December 2008

ADMINISTRATIVE LAW
JUDICIAL LAW

• Equitable Estoppel; PERA.  The Court of Appeals ruled that the Public Employees Retirement Association (PERA) of Minnesota cannot be equitably estopped from denying or rescinding unauthorized payments.  The public employee, a PERA member, retired from his position as city administrator of Bayport in April 2005, and immediately began receiving unreduced early-retirement benefits from PERA.  Within 30 days of his retirement, the employee began performing work for Bayport as an independent contractor.  By providing paid services to the city within 30 days after his resignation date, the employee violated a statutory requirement that he completely and continuously separate “for 30 days from employment as a public employee and from provision of paid services to [the public] employer.”

In July 2007, some time after learning of the employee’s violation of the statute, PERA notified the employee that it intended to cease payment of PERA benefits to him and that it intended to recover the benefits already paid.  The employee petitioned the PERA Board for review of PERA’s decision, claiming that he had never been made aware of the 30-day separation requirement.  At his hearing, the employee admitted that he had asked PERA staff if his plan to work for the city as an independent contractor within a week of his retirement would create “a problem with [his] 30-day break.”  The employee argued that he was confused by the PERA materials regarding the separation requirement and that PERA should be equitably estopped from rescinding his benefits.  The Board found the employee ineligible to receive retirement benefits and ordered him to repay all the PERA payments he had received to date.   

On appeal to the court, the employee argued that PERA acted arbitrarily and capriciously by rescinding his PERA payments without addressing his equitable-estoppel claim.  The court’s decision contains a discussion of the history of the Minnesota Supreme Court’s treatment of estoppel claims against the government, and how its position has changed over the years.  The court found that because the employee conceded that the PERA payments he received were unauthorized, and estoppel cannot be applied so as to cause an agency to make unauthorized payments, PERA cannot be estopped from rescinding the erroneous payments.  Accordingly, the court affirmed the PERA Board’s decision and ruled that PERA did not act arbitrarily and capriciously by rescinding the employee’s retirement benefits without addressing his equitable-estoppel claim.  In the Matter of the Application for PERA Retirement Benefits of Michael A. McGuire, A07-2066, ___ N.W.2d ___ (Minn. App. 10/07/08). www.lawlibrary.state.mn.us/archive/ctappub/0810/opa072066-1007.pdf

— Maria Lindstrom
Office of Administrative Hearings

December 2008

CIVIL LITIGATION
JUDICIAL LAW

• Fiduciary Duty; Attorneys Fees.  After retaining attorney Olsen to represent them in a lawsuit against Windsaloft Company, the Howells refused to pay Olsen’s legal bills, so Olsen withdrew as counsel and served an attorney lien in the amount of $29,700.

The Howells next retained attorney Newby to continue the suit against Windsaloft, which was eventually settled for $115,000.  Olsen reached an agreement with Newby and Windsaloft by which Newby would deposit the settlement proceeds into his firm trust account, and Newby further agreed to hold $31,000 of the settlement proceeds in trust until Olsen’s attorney fee claim with the Howells was resolved.

Next, Newby transferred $84,000 to his clients, the Howells, but soon thereafter they stopped paying Newby’s legal bills, at which time he was owed $17,700.  The Howells then instructed Newby to transfer the remaining $31,000 to a third attorney, Weise.  Despite Newby’s agreement with Olsen, Newby transferred $13,300 to Weise, retaining $17,700 that was owed to Newby. 

Next, Howells and Newby settled Newby’s attorney fee dispute by reducing the fees to $12,700.  Newby transferred that sum to his firm’s operating account, and transferred the remaining $5,000 to the third attorney, Weise.  No money was transferred to Olsen.  Olsen sued Newby and his firm, claiming breach of fiduciary duty and contract arising from the agreement that Newby would retain $31,000 in his trust account until Olsen’s claims were resolved.

The district court ruled against Olsen and in favor of Newby, finding no fiduciary duty.  On appeal, the Court of Appeals reversed for trial, finding that there were sufficient facts from which a jury could find that an express trust had been created.  Thomas B. Olsen and Associates, P.A. v. Leffert, Jay and Polglaze, P.A., A07-2165, 2008 WL 4629127 (Minn. App. 10/21/08). www.lawlibrary.state.mn.us/archive/ctappub/0810/opa072165-1021.pdf

— Andrew Shern
Murnane, Brandt

December 2008

CRIMINAL LAW
JUDICIAL LAW

• DWI/Implied Consent: Failure to Complete Peace Officer’s Certificate. Appellant, upon his arrest for DWI, submitted to an Intoxilyzer test which showed an alcohol concentration of .25 percent.  The arresting officer did not check any box under Question 9 of the peace officer’s certificate.  These boxes describe whether the revocation is based upon a refusal, a failed alcohol concentration test, or the presence of controlled substances.  The officer did, however, send to the commissioner of public safety his narrative report, the notice and order of revocation which had the number “.25” filled in, as well as the Intoxilyzer test record.

