February 2009

ADMINISTRATIVE LAW
JUDICIAL LAW

• Procedural Due Process: Right to a Hearing. An employee of a state-licensed program was charged with two felonies at the time the Department of Human Services (DHS) conducted a required background check. DHS disqualified him from employment, based on a preponderance of evidence standard, and he was subsequently convicted of both felonies. The employee requested that his employer, the Minnesota Department of Health (MDH), reconsider the disqualification decision and MDH denied his request.

Appellant brought this appeal to challenge MDH’s refusal to reconsider his disqualification. Appellant argued that he had a due process right to an evidentiary hearing; the basis for his disqualification was arbitrary and capricious; and the statutory basis for disqualification was constitutionally overbroad.

Citing Mathews v. Eldridge, 424 U.S. 319, 335, 96 S.Ct. 893, 903 (1976), the Court of Appeals first determined that appellant had a protected property interest in pursuing his nursing career in the public sector. The court found that the process already provided to the appellant during his criminal trial minimized the risk of an erroneous decision and that “the government interest in protecting the public, especially vulnerable individuals …, is of paramount importance.” The court held that due process did not require an evidentiary hearing to determine whether appellant had committed disqualifying criminal offenses when he had been convicted of the offenses. Appellant also argued that state law violated his constitutional right to substantive due process. Because the statute required appellant’s disqualification based solely on his criminal convictions, leaving the commissioner no discretion to consider the facts of his individual case, appellant argued that the law was arbitrary and capricious.

The public purpose of the challenged statute (Minn. Stat. Chapter 245C) is to protect the health and safety of vulnerable individuals. While Minn. Stat. §245C.14, subd. 1 mandates disqualification of an individual who has been convicted of certain crimes, it also requires disqualification when an individual admits he has committed certain crimes, and when a preponderance of the evidence indicates that an individual has committed an act or acts that meet the definition of those crimes. The law also requires that the commissioner, in reviewing a reconsideration request, “give preeminent weight to the safety of each person served by the license holder … over the interests of the disqualified individual.” Minn. Stat. §245C.22, subd. 3. The court found that the statute’s bases for disqualification and reconsideration of disqualification decisions were rationally related to its public purpose and therefore the law provided appellant with substantive due process.

The court held that appellant’s procedural and substantive due process rights had not been violated and affirmed the commissioner’s decision on that basis. Having found that appellant’s due process rights had not been violated, the court declined to consider his argument that the statute’s disqualification provisions were overly broad. Obara v. Minnesota Department of Health, A08-0085, ___ N.W.2d ___ (Minn. App. 12/23/08).

— Anne Becker
Attorney at Law

February 2009

BANKRUPTCY
JUDICIAL LAW

• Chapter 13: Ability to Pay; Projected Disposable Income. The 8th Circuit Court of Appeals held that the Bankruptcy Code’s term “projected disposable income,” used in connection with Chapter 13 plans, is not definable simply by averaging the debtor’s disposable income from the previous six months prior to filing bankruptcy. Rather, the court can consider actual current income and expenses, which in some cases will increase a debtor’s ability to pay under a plan.

Appellee debtor Frederickson did not average positive disposable income during the six months prior to filing, but his actual current income and expenses showed he could pay $600 per month. He proposed paying this amount for 48 months. The trustee objected because the repayment was not 60 months, which is the presumptive repayment period that arises if the debtor earns above the local median income. Frederickson countered that in this situation the Code required no repayment at all since he did not have “disposable income,” which is defined by averaging the amount his income exceeds expenses during the prior six months, with expenses based on local averages.

At issue was whether a debtor that did not have “disposable income” as defined under the Code could, over the trustee’s objection, confirm a plan that did not fully pay unsecured creditors or propose to pay “projected disposable income” for a 60-month period. The Code does not define “projected disposable income” separately from “disposable income”.

The Bankruptcy Court and Bankruptcy Appellate Panel agreed with the debtor’s interpretation, but the 8th Circuit was unsatisfied because adopting the debtor’s interpretation of the undefined text would permit Chapter 13 debtors to repay less debt, which is inconsistent with Congress’ expressed intent when amending the Code to add the requirements. The lower courts’ strict use of the six-month prepetition averaging of disposable income was insufficient in determining “projected disposable income,” and is not textually required by the Code. Instead determining “projected” income should factor additional information, such as actual present disposable income. Of course the debtor could also spend lower than the local standards used in calculating expenses to determine “disposable income.” In this specific case, the court remanded and stated that if the debtor proposed a plan paying $600 in income every month the lower court should weigh that as a factor in determining projected disposable income. The court also held that there was no basis to modify the 60-month repayment period, a flaw in the plan proposed by the debtor. Coop v. Frederickson (In re Frederickson), No. 07-3391, (8th Cir. 10/27/08).

— Mychal Bruggeman
Mackall, Crounse & Moore

February 2009

CIVIL LITIGATION
JUDICIAL LAW

• Agreement Not to Sue; Claim Not Barred. An employee sued a health center and physician claiming sexual harassment by the physician. The parties entered into settlement negotiations to avoid litigation. To give them time to negotiate a settlement, the parties executed an agreement to toll the statute of limitations. As part of that agreement, the employee agreed not to sue during the term of the tolling agreement. Each party had the right to cancel the tolling agreement upon ten days notice. After the defendants gave such notice, but before the tolling agreement expired, the employee filed suit. The defendants moved for summary judgment, arguing that the employee’s claims were barred because the employee agreed not to sue during the tolling agreement’s term. The trial court granted the defendants’ motion for summary judgment. The Court of Appeals reversed the judgment and remanded. In a matter of first impression, the Court of Appeals concluded that the employee’s agreement not to sue during the term of a tolling agreement did not serve as a release and thus did not bar the employee’s claims. The court, however, noted that the defendants could sue to enforce their rights under the contract. Kunza v. St. Mary’s Regional Health Center, A07-0360, 747 N.W.2d 586 (Minn. App. 2008).

—Haley Schaffer
Maslon Edelman Borman & Brand LLP

February 2009

CRIMINAL LAW
JUDICIAL LAW

• Grand Jury: Enhancement for Life Sentence. Appellant was convicted of several counts of criminal sexual conduct and kidnapping. The state alleged an element of heinous removal of the victim from one place to another with no safe release, which is an aggravating factor which makes the charges of conviction punishable by a sentence of life imprisonment pursuant to Minn. Stat. §609.3455, subd. 3 (Supp. 2005). The appellant waived the sentencing jury, and the district court found that the verdict on the kidnapping charge established the heinous element for purposes of sentencing and sentenced appellant to life imprisonment.

Held, following the reasoning under Apprendi and Blakely, the court holds that under the clear language of Rule 17.01, a charge for this offense should have been made by indictment in order to support the imposition of an enhanced sentence of life imprisonment. While the charge itself is not a “nullity,” the court lacked authority to enhance the sentence to life without complying with Rule 17.01. Hence, the proper remedy is not to vacate the conviction, but to reverse the imposition of the life sentence based upon the enhancement. State v. Anthony DeWalt, A07-1610 (Minn. App. 11/04/08).

• Sentence: Single Behavioral Incident Doctrine; Firearm Exception. Appellant was convicted of both felon-in-possession and first-degree assault. The district court used the Hernandez method to sentence appellant, first imposing a 60-month sentence on the firearm possession conviction, then using that conviction to increase his criminal history from three to four. This enhancement of the sentence based upon the firearm possession had the effect of increasing the presumptive conviction from 104-146 months to 114-160 months. The district court sentenced appellant to 160 months on the assault conviction and to a concurrent 60-month term for the firearm possession.

Held, the firearms exception to the single behavioral incident rule permits the Hernandez method of sentencing even when the offense is a part of the same course of conduct. Therefore, the Hernandez method can be used, resulting in an increased criminal history, resulting in a longer sentence. The court notes that Minn. Stat. §609.035, subd. 3 permits separate sentencing for the ineligible possession and assault convictions, and that the appellant agrees with this analysis. Two unpublished criminal cases by the Court of Appeals, however, have reached different results, and the court’s decision in this case appears to resolve the conflict. The Court of Appeals notes that Minnesota Sentencing Guideline II.B.102 does not contemplate restrictions applicable to the firearms exception, as they do, for example, in burglary cases. Hence the firearms exception is applicable to the Hernandez method of sentencing. State v. Antoine Delany Williams, A07-1502 (Minn. App. 11/18/08).

