July 2009

BANKRUPTCY
JUDICIAL LAW

• Administrative Claim for Rent Due Post-Petition; Unexpired Nonresidential Lease. The 8th Circuit Bankruptcy Appellate Panel held that a landlord under an unexpired crop land lease was entitled to an administrative claim in the full amount of a post-petition biannual rental payment due two days after the petition. Under Section 365(d)(3) of the Bankruptcy Code, the trustee or debtor-in-possession must perform all obligations of the debtor under an unexpired nonresidential lease until the debtor rejects the lease, for a period up to 60 days. In this case, the crop land lease required debtor to make its second biannual rental payment of $90,799.33, which was due two days after the debtor filed bankruptcy. The court held that the debtor-in-possession was responsible for payment of the full amount to the landlord, even though most of the six-month rental period attributable to the payment occurred prior to the petition. The court further held that nonpayment entitled the landlord to an administrative claim under Section 503(b)(1). The court also excused the landlord from proving that the rental obligation “was an actual and necessary cost or expense of preserving the bankruptcy estate,” as is required for many other administrative claims. The court’s holding is favorable to landlords and a potential trap for unwary tenants. As noted by the court, Congress enacted Section 365(d)(3) to provide “special treatment for non-residential landlords.” While this case specifically addressed a crop land lease, the court’s analysis of Section 365(d)(3) readily applies to all unexpired nonresidential leases in bankruptcy. Roehrich v. Burival (In re Burival), No. 08-6026 (8th Cir. BAP, 06/04/09).

• Lien Against Vehicle as Tool of the Trade; Avoidable if Qualified for Other Exemption. The 8th Circuit Bankruptcy Appellate Panel held that a debtor could avoid a nonpossessory, non-purchase-money security interest on a motor vehicle as a “tool of the trade” even if the vehicle is not exempt under state law as a tool of the trade. In this case, the debtor utilized a state motor vehicle exemption in Iowa to claim a $7,000 exemption for his vehicle worth $21,000. Debtor also sought to set aside a nonpossessory, non-purchase-money security interest against the vehicle under Section 522(f)(a)(B)(ii) of the Bankruptcy Code. That section provides that the court can set aside any nonpossessory, non-purchase-money security interest to the extent it impairs an exemption against “implements, professional books, or tools, of the trade of the debtor.”

The court stated that the debtors could set aside the security interest against the motor vehicle as a tool of the trade even though state law did not permit a motor vehicle to qualify as a tool of the trade. The court found though that while state law defines property interests for determining the nature of an exemption, federal law classifies property interests for avoiding liens that impair exemptions. Under the court’s holding, the debtor can avoid the lien so long as the vehicle qualifies for another state law exemption. The court remanded the case to the Bankruptcy Court to determine whether the vehicle in fact qualifies as a tool of the trade under federal law. Cleaver v. Warford (In re Cleaver), No. 08-6052 (8th Cir. BAP, 06/11/09).

• Real Estate Commissions: Post-Petition Acts; Pre- or Post-Petition Earnings. The 8th Circuit Bankruptcy Appellate Panel held that real estate commissions paid to an agent after his bankruptcy filing were property of the bankruptcy estate and had to be paid to the trustee. The real estate agent facilitated two binding purchase agreements for the sale of real estate prior to his bankruptcy petition. The purchase agreements each contained numerous contingencies. Debtor testified that after filing the petition, he “worked hard to ensure that all sales closed by scheduling inspections, applying for title work, ensuring that buyers were qualified, [etc.].” The BAP held though that in order for post-petition acts to potentially classify the commissions as post-petition earnings not subject to the control of the bankruptcy estate the debtor must present “evidence that the contract terms were altered by post-petition events so as to alter [the agent’s] interest in receiving the commissions.” As a result, the court required debtor to turn over approximately $41,000 in commissions to the estate. Smith v. Hanrahan (In re Smith), No. 08-6050 (8th Cir. BAP, 03/17/09).

