In this month's "Notes & Trends:
• Reconsideration of Agency Decision. The Minnesota Racing Commission denied an application for a Class A racetrack license in Anoka County and two days later voted to reconsider that decision after individual commissioners received new information outside the record. A citizens’ group opposed to the racetrack objected and argued that the commission had no authority to reconsider a decision sua sponte. The Administrative Procedure Act permits reconsideration of a decision if a request is made within ten days. The court observed, however, that the statute does not preclude a commissioner from requesting reconsideration. The court also stated, contrary to the normal administrative practice, that a racetrack license-issuance process was not a contested case subject to the APA. The court relied upon Minnesota precedent in holding that an agency has inherent authority to reopen, rehear, and redetermine a decision, at least while the time for appeal has not expired. The commission’s receipt of information outside the record was not a denial of due process of law where the agency reopened the record and held another hearing where all parties participated. In Re Class A License Application of North Metro Harness, Inc., A05-471, __N.W.2d__ (Minn. App. 03/28/06). www.lawlibrary.state.mn.us/archive/ctappub/0603/opa050471-0328.htm
• Exclusivity of Remedy. Nicollet County argued that the district court lacked subject matter jurisdiction to hear a claim under the Minnesota Environmental Rights Act because a claim in this county ditch dispute could also be presented to the drainage authority under the administrative drainage procedures set out in statute. The Court of Appeals disagreed and noted that MERA specifically states that it "shall be in addition to any administrative … rights and remedies now or hereafter available." State of Minnesota ex rel Swan Lake Area Wildlife Assoc. v. Nicollet County Board of Commissioners, A05-1001, __N.W.2d__ (Minn. App. 04/04/06). www.lawlibrary.state.mn.us/archive/ctappub/0604/opa051001-0404.htm
• Arbitrary and Capricious. Where the city of St. Paul Park decided not to consider cumulative environmental impacts outside of the geographic boundary that it selected for an alternative urban area-wide environmental review (AUAR), the Minnesota Center for Environmental Advocacy argued that the city’s decision was arbitrary and capricious. The Court of Appeals considered and reviewed the extensive public and agency input into the process as well as the discussion of cumulative impacts in the study, and the creation of a mitigation plan. It decided that the city’s adoption of the AUAR, without assessing cumulative impacts outside the area selected, was not arbitrary and capricious and was supported by substantial evidence. A dissent argued that the failure of the city to set forth its reasons for selecting the geographic boundary of its cumulative-impacts analysis defeated the usual deference that the appellate court normally accords to agency decisions and rendered the decision arbitrary. Minnesota Center for Environmental Advocacy v. City of Saint Paul Park, A05-1029, __N.W.2d__ (Minn. App. 04/0/06). www.lawlibrary.state.mn.us/archive/ctappub/0604/opa051029-0404.htm
As this edition is going to press, the 2006 legislative session appears to be one of the least active in memory in considering changes to administrative law in Minnesota. No major changes and only a few minor revisions are in the works. Next column will summarize what little was finally enacted.
— Hon. George
In this month's "Notes & Trends:
• Unsigned Arbitration Agreement in Employee Manual. After White, a long-time employee of J.C. Penney, was terminated in 2004, J.C. Penney moved to compel arbitration of White’s age discrimination and retaliation claims. White argued that the unsigned arbitration agreement, which had appeared in a company program booklet eight years prior to his termination, was invalid. The district court, however, found the arbitration agreement to be valid, and dismissed White’s claims. An earlier case, Lang v. Burlington N. R.R., 835 F. Supp. 1104, 1106 (D. Minn. 1993), held that "clear and definite policy language in employee manuals may constitute a binding unilateral contract." Moreover, the language of an employee manual is binding so long as it is definite in form and clearly communicated to the employee. Pine River State Bank v. Mettille, 333 N.W.2d 622, 626 (D. Minn. 1983). Since neither Lang nor Pine River had been overruled by subsequent cases, and another employee had notified White of the new policy, White was bound to arbitrate his claims. Finally, the court rejected White’s alternative argument, which complained about the fairness of the agreement’s fee-splitting provision. The court reasoned that White was required to cover less than 5 percent of J.C. Penney’s arbitration costs, and this provision was not unreasonable in these circumstances. White v. J.C. Penney Company, Inc., 2006 WL 736965 (D.Minn. 03/21/06).
• NASD Arbitration Claims Barred by Class Settlement. Vivian Vehring, the unnamed member of a class action settlement ("Benaquisto settlement"), died shortly before the district court certified the class and approved the proposed settlement in 2001. Vivian’s son, Richard, became the trustee of his mother’s decedent trust and elected to participate in the settlement claim review process. Richard sought to recover the remaining one-third of a $450,000 annuity from defendant Ameriprise Financial Advisors. The one-third portion was denied because Ameriprise only pays two-thirds of the annuity for those who are over 75 years old. A claims evaluator awarded partial relief, but Richard also submitted an arbitration claim with the National Association of Securities Dealers ("NASD") in 2005. The defendants objected on the grounds that the settlement agreement’s "Release and Waiver" provision precluded claims "based upon, related to, or connected with" the Benaquisto action or the "released conduct." In enforcing the Benaquisto settlement and barring Richard from arbitrating his claims, the district court rejected two of Richard’s key arguments. First, his claims alleging misrepresentations in the sale and servicing of the annuity dealt with conduct occurring in 1999, and were therefore included within the definition of "released conduct." Second, the NASD claims did not fall within any exceptions to the release because they were based on oral misrepresentations made at the time of sale, not on any contractual benefits "that will become payable in the future" pursuant to the express written terms of the annuity. Benaquisto v. American Express Financial Corporation, 2006 WL 453135 (D.Minn. 02/23/06).
• Court Requires Arbitration of Claims Against Amateur Athletic Association. Jeff Siebert, a deaf basketball coach, and his daughter, Cindy, a deaf basketball player on her father’s team, brought suit against the Amateur Athletic Union of the United States, Inc. ("AAU") because the association failed to provide them with a sign language interpreter in violation of the Americans with Disabilities Act (ADA) and Minnesota Human Rights Act (MHRA). AAU argued that the Sieberts were bound to arbitrate their claims pursuant to an online membership agreement completed and submitted online by the team’s head coach on their behalf. The district court sided with AAU and stayed the court proceeding pending arbitration. Although the Sieberts had not physically signed the agreement, "ordinary principles of contract and agency" bound them to the arbitration clause, following the head coach’s actions as their "agent." See Thomson-CSF, S.A. v. American Arbitration Ass’n, 64 F. 3d 773, 776 (2d Cir. 1995). As for the Sieberts’ argument that the agreement was unconscionable, it is for the arbitrator rather than the courts to decide if the agreement’s provisions limiting discovery, waiving punitive damages, and allowing AAU to unilaterally modify the contract were sufficient to invalidate the agreement. Siebert v. Amateur Athletic Union of the United States, Inc., 2006 WL 659498 (D.Minn. 03/14/06).
— Darin T.
In this month's "Notes & Trends:
• No Exception to Discharge Under §523(a)(6); Conduct "Willful", Not "Malicious." In reviewing the district court’s grant of partial summary judgment, the bankruptcy appellate panel (BAP) reversed the bankruptcy court’s ruling that relied on collateral estoppel to support a determination that certain of the debtors’ debt was to be excepted from discharge under 11 U.S.C. §523(a)(6).
The BAP first questioned whether a partial summary judgment is final for collateral estoppel purposes. The BAP noted that while the 8th Circuit has not specifically addressed the issue, the appellate court does appear to favor a more liberal approach to finality and require only that the judgment be "sufficiently firm to be accorded preclusive effect." The BAP went on to find that even assuming the debtors were precluded from relitigating findings in the district court judgment, those findings did not support a judgment under §523(a)(6) of the Bankruptcy Code for two reasons. First, while the conduct described in the judgment demonstrated that the debtors acted willfully, there was no evidence in the record to support a finding that debtors’ conduct was particularly targeted against the plaintiffs. Second, there was no evidence in the record regarding the existence of the plaintiffs’ injuries, proof of which is necessary to prevail under §523(a)(6) of the Bankruptcy Code. Order reversed. Jamrose v. D’Amato (In re D’Amato), No. 05-6055EM (B.A.P. 8th Cir. 2006)
• Property "Exempt from Attachment and Execution." In two recent cases the court permitted debtors to exempt the proceeds from their federal and state tax returns. The authority cited for their claimed exemption was §513.427 of the Missouri Statutes, which states:
The bankruptcy appellate panel (BAP) focused on the language "exempt from attachment and execution." The BAP’s analysis was therefore whether the debtors’ anticipated state and federal tax returns were subject to "attachment and execution" under Missouri law or federal law by any of the debtors’ creditors. The BAP concluded that tax refunds are not subject to attachment and execution under Missouri law or federal law, and therefore found them exempt pursuant to Missouri statute, §513.427.