• Sentence: Life Sentence/ Guidelines Sentence Appropriate. Pursuant to a plea agreement, appellant pled guilty to first-degree criminal sexual conduct and the imposition of a life sentence with a mandatory minimum of 20 years. Minn. Stat §609.3455, subd. 4 requires a mandatory life sentence with the possibility of supervised release. The statute states that defendants are eligible for supervised release after they have served the “minimum term of imprisonment specified by the court in its sentence.” The statute also provides that this minimum term of imprisonment should be based on the sentencing guidelines or any applicable mandatory minimum. While Minn. Stat. §609.3455, subd. 4(a)(1) provides that the mandatory minimum sentence is “life,” Minn. Stat. §244.05, subd. 4(d) states that when a defendant has violated Minn. Stat. §609.3455, subd. 4, that defendant is eligible for supervised release after a minimum term of imprisonment imposed by the district court. Because §609.3455 does not state how long a life sentence must be under its terms, as a result, district courts have discretion to set up a “minimum term.” At this point, a guideline analysis is appropriate, and the district court correctly set the sentence at 240 months using a guideline interpretation and aggravating factors. State v. Booker T. Hodges, A07-1519 (Minn. App. 11/25/08).

• Criminal Sexual Conduct: Physical Incapacitation; Expression of Nonconsent. Appellant was convicted of two counts of third-degree criminal sexual conduct in violation of Minn. Stat. §609.344, subd. 1(d). This subdivision defines physical helplessness as “Unable to consent or to withdraw consent because of a physical condition.” The prior definition from 1990 had defined “physical helplessness” as “unable to withhold consent or to withdraw because of a physical condition.” In this case, the victim was very intoxicated, became lost, and was the subject of oral sex and coital penetration by the appellant in a crawl space under a porch. The victim testified that she repeatedly communicated her nonconsent, but because she felt stuck, and afraid, she “just let it happen.” The victim testified that she did not scream or fight because she was afraid the appellant would harm her and because she was in an unfamiliar neighborhood.

Held, the evidence was insufficient to support the verdict. Because of the change in the statutory language, the state is not required to prove that the victim was unable to withhold consent or withdraw consent. Because the evidence shows that the victim did express her nonconsent to the sexual encounter, the evidence is insufficient to demonstrate that she was unable to withhold or withdraw consent within the meaning of the term “physically helpless.” Reversed. State v. Edward D. Blevins, A07-1397 (Minn. App.11/25/08).

• Criminal Sexual Conduct: Multiple Acts; Upward Departure. Appellant was given an upward departure to 220 months, from the presumptive sentence of 144 months. The facts of the case included exposing his own daughter, over a period of approximately seven years, to oral sex, feigned anal sex, appliances, methamphetamine and pornography. Held, the durational upward departure is supported by the record. The statute under which the defendant was convicted assumes a multiplicity of sexual acts and, therefore, a large number of such acts is not a valid departure. However, “variety in the sexual acts is a valid reason for departure.” Variety in sexual acts is not the equivalent to the element of multiple sexual acts, but it is the type of conduct which makes the offense more serious than that typically involved in the commission of the crime in question. State v. Bradley John Abrahamson, A07-2143 (Minn. App. 12/09/08).

• DWI/Implied Consent: Suspicionless Search; Jail PBT Test. Appellant had been arrested on probable cause for a second-degree assault which involved his use of a snow plow in ramming another vehicle. The arresting officer smelled alcohol, but did not feel that the appellant was intoxicated. At the jail, the jailer also noticed the smell of alcohol and required the appellant to submit to a PBT as part of the routine booking process. The result was an alcohol concentration of .14 percent, and this information was communicated to and observed by the arresting officer. Based on these circumstances, the Implied Consent Advisory was invoked, and the appellant refused to submit to testing.

Held, using a totality of the circumstances approach for the review of a warrantless, suspicionless search (sampling of the breath by PBT), the Court of Appeals holds that a jailer may conduct a suspicionless search of the suspect by use of the PBT. The Court of Appeals concludes that the county’s legitimate interest in operating its jail safely outweighs the appellant’s claim of privacy. Hence, the administration of the PBT does not violate either the federal or state constitutions. Scott Jeffery Mell v. Commissioner of Public Safety, A07-2372 (Minn. App. 11/25/08).

• DWI/Implied Consent: Right to Counsel. In the early morning hours subsequent to a DWI arrest, the appellant was given an opportunity to contact an attorney and decide whether to submit to chemical testing under suspicion of DWI. The arresting deputy provided the appellant with a telephone and telephone directories. Appellant used the telephone for less than three minutes. He attempted to contact his wife but not an attorney. He then walked away from the telephone and to the arresting officer and told him that he couldn’t get a hold of an attorney. Appellant did not request another telephone directory or more time to contact an attorney. Appellant made no further attempts to contact an attorney and when asked if he was done trying to reach an attorney, he nodded his head in the affirmative. Appellant then changed the subject, by denying that he was driving, and disputing whether the arresting officer could legally force him to take the test.

Held, even though the appellant was “given” less than three minutes within which to contact an attorney, his right to counsel was vindicated. Appellant ended any good faith effort to contact an attorney by the time he was asked whether he would take the test, and ceased to make good faith and sincere efforts during that limited time. Mell v. Commissioner of Public Safety, supra.

• Burglary: Multiple Convictions for Burglary and Assault. Appellant was convicted of first-degree burglary and third-degree assault, and received two sentences: 78 months on the burglary and a concurrent 21 months for the assault. Minn. Stat. §609.585 (2004) provides that notwithstanding §609.04, a prosecution for or conviction of a crime of burglary is not a bar to conviction of or punishment for any other crime committed on entering or while in the building entered. The court rejects the appellant’s argument that the statute does not apply because he did not commit “any other crime” beside the assault, which was already included as a predicate for the first-degree burglary conviction. The plain language of §609.582, subd. 1(c) does not require an individual to commit a second “non-burglary” offense while in the building in order to allow multiple punishment. State v. Nosakhere Holmes, A07-1445 (Minn. App. 12/09/08).

• Terroristic Threats: Jury Instructions; Predicate Crimes. Appellant was convicted of terroristic threats. Following a domestic dispute, appellant repeatedly sang that he was going to “kick the shit out of me, throw me down the stairs, fucking hit me for ruining his game.” Following this threat, appellant beat the victim with closed fists, and threw her down the stairs. There is no evidence in this opinion that the victim sustained any substantial harm. At trial, the jury was instructed that the defendant needed to threaten to commit a crime of violence, and was further instructed that “assault is a crime of violence.” No mention was made of the fact that the assault had to be one of the predicate “crimes of violence” included in Minn. Stat. §609.713, which includes only first-, second- and third-degree assault.

Held, it was plain error for the district court to instruct the jury on the elements of terroristic threats without specifically delineating the types of assault which constitute the appropriate predicate crimes under §609.1095. Further, the jury must be informed of the elements of the essential predicate offense. Because neither instruction was given, error was plain, conviction is reversed, and case is remanded for a new trial. State v. Jarrett Lanelle Jorgenson, A07-1745 (Minn. App. 12/09/08).

• Blakely: Commencement of Time for Direct Appeal. Appellant received a 240-month sentence under the dangerous offender statute, Minn. Stat. §609.1095, which represented an upward departure of 108 months from the presumptive sentence based on his criminal history score, under the guidelines. On the day of sentence, the court stated: “If there is any restitution, it may be determined by community corrections, and you have a right to a hearing on that matter.” The sentencing order confirmed that the appellant was to pay restitution as determined by community corrections. The sentence was actually imposed on March 19, 2004, but the court filed a separate order on June 22, 2004, determining the amount of restitution and entering it as a civil judgment.

Held, the Supreme Court rejects the appellant’s position that his case was “pending on direct review” on June 24, 2004, the date Blakely was decided. The 90-day period began to run from March 19, 2004 and not June 22, 2004. The court concludes that the appellant’s sentence was “imposed” on March 19, 2004, when his sentence of incarceration and general restitution obligation was announced. Therefore, the time for direct appeal expired 90 days later, on June 17, 2004. State of Minnesota v. Edgar Randolph Hughes Jr., A07-37 (Minn. 12/18/08).

• Orders for Protection: Collateral Attack of Constitutionality Precluded; No Firearms Forfeiture. Appellant was convicted for violating an order for protection entered under Minn. Stat. §518B.01. Following State v. Harrington, 504 N.W.2d 500 (Minn. App. 1993), a defendant who has not appealed from the issuance of a restraining order issued pursuant to Chapter 518B is precluded from challenging the constitutionality of that order in a subsequent criminal prosecution for a violation of the same order. Further, the Court of Appeals rejects the appellant’s argument that 518B, subd. 2 and subd. 4 are unconstitutionally vague.