—Mychal A. Bruggeman
Mackall, Crounse & Moore

July 2009

CIVIL LITIGATION
JUDICIAL LAW

• Statement of Entitlement to Relief: “Plain” and “Short.” Fed. R. Civ. P. 8(a)(2) requires a complaint to include “a short and plain statement of the claim showing that the pleader is entitled to relief … .” A local case from 2008provides an example of a complaint that does not comply with this requirement. In this instance, the District of Minnesota concluded that the first amended complaint in the case “was filed in blatant violation of this rule.” The court determined that the complaint was not short because it was 153 pages. The court further determined that it was not plain, calling it “convoluted and confusing.” The court went on to explain:

The plaintiffs’ litigation strategy resembles nothing so much as peine forte et dure—a method of torture by which heavier and heavier weights are placed on the chest of a defendant until the defendant either confesses or suffocates. The plaintiffs apparently intend to make every conceivable claim against every conceivable defendant, bring every conceivable motion in connection with those claims, and make every conceivable argument in support of those motions. The court will not permit the plaintiffs to bury their opponents—and the court—under mountains of paper.

The court therefore dismissed the complaint without prejudice. The court also set specific parameters on any new complaint to be filed, including a 15,000-word limitation and a requirement that the complaint set forth plaintiffs’ claims “plainly and understandably, without advocacy, repetition, or conjecture … .” Murrin v. Fischer, No. 07-CV-1295, 2008 WL 540857 (D. Minn. 02/25/08).

—Haley Schaffer
Maslon Edelman Borman & Brand

July 2009

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

• Age Discrimination; “But For” Test. The U.S. Supreme Court recently decided a complex age discrimination case which will have significant bearing on the Age Discrimination in Employment Act (ADEA), the federal law that prohibits age discrimination in the workplace, as well as parallel state laws including the Minnesota Human Rights Act. The Court affirmed an appeal from the 8th Circuit Court of Appeals, which had overruled a $46,000 jury verdict for an age discrimination claimant. The high court held that in a disparate treatment claim under the act, a claimant has the burden to prove that age was the reason for adverse action, “but for” which the action would not have been taken.

The ruling, by a narrow 5-4 vote, turned on an interpretation of the Court’s prior ruling in Price Waterhouse v. Hopkins, 490 U.S. 228 (1999) in which a majority of justices ruled that a plaintiff in an age discrimination case must show that bias was a “determinative factor” in an adverse employment decision, and that a defendant can affirmatively defend by showing that it would have taken the same action regardless of bias. The Court’s “but for” test creates an extremely high standard for ADEA claimants; moreover, the criterion is likely to be adopted in courts interpreting the age bias provision of the state law. Gross v. FBL Financial Services, 2009 WL 1685684 (2009).

• Americans with Disabilities Act: Perception of Disability. The 8th Circuit Court of Appeals upheld a claim under the Americans with Disabilities Act (ADA) for perception of disability. The case was brought by a traveling salesman who was diagnosed with epilepsy, but showed that he was fit to drive and perform other “essential job” duties without accommodation when he was terminated. The appellate court held that there was sufficient evidence for the jury to find that the salesman was terminated due to a perception of disability, in violation of the “regard as” provision of the ADA. To prevail, the salesman had to sufficiently explain an apparent contradiction of his receiving Social Security benefits, which requires total disability, while still being able to perform the “essential functions” of his job. Finan v. Good Earth Tools, Inc., 565 F.3d 1076 (8th Cir. 2009).

• Employment Discrimination; Denial of Tenure.  A claim by a university faculty member that she was denied tenure due to her national origin, religion, or pregnancy, was rejected by the 8th Circuit Court of Appeals. The appellate court denied the professor’s claim under a “cat’s claw” theory that the upper-level decision makers perfunctorily approved the discriminatory action of lower-tiered personnel. The claimant failed to show any direct evidence of discrimination, that the decision to deny her tenure was pretextual, or that the Board of Regents, through the denial of tenure, merely “rubber stamped” earlier decisions. Qamhiyah v. Iowa State University of Science and Technology, 566 F.3d 733 (8th Cir. 2009).

