counsel agreed that the taxpayers had less than $900 per month of "excess" income (as was reported to the settlement officer). The Tax Court found it was an abuse of discretion to issue the notice if indeed the income was the amount now admitted by the IRS and remanded to the commissioner for reconsideration of the matter of ability to pay. Lites v. Commissioner, T.C. Memo 206.

• Income Tax: Investment Tax Credits. The Tax Court determined that the taxpayer was not entitled to take investment tax credits (ITCs) for certain property and equipment placed in service during the taxable years of 1988, 1989 and 1990. The issue was whether taxpayer was entitled to relief from the Tax Reform Act repeal of the ITC in certain circumstances. Because the taxpayer failed to begin construction before December 31, 1985, the Tax Reform Act section 203(b)(1)(C) did not provide relief for taxpayer from the ITC repeal for the distribution and transmission substations. FLP Group, Inc and Subsidiaries v. Commissioner, T.C. Memo 2005-208.

• Income Tax: Constructive Receipt of Income. The taxpayer received a check which would have closed his retirement account in 2001 but he did not cash the check. Therefore, the account remained open throughout 2001. The Tax Court held that the doctrine of constructive receipt was dispositive of the matter despite the fact that a different result on the receipt of the income might have been reached under state law. Arthur F. Millard v. Commissioner, T.C. Memo 2005-192.

• Income Tax: Basis of Advances Paid to S Corporation Netted. The Tax Court decided that advances to petitioners’ S corporation were an open account debt (in part because this was not contested by IRS) and therefore that the basis in the open account is properly computed by netting at the end of the year advances made during the year against repayments made during the year. Thus the advances during the year shielded petitioners from realizing any gain upon the repayments during that year. Fleming and Sherry Brooks v. Commissioner, T.C. Memo 2005-204.

• Income Tax: Tax Protestor. A Pennsylvania tax protester, Larken Rose, was convicted for not filing back taxes. His argument that IRC §861 places domestic earnings outside the reach of the existing income tax structure was used by many other taxpayers (in fact he had a business disseminating this argument to others). The jury did not accept his claims as valid arguments. This contrasts with the Joseph R. Banister criminal trial, where a former IRS agent was acquitted on similar charges earlier this summer using a similar defense. The judge in the Penna. case has stated he will reduce sentence if Rose files the outstanding returns and agrees to pay the back taxes. 2005 TNT 156-1

• Income Tax: Offsets. The Federal Circuit held that the IRS wasn’t entitled to offset an erroneous payment of statutory interest against a tax refund for the same year because the offset was made after the statute of limitations had expired on bringing a suit to recover the erroneous interest. The Federal Circuit overruled a decision by the Court of Claims, which had allowed the offset, because it reasoned that Pacific Gas had opened the door to a redetermination of the entire tax year in question by its claim for refund. Pacific Gas & Electric Company et al. v. United States, (Fed. Cir. 08/10/05) Doc 2005-17029.

• Tax Shelter Penalties: Abated at Death? A U.S. District Court has stayed enforcement of an IRS summons for bank records in a tax shelter case pending an appeal by the taxpayer’s estate. The estate contends that the tax shelter penalties under §§6700 and 6701 abate at death. The judge in the case has previously determined that the penalties did not abate as they were not penal in nature. However, the judge did stay enforcement of the summons order until the estate could appeal the issue. Reiserer v. United States, U.S. Dist. Ct (W.D. WA), 07/15/05, Doc 2005-16920.

• Procedure: Civil Fraud Penalties. The 8th Circuit affirmed the Tax Court decision imposing civil fraud penalties on a taxpayer who had been convicted of four counts of filing false tax returns. The courts rejected arguments that the doctrines of res judicata, equitable estoppel, and double jeopardy prevented the assessment of civil fraud penalties against the taxpayer. Kevin J. Morse v. Commissioner, No. 04-2040 (8th Cir, 08/22/05).

