August 2009

ADMINISTRATIVE LAW
JUDICIAL LAW

• Due Process; Equal Protection.  Shannon Murphy’s parental rights were involuntarily terminated in 1986.  Starting in 2003, she sought employment at several facilities that were licensed by the Department of Human Services (DHS).  As Murphy’s work involved direct contact with mentally ill adults, the DHS was required to conduct a background check on her.  Because of the involuntary termination of her parental rights, Murphy was initially disqualified “from any position allowing direct contact with persons receiving services.”  Minn. Stat. §§245C.14, subd. 1; 245C.15, subd. 1(a). 

In 2003 and 2004, the commissioner had the authority to set aside Murphy’s disqualification and did so six times after determining that she posed no risk of harm to adults in foster care.  In 2005, the law was amended to generally prohibit the commissioner from setting aside a disqualification of an individual due to the involuntary termination of that individual’s parental rights.  As a result of this amendment, the commissioner determined that Murphy posed “an imminent risk of harm to persons receiving services” and her disqualification could not be set aside.

Murphy requested reconsideration of the commissioner’s decision based upon the earlier determinations that she did not pose a risk of harm and the lack of any new facts suggesting otherwise.  The commissioner responded that the determination was not based on any new facts, but on the new law.  This certiorari appeal followed.

Murphy argued that the change in the law permanently barring the commissioner from setting aside her disqualification violated her right to equal protection and the court of appeals agreed.  The statute as amended drew a distinction between individuals whose parental rights had been involuntarily terminated and those whose parental rights had been voluntarily terminated.  The court examined this distinction under a rational basis standard and concluded that the nature of a parental rights termination proceeding (voluntary or involuntary) was not a rational basis for predicting the risk of harm from the individual involved.  Therefore, the commissioner’s decision was reversed on equal protection grounds and remanded for reconsideration.  Murphy v. Commissioner of Human Services, A08-1042, A08-1148, 765 N.W.2d 100 (Minn. App. 2009).

• Preenforcement Rule Challenge.  The Minnesota Pollution Control Agency (MPCA) proposed amendments to rules regulating the discharge of phosphorus into state waters.  The MPCA indicated in its statement of need and reasonableness that it anticipated that requests for exemptions to the discharge limit would be infrequent.  An administrative law judge (ALJ) conducted hearings on the proposed rules and recommended their adoption.  The rules were subsequently adopted by the agency.  The Coalition of Minnesota Cities filed a petition for a declaratory judgment with the court of appeals to bring a preenforcement challenge to Minn. R. 7053.0255, subp. 4.

The MPCA argued that the coalition lacked standing to bring a preenforcement rule challenge.  To have standing to challenge a rule under Minn. Stat. §14.44, a petitioner must show that “the rule, or its threatened application, interferes with or impairs, or threatens to interfere with or impair the legal rights or privileges of the petitioner.”  There must also be a showing that the rule is or is about to be applied to the petitioner’s disadvantage; the mere possibility of an injury is not sufficient.

The coalition argued that the rule’s use of the word “may” instead of “shall” gave the agency decision makers “complete and unbridled discretion” to deny applications for exemptions.  The coalition stated that the overbroad application of the rule could be detrimental to municipalities due to the costs of complying with the discharge limits if no exemption were granted.  The court held that the coalition had demonstrated that the application or threatened application of the rule could interfere with or threaten to interfere with the interests of its members in obtaining exemptions and therefore had standing to proceed with its challenge.

The court did not agree with the coalition’s characterization of the rule as allowing the MPCA to exercise “unbridled discretion,” finding instead that the discretion was limited by appropriate criteria and consistent with the agency’s authority.  Therefore, the court held that the challenged rule was valid. Coalition of Greater Minnesota Cities v. MPCA, A08-1198, 765 N.W.2d 159 (Minn. App. 2009).

LEGISLATION

• Rulemaking, Open Meetings, and Attorney Fee Awards.  The Minnesota Legislature passed four administrative law-related bills this past session.  Rulemaking notices may now be mailed either by U.S. mail or by electronic mail (H.F. 1857/S.F. 532).  In addition, the legislature added a provision to the Administrative Procedure Act requiring state agencies undergoing rulemaking to determine if a local government will be required to adopt or amend an ordinance or other regulation to comply with the proposed rules.  Several exceptions apply (H.F. 1849/S.F. 1544).  Third, the Open Meeting Law was amended to allow meetings to be conducted by telephone or other electronic means if certain conditions are met and if notice is given (H.F. 456/S.F. 764).  Finally, the legislature amended the Minnesota Equal Access to Justice Act at Minn. Stat. §15.471, subd. 5, to delete the $125-per-hour limitation on awards of attorney fees (H.F. 1529/S.F. 798).

August 2009

CIVIL LITIGATION
JUDICIAL LAW

• Tender of Defense; Loan Receipt Agreement. Cargill and subsidiaries were sued for damages arising from Cargill’s waste-disposal practices.  Because it was unclear when the harm alleged in these lawsuits first began, Cargill provided notice of the pending litigation to its primary and umbrella-level liability insurers from the past several decades which potentially had a duty to defend, indemnify, or both.  Upon receiving said notice, one of the insurers, Respondent Liberty Mutual Insurance Company, offered to fund Cargill’s defense, but requested that Cargill execute a customary and neutral loan receipt agreement, by which Liberty Mutual would be allowed to seek contribution from more than 50 other nonparticipating insurers for the multimillion-dollar litigation costs in defending the lawsuits.  None of the 50-plus insurers would agree to assume responsibility for defense costs without the ability to seek contribution from other insurers.