• Race Discrimination: Insufficient Evidence of Disparate Impact. The 8th Circuit rejected a disparate impact claim by an African-American union member who asserted race discrimination and job placement retaliation by the union. Although the disparate impact claim was dismissed due to insufficient evidence, a retaliation claim survived because of unresolved factual disputes regarding the legitimacy of the union’s nonretaliatory explanations. Franklin v. Local 2 of the Sheet Metal Workers International Association, 565 F.3d 508 (8th Cir. 2009).

• Sex Discrimination: Equal Pay Claim. A claim for violation of the Equal Pay Act, along with Title VII of the Civil Rights Act and a state Human Rights Act claim, was allowed to proceed by the 8th Circuit. Dismissal of the case was reversed after the employer, who paid a higher salary to a male human resource manager than to a predecessor woman in that position, was unable to provide sufficient evidence to explain the undisputed pay disparity. Because the employer did not “identify the factor other than sex” to explain the disparity, the woman employee was entitled to prevail. Drum v. Leeson Electric Corp., 565 F.3d 1071 (8th Cir. 2009).

• Fair Labor Standards Act: Police Officers; Overtime Pay for Meal Time. A claim by police officers of entitlement to overtime compensation under the Fair Labor Standards Act for work performed during their meal times was rejected by the 8th Circuit. Because officers did not establish that they were doing work, or on call for work, while they were eating their meals, their time spent eating meals should not be calculated for overtime pay purposes. Hertz v. Woodbury County, Iowa, 566 F.3d 775 (8th Cir. 2009).

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

LEGISLATION

• Sick & Vacation Leave. A proposal in Congress, backed by Democrats in both houses, would require most employers to guarantee workers up to seven paid sick days per year. Currently, employees are not guaranteed any paid sick leave under federal law, although employees who work, on a full-time basis, for more than a year for employers with 50 or more employees can qualify for unpaid sick leave under the Family Medical & Leave Act (FMLA).

The bill, known as the Healthy Families Act, would cover employers with 15 or more employees. It would guarantee employees one paid hour of sick leave for each 30 hours of work, up to seven sick days per year, which could be used when the employee, a child, parent, spouse, or another close family member was ill. The measure is championed in the Senate by Sen. Edward M. Kennedy (D. Mass.) and Rep. Rosa DeLauro (D. Conn.) is the leading advocate in the House of Representatives. They note, in the preamble of the bill, that nearly half of all private sector workers in this country do not have any paid sick days and about three-fourths of low-wage workers lack such paid sick leave. The new proposal is opposed by many business groups and Republicans, who maintain that it would be too costly for business, especially small and mid-size businesses, particularly in the current economic recession.

Two cities, San Francisco and the District of Columbia, have such measures, and Milwaukee voters approved one last November, although business groups have obtained an injunction preventing its implementation. About a dozen states, including Connecticut and Massachusetts, are debating similar measures, with none pending in Minnesota.

Another bill introduced in the House of Representatives would require large businesses to give workers up to one week paid vacation annually. Known as the Paid Vacation Act, it would cover employers with 100 or more employees during the first three years and then extend to those with 50 or more employees. The same threshold as applies now to the Family & Medical Leave Act (FMLA).

Observers expect the two bills to face a tough time in both legislative bodies this year because of the crowded agenda, including major health care reform proposals. However, the chances of succeeding are viewed as stronger during the next session, which begins in January, because many legislators may be disinclined to oppose measures that are considered “family-friendly” in an election year.

• Wisconsin Discrimination Law. Employment discrimination claimants in Wisconsin may now obtain damages under state law. The State Fair Employment Law was amended this year to allow recovery of compensatory and punitive damages and a 10 percent civil “surcharge” upon a finding by the trial court of discrimination or harassment under state law. Previously, the law only allowed the authorized administrative agency, the Department of Work Force Development, to impose injunctive relief, reemployment, and up to two years’ back pay.