As part of the sentence, the trial court judge ordered that the appellant forfeit his firearms and that they be destroyed. In doing so, the district court referred to federal gun control legislation which prohibits persons subject to an OFP from possessing firearms. 18 U.S.C. §922 (g)(8)(2000). While Minn. Stat. §518B contains various limitations on firearms, no provision allows for the forfeiture and destruction of the firearms. In this case, §518B.01, subd. 14(l) prohibits only possession of a pistol for a person convicted of an OFP violation for a period of three years. That same subdivision, however, does not also authorize forfeiture and destruction; it merely restricts possession. State of Minnesota v. Jeffrey Jack Romine, A07-1244 (Minn. App. 12/09/08).

• Fifth Amendment: Sex Offender; Prison Treatment Program. In 2001, appellant was charged with, among other things, first-degree criminal sexual conduct and kidnapping. In the same year, appellant pleaded guilty to kidnapping and the remaining charges were dismissed. Held, the Department of Corrections (DOC) has authority to require sex-offender treatment because the DOC’s definition of “sex offender” contemplates only the charge, and not the ultimate conviction of the offense. Next, the Court of Appeals holds that once a direct appeal is concluded, and the risk of a perjury prosecution is absent or has expired, an offender does not enjoy the 5th Amendment privilege to refuse to participate in prison sex-offender treatment programs. Because the appellant pleaded guilty, there is not a real appreciable risk of a perjury prosecution. Jim Adam Roth v. Commissioner of Corrections, A08-0269 (Minn. App. 12/23/08).

• Jury Instructions: Manslaughter Lesser Included Offense; Heat of Passion Instruction. Appellant was convicted of first-degree murder. The trial court refused to instruct the jury on the lesser included offense of first-degree manslaughter, and properly did so because there was no rational basis for an acquittal on the first-degree murder charges and conviction on the lesser charges. While an appellate court normally looks to a defendant’s emotional state to mitigate culpability for a killing when a defendant behaves as a reasonable person would behave, the evidence shows that the appellant had planned to shoot himself in his girlfriend’s presence, and there was no evidence adduced to show that his reason or willpower was weakened beyond the angry and emotional state which he was already in when he broke into the victim’s home. The available evidence showed pervasive anger, vengeful planning, and preparation. Concurring opinion notes that as an aggressor, the appellant was not entitled to a heat-of-passion instruction, citing Stiles v. State, 664 N.W.2d 315 (Minn. 2003). State of Minnesota v. Steven Van Keuren, A07-1842 (Minn. 12/18/08).

• Ineffective Assistance of Counsel; Knaffla.  In June 2004, the appellant was convicted of first- and second-degree murder, and was given a life sentence and a 306-month consecutive sentence. For the first time, in a petition for post-conviction relief, the appellant raised the issues of ineffective assistance of counsel. This was in August 2007. The post-conviction court denied the petition without an evidentiary hearing, as well as a motion for reconsideration. This appeal followed. Appellant argued that his trial counsel was ineffective in two ways: his closing statement indicated he had not properly investigated the case, and also he allowed the original and corrected transcriptions of his statements to go into the jury room. Because both of these claims of ineffective assistance of counsel can be determined by examining the trial court record, the Supreme Court concludes that his claim should have been brought on direct appeal and is therefore Knaffla-barred. No evidentiary hearing was necessary. The court also determines that the appellant’s claim does not fit within the two exceptions to Knaffla, namely it was not so novel that it could not have been raised at the time of the direct appeal, nor does fundamental fairness require the appellate court to substantively review the claims. Sergio Sanchez-Diaz v. State of Minnesota, A08-58 (Minn. 12/24/08).

• Evidence: Plea Negotiations; Statements at Omnibus. Appellant had been charged with attempted second-degree murder. At the omnibus hearing, the prosecution had presented an offer of 130 and one-half months in prison, the “bottom of the box” of the sentencing guidelines. On the record, the court asked the defendant for a response to which the appellant said, “… I would like to say they offered me something, but how can I accept that for-trying-trying to take care of my family … I don’t understand that.” A colloquy then followed, involving the court, appellant, and the prosecutor during which the facts of the case were discussed by the appellant and the court, as well as the appellant’s exposure under the guidelines for 153 months if he did not take the deal. During this colloquy, the appellant stated that he had a permit for the gun which he used. The plea was withdrawn, and the matter was set for trial.

On direct examination, appellant admitted he did not have a permit for the gun. On cross examination, he was impeached by his testimony at the omnibus hearing with respect to the gun.

Held, the admission of the appellant’s omnibus hearing statement regarding the gun permit at trial did not violate Minnesota Rule of Evidence 410. This rule states, in part, that “statements made in connection with pleas of guilty or offers to plead guilty are not admissible for or against “the person who made the plea or offer.” “A more difficult situation arises when a defendant does not expressly offer to plead guilty, but makes statements in response to a plea offer tendered by the state, as is the case here.” Because the appellant never expressed any interest or willingness to plead guilty in exchange for a concession, there was no attempt by the defendant for a quid pro quo, or any type of bargaining for conditions if a plea were tendered. Hence, because the defendant did not exhibit any subjective expectations to negotiate a plea when he responded to the state’s plea offer, the statements were properly admitted in evidence at trial. State v. Adolphus Brown, A07-0599 (Minn. App. 12/15/08).

—Frederic R. Bruno
Frederic Bruno & Associates

February 2009

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

• Race & Gender Discrimination: No Adverse Action. A woman truck driver who was reinstated to her job of truck driver after losing the position following an accident was not entitled to pursue claims of race and gender discrimination because she suffered no adverse action. The 8th Circuit Court of Appeals upheld summary judgment for the employer. Because the employee was reinstated following a grievance proceeding, she did not suffer any adverse action sufficient to establish a prima facie case of discrimination. Jackson v. United Parcel Service, Inc., 548 F.3d 1137 (8th Cir. 2008).

• Arbitration: Outsourcing Is Arbitrable. An arbitrator did not exceed her authority by ruling that a city violated a clause of a collective bargaining agreement prohibiting outsourcing. While outsourcing is ordinarily a non-negotiable management prerogative, the city waived its right by including a clause in the labor contract: “contracting out will not result in reduction of work for current bargaining unit employees.” Because the outsourcing resulted in a loss of position for a union employee, the arbitrator properly ruled upon the issue and restored the employee to the job and previous pay level. City of Baxter v. AFSCME Council No. 65, 2008 WL 5215647 (Minn. App. 2008) (unpublished).

• Sexual Harassment: Privity Required for Contract-Based Claim. A woman who was the sole owner of a company subcontracting on a construction project could not sue for sex harassment under the Minnesota Human Rights Act. The woman’s claim of discrimination in performance of a contract, based upon sexual harassment at the job site, was not actionable as a business-discrimination claim under Minn. Stat. §363.17(3) because that statute extends only to parties to a contract. Since the woman’s business was the subcontractor, she lacked the required privity to assert a business discrimination claim under the statute. Krueger v. Zeman Construction Company, 2008 WL 5396855 (Minn. App. 2009).

• Unemployment Compensation: Poor Performance After Warnings. An employee who continued to fail to match call slips with work orders, after being given warnings and instruction, was barred from receiving unemployment compensation on grounds of “misconduct.” The Minnesota Court of Appeals held that the employee’s failure to improve after warnings and instructions rose to the level of “indifference” constituting disqualifying misconduct under Minn. Stat. §268.095, subd. 6(a). Rhoades v. Armor Security, Inc., 2008 WL 5136537 (Minn. App. 2008) (unpublished).

• Unemployment Compensation: Accident With Company Car. An automobile dealership employee who had an accident driving a company-owned “demo” car home while intoxicated was disqualified from receiving unemployment compensation benefits. The appellate court held that the driver’s behavior violated the employer’s policy and was not excusable under the “single incident” exception because the employer suffered significant adverse impact due to the destruction of the company-owned vehicle. Engen v. Clements Chevrolet-Cadillac Co., 2008 WL 5215957 (Minn. App. 2008) (unpublished).

• Unemployment Compensation: Insufficient Reason to Quit. An employee was not entitled to unemployment compensation benefits after quitting work following receipt of a paycheck with insufficient funds, which the employer quickly made good. The appellate court held that the employee did not have “good reason” to quit under Minn. Stat. §268.095, subd. 1(1) after the paycheck bounced due to insufficient funds because the employee was given notice of the problem and the employer paid the employee the full amount the next day. Because this short delay in payment is not sufficient to cause an average, reasonable employee to resign, the quitting employee was not entitled to unemployment benefits. Zaudtke v. Vision Financial & Home Mortgage, Inc., 2008 WL 5215960 (Minn. App. 20078) (unpublished).