Chief Judge Kressel dissented. His position was that §513.427 is not an exemption statute. Indeed, he questioned whether the statute was instead a "wordily drafted opt-out statute." Kressel further noted that the BAP’s holding would lead to unintended consequences. As an example, Kressel stated that if debtors owned property in Kansas, it would be exempt because that property would not be subject to attachment under Missouri law. Kressel would have affirmed the bankruptcy court’s order overruling debtors’ claimed exemptions. Benn v. Cole (In re Benn), No. 04-6053EM (B.A.P. 8th Cir. 2006); Mohrhard v. Cole (In re Mohrhard), No. 04-6054EM (B.A.P. 8th Cir. 2006
• Collateral Estoppel. The trustee for the next of kin of Richard Crossman commenced a wrongful death action when Mr. Crossman died about one year after an accident in which the car he was driving collided with a dump truck driven by appellant Lockwood, for his employer, Simonson Construction.
Auto Owners Insurance Company, the property insurer for Crossman, paid for the damages to his vehicle and then commenced a subrogation action against Lockwood and Simonson. Although counsel for Crossman attended the depositions of the Crossmans, taken as a part of discovery for the subrogation action, and Mrs. Crossman testified at trial of the subrogation claim, Crossman was not a party to the subrogation action and their counsel did not control the subrogation lawsuit. A jury found both Lockwood and Crossman negligent, but also found that only Crossman’s negligence was a direct cause of the collision.
Later, the trustee for the heirs of Crossman commenced this wrongful death action. Lockwood and Simonson Construction moved for summary judgment on the ground that Crossman was in privity with Auto Owners and the doctrine of collateral estoppel barred a second lawsuit on the issue of causal negligence. The district court denied the summary judgment motion, but certified this question as important and doubtful: whether privity exists between the trustee in the instant action and Auto Owners Insurance Company, in a prior action involving the same operative facts, such that application of the doctrine of collateral estoppel is appropriate.
The Court of Appeals answered the certified question in the negative, noting that there are four questions to answer regarding the application of collateral estoppel:
The Supreme Court has stated that "There is no prevailing definition of privity which can be automatically applied … ." In fact, the circumstances of each case are to be examined to determine the nature and extent of any relationship between formal parties and those alleged to be in privity.
The Court of Appeals answered the last two questions in the negative, holding that Auto Owners and Crossman were not in privity and that they did not control the testimony or decisions as to what evidence was submitted in the subrogation action. Therefore, the district court correctly denied the application of collateral estoppel. Crossman v. Lockwood, 2006 WL 998081 (Minn. App. 2006).
• Voir Dire; Jurors Prior Criminal Trial Service Not Queried. The appellant proceeded pro se in his trial for terroristic threats and assault. During voir dire, four jurors responded that they had served in prior criminal trials, and verdicts had been reached. The court asked no further questions. "Ideally, the district court should have inquired about the nature of the charges in the previous cases and the effect of the jurors’ past jury service upon their present ability to serve." In this case, however, there was no error. First, the respondent failed to object. Second, appellant did not ask the court to conduct additional inquiry. Third, respondent had the opportunity to inquire further into the jurors’ past service. Fourth, respondent has not established plain error. State v. Gerald Arthur Gillespie, A05-269 (Minn. App. 02/28/06). www.lawlibrary.state.mn.us/archive/ctappub/0602/opa050269-0228.htm
• Medical Privilege; Assertion by Criminal Defendant. In this case of first impression, defendant was on trial for assault and terroristic threats. Over the defendant’s objection, the court allowed the victim’s medical information to be admitted. Following other jurisdictions, the Court of Appeals concludes that the criminal defendant lacks standing to assert the victim’s physician-patient privilege to exclude medical evidence to shield himself from prosecution. State v. Gillespie, supra.
• Miranda; Coercive Interrogation of Juvenile. Appellant, a 14-year-old, was a suspect in a criminal sexual conduct investigation involving a seven-year-old. At a second interview, the child and his mother and her fiancé were brought to the police station. Neither the mother nor the fiancé were invited to attend the interrogation. Without giving the Miranda warning, the detective intensely questioned the appellant for 55 minutes, shouting at him, and suggesting that he would not be able to leave until he confessed ("I have all day"). On several occasions, the appellant broke down sobbing. Appellant was at no time advised that he was free to leave. Eventually, the appellant made incriminating statements.
Held, the circumstances surrounding the appellant’s interrogation support a conclusion that he reasonably believed that he was in custody at the time of his admissions. While the test for determining whether a person is in custody is objective, it must be made from the perspective of a juvenile. Statements are suppressed and the adjudication is reversed and remanded. In re D.S.M., A05-638 (Minn. App. 03/14/06). www.lawlibrary.state.mn.us/archive/ctappub/0603/opa050638-0314.htm
• DWI/Implied Consent; Due Process; Failure to Warn. The Court of Appeals reversed the trial court and held that failing to inform a driver that test refusal is a gross misdemeanor that may result in harsher penalties than a test failure comports with the fundamental fairness required by due process. "Unlike a Miranda warning, which affirmatively states that the respondent has the right to remain silent, the implied consent advisory … did not tell the respondent that he had a right to refuse to take the test or implicitly ensur[e] that the penalties for the test would not be more severe than the penalties for a test/failure." State v. Alan J. Meyers, A05-1604 (Minn. App. 03/14/06). www.lawlibrary.state.mn.us/archive/ctappub/0603/opa051604-0314.htm
• Right to Counsel; Limit on Post Conviction Review. Under Minnesota’s Constitution, the 2003 amendment of the state public defender statute, which allows the public defender to decline representation of indigent postconviction petitioners who pleaded guilty, received the presumptive sentence or less, and did not pursue a direct appeal, violates the petitioner’s right to the assistance of counsel. The 2003 amendment to Minn. Stat. §590.05 is severed and the version that existed immediately prior to 2003 is revived. Daniel Deegan v. State of Minnesota, A05-24 (Minn. 03/23/06). www.lawlibrary.state.mn.us/archive/supct/0603/opa050024-0323.htm
• Expungement; Plea of Guilty with Stay of Adjudication. Respondent pled guilty to felony theft. The judge did not accept the plea, and placed the respondent into a one-year diversion program, after which time the respondent was discharged without a conviction. Upon his successful completion of the diversion program, the complaint was dismissed. Held, the plea of guilty with a stay of adjudication is not a result "in favor of defendant" so as to qualify for expungement under Minn. Stat. §609A.02. The plea and admission of guilt provided the court with a lawful basis for adjudication and the absence of an adjudication does nothing to diminish the extent to which the respondent made himself "subject to sentencing." Furthermore, it would be improper, in this case, for the court to exercise its inherent judicial power to expunge under State v. B.A.D., 436 N.W.2d 808 (Minn. App. 1989). The court notes that judicial intrusion into the executive function should occur only when "essential to the existence, dignity and function of the court," a circumstance arising "only when a petitioner’s constitutional rights have been violated." State v. A.C.H., A05-1405 (Minn. App. 03/21/06). www.lawlibrary.state.mn.us/archive/ctappub/0603/opa051405-0321.htm