—Marshall H. Tanick
Mansfield Tanick & Cohen, PA

July 2009

ENVIRONMENTAL LAW
JUDICIAL LAW

• MPCA Phosphorous Rule: Standing; Agency Discretion; Rulemaking. The Minnesota Court of Appeals upheld a Minnesota Pollution Control Agency (“MPCA”) rule that limits the amount of phosphorous that new or modified point sources may discharge into waters of the state. The Coalition of Greater Minnesota Cities (“the Coalition”) brought a declaratory judgment challenge to Minn. R. 7053.0255, subp. 4. Under that subpart, point sources subject to the one milligram per liter phosphorous discharge limit under subpart 3 may request an alternative discharge limit from the MPCA. The MPCA then has the discretion to grant that request if the requesting party satisfies one of three conditions under subpart 4. The Coalition claimed the discretion the MPCA gave itself under that subpart violated Minnesota’s Constitution and the Administrative Procedures Act and exceeded MPCA’s regulatory authority. The MPCA countered that the Coalition lacked standing to bring its challenge.

The court of appeals first found the Coalition had standing to bring its challenge. The Coalition was not, the court found, raising a hypothetical situation or a speculative claim of harm. Rather, it was challenging the effects of an overbroad application of the rule, which could interfere with or threaten to interfere with the interests of its members in obtaining exemptions under the new rule. As such, the Coalition could assert its challenge on behalf of those members.

The court then went on, however, to reject all of the Coalition’s arguments challenging the validity of Rule 7053.0255, subp. 4. The Coalition first argued the rule gave the MPCA “unbridled discretion” to grant or deny exemptions to the discharge limit. Such discretion, the Coalition argued, was an unconstitutional grant of purely legislative power to the MPCA in violation of Minn. Const. art. III, §1. After affirming that the granting of at least some discretion to an administrative agency is “permissible and desirable”, the court of appeals rejected the Coalition’s claim that the MPCA’s discretion under the rule is “unbridled.” The rule, the court noted, contains specific criteria for each of the three possible grounds for exemption to the new limit that would constitute a “reasonably clear policy or standard of action” for the MPCA. The court next denied the Coalition’s assertions that the MPCA exceeded its statutory authority by giving itself “unbridled discretion” to grant or deny exemptions to a limit that was itself overly broad. The court again found the discretion given to the MPCA under the rule was appropriate and supported by the administrative record. The Coalition asserted the rule violated public-notice-and-comment rulemaking requirements because it lacked a reasonably clear policy or standard to guide MPCA officials in evaluating requests for exemptions, resulting, again, in a grant of “unbridled discretion” to the MPCA’s administrative officers. The court found that the adoption of the rule actually limited the MPCA’s discretion and that of its officials, as it formalized the bases on which the MPCA could grant or deny an application. Finally, the Coalition claimed the rule would often result in a control whose cost would far exceed its environmental benefit, in violation of the prohibition against “overly prescriptive” rules under Minn. Stat. §14.002. The court held, among other things, that the water quality rules included a variance provision that would allow dischargers to demonstrate, on a case-by-case basis, the phosphorous limit under Rule 7053.0255 did not apply. Coalition of Greater Minnesota Cities v. Minnesota Pollution Control Agency, A08-1198 (Minn. App. 05/12/09). www.lawlibrary.state.mn.us/archive/ctappub/0905/opa081198-0512.pdf

• Water Transfers; NPDES Permit Exemption. On June 4, 2009, the 11th Circuit became the first of the federal appellate courts to uphold 40 C.F.R. §122.3(i), which the U.S. Environmental Protection Agency (“EPA”) finalized in June 2008. That rule exempts the transfer of pollutants from one “water of the United States” to another from the need to obtain a National Pollutant Discharge Elimination System (“NPDES”) permit. The 11th Circuit and others, such as the 2nd Circuit, had previously held that such transfers do require NPDES permits. Those precedents lost their controlling value, however, when the EPA issued its rule specifically exempting such transfers from NPDES permitting requirements. The 11th Circuit was instead faced with the question of whether EPA’s new rule was “a reasonable construction of an ambiguous statute” that warrants Chevron deference. The court found that EPA’s exemption was reasonable and, thus, warranted the court’s deference. Friends of the Everglades v. South Florida Water Management District, ___ F.3d___ (2009).