Held, under the circumstances, the Court of Appeals concludes that forwarding these documents signed by the officer suffices as a “certification” that the test results were true, accurate and genuine. Furthermore, the statute does not establish that the “peace officer’s certificate” be completed in a certain manner, nor does Minn. Stat. §169A.52 contain any definition of the term “certification.”  The Court of Appeals also holds that the officer’s failure to completely and accurately complete the peace officer’s certificate does not constitute a violation of procedural due process.  Mark Alan Johnson v. Commissioner of Public Safety, A07-2413 (Minn. App. 09/30/08).

• Crawford: Autopsy Report Testimonial.  In a homicide prosecution, the state presented the testimony of Dr. Baker, the Hennepin County Medical Examiner, whose office conducted the autopsy of the homicide victim. The autopsy was actually performed by two other physicians in the office, who did not testify at trial.  Held, the admission of the autopsy report, without the testimony of either of the two physicians who performed the autopsy, violated the appellant’s right to confrontation under Crawford.   Although this is a case of first impression in Minnesota, the Minnesota Supreme Court previously held that a BCA laboratory report identifying a substance as cocaine was testimonial.  State v. Caulfield, 722 N.W.2d 304 (Minn. 2006). The Court of Appeals also follows the reasoning in State v. Weaver, 733 N.W.2d 799 (Minn. App. 2007), which discounts the significance, under Crawford, of the medical examiner’s independent statutory duties, at least where those duties are performed after a homicide investigation has begun.

After examining the statutory definitions and duties of a medical examiner, the Court of Appeals holds: “… the medical examiner’s statutory duties are not sufficiently independent of a police investigation to make an autopsy report non-testimonial.”  Furthermore, the court rejects decisions from the 1st and 2nd federal circuits, which hold that autopsy reports are not testimonial because they are “business records.”  State v. Brandon M. Johnson, A07-1189 (Minn. App. 10/14/08). www.lawlibrary.state.mn.us/archive/ctappub/0810/opa071189-1014.pdf

• Controlled Substance: Bong Water Not “Mixture.”  Respondent had been charged with first-degree controlled substance, based upon the weight of “bong water” at 37.17 grams.  A first-degree controlled substance charge requires proof of possession of 25 grams or more of methamphetamine or any mixture containing methamphetamine.  Such water is used when individuals smoke methamphetamine. Using various canons of statutory interpretation, the Court of Appeals holds that the statutory terms used to define “mixture’ are ambiguous as applied to bong water, and concludes that the term “mixture” under the controlled substance statute means something that has been prepared for a particular purpose, namely, the use, sale or manufacture of a controlled substance. Although bong water may be usable for ingestion by desperate addicts, the Court of Appeals concludes that it is not marketable in any meaningful sense.  The court holds that the post-use byproduct of a methamphetamine bong is not a “mixture” as defined in Minn. Stat. §152.01, subd. 9a, and the total weight of the mixture cannot be used to charge the respondent with first-degree controlled substance violation.  State v. Sara Ruth Peck, A08-0579 (Minn. App. 10/07/08). www.lawlibrary.state.mn.us/archive/ctappub/0810/opa080579-1007.pdf

• Juror Misconduct: Post-Verdict Contact with Juror.   During a murder trial, the court had received a phone call from a person who knew one of the seated jurors, claiming that the juror was racist, and offering a specific comment made by the juror. The court properly denied the motion for a Schwartz hearing during the trial itself.  On remand, the district court conducted a post-trial Schwarz hearing to disclose information about the caller and the juror.  Subsequent to the granting of the Schwartz hearing, both parties agreed to a cover letter to be sent with the subpoena for the juror and other Schwartz hearing witnesses which stated that the recipients “may speak with the attorneys working on this case or with persons who are working with the attorneys if you are contacted by them and if you wish to speak with them.”  Shortly after the subpoena was served, the Ramsey County Attorney and a BCA agent interviewed the juror at the Ramsey County Attorney’s Office, and provided defense counsel with a transcription of the interview approximately one-half hour before the Schwartz hearing.

Held, in the absence of case law or rule, the Supreme Court cannot conclude that the state’s contact with the juror was plain error.  While Schwartz v. Minneapolis Suburban Bus Company, 104 N.W.2d 301 (1960) prohibits an attorney from contacting and questioning a juror after a verdict has been rendered,  “… we have never prohibited an attorney or investigator from interviewing a juror after a post-verdict Schwartz hearing has been granted ….”  While not approving of such contact, the Supreme Court notes that it is not announcing a prospective rule that either prohibits or permits the interrogation of jurors once a motion for a Schwartz hearing has been granted, noting that there are perhaps, other preferable practices.  State v. Harry J. Evans, A06-821 (Minn. 10/23/08). www.lawlibrary.state.mn.us/archive/supct/0810/OPA060821-1023.pdf