• Bankruptcy: No Offset of Anticipated Tax Refund. A bankruptcy judge held that an anticipated tax refund was not part of the estate and therefore the IRS was not entitled to offset unpaid dischargeable taxes against the anticipated refund. There is a split of authority on this issue. The court avoided the §522 versus §553 debate and held that until the money is released by the Treasury it cannot be part of the estate. In re Adam Patrick Pigott et ux., No. 05-10327-mam-7 (Bankr. S.D. Ala. 08/05/05).

• Income Tax: Sums Received to License Software Were Ordinary Income. The taxpayer claimed that monies received to license inventory management software were installments on the sale of exclusive rights and treated the sums as long-term capital gains. The 6th Circuit affirmed a Tax Court decision holding that the monies received were ordinary income. Vision Information Services LLC v. Commissioner, No. 04-2110 (6th Cir. 08/22/05).

• Criminal Conviction Upheld. The 10th Circuit affirmed the sentence of an individual who had pled guilty to tax evasion. The court found no constitutional Booker errors. United States v. Henry D. Wilson, No. 03-5207 (10th Cir. 07/21/05).

• U.S. Tax Court Transparency. Pursuant to Ballard v. Commissioner of Internal Revenue, 73 U.S.L.W. 4194 (2005), the Tax Court released statements from two judges and the special trial judge involved in the Ballard, Kanter, and Lisle cases that describe the procedure used by the Tax Court in adopting its opinion in the cases. The documents released show that initially the special trial judge found in favor of the taxpayers and later changed his report at the request of the tax court judges. The House Ways and Means Committee is conducting an investigation to learn more about the Rule 183 process employed by the Tax Court in Ballard. The committee is looking into whether changes in the court’s authorizing statute are needed. Tax Notes, 07/25/05 (pp. 394-6).

• Income Tax: Sham Trust Income. Net income from a family business was properly taxable to individuals and not trusts they created to operate the business. The Tax Court held the trusts were shams because they lacked economic substance. AMC Trust et al. v. Commissioner, T.C. Memo 2005-180 (July 25, 2005).

• Income Tax: Employment Termination Settlements. The Tax Court held that no portion of a settlement for a violation of civil rights claim was compensation for personal injury or physical sickness and therefore it was all includable in taxable income. The decision was based on the fact that neither the settlement agreement nor the complaint established that the settlement payment was made on account of physical injury or sickness. Robert A. Allum v. Commissioner, T.C. Memo. 2005-177 (07/20/05). In an unpublished opinion the 2d Circuit affirmed a Tax Court decision similar to Allum. The 2d Circuit held that proceeds of a settlement for employment termination were not excludable from income. Joseph Tamberella v. Commissioner, No. 04-2593-ag (2d. Cir. 07/14/05).

• Income Tax: Settlement Payments. Taxpayer received payment of $2million in settlement of his claims for tortuous interference with contracts, for personal injury including injury to taxpayer’s personal and professional reputation and emotional distress, humiliation, and embarrassment resulting from the contract termination. The Tax Court found the payments were not excludable from income and the 8th Circuit affirmed. Lindsay v. Commissioner, No. 04-2978 (8th Cir. 09/02/05).

• Procedure: Summons Enforcement; 4th and 5th Amendment. The 8th Circuit upheld the enforcement of an IRS summons for financial records holding that this would not violate either the 4th or 5th Amendment rights of the taxpayer. U.S. v. Norwood, No. 04-2623 (8th Cir, 08/26/05).

• Procedure: 60 Day Rule to Provide Income and Expenses. Taxpayer’s failure to provide income and expense information to the county assessor within 60 days of a petition being filed to challenge the assessment of taxpayer’s property resulted in the matter being dismissed. Even though the taxpayer attempted to comply with the rule, failure to fully comply with the requirement contained in Minn.Stat. §278.05 Subd. 6(a) resulted in the dismissal of the petition. David P. Gregorich . County of Anoka, C6-02-4557 (Minn.Tax Ct, 08/31/05).