• Crawford: Statements to Nurse Practitioner by Child. After the mother had noted significant signs of physical and sexual injury to her three and one-half-year-old child, a medical assessment was done. Following the medical assessment, a pediatric nurse assistant conducted a further examination, following a particular protocol. During the examination, the child stated that there had been some sexual contact upon the child by the appellant. In a pretrial hearing, the court found the child unwilling to orally answer questions and hence incompetent to testify. The child was therefore unavailable and the appellant had no opportunity to cross-examine her. Held, the statements by the child to the nurse practitioner are nontestimonial, and may be admitted without a confrontation clause violation under Crawford. The court notes the eight "Crawford factors" articulated in State v. Wright, 701 N.W.2d 802 (Minn. 2005) and finds most, if not all, of these factors to be satisfied. The court notes that the seventh Wright factor, the intent of the questioner, is one of "the most important factors in determining whether statements are testimonial." State v. Anthony Phillip Scacchetti, A03-301 (Minn. 03/30/06). www.lawlibrary.state.mn.us/archive/supct/0603/opa030301-0330.htm
• Presumption of Innocence: Reference to Incarceration Pending Trial. During cross-examination by defense counsel, a witness responded to a question in a way which essentially stated that the appellant had been in jail for the past two years. Defense counsel immediately objected, at which time the court provided a curative instruction in lieu of granting a motion for a mistrial. Noting that references to prior incarceration can be unfairly prejudicial, the Supreme Court states that it has not yet enunciated a general rule that it is prejudicial for the jury to learn that a defendant is in jail for the crime for which he or she is on trial. Finding that the reference to the appellant’s incarceration "arguably damaged the presumption that Manthey was innocent until proven guilty," the Court nonetheless holds that whatever prejudice was created was not so fundamental or egregious as to require declaration of a mistrial and was effectively mitigated by the court’s instruction. State v. Ardell Hope Manthey, A04-2468 (Minn. 03/30/06). www.lawlibrary.state.mn.us/archive/supct/0603/opa042468-0330.htm
• Sex Offender Treatment: Sanction for Not Participating in Treatment; Self-Incrimination. Appellant was incarcerated for 1st Degree Burglary and 3rd Degree Criminal Sexual Conduct. He refused to participate in a sex-offender treatment program in prison, largely because he was appealing his conviction and did not want to admit his offenses during treatment. Noting that Justice O’Connor’s concurrence in McKehn v. Lile, 122 S.Ct. 2017 (2002) must be treated as the Supreme Court’s "holding" in that case, the Court of Appeals finds that decision effectively overrules State v. Morrow, 590 N.W.2d 787 (Minn. 1999). While Justice O’Connor’s concurrence does not set a standard for what would constitute unconstitutional "compulsion," it indicates that a sanction involving longer incarceration would meet the standard. In this case, the sanction imposed on the appellant, namely, a loss of supervised release, effectively extended the appellant’s incarceration and constitutes "compulsion." Frank Edward Johnson v. Commissioner of Corrections, A05-2498 (Minn. App. 04/04/06). www.lawlibrary.state.mn.us/archive/ctappub/0604/opa052498-0404.htm
• DWI/Implied Consent; Out-of-State Convictions; Enhancement. Minnesota may use prior DWI offenses from other states to enhance to a felony even if the out-of-state DWI laws do not recognize a limited right to counsel before electing to take an alcohol test after arrest. Using traditional conflict-of-law principles to evaluate the prior conviction, the Supreme Court finds that the state which has the greatest interest in the police conduct is the state in which the conviction occurred, in this case, South Dakota. The Supreme Court finds that this is far from the "unique case" which would render void a judgment from another state. State v. Randy Leroy Schmidt, A05-218 (Minn. 04/13/06). www.lawlibrary.state.mn.us/archive/supct/0604/opa050218-0413.htm
• DWI/Implied Consent; Fedziuk Violation Remedy. Appellant did not obtain an implied consent hearing within 60 days, as allowed under the 2003 Implied Consent Amendment held to be unconstitutional in Fedziuk v. Commissioner of Public Safety, 696 N.W.2d 340 (Minn. 2005). Citing Szczech v. Commissioner of Public Safety, 343 N.W.2d 305 (Minn. App. 1984), the Court of Appeals agrees that a remedy for not providing a hearing within 60 days is not rescission but the availability of a stay of the revocation. In fact, appellant availed himself of that remedy. Charles J. Bendorf v. Commissioner of Public Safety, A05-1484 (Minn. App. 4/18/06). www.lawlibrary.state.mn.us/archive/ctappub/0604/opa051484-0418.htm
• Sentence; Minn. Stat. §609.035; Basis is Most Serious Offense. After a court trial, the appellant was convicted of gross misdemeanor assault, gross misdemeanor interference with 911-call, and misdemeanor disorderly conduct. The district court sentenced appellant to two concurrent terms of 365 days in the workhouse. Appellant maintained he should be sentenced on the 911-interference call, which is not an aggravated felony under immigration laws.
Held, the Court of Appeals was correct in requiring the sentence on the "most serious" offense rising from a single course of conduct under Minn. Stat. §609.035. Appropriate methods for determining the most serious offense are the length of sentences, severity level rankings under the guidelines and, in this case, a crime of violence (domestic assault) is more serious than a 911 call, which is a crime against government administrative services. Immigration consequences are not relevant to the inquiry as to which of the offenses are most serious under Minn. Stat. §609.035. State v. Kefa Apiemi Kebaso, A04-1239 (Minn. 04/13/06). www.lawlibrary.state.mn.us/archive/supct/0604/opa041239-0413.htm
• Jury Trial; Improper Comments by Bailiff to Jurors. During the appellant’s two-day trial, a bailiff had improperly commented to three of the 12 jurors that there was a real methamphetamine problem in Chisago County and suggested that the only way to stop the problem was to get the offenders off the streets. In this case, the appellant was charged with possession of cocaine, but a Spreigl incident involved methamphetamine.
Held, the bailiff’s comments are presumptively prejudicial because they were privately made and could have affected the appellant’s right to an impartial jury. Using the four Cox factors, the state did not overcome the presumption of prejudice and did not satisfy its burden of establishing that the contact was harmless. Finally, the court had no opportunity to take specific curative measures because it only became aware of the improper comments post trial. State v. Kenneth Eric Hanke, A05-261 (Minn. App. 04/11/06). www.lawlibrary.state.mn.us/archive/ctappub/0604/opa050261-0411.htm
• Search and Seizure; Vehicular Stop; Colored Light. A reasonable articulable suspicion exists to stop a vehicle displaying any colored light, other than that permitted by Minn. Stat. §169.64. In that statute, no red or any other colored light is permitted. In this case, the appellant had an internal purple light in the engine compartment, which had the effect of illuminating the entire one and a half square foot engine compartment with a purple color. State v. Theodore Harold Johnson, A05-1971 (Minn. App. 04/18/06). www.lawlibrary.state.mn.us/archive/ctappub/0604/opa051971-0418.htm
• Search and Seizure; Warrant Tainted by Illegally Obtained Information. On September 17, 2003, while investigating a car crash, a sheriff and a state trooper entered the appellant’s home in a search which the Court of Appeals finds illegal and unjustified by the emergency exception. As a result of that entry, they observed several firearms and open boxes of ammunition. Approximately a week and a half later, on September 17, 2003, police obtained a no-knock and night-capped warrant for "officer safety," citing the information about the firearms from the prior illegal search, and with other boilerplate concerning officer safety. The search on September 27th yielded controlled substances. In between the two searches, police had two peaceful encounters with the appellant.
Held, the search warrant lacked any particularized showing of dangerousness. Without the information obtained from the illegal entry on September 17th, the no-knock and nighttime provisions are invalid, and the evidence seized in such a search must be suppressed. State v. Scott Allen Amundson, A04-2072 (Minn. App. 04/11/06). www.lawlibrary.state.mn.us/archive/ctappub/0604/opa042072-0411.htm
• Search and Seizure; Dog Sniff in Common Hallway a Search. Police were given information from apartment complex employees that appellant had activated growing lights in his apartment: they smelled marijuana, they had observed activated grow lights, and had been refused entry to investigate a water leak. A drug-sniffing dog was brought to the apartment complex and "hit" in the common hallway outside the appellant’s unit. The appellant’s apartment was searched yielding controlled substances.