— Frederic Bruno
Frederic Bruno & Associates

December 2008

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

• Public Sector Employee Discharge; PELRA.  The Minnesota Court of Appeals determined that a dismissed public sector employee was not entitled to independent review of her discharge. The employee’s reinstatement by an arbitrator under the Public Employees Labor Relation Act, Minn. Stat. §179A.25, was reversed because she did not have a contract limiting discharge to “cause,” the employee handbook was too vague to support a “cause” claim, and the handbook included a disclaimer. Alexandria Housing & Redevelopment Authority v. Rost, A07-1620, 756 N.W.2d 896 (Minn. App. 10/21/08). www.lawlibrary.state.mn.us/archive/ctappub/0810/opa071620-1021.pdf

• Public Employee; Unauthorized Benefits Recovery; PERA. The doctrine of estoppel did not prevent the Public Employee Retirement Association (PERA) from denying or rescinding unauthorized payments in a recent decision of the Minnesota Supreme Court, which held that the government agency was not subject to estoppel, irrespective of the “equities involved.”  The high court affirmed a determination by the Court of Appeals upholding a decision by PERA, the retirement body for public employees, to cease payments of annuity benefits and recover previously paid payments that had been erroneously made on the basis that the retiree was ineligible for benefits because he did not meet the statutory requirements.  The doctrine of estoppel could not bar the agency from recovering the unauthorized payments because the employee was not lawfully entitled to receive them. In the Matter of the Application for PERA Retirement Benefits of McGuire, 756 N.W.2d 517 (Minn. 2008). 

• Age Discrimination; Statute of Limitations. An employee’s lawsuit, served while an administrative charge came before the Department of Human Rights, was timely, even though it was served more than one year after the employee’s termination attributable to age discrimination.  The Minnesota Court of Appeals held that the timely filing of the administrative charge by the employee tolled the statute of limitations.  Even though the employee did not give the department notice of intent to bring a civil action while the administrative claim was pending, the lawsuit could be pursued because there was no hearing pending before the department, which had received notice of the lawsuit from the employer.  The court also held that summary judgment was not appropriate on an employee’s claim of tortious interference with contract because of the existence of material facts. DeBerg v. RSM McGladery, Inc., A07-1731,2008 WL 4471222 (Minn. App. 2008) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0810/opa071731-1007.pdf

• Unemployment Compensation; “Good Reason” to Quit.  In an unpublished decision, the Minnesota Court of Appeals determined that an employee who claimed to have quit because of coarse language used by a coworker and failure of other workers to aid him after he requested medical leave was not entitled to unemployment benefits,.  Upholding a determination of disqualification, the Court of Appeals held that there was no evidence that management was aware of the employee’s concerns and he was not entitled to unemployment benefits on grounds that he quit with good reason attributable to the employer under Minn. Stat. §268.985, subd. 1, because he did not give the employer reasonable opportunity to correct any adverse working conditions. Hodge v. Baldwin Supply Co., A07-2142, 2008 WL 4472348 (Minn. App. 2008) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0810/opa072142-1007.pdf

• Unemployment Compensation; “Good Reason” to Quit. An employee who exhausted her 12 weeks of leave under the Family & Medical Leave Act and did not request any other accommodations from her employer or complain about working conditions when she returned to work was not entitled to unemployment compensation benefits when she quit. The Court of Appeals ruled that the employee did not show good reason or cause to the employer to quit under the statute to entitle her to unemployment benefits under the statute. Olsen v. Deluxe Small Business Sales Inc., A07-2084, 2008 WL 4472161 (Minn. App. 2008) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0810/opa072084-1007.pdf

• Unemployment Compensation; “Single Incident” Exception. The “single incident” exception did not allow an employee, a long-distance truck driver who violated the company’s zero-tolerance policy on the consumption of alcohol within eight hours of driving, to receive unemployment compensation benefits under Minn. Stat. §268.095, subd. 6(a). The employee, who admitted to drinking alcohol about eight hours before he began driving despite knowing the company’s policy, was judged to have committed “misconduct.”  The appellate court held that the single-incident exception does not apply because the employer suffered significant harm in that it had to fly another driver to the claimant’s location to complete the delivery, which turned out to be 24 hours late. Gatson v. Q Carriers Inc., A08-9, 2008 WL 4472526 (Minn. App. 2008) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0810/opa080009-1007.pdf

• Unemployment Compensation; “Misconduct.” An employee who violated an employer’s anti-violence policy was denied unemployment compensation benefits. The employee made threatening comments to a coworker who became frightened and reported the incident to management, who terminated the employee.  The appellate court ruled that the employee’s threatening comments, in violation of the company’s anti-violence policy, warranted a denial of unemployment benefits on grounds of misconduct. Parker v. RTL Networks Inc., A07-2015, 2008 WL 4471751 (Minn. App. 2008) (unpublished).  www.lawlibrary.state.mn.us/archive/ctapun/0810/opa072015-1007.pdf

— Marshall H. Tanick
Mansfield, Tanick & Cohen PA

December 2008

FEDERAL PRACTICE
JUDICIAL LAW

• Summary Judgment; Reliance on Attorney’s Affidavit. A recent unpublished 8th Circuit decision affirming summary judgment for the defendant prompted a vigorous dissent by Judge Shepherd in which he criticized the use of an attorney’s affidavit to establish substantive facts in support of the summary judgment motion, and argued that the attorney lacked “personal knowledge” of the facts at issue as required by Fed. R. Civ. P. 56(e)(1).  Because the appellant had not raised the issue in his brief, the majority of the panel concluded that the issue had been waived, and that it was not “plainly erroneous” for the district court to rely on the affidavit in any event.  Moore v. Fargo Police Dept., 2008 WL 4697032 (8th Cir. 10/27/08). 

