In this month's "Notes & Trends:
• Conversion of Non-Exempt Assets into Exempt Assets. The 8th Circuit reaffirmed that converting non-exempt assets into exempt assets on the eve of bankruptcy, without additional extrinsic evidence that debtor intended to delay, hinder, or defraud its creditors, is not sufficient to deny debtor’s discharge of indebtedness.
Shortly before declaring bankruptcy, Addison opened a new IRA account and contributed $8,000 from a non-exempt account. He also increased his homestead exemption by making an $11,500 mortgage payment from the same non-exempt account. The Bankruptcy Court found fraudulent intent primarily because debtor retained control of the property transferred, and the transfers occurred after a creditor sued on a personal guarantee. The 8th Circuit reversed and highlighted that debtor did not fraudulently obtain credit to purchase exempt assets shortly before bankruptcy. The court also noted that the amount of assets transferred was minimal, and that debtor retained $10,000 of non-exempt assets for his creditor’s benefit. The court compared debtor’s incomplete transfer of non-exempt assets with prior cases in which the court denied discharges where debtors made nearly complete transfers of much larger amounts. In re Addison, No. 07-2064/07-2727 (8th Cir. August 7, 2008).
• Willful and Malicious Injury for Failure to Perform a Legal Duty. A debtor’s failure to act is “willful and malicious injury” for rendering a debt resulting from the injury non-dischargeable if the debtor intendedtheinjurythat resulted fromher failure to act, or was “substantially certain” the injurywould result.
The debt arose from a wrongful death action against debtor, a mother who failed to prevent the death of her three-year old son from her boyfriend’s abuse. The Bankruptcy Court found willful and malicious injury because debtor knew of the abuse, previously concealed the abuse, and failed to seek medical attention after observing her son’s injuries prior to his death.
The 8th Circuit reversed, finding no evidence that debtor intended that her son die. Additionally, debtor did not know the severity of her son’s condition when she failed to summon medical help. She observed some bruising on his head and that he had difficulty breathing and speaking, but these were not visible injuries “so objectively life threatening that anyone, even someone with minimal medical training, would have been substantially certain that the [victim] would die.” In re Patch, No. 07-1003, (8th Cir. May 29, 2008).
• Incorrect Legal Description Invalidates Mortgage. A trustee can avoid a mortgage which identifies the wrong parcel in the legal description. In Stradtmann, the creditor identified the correct address of the property on the mortgage, but the legal description identified an entirely different parcel.
The 8th Circuit Bankruptcy Appellate Panel held that constructive or inquiry notice, which is necessary to preserve an erroneous mortgage from the avoidance by the trustee, arises only when the mistake in the legal description is apparent on its face, unless the property can be determined with reasonable certainty. Here, the defective mortgage simply described another parcel of property, a defect not apparent by examining the legal description alone. The court held that under Minnesota law, the correct address would not provide a bona fide purchaser with constructive or inquiry notice. Similarly, while a bona fide purchaser could have found the mortgage by searching the grantor-grantee or tract indices, this would also not trigger constructive notice. In re Stradtmann, No. 07-6056, (B.A.P. 8th Cir. June 30, 2008).
• Order Denying Contempt Not Final Order for Appeal Purposes. While bankruptcy appellate courts generally apply a liberal standard for identifying final orders for the purpose of triggering appeal rights, an order denying a motion to hold a Trustee in contempt was not a final order. The proposed contempt order related to a Chapter 11 Trustee’s failure to make contributions to employee benefit plans, allegedly in violation of a prior Court order. The case converted to a Chapter 7 liquidation, which nullified the prior order to make contributions. The 8th Circuit found that the order denying contempt was not final because the benefit plans’ right to payment would result from the Chapter 7 claims and distribution process, a process not completed when the plans filed the appeal. Because additional litigation remained for the trial court to resolve the plans’ claims, the order denying contempt was not final. In re M & S Grading, No. 07-2434 (8th Cir. May 13, 2008).
— Mychal A. Bruggeman
In this month's "Notes & Trends:
• Interlocutory Appeal of Discovery Order. This case involved the construction of a soybean crushing plant in Union County, Iowa. The petitioner, Union County, received advice from the respondent, Piper Jaffray & Co., Inc. about issuing two General Obligation Capital Loan Notes (bond offerings) related to the construction of the plant. Union County later sued Piper Jaffray, claiming that Piper Jaffray improperly advised it about (1) material information and the risk involved in the issuance of the bond offerings and (2) alternative financing options.
During discovery, Piper Jaffray requested documents concerning the professional advice Union County had received in connection with the bond offerings but Union County claimed those documents were protected by the work product doctrine and the attorney-client privilege. Piper Jaffray filed a motion to compel the production of those documents. The magistrate judge granted the motion in part and denied it in part; the judge noted that Union County waived the attorney-client privilege as to some of the documents by bringing this lawsuit. The district court affirmed, but also certified the case for interlocutory appeal under 28 U.S.C. § 1292(b).
On appeal, the U. S. Court of Appeals for the 8th Circuit considered whether the district court appropriately certified the case for interlocutory appeal and concluded that the district court abused its discretion. In reaching that conclusion, the Court of Appeals noted that Section 1292(b) sets out three requirements for certification: the district court must conclude that (1) the order involves a controlling question of law; (2) there is substantial ground for a difference of opinion; and (3) certification will materially advance the ultimate termination of the litigation. The district court concluded that all three criteria were satisfied because the 8th Circuit lacked precedent on the issue. The Court of Appeals assumed that the first requirement had been met. The Court of Appeals, however, concluded that a lack of precedent on the issue did not meet the second and third requirements. Union County, Iowa v. Piper Jaffray & Co., Inc., 525 F.3d 643 (8th Cir. 2008).