Held, while a dog sniff in a common hallway is not a 4th Amendment search under the federal Constitution, "We conclude that a dog sniff in the common hallway is a search under the Minnesota Constitution that requires only a reasonable articulable suspicion." Following Wiegand, 645 N.W.2d 125 (Minn. 2002), the officer must have a reasonable articulable suspicion of drug-related criminal activity to lawfully conduct a dog sniff. In this case, the legal predicate for the search was met. State v. Scott Evan Davis, A05-857 (Minn. App. 04/11/06). www.lawlibrary.state.mn.us/archive/ctappub/0604/opa050857-0411.htm
• Evidence; Murder Motive; Life Insurance Policy. Adopting a new rule, the Minnesota Supreme Court rules that there must be some evidence, under Rule 402, that a defendant knew of an insurance policy before such a policy may be introduced as evidence of the defendant’s motive for murder. Moreover, circumstantial evidence that the defendant probably knew of the existence of the insurance policy is sufficient to indirectly show the defendant’s knowledge. State v. Thanh Quan Tran, A05-26 (Minn. 04/20/06). www.lawlibrary.state.mn.us/archive/supct/0604/opa050026-0420.htm
• Evidence; CornerHouse Videotapes as Exhibits. In a prosecution for criminal sexual conduct, the state offered as an exhibit, without objection, the CornerHouse videotape of a child sex-abuse victim. The jury asked to preview the videotape during its deliberations. Appellant was not present during the viewing, but did not object to this procedure. The Court of Appeals discusses, at length, the use of CornerHouse videotapes and suggests that trial courts exercise control over the use of such items as exhibits rather than allowing only the actual playing of the tape for the jury.
State v. Earl Wembley, A05-245 (Minn. App. 04/25/06). www.lawlibrary.state.mn.us/archive/ctappub/0604/opa050245-0425.htm
• Homicide; Equal Protection; Overlapping Statutes. The Supreme Court finds that Minnesota’s first-degree domestic murder statute, Minn. Stat. §609.185(a)(6) does not impermissibly overlap with the third-degree depraved mind murder statute, Minn. Stat. §609.195(a), or create an arbitrary classification of domestic abusers. Hence, there is no violation of the Equal Protection Clause of the Minnesota Constitution. The statutes can be distinguished because domestic abuse murder is far more specific, and may be distinguished because the mens rea elements have a different focus. State v. Charles Ray Barnes, A05-810 (Minn. 04/27/06). www.lawlibrary.state.mn.us/archive/supct/0604/opa050810-0427.htm
& LABOR LAW
• Discrimination; Pregnancy; Summary Judgment. The 8th Circuit, by a 2-1 vote, upheld termination of a woman who asserted that she was discriminated against because of her pregnancy when she was told by her boss that it was not "good management sense" for her to take a 12-week maternity leave and then told, two weeks before her return to work, that she was not expected to come back. The court held that she was terminated for legitimate employment-related reasons, rather than her pregnancy. Judge Donald Lay in dissent criticized the decision, reviewing conflicting issues of credibility and fact disputes that "should be submitted to a jury." Quick v. Wal-Mart Stores, Inc., 441 F. 3d 606 (8th Cir. 2006).
• Discrimination; Race; Summary Judgment. In a similar case, also involving Wal-Mart Stores, the 8th Circuit by a 2-1 vote upheld dismissal of racial discrimination and hostile work environment claims by an African-American employee who had on several occasions been subject to racial epithets, finding the employee was terminated for insubordination. That several white employees were terminated for conduct that was less egregious than the behavior of the claimant also refuted any racial discrimination claim. Judge Lay again dissented, viewing the majority decision as one that created "a new and dangerous precedent." Summary judgment, he stated, is a "disfavored standard," and should "seldom be utilized" in employment cases like this one. Canady v. Wal-Mart Stores, Inc., 440 F.3d 1031 (8th Cir. 2006).
• Discrimination; Age, Disability. A claim of age and disability discrimination was rejected by the 8th Circuit in the case of a 48-year-old packaging mechanic who was discharged due to frequent absences, including 96 days in one year. The employee failed to establish a prima facie case of age discrimination and could not rely on "stray remarks" about his age and condition by non-decision-makers. Because of his absences, he was not performing his job at a level to meet the employer’s "legitimate expectations." Schierhoff v. GlaxoSmithKline Consumer HealthCare, L.P., 2006 WL 955424 (8th Cir. 04/14/06).
• Discrimination; Sex; Summary Judgment. Judge Diana Murphy likewise objected to the use of summary judgment to dispose of a hostile sex discrimination claim in a third case before the 8th Circuit. The case arose out of a supervisor looking through a peep hole in the women’s restroom at work. The majority dismissed the lawsuit brought by two women on grounds of failure to exhaust administrative remedies and that the misconduct was not "sufficiently severe and pervasive" to constitute sex discrimination under Title VII of the Federal Civil Rights Act. Judge Murphy, while concurring in dismissal of some of the claims, felt that the hostile workplace claim of one of the women should not have been dismissed because she was forced to act in a "bait and take plan" to record the perpetrator’s peeping in the bathroom, which required her to "play an embarrassing and demeaning role." Judge Murphy opined that summary judgment should not have been utilized because there was "conflicting evidence" and the "inferences" arising from disputed facts should have been "viewed in a light most favorable" to the claimant, warranting trial, rather than summary judgment. Cotrill v. MFA, Inc., 443 F.3d 629 (8th Cir. 2006).
• Retaliation; Sexual Harassment. Where the federal district court had dismissed on summary judgment a sex discrimination and harassment case brought by a woman who was fired 15 days after complaining of sex harassment by her boss, the 8th Circuit reversed. There were material facts in dispute about the employer’s motivation that precluded summary judgment. Wallace v. DTG Operations, Inc., 442 F.3d 1112 (8th Cir. 2006).
• Retaliation; Prior Lawsuit. The appellate court upheld a jury verdict for female firefighters who alleged that, due to retaliation because of prior litigation they had brought, they were not given adequate protective clothing, appropriate job assignments allowing for advancement, and inadequate restrooms,. There was a causal connection between the prior lawsuit and the current maltreatment to warrant a retaliation claim, but injunctive relief to remodel the bathrooms was denied because doing so would interfere with the city’s "long-range plan for remedying the facilities violations throughout the entire department." Wedow v. City of Kansas City, Missouri, 442 F.3d 661 (8th Cir. 2006).
• Retaliation; FMLA; Workers Comp Claim. The appellate court rejected an employee’s claims that her termination following expiration of her maximum 12-week medical leave of absence violated the Family and Medical Leave Act (FMLA) and was effected in retaliation for her filing a workers’ compensation claim. The discharge was proper under the FMLA because the employee was unable to perform the "essential functions of her job after the FMLA leave" expired and the workers’ compensation claim was not was not "the exclusive cause of her termination." Bloom v. Metro Heart Group of St. Louis, Inc., 440 F.3d 1025 (8th Cir. 2006).
• Labor Relations; Subcontract. In an unpublished decision, the appellate court found a school district to have violated its collective bargaining agreement by failing to negotiate the effects of subcontracting bus driving work. Although the collective bargaining agreement gave the district the right to subcontract special education transportation, the court affirmed an arbitration award ruling the district breached the agreement by not negotiating the impact of the outsourcing and ordering reinstatement of bus drivers without cause. The arbitrator acted within his authority in ordering "the appropriate remedy" in the absence of any remedy provision in the labor contract. School Service Employees Local 294 v. Ind. School Distr. No. 728 (Elk River) 2006 WL 851935 (Minn. App. 04/04/06) (unpublished).
• Employment Contract; Unexecuted Document. In an unpublished decision, the appellate court ruled an unexecuted document entitled "Commission Agreement" did not constitute a binding employment agreement. Because there was no "express or implied acceptance" of the proposed agreement, the employee was not entitled to unpaid commissions on sales he made after the he had been previously paid on a straight salary basis as an independent contractor. Becker v. One Call, LLC, 2006 WL 998137 (Minn. App. 04/18/06) (unpublished).
• Labor Relations; Change of Benefits. A school district’s unilateral change of health insurance benefits to require larger copayments, an increase in deductibles, and decreasing inpatient hospital services was held unlawful by the Minnesota Court of Appeals. The reduction in benefits violates Minn. Stat. §471.6161 subd. 5, which proscribes unilateral reduction in the "aggregate value of benefits" under group health insurance plans and was an unfair labor practice under the Public Employee Labor Relations Act (PELRA), Minn. Stat. §179A.13 which bans public sector employers from changing negotiated "terms and condition" of employment. The school district’s claim that the health benefits statute is an unconstitutional delegation of legislative power to the union representing district teachers was rejected because it "does not delegate pure legislative power but merely permits [unions] to waive statutory restriction and reduction of health insurance benefits." West St. Paul Federation of Teachers v. Ind. Sch. Dist. No. 197 (West St. Paul) 2006 WL 997868 (Minn. App. 04/18/06).