• Personal Jurisdiction; Waiver; Summary Judgment. Presented with a purported summary judgment motion by a defendant alleging lack of personal jurisdiction, Judge Schiltz followed “leading authorities” in treating the motion as a motion to dismiss under Fed. R. Civ. P. 12(b)(2), concluding that the court would lack authority to enter a “judgment” if it lacked personal jurisdiction over one or more parties.  In addition, while noting “contradictions” in the plain language of Fed. R. Civ. P. 12, Judge Schiltz held that the defendant had not waived its personal jurisdiction defense by including that defense in an answer served prior to its motion.  Pope v. Elabo GmbH, 2008 WL ______ (D. Minn. 11/04/08). 

• Attempted Interlocutory Appeal; Motions Denied. Judge Montgomery twice denied a defendant’s attempt to appeal from her order denying a motion to strike a jury demand, first denying a motion to certify the issue for interlocutory appeal under 28 U.S.C. §1292(b), and later rejecting the defendant’s argument that an extension of time to appeal under Fed. R. App. P. 4(a)(5)(A) was justified because it had deferred its filing of a notice of appeal until after the district court ruled on its §1292(b) motion.  Minn. Power and Affiliated Cos. Retirement Plan v. Capital Guardian Trust Co., 2008 WL 4287568 (D. Minn. 09/15/08).  Minn. Power and Affiliated Cos. Retirement Plan v. Capital Guardian Trust Co., 2008 WL 4539509 (D. Minn. 10/07/08).

• “Garden Variety” Emotional Distress Claims; Preemptive Protective Order Denied. Reversing an order by Magistrate Judge Nelson, Judge Frank denied plaintiff’s preemptive motion for a protective order shielding their medical records from discovery where they sought damages for “garden variety emotional distress,” determining that the motion was “premature” and rejecting the parties’ “all-or-nothing approach” in favor of staged discovery where a defendant must first establish a need for relevant medical records before access to those records will be granted. Doe v. Mulcahy, Inc., 2008 WL 4572515 (D. Minn. 10/14/08). 

• Attorneys Fee Application Slashed. Judge Kyle slashed a request for attorneys fees and costs from roughly $1.3 million to $450,000, criticizing billing rates for out-of-town lawyers as high as $800 per hour for partners and $480 per hour for associates, and suggesting that the case had been “overlawyered.”  Bores v. Domino’s Pizza LLC, 2008 WL 4755834 (D. Minn. 10/27/08). 

• Motions to Confirm or Vacate Partial Arbitration Award Denied. Judge Schiltz denied without prejudice cross-motions to confirm or vacate a partial arbitration award, finding that the award was not “final” for purposes of 9 U.S.C. §9, and that, in the absence of a “final” award, he lacked jurisdiction to consider the cross-motions.  COKeM Int’l, Ltd. v. Riverdeep, Inc., 2008 WL 4417323 (D. Minn. 09/24/06). 

— Josh Jacobson
Law Offices of Josh Jacobson PA

December 2008

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Trademarks: Cybersquatting. Judge Montgomery recently ordered the transfer of two domain names to a plaintiff under the federal Anticybersquatting Consumer Protection Act.  World Wrestling Entertainment (WWE), owner of the trademarks AMERICAN WRESTLING ASSOCIATION and AWA, sued Dale Gagner for, inter alia, cybersquatting based on his operation of the websites www.awastars.com and www.myspace/awastars.com.  WWE was required to show (1) their marks were distinctive or famous, (2) the domain names and the marks were identical or confusingly similar, and (3) that Gagner acted in bad faith to profit from use of their marks. The court held WWE’s marks to be distinctive because they were federally registered and had achieved incontestable status.  The court also found the domain names to be confusingly similar to WWE’s marks based on 8th Circuit precedent holding that the mere addition of a generic term, such as “stars,” to a plaintiff’s mark results in a confusingly similar domain name.  Lastly, the court determined that Gagner acted in bad faith because he had no trademark rights in the domain names, the domain names did not contain any name by which he was known, his use of WWE’s marks was entirely commercial rather than noncommercial or fair use, and there was no evidence offered to dispute that he intended to attract consumers who would likely believe the websites were owned, sponsored, or affiliated with WWE.  The court granted summary judgment to WWE on its cybersquatting claim and ordered Gagner to transfer ownership of the two domain names to WWE.  World Wrestling Entertainment, Inc. v. AWA Wrestling Entertainment, Inc.,Civ. No. 07-2058 (D. Minn. 10/21/08).