In this month's "Notes & Trends:
• Identification; Officer’s Single-Photo Viewing Not Suggestive. Appellant was accused of third-degree controlled substance sale. Appellant sold from his car to an undercover police officer. After the officer had received a name for the suspect and looked up the appellant’s driver’s license photograph on the DMV electronic database, he was satisfied that appellant was the seller. The court held that the one-photo identification was not unduly suggestive because a police officer may only impermissibly suggest a suspect to a civilian witness, not to him- or herself. As a threshold matter, due process concerns are not triggered when an officer shows himself a “one-photo lineup.” Cases finding violations of due process for unduly suggestive procedures are limited to police assisting a civilian witness in recollection leading to witness identification. State v. Keith Allen Hooks, A07-0597 (Minn. App. 7/1/08). www.lawlibrary.state.mn.us/archive/ctappub/0807/opa070597-0701.pdf
• Jury Instructions; Jury Nullification Power Not Compromised By Instruction. In both opening and closing instructions, the district court stated that the jury “must follow the law” and that if the state proved each element of the crime beyond a reasonable doubt, “then you must find the defendant guilty…”. Held, the court did not err in giving the jury this instruction, which was not objected to at trial. Although jury nullification, also known as jury lenity, is the extraordinary power of the jury to issue a not guilty verdict even if the law as applied to the proven facts establishes guilt, the jury instructions did not direct the jury not to exercise its extraordinary power. State v. Keith Allen Hooks, A07-0597 (Minn. App. 7/1/08). www.lawlibrary.state.mn.us/archive/ctappub/0807/opa070597-0701.pdf
• Criminal Sexual Conduct; Venue Broadly Construed. Minn. Stat. § 627.15 allows a criminal action for alleged child abuse to be prosecuted either in the county where the alleged abuse occurred or the county “where the child was found.” The district court allowed this venue language to go to the jury as an instruction without clarification, as requested by the defense. Noting that venue statutes in cases of criminal sexual conduct involving children should be interpreted liberally, the court held that for the purpose of establishing venue in the “limited area of child abuse,” a child can be “found” in the county where the child resided either when the abuse occurred, or when the abuse was discovered. State v. Richard Parnell Rucker, A07-0773 (Minn. App. 07/15/08). www.lawlibrary.state.mn.us/archive/ctappub/0807/opa070773-0715.pdf
• Spreigl; Expunged Conviction Properly Admitted. In a prosecution for criminal sexual conduct involving teenaged victims, the district court allowed, as Spreigl evidence, the admission of an expunged conviction for criminal sexual conduct in the fifth degree from approximately 14 years prior to the trial. Following the ruling, the parties apparently stipulated that the manner of presenting the evidence would be via copies of documents relating to the 1993 incident, and that the jury would be told that the resulting conviction was expunged from the defendant’s record. Held, the prior expunged conviction was properly introduced to show a common plan or scheme, and did have a “marked similarity in modus operandi” to the charged offense, as is required when the evidence is introduced for the purpose of showing a “common scheme.” State v. Richard Parnell Rucker, A07-0773 (Minn. App. 07/15/08). www.lawlibrary.state.mn.us/archive/ctappub/0807/opa070773-0715.pdf
• Search And Seizure; Inventory Search Invalidated By Unreasonable Impoundment Of Vehicle. The appellant had pulled his vehicle to the side of the road to wait for friends to give him directions. A police officer pulled behind the appellant to see if he needed assistance. During this initial encounter between the appellant and the deputy, alcohol was detected on the appellant’s breath and a twelve pack was on the front seat with one bottle missing. The appellant was allowed to put the alcohol in the trunk of the vehicle and then asked the deputy if he could continue to wait for his friends to come by, which the deputy agreed to. The deputy returned to his squad car and as he drove, ran the license plate and found that the registered owner of the vehicle had a suspended driver’s license, at which point he executed a u-turn, pulled behind the appellant’s vehicle, and activated his emergency lights. In this second encounter, based on the information which the deputy received from the appellant, the deputy issued two citations: no proof of insurance and open bottle. The deputy stated he was going to tow the vehicle, in response to which the appellant requested the opportunity to have someone pick up the vehicle for him to avoid towing charges. The deputy responded that because he believed the vehicle to be uninsured, he could not allow someone else to drive the vehicle away. The deputy also declined the appellant’s request to make his own arrangements to have the vehicle towed. During the second encounter, the deputy specifically informed the appellant that he was not under arrest. The deputy then conducted an inventory search, during which he discovered methamphetamine in the vehicle
The Minnesota Supreme Court, reversing the Court of Appeals, held that impoundment of the vehicle was unreasonable, and therefore the concomitant inventory search of the vehicle was a violation of the appellant’s Fourth Amendment rights. The court holds that neither a suspended driver’s license nor failure to provide proof of insurance justifies the impoundment of the vehicle. These are minor traffic offenses which are addressed by Minnesota Rule of Criminal Procedure 6.01, which limits full custodial arrests for misdemeanors. Furthermore, because the appellant was not placed under arrest, which would allow a tow, the impoundment must have been authorized on some ground other than the nature of the violations. The court rejected the safety hazard, parking violation, and caretaking function justifications for the impoundment, each of which it determined inapplicable under these facts. “We therefore conclude that, in light of the facts of this case—including that Gauster was not placed under arrest and that he asked Wagner if he could make his own vehicle arrangement—the impoundment of Gauster’s vehicle was not justified under the Fourth Amendment.” State v. Steven Allen Gauster, A07-0488 (Minn. 07/10/08). www.lawlibrary.state.mn.us/archive/supct/0807/OPA070488-0710.pdf
• Domestic Assault; Felony Enhancement; Priors Need Not Be Domestic. Reversing the trial court, the Court of Appeals found that predicate offenses to enhance a domestic assault to a felony need not be domestic related. Minn. Stat. § 609.02 enhances to a felony any domestic-related assault when it is committed within ten years of the first of any combination of two or more previous “qualified domestic violence-related offense convictions.” In this case, the respondent’s felony enhancement was based upon his conviction in March 1998 for felony assault against a peace officer and a misdemeanor assault against a different victim. The Court of Appeals rejects the trial court’s interpretation of Minn. Stat. § 609.02, which broadened the definition of a qualified domestic violence-related offense to have a domestic violence nexus. Concluding that Minn. Stat. § 609.02, subd. 16 is not ambiguous, the court found that by its plain text, conviction for any enumerated offense constitutes a “qualified domestic violence-related offense” whether or not the prior offenses had a domestic violence “nexus” or components. State v. Dale Allen Moen, A07-2365 (Minn. App. 07/8/08). www.lawlibrary.state.mn.us/archive/ctappub/0807/opa072365-0708.pdf
• Prosecutorial Misconduct; Prosecutor’s Restricted Status Does Not Invalidate Conviction. Appellant was prosecuted and convicted for first-degree assault. At the time, the prosecutor was on restricted status because she had failed to submit affidavits of CLE compliance. Rule 12(B) of the State Board of Continuing Legal Education provides that an attorney on restricted status may not engage in the practice of law. In this case of first impression, the Minnesota Court of Appeals follows New York state and rejects the appellant’s request for application of a per se rule. Instead, the Court of Appeals held that in order to be entitled to a new trial as a result of the prosecutor’s unlicensed status, the appellant must first show prejudice resulting from that fact. Secondly, the court distinguished between an individual on restricted status versus one who has never been admitted to practice law: “Here, Graham was not an impostor. She had been admitted to practice in law in Minnesota, although her license was on restricted status.” State v. Abdulkani Ali, A07-0428 (Minn. App. 07/8/08). www.lawlibrary.state.mn.us/archive/ctappub/0807/opa070428-0708.pdf
• Sex Offender Registration; Venue Appropriate In County Of Last Registration; Successive Prosecutions Not Double Jeopardy. Appellant was prosecuted in 2001 for prior non-compliance on April 5, 2000, in Ottertail County, by failing to register. In May 2006, Ottertail County law enforcement tracked appellant to cities in Minnesota, North Dakota and Wisconsin. Appellant was eventually found in Eau Claire, Wisconsin, and was charged in Ottertail County with failure to register as a predatory offender. The court held that venue in Ottertail County was appropriate. Minn. Stat. § 243.166, subd. 10 provides that a violation of the registration requirement may be prosecuted in any jurisdiction where an offense took place. The same statute also states that if there are two or more offenses in different counties, a person may be prosecuted for all of the offenses in any county in which one of the offenses was committed. The statute further requires the prosecutor in the county where the person last registered to be responsible initially to review the case for prosecution. Because the appellant last registered in Ottertail County, and because each move related back to that county as appellant’s only residence of record, venue was appropriate in Ottertail County.