Cargill sought declaratory relief against the insurers, seeking a determination that each of the 50 insurers had an obligation to defend and indemnify Cargill in the lawsuits.  Liberty Mutual filed cross-motions against several insurers seeking a declaration it would have a right to subrogation or contribution from them in the event that Liberty Mutual solely incurred defense costs on behalf of Cargill.  The district court bifurcated the proceedings and ordered that the first phase would relate solely to the duty to defend.  The district court denied Cargill’s motion and granted partial summary judgment in favor of Liberty Mutual, holding that Liberty was entitled to equitable relief in the form of a constructive loan-receipt agreement.  The court then certified for appeal the issue of whether a district court can order primary insurers to be equally liable for the costs of defense. 

The court of appeals reframed the issue as follows:  When insured maintains numerous insurance policies and insurance agreements, and the insured demands that one primary insurer pay all defense costs and refuses to cooperate with that insurer to preserve a full right to contribution, does a district court have authority to fashion a remedy that will allow the primary insurer to preserve its claim for contribution for defense costs?  The court of appeals answered that certified question in the affirmative.

On appeal, Cargill first contended that, absent a loan-receipt agreement, no privity of contract existed among the insurers which would allow Liberty to seek contribution.  The court agreed that Iowa National Insurance Company v. Universal Underwriters Insurance Company, 276 Minn. 362, 150 N.W. 2d 233 (1967) controlled this issue.  In Iowa National, the supreme court concluded that an insurer which undertakes the defense of an insured generally cannot pursue contribution for defense costs from another insurer without a parallel duty to defend, because no privity of contract or joint liability exists between the insurers.  The principle of subrogation does not afford one insurer such right of contribution because each has a separate and distinct obligation to defend.  Thus, the court concluded that it was bound by Iowa National so that, in the absence of contractual privity between Liberty Mutual and its co-primary duty to defend insurers, Liberty Mutual has no right of contribution in the absence of a loan-receipt agreement. 

Next, Cargill claimed that, because each insurer owes a separate and distinct duty to defend, Cargill was under no obligation to enter into a loan-receipt agreement with Liberty Mutual, nor did the courts have authority to impose a constructive loan-receipt agreement.  The court disagreed with both of these positions.

First, the court concluded that principles of good faith and fair dealing imposed an affirmative obligation on Cargill to cooperate by entering into a loan-receipt agreement that equitably apportions liability among primary insurers.  Here the court relied on Jostens, Inc. v. Mission Insurance Co., 387 N.W.2d 161 (Minn. 1986).  The court also found that the cooperation clause in the Liberty Mutual insurance policy required Cargill to enter into what everyone agreed was a “neutral” loan-receipt agreement.  Therefore, the court held that Minnesota courts may protect an insurer by imposing a constructive loan-receipt obligation where the insured, in bad faith, refuses to enter into a neutral loan-receipt agreement.  Such an agreement is merely intended to protect insurers’ right to seek equitable apportionment of defense costs among those insurers that have a duty to defend.  (We note that this was not a unanimous opinion; Cargill has petitioned for review; and an order has not yet issued on the petition.)  Cargill, Inc. v. Ace American Ins. Co., 766 N.W.2d 58 (Minn. App. 2009).

—Andrew Shern
Murnane, Brandt

August 2009

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

• Continuing Police Health Benefits; Degenerative Condition Denied.A police officer who underwent replacement of both knees due to a degenerative joint disease unrelated to injuries on the job was not entitled to continuing health insurance benefits under Minn. Stat. §299A.465. Although the police officer suffered knee injuries on three occasions while in the course of his duties, the knee replacements were unrelated to injuries on the job, which negates the claim that the employer must provide continuing health insurance benefits under the statute. In the Matter of Claim for Benefits of Mercado, 2009 WL 1587116 (Minn. App. 2009) (unpublished).

• Unfair Labor Practice:  Sheriff’s Failure to Comply With Reinstatement.The sheriff of Lake County was deemed to have committed an unfair labor practice under the Minnesota Public Employment Labor Relations Act, Minn. Stat. §179A by the court of appeals for failing to comply with a directive from the county board to reinstate a dismissed narcotics investigation. Because the sheriff did not pursue arbitration of the county board’s directive reversing his decision and directing that the investigator be reinstated, the investigator was entitled to summary judgment on his claim that the sheriff violated PELRA, Minn. Stat. §179A.01, et seq. in light of the unambiguous provision of the collective bargaining agreement that requires the sheriff to comply with any decisions of the county board.  The county is not required to indemnify the defense fees for the sheriff under Minn. Stat. §466.07 because the case was not one for damages, which invokes the indemnification statute. Law Enforcement Labor Services, Inc., v. Johnson, 2009 WL 1586810 (Minn. App. 2009) (unpublished). 

• Employment Termination; “At Will,” No Public Policy Violation.  An employee who claimed wrongful termination in violation of public policy lost his claim when the 8th Circuit held that the employee did not have any rights because he worked under the “at will” doctrine, and there is no violation of public policy or any breach of contract arising out of the employment manual.  The trial court’s denial of widespread discovery also was appropriate because there was no need to engage in such broad discovery for the specific wrongful termination case. Semple v. Federal Express Corporation, 566 F.3d 788 (8th Cir. 2009).

• ERISA Preemption; Interference Claim Barred.  A Minnesota employee’s claim of discrimination in violation of the Minnesota Human Rights Act, which included an assertion of employer interference with his pension, was properly dismissed because the claim was preempted by the Employees’ Retirement & Income Security Act (ERISA). The 8th Circuit held that the claim was properly removed from state court to federal court because it was completely preempted by ERISA. Summary judgment for the employer on the state law discrimination claim also was upheld because the claimant did not satisfy the “perception of disability” provision of the Human Rights Act by failing to show that the employer regarded him as having an impairment that substantially limited his ability to work. McLain v. Andersen Corp., 567 F.3d 956 (8th Cir. 2009).  