• Patents: Invalidity Defense; Burdens of Proof. Perhaps the Court of Appeals for the Federal Circuit read Judge Schiltz’s request for clarification of the burdens of proof concerning the defense of patent invalidity (see Bench & Bar Oct. 2008), because that’s exactly what the appellate court did in this case.  Technology Licensing sued Videotek and Gennum for patent infringement. Gennum raised the defense of patent invalidity.  The appellate court described in detail the difference between an alleged infringer’s ultimate burden of proving invalidity by clear and convincing evidence, which does not shift, and the burden of going forward with evidence as particular issues are raised and developed (sometimes called the burden of production), which does.  The alleged infringer must first come forward with evidence that anticipating prior art exists (i.e., information suggesting the patented invention was not new).  The patent owner then must come forward with evidence that the prior art is not anticipating or evidence suggesting the patent is entitled to a filing date earlier than the alleged prior art.  If proven, the alleged infringer must then persuade the court by clear and convincing evidence that the patent owner is not entitled to the earlier filing date.  Here, the Federal Circuit affirmed the district court’s holding that Gennum had proven by clear and convincing evidence that Technology Licensing was not entitled to a filing date earlier than that of anticipating prior art because the written description in the earlier application upon which Technology Licensing relied was insufficient to support the claim at issue.  Technology Licensing Corporation v. Videotek, Inc., 2007-1441, -1463 (Fed. Cir. 10/10/08)

• Antitrust: Discretionary Financial Assistance Given to Competitors. Judge Montgomery also tossed out a local car dealer’s antitrust claims regarding discretionary financial assistance given to competitors.  Barnett Kia sued Kia Motors in connection with advertising allowances given to rival dealers.  The court dismissed Barnett’s claim alleging violation of the Minnesota Unfair Discrimination and Competition Act because the act does not specifically prohibit favorable promotional allowances.  The court also dismissed Barnett’s claim under the Minnesota Vehicle Sales and Distribution Act, which prohibits a manufacturer from offering incentives for dealers to purchase vehicles without making the same offer to other dealers within a ten-mile radius.  The court found that the advertising allowances in question sought to increase sales between dealers and consumers, not between dealers and a manufacturer as required to implicate the act, and Barnett’s competitors were not within a ten-mile radius.  Barnett Chrysler Plymouth Co. v. Kia Motors America, Inc., Civ. No. 08-828 (D. Minn. 10/27/08).

— Tony Zeuli
— Laura Konkel
Merchant & Gould

PROBATE & TRUST
JUDICIAL LAW

• Attorney Fees; Unsuccessful Challenge to Will; Fee Award in Relation to Size of Estate.  The Minnesota Court of Appeals has upheld an award of attorney fees in favor of a party to a will contest who was nominated as personal representative in a prior will, even though (a) the party’s challenge of the will that was admitted to probate was unsuccessful and (b) the attorney fee award was nearly half the value of the decedent’s estate.  Ned P. Masbaum unsuccessfully challenged the 2002 will of the decedent, Mary Torgersen, on the bases of lack of testamentary capacity and undue influence.  Masbaum was nominated as personal representative in a prior will.  In a 2006 decision, the Minnesota Court of Appeals affirmed a trial court order admitting the 2002 will to probate.  In re Estate of Torgesen, 711 N.W.2d 545 (Minn. App. 2006) (“Torgesen I”).  The Torgesen I court remanded the case to the trial court with instructions to determine an appropriate attorney fee award for Masbaum.

The trial court awarded Masbaum $57,000, nearly one-half the value of the estate.  The Court of Appeals affirmed the award, based on Minn. Stat. §524.3-720, which authorizes a trial court to award fees to a person nominated as personal representative who prosecutes a proceeding in good faith, “whether successful or not.”

The Court of Appeals specifically approved the award of fees incurred in seeking fees.  Although the appellant cited cases of other jurisdictions prohibiting such an award, the parties and the Court of Appeals were unable to find any Minnesota authorities on point.  The Court of Appeals decision is unreported, so there is still no binding authority on this issue.

On the issue of the size of the fee award in relation to the size of the estate, the Court of Appeals noted that the value of the estate “shall not be the controlling factor” in a fee award, under Minn. Stat. §525.515(c).  The court also stated, however, “it is not without considerable deliberation that we have found [the] award to be within the discretion of the district court.”  In re Estate of Torgersen, A07-1715 (Minn. App. 09/16/08). www.lawlibrary.state.mn.us/archive/ctapun/0809/opa071715-0916.pdf

• Duty to Diversify; Prudent Investor Rule.  Applying North Dakota’s prudent investor rule (and citing Minnesota case law), the U.S. Court of Appeals for the 8th Circuit has affirmed a summary judgment order dismissing a claim against a corporate trustee based on losses caused by the trustee’s failure to sell stock immediately after the trust grantor’s death.