Second, the appeals court rejected the appellant’s argument that because he was convicted in 2001 for failure to register in Ottertail County, any subsequent violation cannot be punished under double jeopardy principles. The court held that the appellant’s repeated violations of the registration statute can be prosecuted separately. The registration requirement is a continuing obligation, and because the appellant’s duty was ongoing, his repeated failure to register constituted separate and distinct offenses that may be separately prosecuted without implicating double jeopardy. State v. Kevin D. Ehmke, A07-0824 (Minn. App. 07/15/08). http://www.lawlibrary.state.mn.us/archive/ctappub/0807/opa070824-0715.pdf
• Notice to Remove Judge Not Reviewable Without Exhausting Interlocutory Remedies; Notice to Remove Not Effective Against Trial Judge When New Trial Ordered. Minnesota Rule of Criminal Procedure 26.03, subd. 13(4) does not guarantee a party the right to peremptorily remove a district court judge when a case has been remanded and assigned to the same judge for a new trial. The rule states that, “No notice to remove shall be effective against a judge who has already presided at the trial, omnibus hearing, or other evidentiary hearing of which the party had notice.” Furthermore, the Supreme Court announced a prospective rule governing when it would review issues surrounding a notice to remove a judge: Denial of a writ of prohibition by the Court of Appeals is subject to review by the Supreme Court, following conviction, only if the movant petitions the Supreme Court, on an interlocutory basis, for review of the Court of Appeals’ denial of the writ. Failing to do so constitutes a waiver of further review of the removal issue by the Supreme Court. State v. Michael J. Dahlin, A06-0717 (Minn. 07/24/08). www.lawlibrary.state.mn.us/archive/supct/0807/OPA060717-0724.pdf
• No Authority To Issue No Contact Order As Part Of Executed Sentence. The district court sentenced appellant, convicted of criminal sexual conduct, to 144 months, plus ten years of conditional release. The court also ordered the appellant to have no contact with the victim of the offense. The Court of Appeals held that the district court does not have the authority to impose a no contact order as part of the appellant’s executed sentence. Noting that the legislature has the exclusive authority to define crimes and the range of sentences or punishments for their violation, the Court of Appeals rejected the notion that district courts have inherent authority to impose additional terms or conditions of sentences. Consequently, a district court may not impose a no contact order as part of an executed sentence unless the order is expressly authorized by statute. (See, for example, Minn. Stat. 518B.01, subd. 4, which specifically authorizes the court to impose a no contact order in a criminal proceeding for domestic abuse.) Here, the only statutorily authorized punishments for a conviction of criminal sexual conduct in the first degree are imprisonment for not more than 30 years and/or payment of a fine not exceeding $40,000. The general felony statute, Minn. Stat. § 609.10, subd. 1, authorizes courts to order imprisonment, fines, payment of court ordered restitution, and/or payment of a local correctional fee. Neither statute authorizes the court to prohibit a defendant from having contact with the victim of his or her crime. Finally, the Court of Appeals rejected the state’s position that the appellant failed to raise the issue with the district court, hence waiving the issue on appeal. Under Minnesota law, there can be no waiver of issues surrounding illegal sentences. State v. Vernon Pugh, A07-1171 (Minn. App. 07/22/08). http://www.lawlibrary.state.mn.us/archive/ctappub/0807/opa071171-0722.pdf
• Pre-Arrest Silence Issue Unresolved. On appeal, the appellant argued that the prosecution improperly used his pre-arrest silence to imply his guilt, in violation of the Fifth Amendment. He argued that the prosecutor improperly informed the jury, that during an interview with the police the day after the murder, he did not disclose that he knew the victim or that he observed suspicious activity at her home on the day of the murder. The Supreme Court noted that while pre-arrest silence may be used to impeach a testifying criminal defendant’s credibility, it is unsettled whether a prosecutor may elicit testimony of pre-arrest silence before a defendant testifies at trial. Since the Court had not decided whether it is a per se violation of the right against self-incrimination for a prosecutor to elicit testimony of a defendant’s pre-arrest silence before the defendant testifies at trial, and since the federal circuits have split on this issue, the Court declined to find plain error. Since the prosecutor did not commit plain error, and because the appellant did not raise the objection at trial, it was not properly before the Court. State v. Kent Richard Jones, A07-0457 (Minn. 07/31/08). http://www.lawlibrary.state.mn.us/archive/supct/0807/A070457-0731.pdf
• Adult Certification Factors Exclude School Incidents. Appellant was 15 years old when he was charged with second-degree murder. In a certification proceeding, the court applied the six factors required by Minn. Stat. § 260B.125, subd. 4. The third factor is “the child’s prior record of delinquency.” In addressing that factor, the prosecution introduced extensive school material showing numerous acts of bad behavior by the appellant. Over the appellant’s objection, the court found that this material weighed in favor of certification. The Supreme Court held that under the meaning of the statute, a juvenile court may not consider a juvenile’s uncharged school behavior and institutional disciplinary records when evaluating the prior record of delinquency factor for certification as an adult. The court construed the term “delinquency” to mean formal allegations and adjudications in juvenile court, and rejected the State’s argument that the term carries the broader meaning of “misdeeds.” In Re N.J.S., A06-2277 (Minn. 07/31/08). http://www.lawlibrary.state.mn.us/archive/supct/0807/A062277-0731.pdf
— Frederic Bruno
EMPLOYMENT & LABOR LAW
• Racial Discrimination. A group of African-American firefighters lost their claim that the city’s test for promotion was racially discriminatory. The Court upheld a determination by the trial court excluding an expert study of the examination process and also granted summary judgment against the firefighters’ claims of disparate impact discrimination and intentional discrimination. Stewart v. City of St. Louis, 532 F.3d 939 (8th Cir. 2008).