• Employment Contract; Handwritten. The 8th Circuit reversed dismissal of an employment contract claim involving a signed, handwritten document. The document, referencing a deviation of three years without any limitations on discharge, was "textually ambiguous" because it was "reasonably susceptible to more than one construction." Therefore, the contract breach claim was remanded, although negligent and fraudulent misrepresentation claims were properly dismissed. Baum v. Helget Gas Products, Inc., 440 F.3d 1019 (8th Cir. 2006).
• Unemployment Compensation; Vacation Pay. In a rare reversal of an unemployment compensation decision of the Department of Employment and Economic Development (DEED), the Court of Appeals held that a union laborer was not ineligible for benefits due to receipt of a "vacation pay." Although amounts "paid by an employer" due to separation from employment generally are an offset to benefits under Minn. Stat. §268.085 subd. 3, that provision did not apply because the amount was earned by the employee, held by his union, and paid to the employee when his job was terminated. The employee’s lay-off was not the catalyst for the payment, which he would have received "regardless of whether he actually took a vacation, was laid-off, or was working for another employer." Auren v. Belair Builders, Inc., 2006 WL 771394 (Minn. App. 03/28/06) (unpublished).
• Unemployment Compensation; Repeated Mistakes. An employee who twice made mistakes in cutting concrete forms was not disqualified from benefits because his error did not constitute a "serious violation of the standards of behavior" that could reasonably be expected or clearly display a "substantial lack of concern for the employer." Kieft v. RK Builders, 2006 WL 998192 (Minn. App. 04/18/06) (unpublished).
• Patent Infringement; "Hired to Invent"; "Shop Rights." Judge Frank granted summary judgment of no patent infringement on two little-used defenses: hired to invent and shop rights. The hired-to-invent defense protects an employer who has been sued for patent infringement by a former employee or contractor where the employer specifically hired or directed the former employee or contractor to exercise inventive faculties. The shop-rights defense entitles an employer to use an invention patented by an employee, former employee or contractor where equity and fairness support such a use. A contractor, Pedersen, sued Akona for patent infringement. Akona successfully relied on the hired-to-invent and shop-rights defenses. Akona showed the court that Pedersen was hired to work on the project that eventually led to the invention claimed in the patent, that the only work Pedersen did for Akona was on that particular project, and that Pedersen was paid for his work. Although Pedersen performed some of the work at his own lab, he completed testing at Akona using its raw materials, mixers, and the help of Akona employees. Finally, the court found persuasive that Akona paid for the patent prosecution costs and Pedersen was aware of the patent prosecution. "Here, the undisputed facts show that Akona hired Pedersen for the sole purpose of developing [the invention]," wrote the Court.
Akona also successfully proved its shop-rights defense under both the implied license and equitable estoppel rationales. As to the former, the court found that Pedersen was specifically hired to solve the problem that led to the invention at issue, he was paid for his services, and Akona supplied the raw materials on which Pedersen worked. Pedersen also spent at least 40 percent of his time working at Akona’s facility. On these facts, "Pedersen granted Akona an implied license" to use the invention, held the court. Pedersen was also equitably estopped from suing Akona for infringement. Pedersen intended that the outcome of the project for Akona would be that it could make and sell the invention and Pedersen never indicated that Akona would have to pay a royalty to do so, found the court. "Based on the totality of the circumstances, the court finds that, under principles of equity and fairness, Akona acquired a ‘shop right’ to use Pedersen’s invention." Lee C. Pedersen, et al. v. Akona, LLC, et al., Civ. No. 05-748 (D. Minn. 04/19/06).
• Patent Infringement; "Exhaustion or First Sale." The Court of Appeals for the Federal Circuit also recently decided a patent case that turned on another little-used defense: exhaustion or first sale. The first-sale defense, also known as patent exhaustion, arises when a patented device has been lawfully sold in the United States; subsequent purchasers of the device inherit the same immunity from patent infringement as the original purchaser. Jazz convinced the Court of International Trade, and the appellate court affirmed, that the disposable cameras Jazz was importing into the United States were immune from patent infringement because they were purchased from original owners that had lawfully bought the cameras in the United States. Unable to prove the original ownership of thousands of disposable cameras, Jazz introduced evidence that 85 percent of the disposable cameras it bought from U.S. retailers were usually purchased from that same retailer. That was sufficient circumstantial evidence that the patented disposable cameras, subsequently purchased by Jazz, had been originally lawfully sold in the United States. The Court of Appeals reminded: "the ‘unrestricted sale of a patented article, by or with the authority of the patentee, exhausts the patentee’s right to control further sale and use of that article by enforcing the patent under which it was first sold.’" Jazz Photo Corp. v. U.S. and Fuji Photo Film Co., Ltd., Civ. Nos. 05-1096, -1109, -1175 (Fed. Cir. 02/28/06).
— Tony R.
• Bonafide Purchasers of Torrens Property. The Minnesota Court of Appeals recently addressed the effect on one acquiring interest in Torrens property of having actual notice of an unregistered encumbrance. A bank took a mortgage on Torrens property, but recorded it with the county recorder rather than filling it with the registrar, as the bank should have done. The bank foreclosed and was the purchaser of the sheriff’s certificate at the foreclosure sale. Again, the bank recorded, but did not file, the sheriff’s certificate. After the foreclosure, a third party (Collier) discovered that the mortgage and certificate had not been registered. Collier purchased the property owner’s interest in the property which was conveyed via warranty deed and, shortly thereafter, executed a mortgage in favor of a business associate. Collier registered both his deed and the mortgage. Having registered his interest prior to the bank registering its interest, Collier proceeded to court seeking a determination that his interest was superior to the bank’s. The district court granted summary judgment in favor of the bank. The Court of Appeals reversed. At issue was whether Collier’s interest could be superior to a prior unregistered mortgage of which he was unquestionably aware. Under the Torrens Act, an instrument conveying or purporting to convey an interest in registered land does not affect or bind the land until it is recorded; until then, it is only a contract binding on the parties. The act does provide that a purchaser in "good faith" takes registered property free of encumbrances. Clearly, had this property not been registered, Collier’s actual knowledge of the mortgage and sheriff’s certificate would have precluded him from being a good faith purchaser. But because the property was registered, the failure to register the bank’s interests made those interests merely contractual and not interests in the land. According to the court, Collier was a good-faith purchaser despite being aware of the bank’s mortgage and sheriff’s certificate because he only had notice of a "private contract," not an encumbrance. As a result, Collier’s interest was superior to that of the bank. It cannot be discerned from the court’s decision when (if ever) actual knowledge of a prior unregistered interest would preclude a purchaser from being a purchaser in good faith. Reversed. In re Petition of Collier, A05-1178 (Minn. App. 04/04/06). www.lawlibrary.state.mn.us/archive/ctappub/0604/opa051178-0404.htm
• Mootness of Zoning Issues. Property owners applied for and received county approval to construct a lake-front cabin and install a septic system. Certain interested parties (respondents) challenged the approval in district court. While the action was pending, the property owners nevertheless continued with their construction. By the time the district court rendered its decision — which was that county approvals were invalid and must be reversed — the construction had been completed. In an unpublished opinion, the Court of Appeals reversed the district court, concluding primarily that the county’s decision had been reasonable. On appeal, in addition to other arguments, the property owners contended that respondents’ challenge was moot because the improvements had been constructed. The court observed that respondents had not sought injunctive relief to prevent the construction. Given the circumstances, the court concluded that the district court’s decision "may be moot." Although dicta, this language raises the question of whether, as a prerequisite to challenging a zoning approval, the aggrieved party must seek injunctive relief so as to prevent the action from being moot. Reversed. In re Appeal of Berndt, A05-1381, A05-1409 (Minn. App. 04/25/06) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0604/opa051381-0425.htm
• Eminent Domain; Public Purpose. According to the Minnesota Court of Appeals in an unpublished opinion, a condemning authority need not establish that there is some reasonable likelihood that the public benefit ultimately sought by the taking will actually accrue. The St. Paul Housing and Redevelopment Authority (HRA) sought to condemn property owned and previously used by Exxon. The HRA planned to condemn the property for residential use even though the land was contaminated as a result of prior storage of petrochemicals. The district court granted the HRA’s petition to condemn the property over Exxon’s objection. The Court of Appeals affirmed. Exxon’s principal argument was that it was not reasonably likely that the HRA would be able to remediate the contamination sufficiently to allow for residential use of the property. According to Exxon, because the public purpose was not reasonably attainable, the petition should have been denied. The Court of Appeals disagreed. First, the court could find no precedent to support such a rule and declined to extend existing law. Moreover, the court concluded that to establish a rule such as the one proposed by Exxon would require the court to engage in "predictive judgments," which is not the role of the court in these matters. This case illustrates the continuing reluctance of the court system to conduct an extensive examination into the substance of the condemning authority’s stated public purpose. Affirmed. Housing and Redevelopment Auth. v. ExxonMobil Oil Corp. (Minn. App. 04/18/06) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0604/opa050511-0418.htm
— C.J. Deike
• Procedure; Taking of Property; Due Process. The plaintiff brought suit against the Arkansas Commissioner of Revenue for failing to provide adequate notice, which resulted in the taking of his property without due process. While Due Process does not require actual notice before the government may take property, it does require notice reasonably calculated to apprise the interested parties of the action to be taken. Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950). The unique issue in this case is the appropriate response where the government "knows" its efforts to inform failed. The Court stated that "[w]hen a notice of a tax sale or property forfeiture is mailed to a taxpayer’s last known address but returned as undeliverable, constitutional due process requires the state of Arkansas to make additional efforts to locate the owner of house before selling his property." Here, the commissioner did not even resend the letter once it was returned to him. This response did not meet the standard of Due Process, and the property must go back to the plaintiff. The Court left it to the state to determine what would constitute reasonable notice. Jones v. Flowers, No. 04-1477 ___ U.S. ___ (2006).