• ERISA; Termination for “Cause” Bars Severance.  The 8th Circuit Court of Appeals held that an employee who sued his employer under ERISA for firing him to prevent him from receiving benefits under the company’s severance and stock plans could not pursue the case. Summary judgment was properly granted to the employer because the employee was terminated for cause, which barred his entitlement to benefits under the exclusive language of the company’s severance and stock option plans.  Pendleton v. QuikTrip Corporation, 567 F.3d 988 (8th Cir. 2009).

• Unemployment Compensation; Notice of Future Discharge.An employee who received notice of future discharge is ineligible for unemployment compensation benefits if a job is available in any capacity for the employee, the Minnesota Court of Appeals has ruled. The commission by the employee of misconduct after receiving the notice of future discharge, prior to the discharge being implemented, also bars the employee from receiving benefits under Minn. Stat. §268.095, subd. 4(1). Bangston v. Allina Medical Group, 766 N.W.2d 328 Minn. App. (2009).

• Unemployment Compensation; Unexcused Absences Constitute “Misconduct.” An employee who had numerous unexcused absences was ineligible for unemployment compensation benefits on grounds of “misconduct.” The employee had accumulated 11 points in the employer’s system of designating points for unscheduled absences when the employee missed a work shift after being cited for driving with a suspended license.  The court of appeals upheld a determination by an unemployment compensation judge that the claimant committed disqualifying “misconduct,” because of the prior unexcused absences in violation of the company’s attendance policy. Giovingo v. SMSC Gaming Enterprises¸ 2009 WL 1586939 (Minn. App. 2009) (unpublished). 

ADMINISTRATIVE ACTION

• Pay for Employee Training. A pair of recent opinion letters from the U.S. Department of Labor address the issue of when employers must pay employees for training time, including preparatory homework.  Under the regulations, an employee’s attendance at lectures, meetings, and training programs need not be paid if the sessions take place outside of working hours, attendance is voluntary, training is not directly related to the employee’s job, and there is no productive work done during the training.  However, if employees are required to attend, they must be paid, including time spent preparing for the sessions.  FLSA 2009-1 & FLSA 2009-15. 

—Marshall H. Tanick
Mansfield Tanick & Cohen, P.A.

August 2009

FEDERAL PRACTICE
JUDICIAL LAW

• Failure to Prosecute; Inaction Prior to Removal. Affirming a district court’s dismissal of an action for failure to prosecute, less than three months after the action was removed but almost four years after the action was filed in the Missouri courts, the 8th Circuit followed the logic of a series of 9th Circuit cases recognizing that a federal court may consider the plaintiff’s preremoval conduct as part of its Fed. R. Civ. P. 41(b) analysis.  Boyle v. American Auto Service, Inc., ___ F.3d ___ (8th Cir. 2009). 

• Fed R. Civ. P. 54(b); Partial Summary Judgment; Abuse of Discretion. Just last month, this column noted a recent 8th Circuit decision finding that Rule 54(b) certifications should not be granted “routinely.” Huggins v. FedEx Ground Package, Inc., 566 F.3d 924 (8th Cir. 2009). The 8th Circuit’s apparent crackdown on Rule 54(b) certifications continues, as in another recent decision the 8th Circuit again rejected a Rule 54(b) certification, finding that no “exigency” was present to justify exercising its jurisdiction.  Taco John’s of Huron, Inc. v. Bix Produce Co., ___ F.3d ___ (8th Cir. 2009). 

• Attempted Appeal from Denial of Motion for Summary Judgment. The 8th Circuit recently held, yet again, that with limited exceptions, the denial of a motion for summary judgment cannot be appealed following trial.  Hertz v. Woodbury County, 566 F.3d 775 (8th Cir. 2009). 

• Class Action Fairness Act; Subject Matter Jurisdiction Following Denial of Class Certification. Deciding an issue of first impression in the District of Minnesota, and an issue that has divided the federal district courts around the country, Judge Ericksen held that federal courts lack subject matter jurisdiction over purported CAFA-based actions where class certification has been denied, there is no “reasonably foreseeable possibility” of future class certification, and there is no “standard” diversity jurisdiction.  Avritt v. Reliastar Life Ins. Co., 2009 WL 1703224 (D. Minn. 06/18/09). 

• Privilege Claims Rejected; Stay of Order Denied. Having previously affirmed Magistrate Judge Boylan’s determinations that a third-party defendant had waived any privilege relating to a handful of documents, Judge Frank denied a motion to stay enforcement of those orders pending a petition for a writ of mandamus to the Federal Circuit, finding no likelihood of success on the petition.  Imation Corp. v. Koninklijke Philips Elecs. N.V., 2009 WL 1766671 (D. Minn. 06/22/09). 

• Attorney’s Fees; Reasonable Hourly Rates in the Twin Cities. Judge Rosenbaum awarded plaintiffs’ counsel more than $29 million in attorney fees following the settlement of a protracted class action.  Of particular note to local practitioners is Judge Rosenbaum’s determination that $500 was a reasonable hourly rate for partner-level attorneys, and that $200 was a reasonable blended hourly rate for other attorneys “whether counsel, associate or contract attorneys.”  In Re UnitedHealth Group Inc. Shareholder Derivative Lit., ___ F. Supp. 2d ___ (D. Minn. 2009). 