• Racial Discrimination. White employees of the state Department of Agriculture could not pursue their claims of hostile environment and retaliation attributable to African-American supervisors. The Appellate Court affirmed summary judgment on grounds that the white employees failed to show their working conditions were so “severe and pervasive” to rise to the level of a racially hostile environment. The Court also rejected claims by the employees of constructive discharge. O’Brien v. Department of Agriculture, 532 F.3d 805 (8th Cir. 2008).
• Racial Discrimination. The 8th Circuit upheld a $235,000 jury verdict, including $25,000 in punitive damages, for racial discrimination and retaliation. The employee’s claim that he was the subject of racial bias because he was laid off and not rehired after he complained of discrimination was supported by evidence proving that the employer’s action was motivated by discrimination, which warranted $200,000 for compensatory damages and emotional distress and an additional $25,000 for punitives. Heaton v. The Weitz Company, Inc., 2008 WL 2831852 (8th Cir. 2008).
• ERISA. The failure of an employer to include employees retroactively in an early retirement plan failed under the Employees Retirement Income & Security Act (ERISA). Because it was governed by ERISA, the employer had no obligation to amend the pension plan, but if it did so, it could only amend the plan in writing. The union who represented the employees also was not liable on a breach of duty of fair representation claim because there was no underlying impropriety by the employer that would have warranted the union pursuing a claim on behalf of its members. Cole v. International Union, 2008 WL 2756943 (8th Cir. 2008).
• PERA. A public sector employee’s disability benefits may be offset by income earned from a job after disability. The Court of Appeals held that the Public Employee’s Retirement Association (PERA) reasonably construed the “ambiguous” provision in the disability statute, Minn. Stat. § 353.656, subd. 4(b), to embrace an offset for post-disability income from a job not covered by PERA. In the Matter of Mylan Masson, 2008 WL 2885978 (Minn. Ct. App. 2008).
• Unemployment Compensation. An employee’s failure to abide by management’s directive concerning facial hair warranted disqualification for unemployment compensation benefits. The employee, who had been warned repeatedly against being unshaven, was fired after he came to work unshaven and improperly dressed. His appearance constituted “misconduct” barring benefits under Minn. Stat. § 268.098, subd. 4(1). Berg v. Apol’s Harley Davidson, Inc., 2008 WL 2888226 (Minn. Ct. App. 2008) (unpublished).
• Unemployment Compensation. An employee who did not apply for any jobs posted at a workforce center or engage in any job training was not eligible for unemployment compensation because he was not “actively seeking suitable employment.” The employee was disqualified from benefits under Minn. Stat. § 268.085, subd. 1(4), which requires applicants to make “reasonable, diligent efforts … in obtaining suitable employment under the existing conditions in the labor market area.” Burk v. Department of Employment & Economic Development, 2008 WL 2796575 (Minn. Ct. App. 2008) (unpublished).
• Unemployment Compensation. An employee’s testimony that he was not “actively seeking” other employment rendered him disqualified for unemployment compensation under Minn. Stat. § 268.085, subd. 1(4). Bushard v. Contractors Edge, Inc., No. A07-1495, 2008 WL 2885948 (Minn. Ct. App. 2008) (unpublished).
• Unemployment Compensation. A woman who resigned, fearing discharge after a poor performance review, was not eligible for unemployment benefits. The employee did not quit her job for “good cause” attributable to her employer because the reason for termination was disputes with the employer and dissatisfaction with working conditions, and the fear of prospective termination does not constitute adequate grounds for quitting and receiving unemployment benefits. Moriarty v. Wells Fargo Bank, N.A., 2008 WL 2796643 (Minn. Ct. App. 2008) (unpublished).
• Unemployment Compensation. An employee who quit because of concern that he might be fired sometime in the future because the employer had denied him promotions and salary increases, was disqualified from benefits. The fear of future discharge does not constitute “good reason” attributable to the employer to justify quitting. Colglazier v. University of Minnesota, 2008 WL 2885832 (Minn. Ct. App. 2008) (unpublished).
• Unemployment Compensation. A supervisor employee who scheduled subordinates to work 56 hours more than was allotted to them in a one-week period was not disqualified from receiving unemployment compensation benefits on grounds of gross misconduct. The claimant, who worked as a dining service manager, had legitimate reasons for scheduling other employees to work more than the time allotted because he had to cover for an impaired worker with another employee, and had to train another employee. The claimant acted in good faith, and did not commit intentional misconduct. Farhat v. GGNSC Wayzata, LLC, 2008 WL 2796646 (Minn. Ct. App. 2008) (unpublished).
— Marshall H. Tanick
• D.C. Circuit Vacates Clean Air Interstate Rule. The U. S. Court of Appeals for the D.C. Circuit on July 11, 2008 vacated the Environmental Protection Agency’s “Clean Air Interstate Rule” (“CAIR”), a cornerstone of the EPA’s efforts to control particulate matter and ozone pollution levels in a large segment of the United States. This action came just weeks after the D.C. Circuit vacated another major EPA effort to regulate air emissions, the Clean Air Mercury Rule (“CAMR”).
Section 110(a)(2)(D)(i)(I) of the Clean Air Act requires State Implementation Plans (“SIPs”) to include adequate provisions to prohibit sources or emissions activity within the State from emitting an air pollutant in an amount that will “contribute significantly to nonattainment in, or interfere with maintenance by, any other State with respect to any national ambient air quality standard [NAAQS]...” Through CAIR, the EPA sought to reduce or eliminate the impact of upwind sources on downwind, out-of-state nonattainment of NAAQS for fine particulate matter (“PM2.5”) and eight-hour ozone, a.k.a., smog. EPA identified 28 states and the District of Columbia as significant contributors to downwind nonattainment of these pollutant standards because of their emissions of sulfur dioxide (“SO2”) (a precursor to PM2.5 formation), their emissions of nitrogen oxide (“NOX”) (a precursor to PM2.5 and ozone formation), or both. CAIR required these upwind states and the District of Columbia to revise their State Implementation Plans (“SIPs”) to “include control measures to reduce emissions” of SO2 and NOX in two phases. The first phase of NOX reductions was to begin in 2009, while the first phase of SO2 reductions was to begin in 2010. The second phase of both reduction efforts was to begin in 2015. CAIR also created optional interstate trading programs for each pollutant, to which the States and the District of Columbia were subject at the time of the Court’s decision because of their failure to submit and obtain approved SIPs. The EPA issued the final version of CAIR on May 12, 2005. It published a Reconsideration of CAIR and a Federal Implementation Plan (“FIP”), which was to apply while the States reformulated their SIPs, on April 28, 2006.