• Personal Income; Disability Benefits. Taxpayers appealed a decision from the Tax Court finding that they could not exclude disability benefits from their gross income. The husband, a veteran, became eligible for these payments after developing lung cancer from exposure to Agent Orange. The taxpayers argue such payments can be excluded from gross income as amounts received for personal injuries or sickness resulting from active service in the armed forces. IRC §104(a)(4). The court, however, distinguished between SSA disability benefits awarded based on the inability to participate in gainful activity and service-connected disability received from the Department of Veterans Affairs. While the latter are not required to be included in gross income, the taxpayers failed to present sufficient evidence that the benefits they received merit the same treatment. The 2nd Circuit upheld the Tax Court determination that the exception under IRC §104(a)(4) is inapplicable. Reimels v. Comm’r, 436 F.3d 344 (2006).
• Personal Income; Government Grant to Repay Student Loans. Taxpayer received an award pursuant to a public interest reward program in order to pay off her law school debt. The commissioner determined these funds were required to be recorded as gross income. Though the discharge of indebtedness typically constitutes income, IRC §108(f) creates an exception for the forgiveness of student loans in connection with programs that serve the community. However, the court found that the program, which used a dual-payee check to the taxpayer and her lender, does not constitute refinancing under IRC §108(f) and must be included in gross income. Many schools have created public interest award programs that use such dual-payee checks, and it is likely that they will be forced to reconsider their approach. Moloney v. Comm’r, T.C. Summ. Op. 2006-53.
• Personal Income; Scope of Tax Court Review. Taxpayer had been found to be in default regarding an offer-in-compromise, and filed a petition for review with the Tax Court. In this proceeding, the taxpayer presented new evidence regarding an abuse of discretion by the appeals officer. The Tax Court sided with the taxpayer in finding the failure to file in a timely manner was not a material breach of the offer and that that IRS had abused its discretion in imposing the levy. The 8th Circuit disagreed. The court held that Tax Court was limited to the administrative record in reviewing the case, and therefore, could not consider the new evidence. Given the absence of a record regarding the abuse and unfairness of the IRS, it was wrong to set aside the decision of the appeals officer. Robinette v. Comm’r, No. 04-3600 (8th Cir. 2006).
• Corporate Tax; Classification of Payments. Indmar Products Co. appealed a Tax Court decision disallowing interest deductions. For over 30 years, the corporation had received payment from several of its majority shareholders who were subsequently entitled to a 10 percent annual return. For a significant period of time, these transactions were not documented in the form of notes or any other instrument, and the shareholders retained the right to recover their interests on demand. The commissioner disallowed the characterization of these payments as interest deductions and assessed a penalty. The Tax Court upheld the decision. The 6th Circuit reversed, stating the decision of the Tax Court was "clearly erroneous." In particular, the court failed to consider several of the factors presented from Roth Steel Tube, Co. v. Comm’r, 800 F.2d 625 (1986), the primary case for distinguishing between equity and debt. The 6th Circuit’s comprehensive analysis of these factors produced a contrary result. Two other opinions on the case dispute the clearly erroneous standard applied by the court. Indmar Products Co. v. Comm’r, No. 05-1573 (6th Cir. 2006).
• Personal Income; Academic; Unsubstantiated Business Deductions. Taxpayer was employed as a physics professor. He claimed he also was engaged in the business of developing ideas for companies, creating companies, and continuing research projects. As a result of deductions related to this business, the taxpayer submitted tax returns showing zero income and zero tax liability for each year in question. Though the address of the business was different than his residence, the court found that neither the taxpayer’s exhibits nor testimony was sufficient to establish that he had indeed operated a trade or business for the years in question. The documents presented to show expenditures could have related to any trade or business and the testimony only revealed his failed efforts to establish businesses. The commissioner’s decision to deny the deductions was upheld. Kanofsky v. Comm’r, T.C. Memo. 2006-79.
• Personal Income; Foreign Tax Credit; Treaty vs. Tax Code. Taxpayer is a United States citizen who lived in Germany for a period of four years. During that time, all the income he earned was derived from sources outside of the United States, and he filed income tax returns in Germany. Though United States citizens are subject to taxation no matter where they live, their tax liability may be offset by foreign tax credits. Here, the taxpayer claimed that since his tax liability in Germany exceeded that of the United States, he owed nothing for the period in question. The commissioner disagreed. Relying on IRC §59(a), he found that only 90 percent of a citizen’s tax obligation could be written off with foreign credits. Thus, the taxpayer still owed 10 percent of his obligation. The taxpayer claimed these two laws are inconsistent. The D.C. Circuit disagreed. Even though the treaty was enacted subsequent to the Code, it expressly states that it is subject to the limitations of the laws of the United States. Based on such an express limitation, and the desire not to invalidate based on inconsistency, the vourt held that the two laws must be read in a manner that permits coexistence. The decision of the Tax Court to impose a deficiency was upheld. Haver v. Comm’r, No. 05-1269 (D.C. Cir. 2006).
• Procedure; Collection Due Process Hearing. Commissioner filed a federal tax lien in Florida against the taxpayer corporation on the grounds that the corporation had failed to pay taxes. The corporation did not request a collection due process hearing in regard to this lien as it had few assets in Florida. Several months later, the commissioner filed another lien against the corporation in Illinois. In response to this lien the corporation requested a collection due process hearing with the Office of Appeals. The appeals officer determined that the corporation had failed to file a timely request with regard to the first lien, and thereafter conducted an equivalency hearing and issued a decision letter to the corporation rejecting the requested relief. The corporation challenges this decision letter. The Tax Court found that it did not have jurisdiction over the claim under either IRC §6320 or §6330 because the CDP request was not timely. The court restated its status as a court of limited jurisdiction, and held that a decision letter does not constitute a notice of determination necessary to hear the case. Investment Research Associates, Inc. v. Comm’r, 126 T.C. 7 (2006).
• Tax Shelters; "Son-of-BOSS." In its first case involving son-of-BOSS tax shelters, the Tax Court found the shelter to be invalid and dismissed the taxpayer’s jurisdictional claim. In 2001, the taxpayer had declared over $20 million in losses relating to the shelter upon which the commissioner declared a deficiency. The taxpayer must now repay the full losses claimed as well as a 40 percent penalty. Son-of-BOSS is a term referencing a variety of similar, aggressive tax shelters that create artificial losses used to offset other legitimate gains. The agency has focused on curbing such transactions, and though this decision may not have focused on the technical merits of market-linked transactions, it is one of the first legitimate signs of those efforts. RJT Investments X LLC v. Comm’r, Tax Court Docket No. 11769-05 (2006).