• Attempted Removal by the Plaintiff; Sanctions Threatened. Criticizing the plaintiff’s response to an order to show cause as both “incomplete” and “misleading,” Judge Schiltz rejected a plaintiff’s attempt to remove its action following the defendant’s alleged raising of a federal question in a state court motion, and noted that “a repeat of such behavior before this Court will result in appropriate sanctions.”  Board of Trustees of the Sheet Metal Workers National Pension Fund v. Markgraf Mech., Inc., 2009 WL 1444693 (D. Minn. 05/21/09). 

• Appeal of Nonappealable Order; District Court’s Retention of Jurisdiction. Judge Schiltz criticized the parties for filing an appeal and a cross-appeal from what “plainly” was a nonappealable order, and held that the notices of appeal did not divest the district court of jurisdiction to proceed with the case while the appeals remained pending.  Hough v. Shakopee Public Schools, 2009 WL 1457019 (D. Minn. 05/22/09). 

—Josh Jacobson
Law Office of Josh Jacobson

August 2009

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Trademark; Proximate Goods.  TRIX Are For Kids, not Turkish defendants, ruled Judge Frank in granting General Mills’ motion for a preliminary injunction involving its famous TRIX trademarks.  General Mills sued a number of related Turkey-based defendants who were using “Trix” as a trademark on powdered drink mixes—”Trix Drinks”—and marshmallows sold in the United States.  The court noted the fame of the TRIX trademarks and the proximity of the defendants’ goods (drink mixes and marshmallows) to the foods and food-related goods sold by General Mills under the TRIX trademarks.  The court ordered the defendants to stop all U.S. use of TRIX and similar marks, take down websites, and immediately cease any importation of the offending goods into the U.S.  General Mills IP Holdings II, LLC v. Soyyigit Gida Sanayi ve Ticaret Anonim Sirketi, et al., Civ. No. 09-1010 (D. Minn. 06/23/09).

• Trademark; Invalid Because Descriptive; Incontestable. The 8th Circuit Court of Appeals worked through a complicated trademark matter.  In short, the appellate court held that a trademark owner whose mark has recently become incontestable is not prevented from suing a defendant for a second time.  B&B federally registered “Sealtight” as a trademark in 1993.  Three years later, Hargis filed an application to register “Sealtite” as a trademark and asked the Trademark Office to cancel B&B’s trademark registration.  B&B responded by suing Hargis for trademark infringement, and the Trademark Office stayed Hargis’s cancellation proceeding.  But B&B lost the trial when a jury returned a verdict in Hargis’s favor finding that B&B’s trademark was invalid because it was descriptive.  With judgment in hand, Hargis asked the Trademark Office to resume the cancellation proceeding.  The Trademark Office refused, however, apparently because the original petition to cancel had not included an allegation that the mark was descriptive.  To make matters worse for Hargis, B&B’s trademark had now become “incontestable” because it had been registered and used consistently for more than five years.  B&B then sued Hargis again alleging trademark infringement.  The district court dismissed the action due to collateral estoppel based on the earlier litigation that B&B had lost against Hargis.  But the appellate court reversed, holding that the earlier verdict was premised only on the jury’s determination that the registration was descriptive—a defense that no longer could be asserted now that the mark is incontestable.  “The jury did not reach the subsequent interrogatories that addressed [trademark infringement],” stated the court.  B&B Hardware, Inc. v. Hargis Industries, Inc., et al., Civ. No. 07-3866 (8th Cir. 06/22/09).

• Copyright; File Sharing; Evidentiary Rulings. Capitol Records and other music companies prevailed at trial against defendant Jammie Thomas-Rasset.  Judge Davis made some noteworthy evidentiary rulings that will likely be the subject of appeal if the case continues.   The court rejected defendant’s argument that the IT company that downloaded information about defendant’s music-sharing activities online violated certain state and federal laws regulating private investigators.  The court also rejected defendant’s attempts to raise a fair use defense and an innocent infringer defense because both had been waived.  Capitol Records Inc. et al., v. Jammie Thomas-Rasset, Civ. No. 06-1497 (D. Minn. 06/11/09).

LOOKING AHEAD

• Business Method Patents. The United States Supreme Court will hear an important patent case next term dealing with the patentability of business method patents.  The Supreme Court granted certiorari in Bilski v. Doll on June 1, 2009.

—Tony Zeuli
Merchant & Gould

August 2009

REAL PROPERTY
JUDICAL LAW

• Mechanic’s Liens; Ability to Enforce Blanket Lien on Less Than All Property Improved.  The Minnesota Court of Appeals recently addressed whether the full amount of a blanket mechanic’s lien attaching to multiple properties can be enforced against only some of the properties.  In the case, the bank gave a loan to a developer to fund the initial work necessary to develop a 40-acre project.  After the corresponding mortgage was recorded, a contractor began site work and secured mechanic’s lien rights.  Subsequently, the bank entered into three construction loan agreements with a builder, each of which was separately secured by a construction mortgage on an individual lot.  The bank, the builder and the developer entered into a loan modification agreement under which the bank released the initial mortgage from these three lots.  The contractor was not paid for a substantial amount of work done and filed a blanket mechanic’s lien claim against the entire project.  The builder and developer both defaulted on their loans and the bank commenced two separate foreclosure actions, one for the development loan and one for the construction loan. 