A number of states, led by North Carolina and utilities located within the affected states, filed timely petitions challenging various aspects of CAIR. The Court ultimately granted a number of North Carolina’s petitions as well as the petition Minnesota Power filed to reconsider Minnesota’s inclusion in CAIR. It denied North Carolina’s remaining petitions, as well as those filed by certain Texas and Florida utilities. In granting the above petitions, the D.C. Circuit:
The D.C. Circuit opted to strike CAIR down in its entirety as its remedy for the petitions it granted. The Court did so because, as EPA itself had always maintained, CAIR was a “single, regional program … and all its components must stand or fall together.” It also vacated the FIP the EPA promulgated in connection with CAIR. The parties have until August 25, 2008 to petition the D.C. Circuit for a rehearing. In the meantime, the affected states and the District of Columbia are reassessing the effects of CAIR’s vacatur on their still-existing obligations to meet PM2.5 and ozone NAAQS attainment. State of North Carolina v. Environmental Protection Agency, 531 F.3d 896 (D.C.Cir. 2008).
• MPCA Issues Revised General Stormwater Construction Permit. The Minnesota Pollution Control Agency’s revised General NPDES Stormwater Construction Permit took effect on August 1, 2008. As before, coverage under the General Permit (or an individual permit specific to a site) is a requirement for any owner or operator of a construction site in which one or more acres of soil is disturbed. This requirement also applies where less than one acre is disturbed but the disturbed area is part of a “larger common plan for development or sale” or where the MPCA has determined the construction activity poses a risk to water resources. Among the changes to the General Permit:
Projects that received coverage under the previous General Permit before August 1, 2008 may continue to operate under that permit until February 1, 2010. After February 1, owners and operators still covered under the expired General Permit must modify their SWPPPs to reflect the new General Permit’s requirements. Find a copy of the revised General Permit at http://www.pca.state.mn.us/publications/wq-strm2-51.doc.
— William Hefner
• Fed. R. Civ. P. 12(b)(6); Consideration of Matters Outside the Pleadings. Affirming the Fed. R. Civ. P. 12(b)(6) dismissal of a securities fraud action by Judge Montgomery, the 8th Circuit found no error in the court’s consideration of public records not included in the pleadings where those documents “did not contradict” the complaint and “were not critical” to the outcome of the motion. However, while it acknowledged a circuit split as to the “purpose” for which public records can be considered on a motion to dismiss, the 8th Circuit did not reach that issue, finding it “not necessary for the resolution of the matter before us.” Little Gem Life Sciences LLC v. Orphan Medical, Inc., ___ F.3d ___ (8th Cir. 2008).
• Fed R. Civ. P. 21; Severance Rather Than Dismissal; Impact of Statute of Limitations. Reversing an order by Judge Rosenbaum, the 8th Circuit held that the appropriate remedy under Fed. R. Civ. P. 21 for the problem of misjoined plaintiffs is severance of the claims rather than dismissal without prejudice, where the misjoined plaintiffs’ claims would be barred by the statute of limitation were they forced to refile. Strandlund v. Hawley, 532 F.3d 741 (2008).
• Fed. R. Evid. 408; Evidence of Defendant’s Settlement with Third Parties. While noting a split among the circuits on the issue, the 8th Circuit found no abuse of discretion in a district court’s admission of evidence of the defendant’s settlement with other similarly situated plaintiffs where the district court “took steps to avoid unfair prejudice” to the defendant by barring evidence of the settlement amounts or the settlement documents themselves. Dahlgren v. First National Bank of Holdrege, ___ F.3d ___ (8th Cir. 2008).
• Fed. R. Civ. P. 54(b); Abuse of Discretion; Dismissal for Lack of Jurisdiction. Finding an abuse of discretion by the district court, the 8th Circuit dismissed an appeal for lack of jurisdiction where the trial court had entered final judgment under Fed. R. Civ. P. 54(b) while providing “no reasons or analysis to explain its decision.” McAdams v. McCord, ___ F.3d ___ (8th Cir. 2008).
• Untimely Disclosure of Experts; Fed. R. Civ. P 37(c)(1). In an order that subsequently was affirmed by Judge Davis, Magistrate Judge Boylan denied defendant’s motion for leave to submit a supplemental expert report where that motion was filed more than 20 months after the close of discovery and less than three months prior to trial, rejecting defendant’s argument that it could not have made the proposed disclosures previously. Global Traffic Technologies, LLC v. Tomar Electronics, Inc., 2008 WL 2811165 (D. Minn. June 10, 2008).
• Motions to Compel; Privilege Log; Sanctions. Judge Tunheim affirmed multiple orders by Magistrate Judge Erickson requiring the production of a privilege log and imposing $29,138 in sanctions against the plaintiff, based on Magistrate Judge Erickson’s determination that the plaintiff had engaged in “significant discovery abuses.” Alden v. Mid-Mesabi Assocs. Ltd. Partnership, 2008 WL 2828892 (D. Minn. July 21, 2008).
• Summary Judgment; “Sham Affidavit Doctrine.” Awarding summary judgment to the defendant in an employment discrimination action, Judge Montgomery declined to consider plaintiffs’ declarations that either contradicted their prior deposition testimony or incorporated factual allegations and documents that had not been disclosed during discovery. Urich v. Mid-Minnesota Legal Assistance, 2008 WL 2891020 (D. Minn. July 22, 2008).
• Personal Jurisdiction; Grant of Jurisdicitonal Discovery. Adopting a Report and Recommendation by Magistrate Judge Noel, Judge Tunheim denied a Fed. R. Civ. P. 12(b)(2) motion to dismiss for lack of personal jurisdiction without prejudice, and granted the plaintiff 30 days to conduct jurisdictional discovery. Apex IT, Inc. v. Rhema Bible College, 2008 WL 2952027 (D. Minn. July 28, 2008).
• Motion to Decertify Class Denied. Distinguishing the 8th Circuit’s recent decision in In Re St. Jude Medical, Inc., 522 F.3d 836 (8th Cir. 2008), Judge Montgomery denied the defendant’s motion to decertify a previously certified plaintiff class. Mooney v. Allianz Life Ins. Co., 2008 WL 2952055 (D. Minn. July 28, 2008).