• Personal Income; Residency; Minnesota. Taxpayer had been a Minnesota resident his entire life. Upon retirement as a doctor, he entered into two separate employment agreements with tribal organizations in Alaska. He obtained a medical license in Alaska and worked there for several months on two occasions. When not working, he spent his time traveling in Alaska, at his home in Florida, and at his home in Minnesota, where his wife still lived. His paychecks all went to his Minnesota home. He and his wife filed jointly, though he claimed to be a resident of Alaska. The commissioner claimed a deficiency on reported income and also imposed a penalty for fraud. The Supreme Court agreed that the taxpayer was a resident of Minnesota during this period, based on the 26 factors identified in Minn. R. 8001.0300, sub. 3 (2005). Though not all of these factors indicated residence, the Court emphasized none were dispositive and that the facts and circumstances of each case must be considered. The Court disagreed with the imposition of the fraud penalty, however. The only false statement on the return was the state of residence, which the taxpayer believed to be Alaska based on state law. Such a mistake could not be considered a deliberate attempt to evade taxes. Dreyling v. Comm’r, No. A05-970 (Minn. 2006).
• Personal Income; Payment to Avoid Suit Reportable. Taxpayer discovered that his wife was having affair with her doctor. Subsequently, he lured the doctor to his house by claiming his wife needed medical help, confronted the doctor, and threatened to sue him for $150,000. The doctor claimed he did not have that much money, but called two days later to offer $25,000. This amount was paid, and the taxpayer promised he would not later file for divorce on grounds of adultery. The issue was whether this money constituted a gift or reportable income. The taxpayer claimed that since the payment was not forced and was the idea of the doctor, it should be considered a gift. The court disagreed, finding that the payment was meant to avoid a lawsuit, public embarrassment, and to appease feelings of guilt. Under such circumstances, it could not be found that the payment was a result of detached and disinterested generosity or paid out of affection, respect, admiration, or charity. Peebles v. Comm’r, T.C. Summ. Op. 2006-61.
• Personal Income; Required Notice; Final vs. Item-Specific Closing Agreements. Taxpayers and the IRS agreed to changes on several of the couple’s tax returns, and thereafter executed a Form 906 Closing Agreement relating to the specific partnership items in question. Following the agreement and without issuing a statutory deficiency notice, the commissioner assessed the taxpayer’s taxes and commenced a collection action against the couple. In considering whether the closing agreement made the deficiency notice unnecessary, the court addressed the two different kinds of agreements. First, agreements that determine final liability do not require such notice from the commissioner. The second type of agreement relates to only one or more items on the taxpayer’s return, which does not constitute an agreement as to final liability. Under such circumstances, notice is still required. Because the agreement in this case fell under the latter category, the commissioner was not allowed to proceed with collection. Manko v. Comm’r, 126 T.C. 9 (2006).
• Personal Income: Business Deductions; Activity Not "For Profit." Taxpayer was recruited as seller for RTP Inc., a pyramid scheme that sold materials designed to avoid taxation. Though he maintained a full-time job, the taxpayer also worked as a seller, where he frequently met with people in coffee shops and took them out to dinner. For the year in question, the taxpayer claims to have earned $2,700 in income and incurred $17,500 in expenses relating to his sales position, constituting a loss of $15,000. The commissioner asserts that the expenses could not be deducted because the primary purpose of the activity was not for income or profit. Comm’r v. Groetzinger, 480 U.S. 23, 35 (1987). Applying the factors from Reg. §1.183-2(b), the court determined the activities were not done in a manner consistent with traditional business practices and that taxpayer had no intent of earning income. Under these circumstances, the deductions were invalid and the deficiency must be upheld. Sears v. Comm’r, T.C. Summ. Op. 2006-47.
• Corporate Tax; Payments to Attorney; FICA Liability. Business claimed payments to an attorney/officer ("attorney") did not constitute wages, and therefore did not trigger FICA tax liability. More specifically, they claimed the attorney was not an "employee" as defined in IRC §3121(d)(1) because more than half of his services did not constitute employment. The court disagreed, finding that the attorney "exercised sole authority to make major corporate decisions," including paying creditors, signing checks, completing tax returns, and drawing money from corporate accounts. In addition, the fact that the attorney owned all of the tangible assets of the corporation did not remove him from the statutory definition of employee. The FICA liability of the corporation was upheld. Western Management, Inc. v. Comm’r, No. 04-70795 (9th Cir. 2006).
• Excise Tax; Challenge to Telephone Tax. A complaint filed in the Court of Federal Claims asks for a writ of mandamus against the IRS to prevent further enforcement of the telephone excise tax in light of the recent decisions declaring it invalid. Krasney v. United States, (Doc 2006-2952, 02/10/06). Another class-action suit was filed in the Court of Federal Claims in January seeking refunds on behalf of millions of taxpayers who have paid the disputed tax. Radio Shack v. United States (Doc 2006-632, 01/10/06).
• California Levy on LLCs. The case involved a constitutional challenge to California’s levy on limited liability companies. Cal. Rev. & Tax. Code §17942. The taxpayer is an LLC organized under the laws of Washington, which was also registered to operate in an LLC in California between 1997 and 2002. During that time, the LLC conducted no business operations in California, and had no other connections with the state besides its registration. For those years, the LLC paid the minimum tax due under the California statute, but did not pay anything according to the levy. The levy was adopted in order to offset the loss in income to the state upon the creation of LLCs. The statute states it is applicable to all LLCs registered in the state, regardless of their operations. The court found the levy unconstitutional. First, the levy was determined to indeed constitute a tax, since its purpose was to raise revenue and not provide funding for any specific government service. Second, the levy was an unconstitutional tax because it was not fairly apportioned to the level of activity within the state. The structure of the levy would create a burden for any interstate LLC wishing to register in California. Thus, the levy is invalid, and the LLC is entitled to full refund. Northwest Energetic Services, LLC v. California Franchise Tax Board, No. 05-437721 (Cal. 2006).
• Personal Income; Self-Serving Testimony. This appeal followed the commissioner’s notice of a $3,500 deficiency. Taxpayer is a father of two, who prior to 2003, had lived with the children and one of their mothers in a trailer home. At some point before 2003, the mother moved out with the children, and the taxpayer spent the next year living and paying rent at a friend’s home, then with his mother. During this period, both the taxpayer and the mother assisted in raising the children, and they were aided by a friend that providing babysitting and some additional support. Taxpayer timely filed his 2003 tax return, which included a dependency exception, head of household status, earned income credit, child tax credit, and additional child tax credit. As evidence for these claims, taxpayer received testimony from both his mother and family friend. The Tax Court rejected their statements, however, on the grounds that they were not based on personal knowledge, were vague, and were self-serving in nature. Without this testimony, the taxpayer only had minimal documentary support for his claims, and the court rejected all of them. The full deficiency was upheld. Baker v. Comm’r, T.C. Memo. 2006-60.
• RICO; Class to Include Future Risk Members. This is a class action brought under RICO in response to a fraudulent tax scheme. Defendants developed tax strategies based on foreign currency options and marketed them through accounting firms knowing full well they would eventually be defeated by the IRS. The district court certified the class action and approved a settlement between the parties, which prompted challenges from several plaintiffs and defendants. Several plaintiffs alleged other plaintiffs did not have standing because they had not yet incurred a penalty by the IRS. The court disagreed. The "future risk" members of the class had still incurred an injury in fact by paying an exorbitant amount for bad legal advice and for the certain risk of a future audit. This injury was sufficient to be included in the class. In regards to the defendants, the court remanded the issue involving the distribution of claims amongst the group. Denney v. Deutsche Bank, No. 05-1275 (2nd Cir. 2006).
• Regs Protecting Taxpayer Information. The proposed rules aim to increase taxpayer control over private information by requiring proper warnings and consent notices that allow for informed decision making. Prior to issuance of the proposed rules, the regulation of private information under IRC §7216 had remained largely unchanged since 1974. http://www.irs.gov/newsroom
• Tax Implications of Gifts from Charity. In a recent information letter, the IRS reaffirmed that payments made by a tax-exempt organization under IRC §501(c)(3), "pursuant to its purpose statement" are nontaxable gifts and not income under IRC §102. Though the letter addressed payments made to help individuals with adoption, another cited Revenue Ruling indicates the rule may also apply to help needy individuals with medical care, temporary housing, or transportation expenses. Rev. Rul. 2003-12. In general, "a payment made by a charity to an individual that responds to the individual’s needs, and does not proceed from any moral or legal duty, is motivated by detached and disinterested generosity." Information Letter 2006-0027.