The Leonard Nelson Trust was established in 1998.  At the time of Leonard Nelson’s death, in June of 2006, the trust held nearly 600,000 shares of Medtronic stock directly, and contained most of the interests in partnerships holding another 700,000 shares of Medtronic stock.  During the two weeks after Leonard Nelson’s death, the value of the shares fluctuated between approximately $64 million and $67 million.  In October of 2006, First National Bank and Trust Company was removed as trustee and replaced with a different corporate trustee.  The day after First National transferred the trust assets to the new trustee, the new trustee sold the stock for approximately 8 percent less than its peak price during the two weeks following Nelson’s death.

The beneficiaries sued First National, claiming the trustee failed to exercise reasonable care, skill and caution, as required under the North Dakota prudent investor rule, N.D.C.C. §59-02-08.2 (2006) (substantially similar to Minn. Stat. §501B.151).  The trustee defended in part on the basis of a provision of the trust providing that “any investment made or retained by the trustee in good faith shall be proper despite any resulting risk or lack of diversification or marketability and although not of a kind considered by law suitable for trust investments.”  The beneficiaries claimed that the trust provision did not relieve the trustee of the duty to act with prudence, citing the Restatement (Third) of Trusts §91 comment f (2007).  The trial court and Court of Appeals held, however, that the trustee could not be held liable absent a showing of bad faith, because of the trust provision.  The court distinguished In re Trusteeship of Williams, 591 N.W.2d 743, 748 (Minn. App. 1999), where the Minnesota Court of Appeals held that a provision exculpating a trustee for good faith “errors of judgment” did not relieve a trustee from liability for negligent acts.  The 8th Circuit noted that the Nelson trust “did not limit its shield to errors of judgment.”  Nelson v. First National Bank and Trust Company of Williston, No. 07-3543 (8th Cir. 10/01/08) www.ca8.uscourts.gov/opndir/08/10/073543P.pdf

ADMINISTRATIVE ACTION

• Gift and Estate Tax; Inflation Adjustments for 2008.  The IRS has published inflation-adjusted tax figures for 2008, including the following figures relating to estate and gift taxes:

• The annual gift tax exclusion under IRC §2503(b)(2) will increase from $12,000 to $13,000.  The annual exclusion was originally $10,000 and is adjusted for inflation in increments of $1,000 from 1998.  The annual exclusion was $10,000 for gifts made between 1998 and 2001, was $11,000 for gifts made between 2002 and 2005, and is $12,000 for gifts made between 2006 and 2008.

• The limit on the decrease in the value of a gross estate under IRC §2032A for a decedent who dies in 2009 will increase from $960,000 to $1 million.  Section 2032A allows for reduction in the value of an estate’s interest in certain real property, and is usually applied to agricultural land.  The limit on the reduction was originally $750,000 and is increased for inflation in increments of $10,000 from 1998.

• The gift tax annual exclusion for gifts to a non-U.S. citizen spouse will increase from $128,000 in 2008 to $133,000 in 2009.  This is an important exclusion because gifts to non-U.S. citizen spouses do not qualify for the gift tax marital deduction.

Rev. Proc. 2008-66 (10/16/08). http://www.irs.gov/pub/irs-drop/rp-08-66.pdf

• Fiduciary Income Tax; Grantor Trusts; Loans to Grantor vs. Withdrawal Right of Beneficiary.  The IRS has privately ruled that where a non-adverse trustee may make loans to the grantor of a trust without security, the income and principal of the trust will be treated as though owned by the grantor, even if the beneficiary of the trust is given a right to withdraw the trust assets.  Under §675(2) of the Internal Revenue Code, the grantor of a trust will be treated as the owner of the trust for income tax purposes if the grantor or a non-adverse trustee may loan the trust property to the grantor without adequate interest or without security.  Under §678(a) of the Code, a person other than the grantor of a trust will be treated as the owner of the trust property for income tax purposes if the person is given the right to vest the corpus or income of the trust in himself.  The trust at issue in the ruling gave a non-adverse trustee the power to make loans to the grantor without security, but also provided that upon and after attaining a certain age the beneficiary may withdraw the trust assets.  The IRS ruled that §675(2) trumps §678(a) in this situation, and that the trust income will continue to be taxable to the grantor after the withdrawal right arises.  PLR 2008-40025, (10/03/08) www.irs.treas.gov/pub/irs-d/0840025.pdf

— Cameron R. Seybolt
Fredrikson & Byron, PA

December 2008

REAL PROPERTY
JUDICIAL LAW

• Non-Discretionary Remedy for Boundary by Practical Location. Homeowner Gabler’s predecessor-in-interest constructed a driveway along the boundary between his property and his neighbor’s property.  The neighbors never objected to the placement or the use of the driveway even though, as Gabler later discovered, the driveway was constructed on the neighbor’s property.  The driveway was used for over 30 years without objection, and for 15 of those years, the neighbors were aware that the driveway was encroaching on their property. 