One issue in the case was whether the contractor would be able to enforce its mechanic’s lien claim.  With respect to the property under the development mortgage, which was the vast majority of the property, the district court concluded that the contractor could not enforce its lien because the bank’s development mortgage was recorded before the lien attached.  With respect to the three lots that were subject to the construction loan, however, the court held that the contractor could enforce its lien because the construction mortgages were recorded after the lien attached.  Significantly, the court ruled that the contractor could enforce the full amount of its blanket lien on those three lots even though some of the work was performed on other lots.  Although reversing other aspects of the district court’s judgment, the court of appeals affirmed the district court’s decision with respect to the enforcement of the mechanic’s lien.   The court held that the mechanic’s lien statutes are ambiguous.  According to the court, the statutes do not specifically permit a claimant to enforce the full amount of its lien on less than all of the properties on which the work was performed.  On the other hand, nothing in the law expressly prohibits enforcement on less than all lots.  Because the court could not reach a conclusion based on the statutory language, the court decided the matter by weighing the equities.  Considering the requirement that the lien laws be liberally construed in favor of protecting laborers and suppliers, the court determined that the contractor should be able to enforce its entire lien on the three properties.  Of particular importance to the court was that if it did not permit the contractor to enforce the lien on these three lots, the bank would receive a windfall in obtaining the property with all the work that the contractor had performed.  Premier Bank v. Becker Dev., LLC, ___ N.W.2d ___, A08-1700 (Minn. App. 06/30/09).  www.lawlibrary.state.mn.us/archive/ctappub/0906/opa081252-0630.pdf

• Misrepresentation in Sale of Real Property; Proximate Cause Requirement.  A residential homebuyer purchased property that had been damaged when lightning started a fire on the roof of the property.  Although the seller disclosed prior moisture intrusion and lightning damage, the seller did not specifically disclose the fire or that the fire department had sprayed water into the house and funneled it out through the interior of the home.  The buyer ultimately learned of the fire and hired a water intrusion inspector who discovered significant moisture damage.  The damage was not related to the fire, but rather was caused by latent structural defects.  At trial, the buyer proposed to introduce the cost to repair the damage to the home.  The district court granted a motion to exclude the evidence and subsequently granted judgment as a matter of law.  The court of appeals affirmed.  In an action for misrepresentation, a plaintiff must establish that the misrepresentation proximately caused the claimed damages.  In this case, the damages claimed by the buyer—the damages related to structural problems—were not proximately caused by the failure to disclose the unrelated fire.  The court rejected the buyer’s causation analysis, which was that if the fire had been disclosed, the buyer would have done more intrusive moisture testing and would have discovered the structural problem.  But this was an application of the “but for” test of causation, which has long been rejected by Minnesota courts.  Affirmed.  Bryan v. Kissoon, ___ N.W.2d ___, A08-1482 (Minn. App. 06/30/09). www.lawlibrary.state.mn.us/archive/ctappub/0906/opa081482-0630.pdf

• Cartway Statute; Right to Access to Property.  A property owner owned about 26 acres of landlocked property, which consisted of bluffs along with a buildable area of approximately five acres.  The owner petitioned the township for the establishment of a cartway from a public roadway across lands owned by an orchard to the buildable area on his property.  The orchard objected to the cartway, contending that it threatened its business operation.  Another neighbor of the property was willing to allow a cartway across his property to a public roadway, but that cartway would have provided access only to the unbuildable portion of the property and would not have provided access to the buildable area.  The township concluded that the statute did not mandate that a property owner be entitled to access to any particular portion of his property, and selected a cartway that only provided access to the unbuildable portion of the property.  On appeal, the court of appeals reversed and remanded.  Minn. Stat. §164.08 mandates the establishment of a cartway upon petition by an “owner of a tract of land containing at least five acres, who has no access thereto.”  The township may select a different route than that in the petition if it will be less disruptive and in the public’s best interest.  The central issue was the definition of “tract of land” in the statute.  The township argued that “tract of land” could only mean the entire parcel of property.  If that were the case, the township likely met its requirement by providing access to the unbuildable area.  But the court rejected the township’s argument.  Instead, the court concluded that the five-acre tract of land could be a tract less than the entire parcel.  Because the buildable area was five acres and landlocked, the court held that the owner was entitled to a cartway to the buildable area.   Kennedy v. Pepin Township, ___ N.W.2d ___, A08-1921 (Minn. App. 06/23/09). www.lawlibrary.state.mn.us/archive/ctappub/0906/opa081921-0623.pdf

• Landlord-Tenant; Limitations on Exculpatory Clauses.  In an unpublished opinion, the Minnesota Court of Appeals addressed whether the interruption of utility services constitutes a breach of a basic duty on the part of a landlord.  The tenant was a research and development company to which the operation of its freezers was critical as it stored perishable material within them.  Over a long holiday weekend, an unidentified person turned off the power to the freezers.  The tenant alleged that person was an employee of the landlord.  As a result of the cessation of power, the tenant’s research materials were destroyed.  The tenant sued the landlord for negligence and breach of contract.  The landlord defended the case on the basis of an exculpatory clause within the lease that generally provided the tenant could make no claim against the landlord for damage to personal property within the lease premises.  The district court granted summary judgment in favor of the landlord based on the exculpatory clause.  The court of appeals reversed.  After rejecting the tenant’s claim that the exculpatory clause was ambiguous, the court moved on to the central issue of whether the exculpatory clause was enforceable.  A clause exculpating a landlord is unenforceable to the extent that it relieves the landlord of liability for violating a basic duty.  The court concluded at least with respect to this particular lease, that the landlord had a basic duty to refrain from unreasonably disrupting the tenant’s utility service.  Reversed.  Natural Process Designs, Inc. v. Lawrence Trans. Co., A08-952 (Minn. App. 07/07/09) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0907/opa080952-0707.pdf

—C.J. Deike
Edina Home Realty Services

TAX
JUDICIAL LAW

• Sales Tax: “Estimate” Suffices for Allocation to Nontaxable Items and Services Notwithstanding Invoice.  The Minnesota Tax Court permitted the taxpayer to rely on an “estimate” to allocate to nontaxable items and services even though not listed on the invoice since the sale happened at the time of the estimate.  The taxpayer was in the business of making drapes and reupholstering furniture.  When it hired for a project, it provided a written “Estimate and Measure Sheet” to the customer.  The estimate listed all charges for the project.  If there were any changes to a project, a new estimate was prepared and given to the customer.  After the project was completed, the taxpayer would send an invoice to the customer, which stated the total amount due.  The amount due stated on the invoice matched exactly the amount due on the estimate.  Although there were multiple issues involved in the case, the principal issue related to the commissioner’s argument that the allocation to nontaxable items and services had to be on the invoice, which the court rejected.  Artistic Drapery Services, Inc. v. Commissioner of Revenue, Docket No. 7954, 2009 WL 1585854 (Minn. T. Ct. 06/03/09).