Administrative Matters

• Minnesota Penalty Abatement Requests; "Reasonable Cause." The Minnesota Department of Revenue modified Revenue Notice 97-01 on August 15, 2005, concerning requests for abatements of penalties. The modification creates a presumption of reasonable cause for a late payment or filing if it is a first time occurrence for the tax involved and the taxpayer has a previous history of timely compliance unless facts exist which make it inequitable to grant the abatement of the penalty.

• Accounting for Uncertain Tax Positions. The Financial Accounting Standards Board released on July 14, 2005 a draft on proposed interpretation of accounting for uncertain tax positions. Two standards were contained in the draft, one for the recognition of benefits from uncertain tax positions and one for withdrawing recognition of benefits. To recognize benefits it must be probable that the tax position would be sustained on audit. 2005 TNT 135-2

Looking Ahead

• Guidance Plan for 2005-06. The IRS and Treasury released a priority guidance plan for 2005-06 on August 8, 2005. The plan contains 254 projects. The plan contains a project on donee reporting for car donations. Another project is on reporting noncash contributions to charities. The Industry Issue Resolution Program was expanded to include two new issues, the definition of home construction contracts under §460 and the member of a family receiving assistance requirements under the work opportunity and welfare-to-work credits. In addition, the tax treatment of distributions from Roth IRAs and regulations on qualified tuition programs for higher education are also contained in the list of projects. 2005 TNT 152-2, TNT 152-3 and TNT 152-17.

• Revised Form 4868. The draft of the new 4868 gives the taxpayer a six-month extension without having to file an intervening form. 2005 TNT 150-26.

— Kathryn J. Sedo
University of Minnesota Law School

October 2005

TORTS & INSURANCE
Judicial Law

• Exculpatory/Indemnification Clauses; Houseboat Rental Contracts. Exculpatory and indemnification clauses in a houseboat rental agreement violate public policy and are therefore not enforceable. Plaintiff and his party suffered carbon monoxide poisoning while using the houseboat they had rented from defendant. When plaintiff sued, the district court granted defendant summary judgment based on exculpatory and indemnification clauses in the rental agreement. The Court of Appeals affirmed the district court, but the Supreme Court reversed.

The Supreme Court held that by offering houseboats for daily and weekly rental, defendant was in effect furnishing sleeping accommodations to members of the public seeking recreation. These actions constituted "resort" or "innkeeper" functions for which a business cannot require a guest to sign a rental agreement containing an exculpatory clause that purports to release the business from liability for its own negligence.

The Court also found that the indemnification clause was similarly disfavored under the law and therefore not enforceable under the same analysis applied to the exculpatory clause. The Court also relied upon the disparity of bargaining power between the parties and the specific language of the indemnification clause, which, it held, did not contain the required "clear and unequivocal" language expressly stating that plaintiff would indemnify defendant for defendant’s negligence or for negligence occurring before plaintiff took possession of the houseboat. Doua Yang, et al. v. Voyagaire Houseboats, Inc.; B.J.M, Inc. v. Lao Xiong, A03-1842, A03-2000 (Minn. 08/04/05). www.lawlibrary.state.mn.us/archive/supct/0508/opa031842-0804.htm

• Minnesota Insurance Guaranty Association; Insolvent Insurer; Insured Liability. A party insured by an insolvent insurer may be liable to a claimant for any portion of a claim exceeding the $300,000 available from the Minnesota Insurance Guaranty Association (MIGA) up to the limits of the insolvent insurer’s policy.

Plaintiff sued defendant in U.S. District Court for more than $2 million after an alleged malfunction of equipment that plaintiff had purchased from defendant. Defendant had $1 million in primary coverage and $6 million in excess umbrella coverage from an insurer that eventually became insolvent. MIGA assumed the insurer’s obligation to defend against plaintiff’s claims. Defendant later made an offer of judgment of $300,000, the statutory maximum available from MIGA, combined with a motion to dismiss the balance of the case as moot on the ground the insured was fully protected by the statutory cap to the extent of its coverage from the insolvent insurer.