LEGISLATION

• Discrimination Claims; Equal Pay Act. Several major pieces of legislation were near the top of the employment law agenda as the Obama administration came into office last month. One would facilitate employment discrimination claims by extending the time for filing job bias claims, overturning the controversial decision of the U.S. Supreme Court in Ledbetter v. Goodyear Tire & Rubber Co., 550 U.S. 618 (2007). Another would make it easier for claimants to pursue violations under the Equal Pay Act. 29 U.S.C. §206(d). Both measures were approved by the House of Representatives and passed on to the Senate, where the likelihood of their passage was more questionable.

• Employee Free Choice Act. Another measure, known as the Employee Free Choice Act, faces a more uncertain future in both chambers. It would allow unions to be recognized through a majority of signed authorization cards, rather than an internal workplace election. It is strongly supported by labor unions and their allies and vigorously opposed by many business interests. The Bush administration was opposed to the measures as too much of a “burden on business.” President Obama supports all three and pledged to sign any if approved by Congress.

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

February 2009

ENVIRONMENTAL LAW
JUDICIAL LAW

• EPA Board Orders CO2 BACT Permit Review. The Environmental Protection Agency’s Environmental Appeals Board ruled for the first time ever on November 13, 2008 that the EPA must conduct an analysis to determine whether a proposed prevention of significant deterioration (“PSD”) permit for a new coal-fired power plant must include carbon dioxide (“CO2”) Best Available Control Technology (“BACT”) limits. The EAB rejected petitioner Sierra Club’s argument that EPA Region 8 violated the public participation provisions of Clean Air Act section 165(a)(2) when the Region failed to consider “alternatives” to the proposed facility. The EAB took issue with Region 8’s reasons for not including BACT limits in the proposed permit, however. It remanded the permit to Region 8 to “reconsider whether to impose a CO2 BACT analysis and to develop an adequate record for its decision.” The EAB’s order acknowledged the “national scope” of the issue of CO2 permit regulation and encouraged the EPA to address the issue through rulemaking rather than through case-by-case permit determinations. In re: Deseret Power Electric Cooperative, 2008 WL 4921265 (E.P.A.).

• Clean Water Act: Citizens Suits Following State Administrative Penalties. The 11th Circuit Court of Appeals, on November 13, 2008, became the first federal appeals court to rule that state administrative enforcement proceedings do not preempt citizen suits under the Clean Water Act, provided the citizens suit satisfies the notice and filing requirements of 33 U.S.C. §1319(g)(6)(B) (Clean Water Act §309(g)(6)(B)). In the case before the court, the Alabama Department of Environmental Management (“ADEM”) began an administrative enforcement action two months after a citizens group notified Cherokee Mining of the group’s intention to sue Cherokee regarding the latter’s discharge of pollutants into water bodies such as the Black Warrior River. ADEM and Cherokee entered into a consent order, which included $15,000 in penalties, after the citizens group filed suit 120 days after its original notice to Cherokee. The district court and, later, the 11th Circuit, rejected Cherokee’s attempts to dismiss the citizens group’s suit under section 309(g)(6)(A)(ii), which precludes citizens suits against a party when a state agency has commenced and is diligently prosecuting an administrative enforcement action against that party. The courts held that the plain language of section 309(g)(6)(B) lifts the prohibitions against citizens suit under section 309(g)(6)(A) whenever the citizen party satisfies the notice and filing requirements of the former provision. This holding by the 11th Circuit follows similar developments under the Resource Conservation and Recovery Act and the Surface Mining Control and Reclamation Act, which have similar citizens suit provisions. Black Warrior Riverkeeper, Inc. v. Cherokee Mining, LLC, 548 F.3d 986 (11th Cir. 2008).

• Clean Air Act: “Upset” Emissions Not Exempt from Permit Limits. The D.C. Circuit Court of Appeals, on December 19, 2008, vacated EPA rules that allowed major air pollution sources to exceed normal emission limits during periods of startups, shutdowns and malfunctions (“SSM”). The EPA adopted the first version of this exemption in 1994. At that time, the EPA declared that sources were exempt from numeric emission limits established under section 112 of the Clean Air Act during SSM events but were still subject to a “general duty” under 40 C.F.R. §60.11(d) to operate and maintain pollution control equipment at all times, including during SSM events. The 1994 rule, however, required sources to develop “SSM plans,” the purpose of which was to demonstrate how a source will do its “reasonable best” to maintain compliance with section 112 standards, even during SSM events. These SSM plans were incorporated by reference into the source’s Title V permit and were to be made publicly available, according to the Clean Air Act itself. Over time, the Bush administration first removed the requirement that an SSM plan be incorporated by reference into a Title V permit, then, in 2006, it retracted the requirement that a source implement its SSM plan during an SSM event.

The D.C. Circuit Court first held that the 2006 amendment had the effect of opening up the original 1994 rule, which created the SSM event compliance exception. The court then held that when sections 112 and 302(k) of the Clean Air Act are read together, they reveal that Congress intended for there to be continuous compliance with the 112 standards, even during “upset” events. The court vacated EPA’s exemption because of this conflict with the underlying statutes. Sierra Club v. EPA, __ F.3d __ (D.C.Cir. 2008), 2008 WL 5264663.

• Clean Air Interstate Rule; Vacatur Remanded for Further Action. In a December 23, 2008 order, the D.C. Circuit Court of Appeals stayed its July 11 decision to vacate the entire Clean Air Interstate Rule (“CAIR”) and instead remanded CAIR back to the EPA for revisions consistent with the court’s July 11 decision. The court rejected petitioner North Carolina’s request that any remand include a one-year deadline to finalize a revised rule, choosing instead to remand CAIR for revision without any deadline for doing so. The court stated, however, that it did not intend the remand to function as an “indefinite stay” to the rule. It also reminded petitioners that they had the power to bring a mandamus petition to the court if EPA failed to modify CAIR consistent with the court’s July 11 decision. North Carolina, et al. v. EPA, __ F.3d __ (D.C.Cir. 2008), 2008 WL 5335481.

ADMINISTRATIVE ACTIONS

• Construction Site Stormwater Runoff Standards. The EPA, on November 28, 2008, published proposed rules that would further control discharges of sediment, total suspended solids, and other pollutants from construction sites. The rules would do so through technology-based effluent limitations guidelines and new source performance standards. The proposed rules would establish a set of mostly non-numeric effluent limitations requiring dischargers to provide and maintain effective erosion-control measures, sediment-control measures, and other pollution-prevention measures. Certain large sites located in areas of high rainfall energy and with soils of significant clay content, however, would be required to meet a numeric effluent limit on the level of allowable turbidity, i.e., 13 nephelometric turbidity units.

The deadline for submitting comments on the proposed rule is February 26, 2009. Effluent Limitations Guidelines and Standards for the Construction and Development Point Source Category: Proposed Rule, 73 Fed. Reg. 72562 (11/28/08).

• Concentrated Animal Feeding Operations; Reporting Requirements. Concentrated animal feeding operations (“CAFOs”), regardless of size, will no longer have to report releases of hazardous substances to the air, even if they meet or exceed the “reportable quantities” under section 103 of the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), under a new rule that takes effect on January 20, 2009. Large CAFOs, however, will still be subject to the reporting requirements of section 304 of the Emergency Planning & Community Right to Know Act (“EPCRA”). The EPA, in defining “large CAFOs” for this purpose, borrowed the same animal-unit-based threshold it developed to determine the applicability of certain National Pollutant Discharge Elimination System requirements to farms. Despite the CERCLA notification exemption, the EPA declared in the preamble to the final rule that the exemption will not limit EPA’s authority under other sections of CERCLA against CAFOs. CERCLA/EPCRA Administrative Reporting Exemption for Air Releases of Hazardous Substances from Animal Waste at Farms, 73 Fed. Reg. 76948 (12/18/08).

• Resource Conservation and Recovery Act: “Comparable Fuel Exclusion.” The EPA issued the final version of an exclusion to the rule implementing subtitle C of the Resource Conservation and Recovery Act (“RCRA”) on December 19, 2008. The amended rule already includes exclusions to the definition of “hazardous waste” for fuels that are energy-rich hazardous secondary materials that would otherwise be considered hazardous waste but have the same hazardous constituent concentrations as fossil fuels that would be burned in their place, a.k.a., “comparable fuels.” The newly-excluded materials, called “Emission Comparable Fuel,” are hazardous secondary materials that, when generated, are handled in such a way that they are not discarded in any phase of management but are instead handled as a valuable commodity. The final rule includes “feed rate limits,” i.e., limits on the conditions under which ECF can be burned, so as to ensure that the emissions generated from the burning of ECF are comparable to those of the fossil fuels they displace. The rule became effective on January 20, 2009. Expansion of RCRA Comparable Fuel Exclusion, 73 Fed. Reg. 77954 (12/19/08).