• Real Property: Valuation for Property Assessments; Corporate Campus Headquarters. The Minnesota Tax Court lowered the property values of General Mills on its headquarters campus for assessments 2004 through 2006.  The corporate campus consisted of 90 acres and six buildings of over 1 million square feet.  The buildings were built starting in 1958 and the building continued through a $120 million construction project for two new buildings in 2003.  The assessor valued the property in 2004 at $77,454,000; at $85,090,000 in 2005; and $90,682,000 in 2006.  The court determined the final values based on the sales approach and found the values to be $73 million in 2004; $79 million in 2005; and $85 million in 2006.  The court acknowledged that it was a difficult property to value because of its large size, design, and single user.  General Mills, Inc. v. County of Hennepin, Docket No. S. 27-CV-06-07202, 27-CV-07-07146, and 32727 2009 WL 1212204 (Minn. T. Ct. 04/29/09).

• Real Property:  Nature Sanctuary; Institution of “Public Charity.” The Minnesota Tax Court held that Blacklock Nature Sanctuary qualified as an institution of public charity under Minn. Stat. §272.02, Subd. 7 for assessments on January 2, 2006 and January 2, 2007 for its artist fellowships but failed on its conservation of land and recreational venue functions for a lack of proof of the number of people using the land for the latter two purposes.  The taxpayer was a nonprofit corporation exempt from federal and state income taxes, who owned approximately 550 acres of contiguous land in Pine County and Carlton County.  As part of its charter, the taxpayer provided artists fellowships which consisted of lodging for two-week periods plus a stipend to cover food and travel expenses while staying on the land.  The artists’ work was displayed to the public free of charge.  The court held that the artists fellowships qualified under the six-factor test of Northstar Research Inst. County of Hennepin, 236 N.W.2d at 754 (Minn. 1975).  On the conservation of land and recreational functions, the court found a failure of proof to show how many people actually accessed the taxpayer’s property to view and to enjoy nature and similarly how many accessed its property to engage in recreational activities free of charge.  Therefore, the court held that Factor 3 of the Northstar test on who was the “recipient” was failed.  The court administrator was directed to schedule a hearing to determine the allocation of the physical property used by the artists fellowships, which qualified for exemption, and the land for conservation and recreation activities, which did not. Blacklock Nature Sanctuary v. County of Pine and County of Carlton, Docket No. 58-CV-06-200, 58-CV-07-214, 09-CV-06-1522, and 09-CV-07-1153 (Minn. T. Ct. 04/27/09).

• Real Property: Homeowner’s Property Tax Challenge Granted.  The Minnesota Tax Court reduced a taxpayer’s residential homestead valuation for assessment year 2006.  The taxpayer’s property was located in St. Paul and was built in 1885.  The residence was in poor condition.  The assessor valued the property at $737,600.  The taxpayer’s sales and comparable approach valued the property at $206,000, while the county’s appraisal was at $530,000.  The court did not use the income approach because of the age and non-income-producing character of the property and relied substantially on the sales approach in lowering the value to $330,000. Daniel E. Wagers v. County of Ramsey, Docket No. C2-07-4624, 2009 WL 1351649 (Minn. T. Ct. 05/11/09).

• Real Property:  Motion to Defer Payment of Real Property Taxes Denied.  The Minnesota Tax Court denied a tax-exempt entity’s motion to defer payment of real property taxes on acquired commercial property.  The court denied waiving payment of 50 percent of the $103,836.58 tax levied against the property for tax-year 2008 payable in 2009.  The court held that pursuant to Minn. Stat. §278.03, Subd. 1, the tax-exempt entity lacked “probable cause” to believe that the property acquired would be tax exempt.  The property at issue was subject to tax on January 2 but was acquired after the July 1 deadline mandated by Minn. Stat. §272.08, Subd. 38 to provide for the property tax exemption of the church. Crossroads Church of Prior Lake, Minnesota v. County of Dakota, Docket No. 19 HA-CV-09-2780, 2009 WL 1506968 (Minn. T. Ct. 05/14/09).

• Basis Overstatement Not an Omission of Income for Six-Year Limitations Period.  The 9th Circuit affirmed the U.S. Tax Court, and held that an overstatement of basis is not an “omission” of gross income for purposes of the six-year limitations period of IRC §6501(e)(1)(A).  Bakersfield Energy Partners Other Than the Tax Matters Partner, 103 AFTR 2d ¶ 2009-1064 (9th Cir. 2009).

• FICA; Medical Residents.  The 8th Circuit reversed a district court decision that held invalid an IRS regulation that disqualified Mayo Foundation medical residents from the IRC §3121(b)(10) FICA student exception because they were full-time employees and therefore exempt.  The appellate court found the regulation was valid and the students were required to pay FICA.  Mayo Foundation for Medical Education and Research v. U.S., 103 AFTR 2d ¶ 2009-1040 (8th Cir. 2009).