— Josh Jacobson
• Patent Reexamination; Laches. The Court of Appeals for the Federal Circuit recently clarified the effect of a patent reexamination on the doctrine of laches. Dr. Serdarevic sued Advanced Medical Optics to be added as a named inventor to several laser vision correction patents. The district court found Dr. Serdarevic’s inventorship claim barred by laches because she had known of the patents for more than six years. A presumption of laches ordinarily attaches when the omitted inventor does not sue within six years of learning of the patent. However, on appeal Dr. Serdarevic argued that the laches clock starts on the day the reexamination proceedings end for a patent undergoing reexamination. The reexamination proceedings ended less than six years ago. But because Dr. Serdarevic took no part in the reexamination proceeding, it was immaterial to her inventorship claim and did not toll the laches clock: “there is no rule that the issuance of a reexamination certificate automatically resets the six-year clock for the presumption of laches in each and every case.” Serdarevic v. Advanced Medical Optics, Inc., No. 2008-1075 (Fed. Cir. July 16, 2008).
• Secondary Considerations of Nonobviousness. The Federal Circuit disregarded secondary considerations of nonobviousness that focused on only one aspect of a broadly claimed invention. Muniauction sued Thomson for infringing a patent covering methods for online bidding and won at trial. The Federal Circuit reversed, however, finding Muniauction’s patent obvious and invalid as a matter of law. Patentees can use evidence of secondary considerations such as commercial success to rebut obviousness. Muniauction documented the commercial success of just one of the two types of online bidding claimed in its patent; it did not offer any evidence as to the other. The appellate court rejected Muniauction’s evidence of secondary considerations as too narrow: “commercial success or other secondary considerations may presumptively be attributed to the patented invention only where ‘the marketed product embodies the claimed features, and is coextensive with them.’” Muniauction, Inc. v. Thomson Corp., No. 2007-1485 (Fed. Cir. July 14, 2008).
• Reverse Doctrine of Equivalents. The Federal Circuit has once again refused to apply the reverse doctrine of equivalents. Roche sued Apotex for infringing a patented drug used to treat eye inflammation. Apotex conceded literal infringement but argued on appeal that the reverse doctrine of equivalents precluded liability. Under this doctrine, a defendant can avoid liability by showing that the literally infringing article nonetheless operates in a “substantially different way” than the patented article. Apotex argued that its drug was stabilized by a “completely different ingredient and mechanism” than Roche’s patented drug. However, Apotex could not avoid infringement under the reverse doctrine of equivalents because neither the patent nor its file history referred to the particular stabilization “principle” allegedly embodied by Roche’s drug. The court confirmed that the doctrine, while still good law, in practice has limited viability: “The reverse doctrine of equivalents is rarely applied, and this court has never affirmed a finding of non-infringement under the reverse doctrine of equivalents.” Roche Palo Alto LLC v. Apotex, Inc., No. 2008-1021 (Fed. Cir. July 9, 2008).
— Tony Zeuli
• Eviction; Stay of Proceedings. The former owner of a trucking company allegedly promised to transfer real property to the new owners. In exchange, the former owner would receive annual payments. The payments would continue for a limited time, and would begin after he transferred shares of the company to the new owners.
The new owners made the annual payments to the former owner as agreed, but the former owner refused to transfer title of the real property. He claimed that the annual payments were for rent; the new owners countered that they were performance on an oral contract to purchase the real property.
The new owners sued the former owner for, inter alia, specific performance of the contractual agreement to transfer the real property. The former owner then brought a separate eviction action against the new owners. The new owners moved to stay the eviction action pending resolution of the underlying title action, or in the alternative, a full hearing on its title claims against the former owner.
The district court denied the new owner’s motion to stay the eviction action. The court allowed the new owners to assert their title claims in the eviction action as an affirmative defense, but would not allow them to seek any affirmative relief. The jury form asked only whether the former owner had a right to recover possession of the real property. The jury answered in the affirmative and the district court evicted the company.
The Court of appeals reversed and remanded. It held that, while the district court was not mandated to stay the eviction proceeding pending an outcome in the first-filed title litigation, it nevertheless abused its discretion by denying the stay in this case. The appeals court held that when counterclaims and defenses are necessary to a fair determination of an eviction action, it is an abuse of discretion not to grant a stay of the eviction proceedings while an alternate civil action that involves those counterclaims and defenses is pending. The Court of Appeals noted that pre-1998 case law citing the summary nature of an eviction proceeding is not entirely applicable because eviction actions now originate in the district court, which may expand the score of the action to address equitable defenses to title. The court ruled that once a district court determines that some of the tenant’s equitable claims against the landlord in previously filed litigation are essential to the tenant’s defense in the eviction action, the district court must stay the eviction action pending resolution of the previously filed action. Bjorklund v. Bjorklund Trucking, Inc., A07-1327, 2008 WL 2796645 (Minn. Ct. App. 2008).
• Conveyance of Tax-Forfeited Lands; Restricted Use Deeds. The State of Minnesota, through the Commissioner of Revenue, conveyed five parcels of real property to the City of Saint Paul as tax-forfeited land, pursuant to Minn. Stat. § 282.01, subd. 1a. All five parcels were conveyed free of charge because the city agreed to use them for an authorized public purpose, pursuant to the statute. One parcel was conveyed “exclusively for snow removal and street cleaning disposal.” Four parcels were conveyed “exclusively for park purposes.” The snow removal and street sweeping parcel was used for that purpose for a number of years until the site was deemed full of street-sweeping residue. All four of the park parcels were left in their natural state as open space. There was no information in the record whether the park parcels are actively used by the public, but there was no prohibition against entry. One of the park parcels had no access to the public, except over privately owned land.
The state issued declarations of reversion for the five parcels and the city commenced litigation to prevent reversion. The district court granted summary judgment in favor of the city, concluding that the city’s code and charter provided definitions for park purposes that were in compliance with the use deeds.
The Court of Appeals affirmed the district court’s ruling on the park parcels. While the Department of Revenue had guidelines on the definition, the court ruled that the procedures and presumptions inherent in tax court proceedings do not apply to the reversion proceeding. The court noted that a restricted use deed is conditioned on continued use for the purpose stated in the application. The city’s application indicated the parcels would be used for park purposes and the city’s code and charter definitions of park purposes included open space. Because the city had continued to use the parcels precisely as stated in its applications, the Court of Appeals found no basis for reverter.
The court of appeals reversed on the snow removal and street sweeping parcel, holding that the state had established grounds for reverter. The court noted that since the city no longer used the parcel for snow removal or street sweeping disposal, the city was no longer using the parcel in conformance with the use deed. Passive storage of street sweeping debris was not consistent with the use deed. The court held that maintaining the parcel as an empty and functionally abandoned site was not the best use of tax-forfeited lands, which the state holds in trust for the public’s benefit. City of Saint Paul v. State of Minnesota, 2008 WL 2967026 (Minn. Ct. App. 2008).