—William P. Hefner
The Environmental Law Group, Ltd

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FEDERAL PRACTICE
JUDICIAL LAW

• Review of Discretionary Remands under 28 U.S.C. §1367(c); Certiorari Granted. The United States Supreme Court has granted certiorari to review a recent decision by the Federal Circuit holding that 28 U.S.C. §1447(d) precludes appellate review of discretionary decisions declining to exercise supplemental jurisdiction under 28 U.S.C. §1367(c). The grant of certiorari likely was prompted by a circuit split on this issue, as the 3rd, 4th, 5th, 6th, 7th, 8th, 9th, 10th and 11th circuits previously have held such orders are reviewable. However, the Federal Circuit suggested that some of the authority underlying the other circuit court decisions has been called into doubt. HIF Bio, Inc. v. Yung Shin Pharms. Indus. Co., 508 F.3d 659 (Fed. Cir. 2007), cert. granted, ___ U.S. ___, 129 S. Ct. 395 (2008).

• Preliminary Injunctions; Applicable Standards. Two recent decisions shed some additional light on the standards governing the issuance of preliminary injunctions.

In the first decision, the United States Supreme Court reversed a preliminary injunction in favor of the plaintiff, finding that it had failed to establish that irreparable harm was “likely” in the absence of a preliminary injunction, and that the mere “possibility” of irreparable harm was sufficient to warrant an injunction no matter how strong the likelihood of success. Winter v. Natural Resources Defense Council, ___ U.S. ___, 1290 S. Ct. 365 (2008).

In the second case, the 8th Circuit reversed the denial of a preliminary injunction in a case challenging the constitutionality of a statute regulating speech despite applying its recently articulated and more stringent “likelihood” of success standard. Phelps-Roper v. Nixon, 545 F.3d 685 (8th Cir. 2008).

• 28 U.S.C. §1292(b) Interlocutory Appeals; Required Procedural Steps. The 8th Circuit recently dismissed a purported 28 U.S.C. 1292(b) interlocutory appeal where, rather than filing an application for leave to appeal with the 8th Circuit within ten days of the district court’s certification, the purported appellants filed a document captioned “Plaintiffs’ Notice of Interlocutory Appeal” with the clerk of the district court and filed no other document with the 8th Circuit that might have served as an acceptable substitute. Estate of Storm v. Northwest Iowa Hospital Corp., 548 F.3d 686 (8th Cir. 2008).

• Motion for Judgment as a Matter of Law; Failure to Renew Motion Following Entry of Judgment. The 8th Circuit recently rejected several creative attempts to avoid the well-established law that precludes appellate review of mid-trial motions for judgment as a matter of law when those motions are not renewed following the entry of judgment, rejecting the defendant’s attempts to cast its arguments as something other than a dispute as to the sufficiency of the evidence. E.E.O.C. v. Southwestern Bell Telephone, L.P., ___ F.3d ___ (8th Cir. 2008).

• Limited Liability Companies; Failure to Plead Diversity Jurisdiction. In two recent decisions Judge Ericksen expressed obvious irritation with litigants unable to properly allege diversity jurisdiction in cases involving limited liability companies.

In the first case, Judge Ericksen criticized a party seeking to confirm an arbitration award for failing to properly allege the citizenship of the respondent limited liability company, and allowed the petitioner seven calendar days to cure its pleading deficiencies or have the matter dismissed for lack of subject matter jurisdiction. In Re Arbitration Between Wells Fargo Bank, N.A. and WMR e-PIN, LLC, 2008 WL 5110204 (11/26/08).

In a second decision that same day, Judge Ericksen noted that she had previously instructed the plaintiff to cure the same pleading deficiency, and denied a request to accelerate a hearing on dispositive motions, noting that much of the delay “was occasioned by the parties wasted effort stemming from their misapprehension of applicable law.” Marquette Business Credit, Inc. v. International Wood, Inc., 2008 WL 5104421 (D. Minn. 11/26/08).

• Cross-Motions for Sanctions Denied. Judge Frank recently denied cross-motions for sanctions, denying one defendant’s Rule 11 motion after finding that certain of plaintiff’s claims were not sanctionable even if “ultimately not prevailing,” and denying plaintiff’s request to sanction that defendant’s counsel under both 28 U.S.C. §1927 and the court’s inherent authority.  Cengage Learning, Inc. v. Earl, 2008 WL 4857938 (D. Minn. 11/10/08).

• Motion to Certify Interlocutory Appeal Denied. Chief Judge Davis recently denied a motion to certify an order for interlocutory appeal pursuant to 28 U.S.C. §1292(b), determining that while the disputed issue did involve a controlling question of law, the existence of a controlling 8th Circuit decision precluded any finding of a “substantial ground for difference of opinion,” even if other courts disagreed with the 8th Circuit. Capitol Records Inc. v. Thomas, 2008 WL 5423133 (D. Minn. 12/23/08).

— Josh Jacobson
Law Office of Josh Jacobson

February 2009

INTELLECTUAL PROPERTY
JUDICIAL LAW

• A Method of Hedging Risk: Not Patent Eligible. Sitting en banc, the Federal Circuit clarified the test for determining if a process involving a fundamental principle qualifies for patent protection under 35 U.S.C. §101. Section 101 provides four categories of patent-eligible subject matter: machines, manufactures, compositions of matter, and processes. However, processes that are considered fundamental principles are not always patent eligible. Fundamental principles include laws of nature, abstract ideas, natural phenomena, and mental processes. At issue in Bilski was a process claiming a method of hedging risk in the field of commodities trading including the steps: (a) initiating a series of transactions between a commodity provider and consumer, (b) identifying market participants, and (c) initiating a series of transactions between said commodity provider and said market participants. The majority held that processes considered fundamental principles are not eligible for protection unless the “machine-or-transformation” test is met. Under the “machine-or-transformation” test a claimed process must utilize a particular machine or apparatus, or transform a particular article into a different state or thing. The court held the claimed method at issue did neither. In re Bilski, 545 F.3d 943 (Fed. Cir. 2008)

• Trademark Infringement: Summary Judgment Granted. Judge Frank granted Target’s motion for summary judgment of noninfringement because the marks are not similar. NSM sued Target for trademark infringement of its federally registered HUCK trademark because Target was selling athletic shoes with the model name HUCK under its house brand PROSPIRIT. The court balanced the Squirtco factors to determine the likelihood of confusion. The court held four of the six factors favored Target: 1) consumers are unlikely confused about the differences between a skate shoe for children and a men’s running shoe, 2) Target did not have an intent to confuse the public because they had not heard of NSM’s products, 3) NSM did not produce any evidence of actual customer confusion, and 4) the marks were dissimilar because of a difference in font, placement, and reliance on the mark for marketing. In NSM’s favor, the court held the HUCK mark is suggestive and the products are related but qualified these factors due to popular third-party usage of the mark and because the two products were marketed and sold for different reasons. The court granted Target’s motion, holding no genuine issue of material fact existed because only two of the six factors slightly favored NSM. NSM Res. Corp. v. Target Corp., Civ. No. 07-2501 (D. Minn. 12/03/08).

• Trademark Infringement: Temporary Restraining Order Denied. Judge Doty denied Clam’s motion for a temporary restraining order (TRO) despite having a valid trademark because Clam failed to demonstrate a likelihood of confusion or irreparable harm. Clam sued Otter for infringement of its federally registered mark on the color blue as applied to ice fishing shelters. Otter alleged the mark was both invalid and not infringed. The court considered the Squirtco factors to determine the likelihood of confusion. Despite holding Clam’s mark is valid the court did not find a likelihood of confusion because: 1) Otter’s shelters are a different shade of blue with black tops and bottoms and are identifiable by large easily legible lettering, 2) the conspicuous labeling of Otter’s shelters suggests there is no intent to confuse the public, 3) the expensive price suggests an informed and considered purchasing decision by consumers, and 4) there was no evidence of actual consumer confusion. The court also held no immediate or irreparable harm existed because Clam delayed its objection to Otter’s shelters for one year and delayed its motion seeking a TRO several weeks. The court denied Clam’s motion for a TRO holding Clam failed to establish a likelihood of confusion or immediate or irreparable harm. Clam Corp., v. Innovative Outdoor Solutions, Inc., Civ No. 08-5895 (D. Minn. 12/15/08)

• Patent Infringement: Motion for Partial Summary Judgment Granted. Judge Ericksen granted County’s motion for partial summary judgment because Allan Block failed to disclose infringement claims based on unauthorized sales in its patent infringement suit. Allan Block sued County for infringement of two patents covering concrete blocks and related technology for use in the construction of segmented retaining walls. In an amended complaint, Allan Block alleged Country infringed both patents by selling concrete blocks sold under the trademark “Allan Block” without Allan Block’s consent. County moved for partial summary judgment because Allan Block failed to assert infringement claims based on unauthorized sales in the original contentions. The court granted County’s motion holding Allan Block cannot now pursue infringement claims when it failed to assert that County infringed the patents-in-suit in its original patent infringement contentions and interrogatory answers. Allan Block Corp. v. County Materials Corp., Civ. No. 05-2879 (D. Minn. 12/17/08)

— Tony Zeuli
— Ryan Fletcher
Merchant & Gould

JUVENILE LAW
JUDICIAL LAW

• Termination of Parental Rights; Discretion of District Court. The appellant Guardian ad Litem (GAL) challenged the district court’s orders granting termination of parental rights of the mother and denying the children’s new trial motion. The GAL claims that long-term foster care, as opposed to termination of parental rights, would be in the two minor children’s best interest.