In 2006, Gabler sold his property.  In connection with that sale, he and the new owners brought suit against the neighbors for a declaration that the boundary had been established by practical location.  Alternatively, Gabler alleged that he had acquired a prescriptive easement.  The district court found that Gabler had established boundary by practical location and had proven an easement by prescription as well.  As a remedy, however, rather than declaring a new boundary line based on the location of the driveway, the court merely granted an easement.  The court also ordered that Gabler and the new owners pay the neighbors the value of the easement acquired. 

Gabler appealed and, in a 2-1 decision, the Court of Appeals reversed.  Gabler argued that it was improper for the district court to grant only a prescriptive easement when it found that the boundary had been established by practical location.  The neighbors and the dissenting opinion contended that the action was an equitable one and that the court had broad discretion in fashioning its remedies.  The majority disagreed and held that where a party has established boundary by practical location, the remedy for that is not discretionary.  The remedy in such cases is that the boundary line is reestablished in accordance with the use and conduct of the parties and title to property is divested based on that new property line.  Because the doctrine of boundary by practical location does not require payment for the property acquired, it was error for the district court to award damages to the neighbors.  Reversed and remanded.  Gabler v. Fedoruk, A08-0517, 756 N.W.2d 725 (Minn. App. 2008). www.lawlibrary.state.mn.us/archive/ctappub/0810/opa080517-1014.pdf

• Statutory Requirements for Mortgages; Guarantees.  Kevin Hanson (“Hanson”) entered into a business venture and executed personal guarantees to Business Bank on loans for a corporation and another individual.  Later, Hanson signed an amended guarantee under which he guaranteed $512,000 in financing.  To secure that guarantee, Hanson gave Business Bank a mortgage on his home for “up to $200,000.”  Hanson subsequently executed another mortgage on the home in favor of Option One.  Business Bank’s borrowers ultimately defaulted on their financial obligations and the bank sought to enforce its guarantee from Hanson.  Business Bank sued Hanson and Option One to enforce the guarantee and to foreclose on the mortgage.  Hanson commenced a separate action against Business Bank alleging in part that Business Bank had fraudulently induced him to execute the guarantee.  The two actions were later consolidated.  The district court granted Business Bank’s motion for summary judgment, ordering the foreclosure, entering judgment against Hanson, and determining that Business Bank’s mortgage held priority over Option One’s mortgage.  The court also dismissed Hanson’s claims for fraudulent misrepresentation. 

The Court of Appeals reversed in part.  As to the misrepresentation claim, the court determined that Hanson’s claims for the bank’s alleged representations (that the loan he was guaranteeing was “oversecured,” that there was “virtually no risk” and that it was a “no-brainer” and omitting to tell Hanson that the individual borrower was filing for bankruptcy) should have survived summary judgment.  The only issue on appeal was whether the language of the guarantee agreement defeated as a matter of law any claim that Hanson actually or reasonably relied on the misrepresentations.  Although a party may not rely as a matter of law on oral statements that are contradicted by a written contract, the Court of Appeals held that nothing in the contract directly contradicted the alleged representations. 

The other principal issue on appeal concerned the determination that Business Bank’s mortgage held priority over that of Option One. Option One argued that Business Bank’s mortgage was invalid because it did not comply with Minn. Stat. §287.03.  The statute provides that a mortgage is not valid unless the initial amount of the debt is expressed in it.  Option One argued that because the mortgage stated that it was security for up to “$200,000” when in fact the initial amount of the debt was $512,000, the mortgage was invalid.  The Court of Appeals agreed with that application of the statute’s language.  The effect of the failure to comply with the statute was to invalidate the mortgage at least with respect to Option One, but only if Option One had no actual notice of the amount of Hanson’s guarantee.  The court also noted that the invalidity could be cured (and cured retroactively) by simply seeking reformation of the instrument.  Affirmed in part, reversed in part, and remanded.  The Business Bank v. Hanson, A07-1832 (Minn. App. 10/28/08) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0810/opa071832-1028.pdf

— C.J. Deike
Edina Home Realty Services

TAX
JUDICIAL LAW

• Sentencing: Tax Fraud; Departure from Guidelines. The D.C. Circuit has affirmed (in a 2-1 decision) a district court’s imposition of probation and a fine for filing a false income tax return.

The defendant pled guilty to filing a false income tax return in violation of 26 U.S.C. §7206(1), a crime for which, given the relevant factors, the applicable advisory guidelines range was 10 to 16 months of imprisonment.  The district court, however, imposed probation and a fine.  The Government challenged the below-guidelines sentence as substantively unreasonable.

In affirming the sentence, the D.C. Circuit emphasized “the twin points that the Supreme Court has stressed in its recent sentencing decisions: The Guidelines now are advisory only, and substantive appellate review in sentencing cases is narrow and deferential.”  Those twin points led the court to affirm the district court’s judgment in this case.

The dissent commented on the value of deterrence in criminal tax sentencing, given the limited number of criminal tax prosecutions relative to the estimated incidence of such violations: “[D]eterrence is a primary consideration in choosing the appropriate sentence for any tax crime.” United States v. Gardellini, No. 07-3089 (D.C. Cir. 11/14/08).