The federal court certified to the Minnesota Supreme Court the question of whether the MIGA statute capped defendant’s liability. The Supreme Court held that MIGA stands in the shoes of the insolvent insurer only until it satisfies its $300,000 indemnity obligation. Thereafter, the risk of loss shifts back to the insured, which may then pursue the assets of the insolvent insurer in an attempt to recover the difference between the statutory maximum and the policy limits. The Goodyear Tire & Rubber Co. v. Dynamic Air Inc., A04-2439 (Minn. 08/18/05). www.lawlibrary.state.mn.us/archive/supct/0508/opa042439-0818.htm

• Apportionment of Damages; Preexisting Injuries; CIVJIG 91.40. CIVJIG 91.40 misstates Minnesota law on a defendant’s burden of proof in cases involving aggravation of plaintiff’s preexisting injury or condition.

Plaintiff was rear-ended by defendant in an automobile accident and sustained neck and shoulder injuries. Plaintiff sued defendant and at trial requested the CIVJIG 91.40 instruction, claiming the accident aggravated her preexisting back and neck injuries. The district court gave the instruction, which provides that if the jury cannot separate damages caused by the plaintiff’s preexisting disability or medical condition from those directly caused by the accident, then the defendant is liable for all damages.

After the jury found for plaintiff, defendant moved for a new trial, arguing that CIVJIG 91.40 impermissibly shifted the burden to him to prove apportionment of damages. The district court denied the motion, the Court of Appeals reversed and remanded for a new trial, and the Supreme Court granted further review.

The Supreme Court affirmed the Court of Appeals’ decision, holding that defendant was entitled to a new trial on damages. Cheryl Rowe v. Mohamed Munye, A03-465 (Minn. 08/18/05). www.lawlibrary.state.mn.us/archive/supct/0508/opa030465-0818.htm

• Automobile Accident; Workers’ Compensation; Collateral Estoppel. Plaintiff was involved in two separate automobile accidents, both in the course of his employment. In a suit concerning the second accident, defendant moved for summary judgment on the ground that plaintiff’s prior workers’ compensation determination on wage loss collaterally estopped him from litigating the wage loss claim in the tort action. Defendant’s motion was denied. After the jury awarded damages, plaintiff moved for a new trial on damages because the court refused to give the CIVJIG 91.40 aggravation instruction. Defendant moved to reduce the award by the amount plaintiff received in workers’ compensation benefits. The court granted defendant’s collateral-source-offset motion in part and denied plaintiff’s motion. The Court of Appeals affirmed the district court.

The Supreme Court affirmed in part, reversed in part, and remanded. The Court held it was not error to refuse to give the CIVJIG 91.40 instruction, citing its opinion in Rowe v. Munye (supra) which held CIVJIG 91.40 misstates Minnesota law. The Court also rejected defendant’s collateral estoppel argument, holding that an employee retains the right to recover in tort from a negligent third party notwithstanding a workers’ compensation determination. The Court reasoned that the purpose of a workers’ compensation claim and a negligence action are different: one being to provide security for workers injured on the job and the other to provide for a remedy for damages caused by a nonemployer defendant. Liability was not at issue in the workers’ compensation determination, and the wage loss issues were defined differently in the two proceedings. The Court noted that the purposes of collateral estoppel — to conserve judicial resources, protect parties from multiple lawsuits, and improve court efficiency — would not be served by applying it in this context.

The Court also remanded for a new collateral-source-offset determination because the district court erred by using plaintiff’s total claimed damages, instead of the damages the jury actually awarded for past health care expenses, as the starting point for applying the collateral source statute. James A. Heine v. Valerie Simon, A03-710 (Minn. 08/18/05). www.lawlibrary.state.mn.us/archive/supct/0508/opa030710-0818.htm

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