• Qualifying Expenses for Research Credit; “Cohan Rule.” The 5th Circuit held that a taxpayer’s expenditures may qualify for the IRC §41 research credit even though detailed records were not kept allocating the expenditures to the research activities.  The court said that the district court should apply the Cohan rule, by looking at testimony and other evidence, to determine a fair estimate of the qualifying expenses.  McFerrin v. U.S., 103 AFTR ¶ 2009-1015 (5th Cir. 2009).

• Communications Excise Tax; Refund Claims Barred.  Limitations periods barred corporation taxpayer/telephone user’s claim for refund of one of two years’ communications excise taxes that it paid to telephone service provider, which then filed applicable returns and paid taxes over to IRS.  The court rejected the taxpayer’s argument that because service provider rather than taxpayer itself was the party required to file returns for subject taxes the refunds were timely under IRC §6511(a)’s limitation periods.  The proper inquiry was not who was obligated to file, but only whether the tax was a type for which returns were filed.  Communications excise taxes were just such type of tax, therefore IRC §6511(a) applied and the claims were barred.  Radioshack Corp. v. U.S., 103 AFTR 2d ¶ 2009-951.  (C.A. Fed. Cir. 2009).

• Federal Authorized Tax Practitioner Privilege; Document Disclosure Denied.  The U.S. Tax Court denied disclosure of documents sought by IRS because they were protected by the IRC §7525 federally authorized tax practitioner (“FATP”) privilege.  IRS failed to show that the exception to the FATP privilege applied—that the documents sought were written communications in connection with promoting corporate participation in a tax shelter. Countryside Limited Partnership, CLP Holdings, Inc. Tax Matters Partner, et al., 132 TC No. 17 (2009).  Cf. Valero Energy Corp. v. U.S., 103 AFTR 2d ¶ 2009-1054 (7th Cir. 2009) (7th Circuit granted the IRS’ discovery motion, rejecting the taxpayer’s claim that they were protected by the IRC §7525 privilege.  The court also rejected the taxpayer’s contention that the exception to the privilege—that the documents sought were written communications in connection with promoting corporate participation in a tax shelter—applied only, to marketed, prepackaged tax shelters.

ADMINISTRATIVE ACTION

• Employer-Provided Cell Phones—Substantiation.  IRS requests comments on several proposals to simplify procedures under which employers substantiate employee’s business use of employer-provided cellular telephones or other similar telecommunications equipment, and requests suggestions for alternative approaches to simplify those procedures.  Notice 2009-46, 2009-23 IRB 1068.

• Property Seizure: Nontransferable Right to Renew Season Tickets; Personal Seat Licenses.  The IRS concluded that it cannot seize and sell a taxpayer’s nontransferable right to renew season football tickets for a later season because it was not property or a right to property under state law.  However, the IRS also concluded that the taxpayer clearly had a property right in the personal seat licenses.  Because a tax lien attaches to a taxpayer’s property and right to property, the IRS steps into the taxpayer’s shoes.  Therefore, the IRS could exercise the property right to terminate the season tickets and receive a refund of the personal seat license deposit by serving a levy.  LAFA 20092102-F.

LEGISLATION

• Minnesota Court Filing Fees Increase.  Effective July 1, 2009, S. F. 802, codified as Chapter 83, provides that various fees for use of Minnesota courts will increase.  For example, the initial filing fee in a district court civil action will increase to $310 from $240; motion fees will be $100 up from $55; and filing fees for an appeal will increase to $550 from $500.  Many other court fees are also being increased.

• Funding for Commissioner Compliance Initiative.  In S.F. 2082, the State Government Appropriations Bill, codified as Chapter 101, the Minnesota Tax Commissioner was appropriated $10.4 million for the biennium ending June 30, 2011 for compliance and audit initiatives.  The payback is estimated to be $41.5 million.  The commissioner is expected to employ 70 new auditors along with some appeals personnel.

• Loss of Corporate Name upon Dissolution Remedied.  In S.F. 1288, codified as Chapter 98, the bill provides a remedy for a situation where entities were administratively dissolved for failure to file annual reports with the secretary of state.  A sharp practice had grown up where the names would be taken over by new corporations following dissolution.  When the true owner desired to reinstate its old name, it found the name was claimed by the new entity and had to be purchased.  Now, when a corporation or entity has been administratively dissolved, there is a one-year period to reclaim the use of the prior name.  The provision is effective 30 days after the secretary of state certifies that the information systems at the Office of Secretary of State have been modified to implement the new law, which presently is scheduled for some time in 2010.

• Minnesota’s Attorneys Fees Cap Repealed.  In H.F. 1529 and S. F. 798, codified as Chapter 125, the current law cap on the per-hour rate to be awarded as attorneys fees at $125 per hour has been repealed.  Under current law if the state or state agency is a party in an action or contested case proceeding, any prevailing party except the state is entitled to an award of attorneys fees and expenses, if the state’s position was not “substantially justified” in the proceeding and there are no special circumstances which makes the award of fees unjust.  With the removal of $125 per hour limitation, the attorneys fees statute could impact tax litigation in situations where the statute applies.  Normally, large taxpayers do not meet the net worth limitations but smaller individual taxpayers and certain entities can benefit.

• New Minnesota Refund Procedure Provides a “Second Chance.” The newly enacted law amends Minn. Stat. §270C.56, Subd. 3, to create a refund procedure under which an individual who has been personally assessed for unpaid Minnesota “trust fund” taxes, may contest such liability by filing a claim for refund within 120 days after making any payment of any portion of the assessed liability so long as such payment is made within 3.5 years after the date of the order assessing personal liability.  The new refund procedure applies to orders issued after the date of final enactment which was May 26, 2009.