• Jurisdiction: Tax Shelter-Related Arbitration Dispute; Cert. Granted. The U.S. Supreme Court granted review in a dispute regarding an arbitration agreement between the plaintiff investors and defendants who recommended and sold investments to the plaintiffs in a tax shelter.

Plaintiff investors brought a fraud and breach-of-fiduciary-duty suit against their broker, accounting firm, and law firm. Defendants sought to stay the proceedings on the ground that the investors were equitably estopped from proceeding against them based on the investors’ arbitration agreement with the broker.  The defendant accounting firm and defendant law firm, however, were not signatories.

The U.S. Court of Appeals for the 6th Circuit read the plain language of the Federal Arbitration Act, Section 16(a)(1), to preclude appellate jurisdiction between the parties. The courts are divided, however, on whether federal courts have appellate jurisdiction to review the denial of a motion to stay litigation when the motion was brought by a party who is not a signatory to the underlying arbitration agreement. Arthur Andersen LLP v. Carlisle, No. 08-146 (U.S. 11/07/08).

ADMINISTRATIVE ACTION

• Quiet Windfall for Banks Growing Louder. On Oct. 20, 2008, Treasury released Notice 2008-83, which modifies the rules governing deductibility of losses under section 382(h) as it applies to banks.  Prior to the Notice, the amount of income that an acquiring bank could shelter in order to absorb the losses of the bank it acquired was limited.  The Notice allows an acquiring bank to use an acquired bank’s losses to shelter the acquiring bank’s income without limitation.

Reactions in the press, in Congress, and in the tax community have been swift and shocked. On Nov. 10, the Washington Post ran a story detailing the tax community’s reaction to the Notice.  Four days later, Sen. Chuck Grassley (R-Iowa), ranking member of the Committee on Finance, asked the Treasury Department’s inspector general to review the circumstances and any possible conflicts of interest involving the Notice. 

The Washington Post reported that the Notice was instrumental in Wells Fargo’s acquisition of Wachovia, and the rule change could be worth up to $25 billion for Wells Fargo.  Senator Grassley’s letter is available at http://finance.senate.gov/press/Gpress/2008/prg111408c.pdf.  The law firm of Jones Day has released a commentary on the Notice, which is available at the Jones Day website:  http://www.jonesday.com/pubs/pubs_detail.aspx?pubID=S5513.

• Form 1040 Instructions for 2008 with Additional Guidance. The 2008 Form 1040 instructions detail several new items for 2008, including: guidance on economic stimulus payments and economic recovery rebates; the AMT exemption amount is increased to $46,200 ($69,950 if married filing jointly or a qualifying widow(er), $34,975 if married filing separately); the IRA deduction is expanded; and tax relief is provided for Midwestern disaster areas.  The instructions detail new items for 2009, including EITC information; elective salary deferrals; information on the definition of “qualifying child”; and credits for nonbusiness energy property, among others.

• Business E-Filing up by 50 Percent. The IRS reported (2008-128) that businesses have e-filed nearly two million corporate and partnership income tax returns, an increase of more than 50 percent over the prior year.  Individual taxpayers have e-filed almost 90 million tax returns during 2008, an increase of more than 12 percent.

LEGISLATIVE AFFAIRS

• New Approach on Federal Tax Expenditures. The Joint Committee on Taxation released a report, Estimates of Federal Tax Expenditures for Fiscal Years 2008-2012, that implements a new paradigm for identifying and classifying tax expenditures.  The report classifies tax expenditures in current law in two primary categories: “tax subsidies” or “tax-induced structural distortions.”

According to the report, this new approach will “improve the utility of tax expenditure analysis and … reemphasize its neutrality.”  The report (JCS-2-08) can be downloaded at http://www.jct.gov/s-2-08.pdf

LOOKING AHEAD

• Swiss Bank Executive Indicted. According to a Department of Justice press release (11/12/08), Raoul Weil, a senior executive with UBS AG, has been indicted for allegedly conspiring with other executives, managers, private bankers, and clients of the firm to defraud the United States.  The indictment alleges that over five years, Weil oversaw UBS AG’s cross-border private banking business that provided services to some 20,000 U.S. clients who reportedly concealed approximately $20 billion in assets from the IRS.

• Annual Federal Tax Update Available. Samuel A. Donaldson has posted his thorough and occasionally amusing (really) annual Federal Tax Update: Important Developments in Federal Income, Estate & Gift Taxation Affecting Individuals (August, 2007 to August, 2008) on the Social Science Research Network.  The 75-page update is available for download at http://ssrn.com/abstratct=1288906

• Just in time for the Superbowl:  Capital Gains Head Fake. Dan Rooney, chairman and owner of 16 percent of the stock of the Pittsburgh Steelers, is a life-long Republican who drew attention with his support of Barack Obama in the presidential election. The Pittsburgh press now reports that Rooney and his son will buy out the 16 percent ownership stakes held by each of his four brothers and want to close the sale by year-end to avoid the expected increase in the capital gains tax rate under the president-elect.