• Direct Deposit Implications for Constructive Receipt. The IRS addressed the role of the constructive receipt doctrine in relation to ability to receive direct deposits. Typically, the delivery of a check to a taxpayer is not required to be included in gross income until the taxpayer actually receives the check. Until the taxpayer had access to or control over the check during the taxable year, recognition of income is not required. The ability to receive direct deposit presents a unique difficulty because a taxpayer may have the option to receive payment instantly. In regard to this possibility, the Agency stated "if a taxpayer has the option of receiving payments by direct deposit instead of by checks sent through the mail, there may be constructive receipt of a payment on the earlier date that the direct deposit would have been made." Information Letter 2006-0005.
• Collateral Sources; Offers of Judgment. Under Minn. Stat. §548.36, only the premium paid for personal injury protection, not the full automobile insurance premium, may be used as an offset in the reduction of an award. A plaintiff who nonetheless "prevails" on the merits is entitled to costs and disbursements even if she rejects an offer of judgment that is more than the damages awarded under the verdict. Sherry Lea Rush v. Tasha Lee Jostock, et al., A05-714, (Minn. App. 03/07/06). www.lawlibrary.state.mn.us/archive/ctappub/0603/opa050714-0307.htm
• Duty to Indemnify; Statute of Limitations. Following a car accident, the insurer of the injured party paid $21,000 in full settlement of the insured’s uninsured motorist claim. The insurer then brought a subrogation action against the other driver, who was allegedly insured under a separate liability policy. The driver’s insurer claimed there was no coverage because it had canceled the liability policy for nonpayment prior to the accident. The injured party’s insurer and the driver stipulated to settlement of the subrogation action and agreed to entry of judgment against the driver for $21,000. The injured party’s insurer then commenced a garnishment action against the driver’s insurer to enforce the judgment. The driver’s insurer moved for summary judgment arguing that the six-year statute of limitations for insurance claims began to run when it notified its insured that it would not provide coverage and that the period had expired. The district court denied the motion and the insurer appealed.
The Court of Appeals affirmed, holding that under the Minnesota No-Fault Automobile Insurance Act, Minn. Stat. §65B.49, subd. 3(2), a liability insurer is obligated to pay only those sums that "the insured is legally obligated to pay." Therefore, an insured’s cause of action against a liability insurer for breach of its contractual duty to indemnify does not accrue, and the statute of limitations does not begin to run, until the insured becomes legally obligated to pay damages as a result of a judgment or settlement. The court rejected the insurer’s argument that the driver should have brought a declaratory judgment action immediately following the denial of coverage, stating that the burden to bring a declaratory judgment action is on insurers because they are more sophisticated and familiar with their duties under their contracts. Northwestern National Insurance Company v. Dawn Marie Carlson and Farmers Insurance Group, A05-943, (Minn. App. 03/07/06). www.lawlibrary.state.mn.us/archive/ctappub/0603/opa050943-0307.htm
• Legal Malpractice Claims; Proof of "But For" Causation. Plaintiff hired the defendant law firm to represent it in the purchase of real estate. Plaintiff intended to subdivide the property and develop it for resale. The purchase agreement drafted by defendant included a buy-back option in the event plaintiff failed to develop the property within two years. The closing documents drafted by seller’s attorney did not include the buy-back option. Defendant law firm did not research whether the buy-back option survived closing and did not inform plaintiff that the buy-back option could create a cloud on the title. Two years later, when plaintiff hadn’t begun to develop the property, the seller exercised the buy-back option but plaintiff refused to sell. After a Minnesota Supreme Court ruling forced plaintiff to sell the property back at a loss, plaintiff sued defendant for legal malpractice. At trial, defendant argued that it had no duty to research whether the buy-back option survived closing because, at the time in question, the state of the law on the doctrine of merger was well-settled. The district court agreed and granted a directed verdict to defendant.
The Court of Appeals reversed and remanded, holding that while an attorney is not liable for errors in judgment as to a point of unsettled law and does not have to predict changes in the law, an attorney must exercise some kind of legal judgment to be protected. Because defendant failed to even consider or research whether the buy-back option would survive closing, the court held that defendant was not immune from liability. The court also held that because plaintiff alleged malpractice in a transactional matter and not in the course of litigation, plaintiff was relieved from making a "but for" causational showing linking defendant law firm’s alleged negligence to plaintiff’s injury.
The Minnesota Supreme Court affirmed but held that in an action for legal malpractice arising out of representation in transactional matters, the plaintiff must show that but for defendant’s conduct the plaintiff would have obtained a more favorable result in the underlying transaction than the result obtained. Jerry’s Enterprises, Inc. v. Larkin, Hoffman, Daly & Lindgren, Ltd., et al., A04-0188, (Minn. 04/06/06). www.lawlibrary.state.mn.us/archive/supct/0604/opa040188-0406.htm
• Collateral Estoppel. After paying collision-insurance proceeds to its insured as a result of a two-vehicle accident, the insurer, without the consent, joinder, or participation by the insured, brought a subrogation action against the driver of the other vehicle and his employer. The jury found causal negligence only against the insured, who had died before the subrogation trial, allegedly from injuries he suffered in the accident. When plaintiff trustee (the insured’s widow) brought a wrongful death action against the driver of the vehicle and his employer, they moved for summary judgment arguing plaintiff was collaterally estopped from relitigating the issue of causal negligence. The trial court denied defendants’ motion for summary judgment but certified the following question as important and doubtful to the Minnesota Court of Appeals:
[Did] privity exist between the [trustee] in the instant action and … Auto-Owners Insurance Co. in a prior action involving the same operative facts such that application of the doctrine of collateral estoppel is appropriate?
The Court of Appeals answered the certified question in the negative, reasoning that, under these circumstances, the plaintiff did not have controlling participation or active self-interest in the subrogation action sufficient to establish privity. Except for their presence at the deposition, the plaintiff’s lawyers were not allowed to participate in any aspect of the subrogation case and did not exercise any control over the events that occurred. Furthermore, the insurer chose not to present any affirmative evidence on the issue of liability. Although defendants argued that plaintiff improperly delayed her action in an attempt to use the outcome of the subrogation action against the defendants, the court could not find improper use of offensive collateral estoppel on the record presented. Connie Crossman, as Trustee for the Next of Kin of Richard Crossman, deceased v. Michael S. Lockwood, et al., A05-1372, (Minn. App. 04/18/06). www.lawlibrary.state.mn.us/archive/ctappub/0604/opa051372-0418.htm
• Breach of Fiduciary Duty; Forfeiture of Fees. Plaintiff insurance agency brought suit against defendant staffing company seeking to recover unpaid premiums. Defendant counterclaimed alleging that plaintiff breached its fiduciary duty to defendant when it secretly collected commissions from the insurance company while also collecting risk management fees from defendant and Êbreached its contract with defendant when it failed to reduce the premium for the insurance policy by the scheduled "debit" outlined in the policy.
A jury found that plaintiff breached its fiduciary duty to defendant but awarded no damages, the trial court granted partial JNOV, ordering plaintiff to forfeit $483,000 in risk-management fees. On appeal, plaintiff argued that the jury finding of no damages precluded the fee-forfeiture award ordered by the court.
The Court of Appeals held that a scaled fee forfeiture rule — as opposed to a total fee forfeiture rule — applies in circumstances where the breach of fiduciary duty involves no actual fraud or bad faith and no actual harm. The Court of Appeals remanded for the trial court to make findings of fact as to whether plaintiff’s breach of fiduciary duty involved actual fraud or bad faith. The court held that the insurance agency is not required to forfeit its standard commissions paid by third-party insurance companies where there is no evidence the insured paid an increased premium or bore the "economic burden" of the insurance commissions received by the plaintiff. Commercial Associates, Inc. v. The Work Connection, Inc., A05-862, (Minn. App. 04/18/06). www.lawlibrary.state.mn.us/archive/ctappub/0604/opa050862-0418.htm