• “North Star Factors” for “Public Charity.”  The 2009 Legislature laid out a mandate as to which of the North Star factors must be present for an entity to qualify as a “public charity” unless there is “reasonable justification” for missing certain of the six factors.  The new law also defines “grants,” which had been a contentious issue after the Rainbow, 741 N.W.2d 880 (Minn. 2007) decision.  Lastly, a “public charity” exemption properly granted will remain in effect unless there is a material change in the facts.  H. F. 1298 and S. F. 1257 (codified as Chapter 88, Article 2).

• Tax Rate Bumped Up For Legacy Amendment.  Effective July 1, 2009, the state sales tax rate is 6.875 percent.  This reflects a 0.375 percent rate increase required by the approval of the constitutional amendment in November 2008.  The revenues are dedicated to parks, clean water, and the arts for a period of 25 years.  H. F. 1231 and S. F. 1651 (codified as Chapter 172).

• Truth in Taxation Eliminated.  The Minnesota Truth in Taxation public hearings and the newspaper notice providing for such hearings was eliminated, effective for taxes payable in 2010 and thereafter.  H. F. 1231 and S. F. 1651 (codified as Chapter 88, Article 3).

• “Cash For Clunkers” Signed Into Law.  President Obama signed into law H.R. 2346, the Supplemental Appropriations Act, 2009, which has been assigned the public law number, P.L. 111-32.  The act includes, as Title XIII, the “Consumer Assistance to Recycle and Save Act” (colloquially known as the “cash for clunkers” provision), which gives a cash incentive for individuals and businesses to trade in older gas-hogging vehicles for new, more fuel-efficient ones.  The incentive comes in the form of a voucher of $3,500 or $4,500, depending on the type of vehicle traded in and the fuel efficiency of the vehicle purchased.  Different rules apply to passenger cars, and various categories of trucks.  The new vehicle must be purchased between July 1 and November 1 of 2009, and a total of $1 billion is allocated to the trade-in initiative.

LOOKING AHEAD

• “Cap-and-Trade” Legislation Introduced.  Congress has been grappling with a “greenhouse gases” and climate relief bill, H.R. 2454, the “American Clean Energy and Security Act of 2009,”dubbed a “cap-and-trade” system of reducing greenhouse gas omissions.  “Cap-and-trade” legislation would limit emissions by capping the amount of emissions companies may emit, and allow more efficient enterprises to sell or exchange emissions allowances.  Low-income households would be given energy rebates and tax credits to offset projected higher energy costs that the legislation would create.  Legislation is expected before the end of the year. 

—Jerry Geis
Briggs & Morgan

August 2009

TORTS & INSURANCE
JUDICIAL LAW

• Invasion of Privacy; Social Networking Websites. The Minnesota Court of Appeals recently considered an invasion-of-privacy case arising from the use of social networking websites.  A health-care clinic employee gained access to plaintiff’s (an acquaintance’s) medical file and learned plaintiff had contracted a sexually transmitted disease from someone other than her husband.  The employee disclosed this information to another employee, and a myspace.com page was created containing the information.  Plaintiff sued the clinic for invasion of privacy, but the district court dismissed.

The court of appeals affirmed the dismissal, holding that while posting private medical information on a publicly accessible internet website satisfies the “publicity” element of an invasion-of-privacy claim, plaintiff failed to prove that the clinic had any role in posting the information.  But the court disagreed with the district court’s determination that the federal HIPAA act preempted plaintiff’s claim. Yath v. Fairview Clinics,A08-1556 (Minn. App. 06/23/09). www.lawlibrary.state.mn.us/archive/ctappub/0906/opa081556-0623.pdf

• Defamation/Employment; Qualified Privilege. In a recent defamation case, the Minnesota Supreme Court held an employer that republishes defamatory statements during the course of a workplace misconduct investigation is entitled to a qualified privilege where the investigation is neither a “sham” nor motivated by an investigatory manager’s “ill will.” Bahr v. Boise Cascade Corp.,A07-1353 (Minn. 06/25/09). www.lawlibrary.state.mn.us/archive/supct/0906/OPA071353-0625.pdf

• Auto Insurance; um Benefits; Statute of Limitations. The Minnesota Supreme Court has held that when a tortfeasor’s insurer is judicially declared insolvent within six years of the date of the accident, an uninsured motorist (“UM”) benefits claim accrues and the limitations period begins to run on the date of the declared insolvency. Oganov v. American Family Ins. Group, A07-929 (Minn. 06/25/09). www.lawlibrary.state.mn.us/archive/supct/0906/OPA070929-0625.pdf

• Sale of Real Estate; Duty to Disclose. In selling his home, seller disclosed past water damage; buyer declined to arrange for a home inspection.  After the sale, buyer learned of a prior fire in the home that seller did not disclose.  Buyer also discovered significant water-intrusion damage caused by structural defects unrelated to the fire.  Buyer sued the seller for misrepresentation, alleging that if seller disclosed the fire, she would have asked for a pre-sale inspection, learned of the home’s structural defects, and walked away from the purchase, thus avoiding the repair costs.

The district court granted JMOL in favor of seller due to buyer’s failure to prove damages, ruling the costs of repairing water damage were not proximately caused by the fire that seller failed to disclose.  The Minnesota Court of Appeals affirmed, holding that buyer’s claimed damages did not have a natural and proximate relation to the claimed misrepresentation. Bryan v. Kissoon, A08-1482 (Minn. App. 06/30/09). www.lawlibrary.state.mn.us/archive/ctappub/0906/opa081482-0630.pdf

—David Turner
Bassford, Remele, A Professional Association