— Michael Kreun
• Gains on Sale of Stock Pledged as Collateral are Taxable to Borrower. The 10th Circuit has held that gains from the sale of stock pledged as collateral for a loan are taxable to the borrowers, and must be calculated under the first-in/first-out method (FIFO). The circuit court also denied the taxpayers a worthless debt reduction.
John S. Rendell was one of two founding shareholders of a corporation involved in oil research and development. Rendell was also the CEO and chairman of the board, and owned significant amounts of the corporation’s stock. Rendall loaned the corporation $2 million from funds he had obtained through a margin account with Merrill Lynch (“Merrill”). To obtain the loan from Merrill, Rendall had pledged shares of his corporation stock as security. Eventually, Merrill demanded repayment of the loan; Rendall did not remit, and Merrill liquidated the pledged shares to pay the debt. Rendall disputed Merrill’s authority to complete the sale, but the sale was nonetheless completed. Shortly after the sale, the corporation filed for bankruptcy in both Canada and the United States.
The 10th Circuit rejected Rendall’s argument that Merrill’s sale constituted an unlawful conversion of stock. The Court reasoned that “the terms of the pledge agreement…gave [Merrill] an unrestricted right to demand payment at any time…and [Merrill] subsequently sold only enough shares to satisfy [Rendall’s] indebtedness.” Rendall, therefore, was taxable on the gain. Because Rendall could not identify which particular shares were sold, he was required to use the FIFO method to determine gain. The Court then denied Rendall’s claim for a bad debt deduction. Despite the bankruptcy proceedings, Rendall failed to demonstrate that “there was no reasonable hope of recovery on the [corporation] loan.” Rendall’s contention that the corporation was insolvent was insufficient when there were “no financial statements or other documents in the record that reflect[ed] the corporation’s position as of [the end of the tax year].” Rendall v. Commissioner, No. 06-9007 (Aug. 5, 2008).
• Innocent Spouse and Community Property. The 9th Circuit denied an innocent spouse a refund of amounts paid from community property. Individuals filing joint tax returns accept joint and several liability for underpayment. This joint and several liability can lead to hardship and unfairness in cases of “innocent spouses.” IRC Section 6015(a) mitigates that unfairness by providing protection from an assessed deficiency due to an understatement where a spouse incorrectly reports items.
Lois Ordlock and her husband reside in a community property state. Mr. Ordlock understated various items, the IRS assessed a deficiency, and the Ordlocks paid the deficiency out of both community funds and Mrs. Ordlock’s separate funds. Mrs. Ordlock was granted innocent spouse relief, and requested a refund of the total amount paid. The IRS refunded the amount paid out of Mrs. Ordlock’s separate funds, but did not refund any amounts paid out of community funds.
The 9th Circuit held that Mrs. Ordlock was not entitled to a refund of amounts paid out of the community property. Though the determination whether a spouse qualifies for innocent spouse status is to be made under Code Sec. 6015(a) without regard to community property laws, Code Sec. 6015(g), the refund provision has no similar language. Therefore the innocent spouse refund provision, Code Sec. 6015(g), does not preempt state community property law.
Tax Court cases that involve unusual, important, or novel issues are heard or reviewed by more than one of the 19 Tax Court Judges. The Ordlock case was reviewed by 18 of the 19 judges. The majority (10 judges) agreed with the ultimate holding. Eight Tax Court judges, however, dissented. Ordlock v. Comm’r, No. 06-74539 (9th Cir. July 24, 2008).
• No Deduction for Cost of Day-Trading Course. Taxpayers who conceded they were not in the trade or business of day-trading were not permitted to deduct the cost of a day-trading course. The taxpayer claimed a deduction for the course pursuant to Section 212(1), which allows as a deduction all the ordinary and necessary expenses for the collection of income. Section 274(h)(7), however, denies a deduction under 212 for expenses for conventions, seminars, or similar meetings. The taxpayer was unable to convince the Tax Court that his five-day, one-on-one training session did not fall within the disallowance of Section 274(h)(7). Jones v. Comm’r, 131 T.C. No. 3, Docket No. 10434-06 (July 28, 2008).
• Minnesota Residency. The Minnesota Supreme Court unanimously affirmed the tax court’s determination that the taxpayer, Dr. Dreyling, was a Minnesota domiciliary, and therefore a resident for tax purposes. Dr. Dreyling argued that his domicile had changed to Florida, but several presumptions, and the failure to submit evidence during trial, combined to drive the Court’s rejection of his argument.
First, the presumptions: (1) absent divorce or legal separation, one spouse’s domicile is the same as the other’s, unless there is affirmative evidence to the contrary; (2) a domicile once shown to exist is presumed to continue until the contrary is shown; and (3) the Commissioner’s determination of domicile is presumed correct. The Dreylings had been long-time Minnesota residents, Dr. Dreyling’s spouse did not change her domicile, and the Commissioner determined that the taxpayer’s residence was Minnesota. Despite providing credit card receipts and telephone records in the audit, the taxpayer failed to offer those documents at trial. The Court was not convinced that the taxpayer had overcome any of the three presumptions. The Court then affirmed the Minnesota Tax Court’s conclusion that the 26-factor test to determine residency (set forth in Minn. R. 8001.0300, subp. 3 (2007)) supported a determination of Minnesota residency. Factors the reviewing court noted included that Dr. Dreyling continued to practice medicine in Minnesota, and pursued continuing medical education in Minnesota. He also maintained his living quarters in Minnesota, maintained a Minnesota homestead election, and had Minnesota hunting and fishing licenses. Dreyling v. Commissioner of Revenue, ___ N.W.2d ___ (Minn. July, 31 2008) (2008 WL 2917776).
• President Bush Signs Housing Stimulus Bill. President Bush signed the American Housing Rescue and Foreclosure Act of 2008 (H.R. 3221), which included more than $15 billion in tax incentives intended to bolster the struggling housing sector. Included in the bill is a $7,500 tax credit for first-time homebuyers that can be used for purchases made from April 9 of this year through July 1 of next (the credit must be repaid over a 15-year period), and a provision to allow non-itemizers to use a standard deduction of property taxes of up to $1,000. The bill contains nearly $4 billion in grants to local governments to buy and refurbished foreclosed properties.