In this case, the social service agency did not seek long-term foster care for the two children, then ages 14 and 12. The children were deemed to be thriving in foster care with the foster father who was the godfather of one of the children. The evidence was found to not substantiate the GAL’s claim that the foster father could not provide for the children’s needs if his income were reduced by receiving an adoption subsidy instead of a foster care subsidy. Thus, the Court of Appeals, in an unpublished decision, concluded that the district court did not clearly err in finding that, even if it were permitted to consider long-term foster care, no compelling reasons weigh in favor of long-term foster care and that the best interests of the children mandate termination of parental rights so that they are free to be adopted.

Judge Crippen concurred specially in this decision, stating that in his opinion, this record would permit a finding that termination of the parental rights to the two minor children was not in their best interest, and that the record showed compelling interests of the boys for a plan of long-term foster care. Still, Judge Crippen went on to observe that as the majority determined, the district court can and should be affirmed in the exercise of its discretion. In the Matter of the Welfare of the Children of A.W., Parent, A08-0983 (Minn. App. 12/30/08).

• Voluntary Termination of Parental Rights; Motion to Vacate. In an unpublished decision, the Court of Appeals reviewed a mother’s challenge to the district court’s denial of her motion to vacate her voluntary termination of parental rights. This mother, while nine months pregnant with her second child, voluntarily terminated her parental rights to her then 22-month-old son. The county social worker informed her that if she voluntarily terminated her parental rights to that son, the county would not open a new CHIPS file on her unborn child. At the pretrial hearing, the mother acknowledged that she understood the voluntary termination of parental rights, which she had reviewed with her attorney. She subsequently stated that she did not consent to the voluntary termination of parental rights due to duress, undue influence, or fraud.

The Court of Appeals concluded that because of the statutory presumption following involuntary termination of parental rights, the fact that the department informed the mother about the consequences of an involuntary termination of parental rights does not rise to the level of undue influence and the record supports the district court’s denial of the mother’s motion to vacate the voluntary termination petition on the basis of undue influence. In the Matter of the Welfare of the Child of: A.F., A08-1044 (Minn. App. 12/23/08).

• Termination of Parental Rights; “Knew or Should Have Known” Standard. In another unpublished termination case, the appellant mother challenged the district court’s termination of her parental rights arguing that the district court’s findings were inadequate because they did not contain the finding that she knew or should have known that one of her children suffered egregious harm and that the record does not support such a finding. She also contended that the egregious harm suffered by the child was not of a nature, duration, or chronicity that indicates a lack of regard for the child’s well-being. The Court of Appeals reversed and remanded for further proceedings. The court held that even though the district court terminated the mother’s parental rights after finding out the child had suffered egregious harm while in the care of the mother and father, that at least one of the parents caused fractures to the child, and that both mother and father ignored the child’s distress and did not timely seek medical treatment, the matter needed to be reversed and remanded because the district court’s findings do not address the knew-or-should-have-known standard since articulated by the Minnesota Supreme Court in In Re the Welfare of the Child of T.P., 747 NW 2nd 356 (Minn. 2008). In the Matter of the Welfare of the Children of V.J.J. and R.L.H., A08-0683 (Minn. App. 11/04/08).

• Juvenile Delinquency; Criminal Sexual Conduct; Failure to Suppress Statements. In an unpublished Court of Appeals decision, the minor was adjudicated delinquent for first- and second-degree criminal sexual conduct involving his seven-year-old sister. The then 13-year-old juvenile was brought to the police station by his foster mother without being told why and was escorted to a room separate from his foster mother. The juvenile had never been interrogated by a police officer before. An officer confronted the juvenile with statements and questions which were consistently accusatory in nature. The officer also down-played the seriousness of the allegations and suggested the favorable treatment the juvenile would receive if he told the “truth.” On appeal, the juvenile argued that the district court erred in failing to suppress statements made by him during custodial interrogation prior to being given a Miranda warning. He also contended that the statements were inadmissible because they were not made voluntarily.

The Court of Appeals affirmed the adjudication, holding that even though the juvenile was told that he was not under arrest and could leave at any time, the district court erred in concluding that the juvenile was not in custody and that his statement was made voluntarily. However, the Court of Appeals went on to hold that the trial court’s error was harmless beyond a reasonable doubt where the testimony of the victim and other witnesses sustained the adjudication for second-degree criminal sexual conduct. The Court of Appeals also addressed the juvenile’s claim that there was insufficient evidence on genital to genital contact which was part of the basis for the adjudication. On that claim, the Court of Appeals held that because there was insufficient evidence of bare genital to bare genital contact, the Court of Appeals held that the evidence was insufficient to support the first-degree criminal sexual conduct adjudication. In the Matter of the Welfare of E.T., Jr., A07-2044 (Minn. App. 12/30/08).

• Adoption; Untimely Petition; Trial Court Discretion. In a published decision, the Minnesota Court of Appeals reviewed a situation where there were three competing adoption petitions as to two minor siblings. One was filed by the children’s paternal grandparents, one by their maternal grandmother, and one by a foster parent couple. Those three petitioners had reached an agreement that the maternal grandmother would adopt one of the children and the foster parent couple would adopt the other child. The district court accepted the agreement and issued an order finding it to be in the children’s best interest and granting the relevant petitions. Before the court held the final adoption hearing, however, appellant maternal aunt and uncle of one of the children filed an adoption petition as to their nephew. All of the other adoption petitioners and the Guardian ad Litem each moved to dismiss the maternal aunt and uncle’s petition. The district court granted the dismissal and the maternal aunt and uncle appealed.

The Court of Appeals affirmed the district court’s ruling, stating that the Minnesota Rules of Adoption Procedure do not establish any time requirements for the filing of the petition other than that the petition must generally be filed within a year of the child’s placement in a respective adoptive home. However, under those procedural rules, the district court may, either on a motion by a party, or on its own, dismiss an adoption petition. The rules listed the seven specific grounds for dismissal, one of which is failure to move forward with the petition. The rule also states that dismissal is not limited to those seven listed grounds. In this case, the district court made numerous findings supporting the conclusion that the maternal aunt and uncle’s petition was untimely. These findings included the maternal aunt and uncle’s previous disinterest in adopting the child, the fact that they did not file their petition until ten months after the three other petitions were filed and after the county had investigated and insured the suitability of the other petitioners as adoptive placements, and four and one-half months after those petitioners had reached a settlement agreement that was ultimately approved by the commissioner of human services and the district court. These appellants filed their petition just before finalization of the adoption. The Court of Appeals affirmed the district court’s analysis that the Rules of Adoption Procedure conferred discretion on the trial court to dismiss a timely petition for foot-dragging, and there is similarly a rational basis to infer that the trial court is similarly authorized to dismiss a petition that was not timely filed in the first place. In the Matter of the Petition of: K.L.B. and J.A.B. to Adopt L.J.D., A08-1292 (Minn. App. 12/30/08).

• CHIPS: Evidence; Statutory Criteria for Adjudication. Appellant parents appealed a CHIPS adjudication arguing that the district court’s findings that the minor child was physically abused were not supported by clear and convincing evidence and that the court’s findings did not sufficiently address the statutory criteria for the CHIPS adjudication. In this matter, a seven-week-old infant sustained bruising to his legs and a fractured clavicle. A physician testified at the trial that the injuries were “caused by someone,” that the fracture would “require some force,” and that there was no evidence that the infant suffered from any bruising disorders or bone diseases. The mother expressed concern to the therapist that the infant’s father might have hurt him. The father invoked the 5th Amendment and declined to testify.

The Court of Appeals concluded that the state’s evidence did not rise to the level of proving intent to injure, but that there was clear and convincing evidence to support the district court’s findings of physical abuse. The Court of Appeals went on to hold, however, that the district court’s dispositional order did not sufficiently address the statutory criteria set forth in Minn. Stat. §260C.201 subd. 2. Therefore, the matter was remanded for the necessary findings. In the Matter of the Welfare of the Child of: S.J.W. and D.L.P., Parents, A08-0716 (Minn. App. 12/16/08).

— Gary A. Debele
Walling, Berg & Debele PA

PROBATE & TRUST LAW
JUDICIAL LAW

• Trust Construction; Gift of Purchase Option. The Minnesota Court of Appeals has held that a trust provision restricting the powers of the trustees to prevent the trustees “or any other person” from dealing with or disposing of trust property for less than adequate consideration does not affect a separate provision of the instrument giving certain beneficiaries an option to purchase a particular asset for a fixed price (which was in fact less than the fair market value of the trust property).

The court based its decision on the following legal principles: (a) trust provisions must be interpreted in the context of the instrument as a whole and not in isolation, (b) each trust provision must be given effect whenever possible, (c) words of a trust cannot be disregarded as meaningless where a meaning can be given that is consistent with the rest of the instrument, and (d) a court has a duty to give effect to the donor’s dominant intention as gathered from the instrument as a whole.

The court also noted that the provision preventing the disposition of trust property for less than adequate consideration was a restriction on the powers of the trustees, while the provision granting a purchase option to beneficiaries does not involve any power of the trustees. The court rejected the appellant’s argument that the provision granting the option should be interpreted as applying only if the stated option price constituted adequate consideration, stating, “a court may not rewrite a trust … to provide by conjecture what a trustor might have intended if he knew how events would occur … .” (quoting In re Wiedemann, 358 N.W.2d 139, 142 (Minn. App. 1984) (alterations in original)). Gilyard v. Lichtsinn, A08-0243 (Minn. App. 12/09/08).

• Trust Construction; Power to Borrow; Loan vs. Distribution from Trust. The Minnesota Court of Appeals has interpreted a trust provision authorizing the trustee (initially a bank) to “borrow money with or without security and to repay such borrowings from principal and income” as giving an individual trustee the power to lend trust principal to himself.

During his marriage, David Norman’s father died and a “family trust” was created under the father’s will or trust agreement. Initially, a bank was the sole trustee of the trust, but in 2002 the bank resigned and Mr. Norman and his sisters took over as trustees. In late 2004 and early 2005, over $150,000 was transferred from the trust to Mr. Norman. No promissory notes or other documents were created at the time of the transfers indicating that the transfers were loans. In late 2005, Mr. Norman told his mother and sisters that he expected to be divorced from his wife. Mr. Norman’s mother and sisters asked him to characterize the transfers from the trust as loans, and he then created and back-dated notes, and transferred approximately $6,000 back to the trust. In his divorce proceeding, Mr. Norman’s wife argued the transfers from the trust were not loans, but were gifts. The trial court agreed, finding “there was no evidence that anyone considered the transfers loans until after it was clear the parties were divorcing.”

The Minnesota Court of Appeals reversed, holding that the trial court’s finding was clearly erroneous. The Court of Appeals stated in its opinion that “the trust does not permit or authorize any trustee to make gifts of trust funds or to remove funds from the account without the agreement of all three trustees,” but “[t]he trust empowers the trustees to ‘borrow money with or without security.’” The Court of Appeals does not explain in its opinion how the words in the trust document, “and to repay such borrowings from principal and income” can be squared with the view that the trust provision in question describes “borrowings” from the trust, as opposed to “borrowings” by the trust.

The Court of Appeals’ interpretation would authorize nearly any trustee to engage in self-dealing by lending the trust property to himself. Language similar to that at issue in the case is commonly used in wills and trust agreements (see, e.g., “Maritalized Revocable Trust,” Section 8.2.7, Drafting Wills and Trust Agreements Ch. 10, Minn. State Bar Assoc. Continuing Legal Education (6th Ed. 2008)). In addition, the Minnesota Trustees’ Powers Act specifically authorizes a trustee to “borrow money … for a term within or extending beyond the term of the trust … .” Minn. Stat. §501B.81, subd. 19. Mr. Norman’s former spouse has petitioned for review by the Minnesota Supreme Court. Norman v. Norman, A07-2021 (Minn. App. 11/18/08.)

LOOKING AHEAD

• Gift and Estate Tax; Applicable Federal Rates at Record Low.  The assumed rate of return under §7520 of the Internal Revenue Code for January, 2009 dropped to 2.4 percent, its lowest level ever in the nearly 20 years since §7520 became effective on May 1, 1989. The current rate can be found at this website: http://www.irs.gov/app/picklist/list/federalRates.html. The §7520 rate is the assumed rate of return used for establishing the gift and estate tax values of annuities, life interests or interests for terms of years, and remainder or reversionary interests. Generally, it is 120 percent of the mid-term applicable federal rate under Code Section 1274, using annual compounding, rounded to the nearest two-tenths of one percent. The current low rate makes various estate-tax-planning strategies, such as gifts to grantor-retained annuity trusts and charitable lead trusts and seller-financed sales to family members and trusts, more effective than they would otherwise be, all else being equal. Rev. Rul. 2009-1 (12/19/08).

— Cameron R. Seybolt
Fredrikson & Byron, P.A.

REAL PROPERTY
JUDICIAL LAW

• Substantive Due Process; Equal Protection; Taking. The owner purchased property on which her father operated an auto sales and repair business under a conditional use permit (“CUP”). The CUP was granted to the father under an undue hardship exception and was to expire upon change of ownership of the business. Upon the death of her father, the owner applied to continue the CUP. The city’s planning commission denied the application because the property failed to meet the code requirements regarding lot size and vehicle access in relation to a nearby intersection. The city council upheld the denial of the CUP and the owner sued the city in state court arguing substantive due process, equal protection, inverse condemnation, and illegal taking.

The city removed the case to federal court. The Federal District Court held that the owner failed to establish a protected property interest to support her substantive due process claim because the property did not meet all of the conditions required for a CUP. Moreover, the district court held that the city’s decision was not arbitrary or capricious. The owner claimed that the property had not changed since the previous CUP was granted, but the district court noted that the previous CUP was granted under an undue hardship exception due to the then-owner’s severe illness and that the current owner failed to demonstrate the same undue hardship. The district court held that the owner’s equal protection claim failed because the owner and the former owner were not similarly situated because of the city’s discretionary finding of an exceptional undue hardship for the former owner. The district court held that the owner’s federal takings claim was not ripe because owner had not sought and been denied just compensation in a state court inverse condemnation action. The district court concluded, however, that even if the takings claim were ripe it would fail because a CUP is a government entitlement and not subject to a takings claim and the owner did not establish that by denying the CUP the city deprived her of all economically beneficial use of the property.

On appeal, the owner argued that the district court erred by not reaching her takings claim. The 8th Circuit Court of Appeals held that because the owner had not completed her state inverse condemnation claim before the action was removed to federal court, the district court lacked subject matter jurisdiction to hear the takings claim. The owner argued that because the city removed the case to federal court before the inverse condemnation case could be decided, it had waived any challenge to the ripeness of the takings claim. The Court of Appeals rejected this argument because it would require the court to refuse to consider whether it had subject matter jurisdiction. Therefore, the Court of Appeals held that the district court did not err when it found the takings claim was not ripe and dismissed it without prejudice. The Court of Appeals also affirmed the district court in its denial of the owner’s substantive due process claim because the owner did not have a legitimate claim of entitlement to the CUP. Even if the owner had identified a protected property interest, the city’s decision was not irrational because the use did not meet the zoning regulations. Snaza v. City of St. Paul, 548 F.3d 1178 (8th Cir. 2008).

• Mechanics Lien; Pre-Lien Notice. Tenant occupied 4,375 square feet in a mall with more than 5,000 total square feet. The tenant contracted with a general contractor to build out its lease space. The general contractor subcontracted for the drywall services and the drywall services provider subcontracted with a company that supplied the drywall. The tenant paid the general contractor in full and the general contractor paid the drywall services company in full. However, the drywall servicer did not pay the drywall supplier. The drywall supplier timely served its lien statement on the owner of the mall, recorded the lien statement, and commenced action to enforce the mechanics lien. The lien claimant did not serve a pre-lien notice. The district court denied the enforceability of the mechanics lien and held that the pre-lien notice exception set forth in Minn. Stat. §514.011, subd. 4(c) did not apply to a tenant with leased space of less than 5,000 square feet even if the landlord’s total square footage exceeds 5,000 square feet.