• Taxation of Profits on Sales of Second/Rental Homes. The recently passed federal housing bill also narrows the use of the tax-free exclusion that permits homeowners to escape taxation on profits from the sale of a principal residence. Currently, sellers can claim the full amount of the exclusion (the first $500,000 of profit for married filing jointly; $250,000 for other filers) so long as they have used a property as their principal residence for at least two of the five years preceding a sale. Sellers are permitted to claim the exclusion if they convert an investment property or vacation home into a principal residence, and live there at least two years. The new rule tightens up the requirements for converting vacation and/or rental homes into principal residence. Specifically, profits on a second or investment home that is purchased after January 1, 2009 and later converted to a principal residence and sold, will be allocated between periods of qualified and nonqualified use. Profit attributable to nonqualified use will not be excluded from gain.
• Charitable Contribution Substantiation Requirements. The IRS posted proposed regulations providing guidance concerning substantiation and reporting requirements for cash and non-cash charitable contributions under tax code Section 170. The regulations guide individuals, partnerships, and corporations that make charitable contributions, and will impact any donor claiming a deduction for a charitable contribution after the date the regulations are published as final regulations in the Federal Register. The American Jobs Creation Act of 2004 and the Pension Protection Act of 2006 put into place more stringent record keeping and substantiation requirements. For example, Section 170 requires that taxpayers maintain a record of any contribution the taxpayer wishes to deduct. Contributions of $250 or more must be substantiated by a contemporaneous written acknowledgement from the donee. Additional requirements apply to non-cash contributions: non-cash contributions between $500 and $5,000 require the donor to attach to its return a description of the contributed property; for donations valued between $5,000 and $500,000, the donor must obtain a “qualified appraisal” (defined by statute) and attach to its return information about the property and the appraisal; for donations of more than $500,000, the donor must attach a qualified appraisal to its return. The proposed regulations provide guidance and clarification surrounding these record keeping and substantiation requirements.
• Overhaul of IRS Form 990. The IRS overhauled Form 990, the nonprofit organization tax return. The overhaul of Form 990 indicates that the Service continues to increase scrutiny of non-profits. The new 990 requires more disclosure about non-cash donations, executive pay, partnership with for-profit corporations, and certain information about conflicts of interest. The form will be in effect next year, for 2008 returns.
• IRS Offer of Settlement for Two Tax Shelters. Building on recent successful court challenges to two dubious tax shelters, the IRS has offered more than 45 corporations the opportunity to settle disputes involving LILO (lease-in/lease-out) and SILO (sale-in/lease-out) tax shelters. The shelters involve paper leases of subways, bridges and other infrastructure which are then leased back to their owners or operators. The IRS considers the shelters improper, and asserts that corporations using the shelters improperly defer taxes and artificially bolster their balance sheets. The corporations have 30 days to accept the offer, and in some cases will be permitted to keep a portion of the deductions claimed through 2007 from the use of the shelters. Companies accepting the offer will not be made to pay penalties.
• HSA Contributions. The IRS has offered proposed rules (REG-120476-07) which will provide guidance on employer comparable contributions to health savings accounts under tax code section 4980G. The rules, according to the Service, would affect employers that contribute to employees’ Health Savings Accounts and Archer medical savings accounts, employers or employee organizations sponsoring a group health plan, and certain third parties.
• Minnesota Credits for Income Taxes Paid. Minnesota law provides credits paid for “taxes based on net income” paid to another state. (Minn. §§ 290.06, sub. 22; 290.01, sub. 19a(4); 290.01, sub. 19c(1)). The Minnesota Department of Revenue set forth its position regarding credits for taxes paid under three states’ laws: the Ohio Commercial Activity Tax (not a tax based on net income), Texas business margin tax (not a tax based on net income), and the Wisconsin recycling surcharge (in certain instances, a tax on net income, in other instances, not a tax on net income). Revenue Notice No. 08-08, July 21, 2008, available at 2008 WL 285527.
• Sales and Use Tax on Lawn Care. The Minnesota Department of Revenue issued Notice No. 08-07, July 21, 2008, available at2008 WL 2855726, providing guidance on when lawn care services are taxable. The notice provides a list of taxable services, including picking up pet droppings. The Department revoked previous Revenue Notice No. 04-05: Sales and Use Tax-Lawn Care.
• California: Personal Income Taxation of Same-Sex Married Couples. A new Web page created by the California Franchise Tax Board provides guidance for the myriad of personal income tax issues that impact same-sex married couples in light of the California Supreme Court’s decision in In re Marriage Cases , 43 Cal. 4th 757 (2008), in which the Court ruled that same-sex couples are allowed to be legally married in California. The information can be found by searching for “SSMC” (same sex married couple) on the FTB’s Web site at: http://www.ftb.ca.gov.
• Foreign Banks Complicit in Tax Evasion. On July 17, the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations revealed the results of its six-month inquiry into the role of foreign banks in facilitating tax evasion by United States clients. The subcommittee is chaired by Senator Carl Levin (D-Mich), and the ranking Republican is Minnesota’s Senator Norm Coleman. The report identified Swiss bank USB AG and LGT Bank, the bank owned by the royal family of Liechtenstein. In response to the inquiry, Senator Coleman has called for closing offshore loopholes by strengthening reporting requirements, broadening the scope of the IRS audit program, and utilizing more IRS resources in offshore tax haven investigations.
• Distribution of Federal AGI within the States, 2006. Using data released from the IRS, the Institute on Taxation and Economic Policy compiled a summary of the share of federal AGI reported by state residents. Wyoming had the highest concentration of federal AGI (the top 1% of returns reported 30.7% of AGI, while the bottom 50% of returns reported only 11.6% of AGI). West Virginia had the lowest concentration, with the top 1% of returns reporting 12.1% of AIG and the bottom 50% reporting 15.2% of federal AGI. Minnesota was close to the middle, with the top 1% of returns reporting 17.4% of AIG and the bottom 50% reporting 13.7% of federal AGI. Twenty-two states had lower concentrations than Minnesota.
— Morgan L. Holcomb
TORTS & INSURANCE
• Insurance Coverage; Policy Exclusions; Duty to Defend. The 8th Circuit, applying Minnesota law, held that an insurer had no duty to defend under an errors-and-omissions policy two real estate agents sued for fraud. The court ruled that the claim fell within a policy exclusion for claims “arising out of the conversion, commingling, defalcation, misappropriation or improper use of funds or other property [or] the inability or failure to pay, collect or safeguard funds held for others.” The court observed that Minnesota courts have given the phrase “arising out of” a broad meaning and that this phrase only requires a “but for” causal connection and not proximate cause. Murray v. Greenwich Ins. Co., ___ F.3d ___, 2008 WL 2629958 (8th Cir. 7/7/08).
— David Turner