The Court of Appeals, finding this was a case of first impression, affirmed the district court. The Court of Appeals recited the mechanics lien statutes that generally require a pre-lien notice to the owner to enforce a mechanics lien. Owner is defined as one who holds a legal or equitable interest in real property whose interest is known to one who contributes the improvement or is recorded in the real estate records. The Court of Appeals noted the exception to the pre-lien requirement set forth in §514.011, subd. 4(c), where a pre-lien notice is not required for work or improvement to real property where the existing property contains more than 5,000 total usable square feet of floor space. The lien claimant argued because the mall in its entirety contained more than 5,000 square feet, the exception applied. The owner argued that tenant’s space that actually was improved did not exceed 5,000 square feet, so the exception did not apply.

The Court of Appeals strictly construed the statutory language in determining whether the mechanic’s lien attached. The Court of Appeals disregarded the lien claimant’s invitation to examine the sophistication of the parties in equitably interpreting the mechanics lien statutes. The lien claimant also argued that the district court erroneously focused on the term “owner,” which is not found in §514.011, subd. 4(c). The Court of Appeals rejected this argument because ownership is implied in the term “existing property” and the term “owner” is used in other parts of the mechanics lien statute. The Court of Appeals also noted that to not consider “owner” in the §514.011, subd. 4(c) exception would have broad and far-reaching impact on tenants, who would not be entitled to pre-lien notice in a host of situations where the landlord’s property exceeded 5,000 square feet. Finally, the lien claimant argued that the landlord’s total square footage must be considered because it could not record its mechanics lien on only the tenant’s portion of the real property. The Court of Appeals rejected this argument because there was no evidence that the mechanics lien would have been rejected by the county recorder if it only described the tenant’s interest in the property and because it would be possible to include a description of only the tenant’s interest in the property in addition to the complete legal description of the entire parcel. Wallboard, Inc. v. St. Cloud Mall, LLC, A08-0319, 758 N.W.2d 356 (Minn. App. 2008).

— Michael E. Kreun
Beisel & Dunlevy, PA

TAX
JUDICIAL LAW

• Tax on Title Insurance Premiums; “Gross Premiums.” Minn. Stat. §60A.15 requires a tax be remitted based on “gross premiums … received by the insurer … or its agents for it … .” At issue in Stewart Title Guaranty Co., was whether “gross premiums” included the percentage of the premium retained by the agent. From 2000 to 2002, Texas-based Stewart Title Guaranty Company paid premium tax only on the portion of the premium that was remitted by its agents. The Minnesota Supreme Court held that the tax on insurance premiums applies to the full amount of the premium charged by the insurance company, including the significant percent of the premium retained by title insurance agents. Stewart Title Guaranty Co. v. Minnesota Commissioner of Revenue, A08-419 (Minn. 12/04/08).

• Standing to Collect Refund; “Interest” of Former Law Partner. The 8th Circuit affirmed the principle that “standing to sue for a tax refund extends only to the taxpayer from whom the tax was allegedly wrongly collected.” Attorney Barry J. Jewell argued that he was due a refund of his pro rata share of a tax sanction paid in conjunction with a closing agreement between his former law firm and the IRS. The IRS moved to dismiss, arguing that only the law firm, and not Jewell himself, had standing. The 8th Circuit reversed the Arkansas district court’s denial of the IRS’s motion to dismiss. The court reasoned that Jewell did not satisfy the prudential standing requirement that a litigant generally may assert only his own rights. The decision drew a dissent from Judge Riley, who suggested that this taxpayer had a direct, personal interest which gave him standing. Judge Riley’s dissent went on the address the IRS’s conduct in the case, which Riley said “exceeded its legal authority and was wrongful.” (Slip. Op. at 15). Jewell v. United States, No. 08-1175 (8th Cir. 12/10/08).

• Tuition at Religious Schools; Not Deductible. In 1995, the Sklar family paid tuition for their five children to attend Orthodox Jewish day schools; the couple deducted a portion of the tuition payments from their federal income taxes as charitable contributions. Last month, the 9th Circuit held that the Sklars could not take such a deduction under §§170 and 6115 of the tax code This is not the first time the 9th Circuit has addressed the Sklar’s case. The appellate court had previously held that the tuition and fees payments were not deductible. In this latest opinion, the court upheld a U.S. Tax Court decision that rejected Michael and Marla Sklar’s contention that the tuition and fee payments to Jewish day schools were deductible. It concluded the couple failed to demonstrate that any part of their tuition payments was intended as a charitable contribution. Sklar v. Commissioner, No. 06-72961 (9th Cir. 12/12/08).

•Section 104(a)(2): Settlement “Not on Account of Personal Physical Injury” Taxable. Section 104(a)(2) excludes from gross income damages received on account of personal physical injury or physical sickness if the underlying cause of action was based upon tort or tort-type rights. In Stadnyk v. Commissioner, the Tax Court held that physical restraint and detention by police did not constitute a physical injury for purposes of §104(a)(2). The underlying dispute arose after the taxpayer, Mrs. Stadnyk, was arrested for allegedly passing a bad check to purchase a car. In fact, Stadnyks had stopped payment on the check because the car was not satisfactory and the dealer would not return their calls. The bank mistakenly stamped “NSF” on the taxpayer’s check, and returned the check to the dealer. The mistake ultimately led to the taxpayer’s arrest and indictment. The criminal charges against the taxpayer were dropped, and the Stadnyks brought suit against the owner of the dealership, the dealership itself, and the bank. The dispute was resolved when Bank One agreed to pay the Stadnyks $49,000. The Tax Court reasoned that the settlement was not on account of personal physical injury or physical sickness, and was therefore taxable. The Tax Court also held that the taxpayers were not liable for an accuracy-related penalty because the taxpayers reasonably relied on their attorney, the attorney for the bank, and the mediator, all of whom told taxpayers that the settlement would not be taxable. Stadnyk v. Commissioner,No. 2008-289 (T.C.M., 12/22/08).

ADMINISTRATIVE ACTION

• Tax Changes in Bailout Bill. The Emergency Economic Stabilization Act of 2008 includes several tax changes relevant to individuals, including tax breaks for disaster victims and AMT (Alternative Minimum Tax) relief, and extends certain tax breaks that had expired at the end of 2007. All told, the act contains more than 100 tax provisions worth an estimated $150 billion in tax benefits.

•Application of Section 409A to Nonqualified Deferred Compensation Plans. Proposed rules on Application of Section 409A to Nonqualified Deferred Compensation Plans appeared in the December 8 Federal Register. The proposed rules (REG-148326-05) address the calculation of amounts includible in income under Tax Code §409A and the additional taxes imposed by that section with respect to service providers participating in certain nonqualified deferred compensation plans.

LOOKING AHEAD

• Certiorari Granted: Alaska City Tax on Large Vessels. The city of Valdez, Alaska imposed an ad valorem property tax on certain large vessels that dock in the city. The tax is apportioned by a formula that includes days spent in a port. Oil transporters, including Polar Tankers Inc., challenged the tax, alleging the tax violated the due process, commerce, and tonnage clauses of the U.S. Constitution. The Alaska Supreme Court upheld the tax, and the group of oil transporters sought review in the United States Supreme Court. Certiorari was granted on December 12. In its appeal, Polar Tankers continues the arguments raised below: that the tax violates the Tonnage, Commerce, and Due Process clauses of the United States Constitution. Polar Tankers v. Valdez, Alaska, No. 08-310, __ U.S. __, cert. granted 12/12/08.

• Estate Tax to be Preserved? The phase-out of the Estate Tax began in 2001 under President Bush, and was scheduled to be complete in 2010. The Wall Street Journal reported on January 12 that President-elect Obama and congressional leaders will lock-in the estate tax at its current rates: estates are exempt up to $3.5 million for individuals, $7 million for couples; value of estates above the exemption amount would be taxed at 45 percent. The story is reported by Jonathan Weisman.

•Taxpayer Advocate Calls for Simplification. Taxpayer Advocate Nina Olson released her annual report to Congress on January 7, 2009. Olson particularly criticizes the “overwhelming” complexity of the Code, and writes: “The only meaningful way to reduce these [compliance] burdens is to simplify the tax code enormously.” The report is available at http://www.irs.gov/pub/irs-utl/08_tas_arc_msp_1.pdf

•Attention to Health Tax Exclusion. The Organization for Economic Cooperation and Development recommended that the United States scrap its tax exclusion for employer-sponsored health insurance with a more efficient subsidy scheme. The same week that the OECD made its recommendations, the Kaiser Family Foundation criticized the tax exemption for employer contributions to health insurance as a “hidden cost” to the federal government in the form of lost tax revenue. The Kaiser Foundation used estimates that the exemption cost approximately $225 billion in 2008.

— Morgan L. Holcomb
Hamline University  School of Law