ADMINISTRATIVE ACTION

• “Solid Waste” Definition; Hearing on Revisions. The U.S. Environmental Protection Agency (“EPA”) published a notice in the May 27, 2009 Federal Register of its intent to hold a public meeting regarding the definition of “solid waste”, which the Bush administration revised in October 2008. The revised rule exempts hazardous secondary materials that are recycled via reclamation from the definition of “solid waste” under the Resource Conservation and Recovery Act. The notice also sought comments on the Sierra Club’s January 2009 petition to repeal the new definition in its entirety. In its May 27 public notice, the EPA stated that it will not consider repealing the new definition, but it is open to hearing comments on potential revisions to the new rule. The meeting will be held June 30, with comments on Sierra Club’s petition due by July 14, 2009. “Definition of Solid Waste Public Meeting,” 74 Fed. Reg. 25200 (05/27/09).

—William P. Hefner
The Environmental Law Group, Ltd.

July 2009

FEDERAL PRACTICE
JUDICIAL LAW

• Fed. R. Civ. P. 8; Pleading “Specific Facts” to Make Claims “Probable.” Building on its 2007 decision in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), a divided Supreme Court rejected the respondent’s argument that the holding in Twombly was limited to antitrust cases, and held that the respondent had failed to allege the “specific facts” required to move his claims “from conceivable to probable.” Justice Breyer’s dissent argued that the majority had misapplied both Twombly and Fed. R. Civ. P. 8, and suggested that the trial courts had “other legal weapons” at their disposal to prevent “unwarranted litigation.”

Like Twombly before it, this decision unquestionably raises the bar for plaintiffs, and the number of Fed. R. Civ. 12(b)(6) dismissals is likely to grow substantially in the coming years unless plaintiffs are careful to allege “specific facts” rather than simply reciting the elements of their claims. Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009).

• Fed. R. Civ. P. 54(b); Partial Summary Judgment; Abuse of Discretion. The 8th Circuit held that a district court abused its discretion in entering judgment for some of the defendants under Fed. R. Civ. P, 54(b), noting that Rule 54(b) certifications should not be granted “routinely,” and finding nothing about the case “that would distinguish it from a mine-run multi-party lawsuit.” Huggins v. FedEx Ground Package, Inc., ___ F.3d ___ (8th Cir. 2009).

• Alleged ECF Notification Failure; Appeal Following Evidentiary Hearing. In October, 2005, this column noted an August, 2005 8th Circuit decision establishing the guidelines that will govern when a party claims that it failed to receive ECF notification. American Boat Co. v. Unknown Sunken Barge, 418 F.3d 910 (8th Cir. 2005). In that decision, the 8th Circuit remanded the action to the district court for an evidentiary hearing on the alleged ECF notification failure.

Almost four years later, and following that evidentiary hearing, the case returned to the 8th Circuit on appeal from a district court order finding that the plaintiffs had failed to rebut the presumption of ECF delivery and receipt. Reviewing the district court’s factual findings for clear error, the 8th Circuit found no clear error in the district court’s application of a presumption of delivery and receipt of the ECF-related emails, or in its ultimate conclusion that the plaintiffs had failed to meet their burden of proof. American Boat Co. v. Unknown Sunken Barge, ___ F.3d ___ (8th Cir. 2009).

• Pleading Elements of Diversity Jurisdiction. In February, 2009, this column noted two decisions by Judge Ericksen expressing obvious irritation with litigants who were unable to properly allege diversity jurisdiction. Sadly, a number of recent litigants have done little to address Judge Ericksen’s concerns.

In the first of these cases, the defendant removed a Minnesota state court action on the basis of diversity jurisdiction, but failed to properly allege the citizenship of the plaintiff limited liability company or its own corporate principal place of business. The parties also stipulated to the joinder of a Minnesota corporation as an additional defendant, possibly compounding the diversity-related issues. Judge Ericksen subsequently issued an order (apparently sua sponte) giving the parties one week to show cause why the action should not be remanded. Judge Ericksen described the removing defendant’s response to her order as a “whiff,” and much of its submission was viewed as “not germane” or “simply irrelevant.” Despite her obvious frustration, Judge Ericksen allowed the parties an additional 15 days to exchange jurisdictional information intended to resolved the jurisdictional issues. Willows on France, LLC v. Am. Fam. Mut. Ins. Co., 2009 WL 1291405 (D. Minn. 05/05/09); Willows on France, LLC v. Am. Fam. Mut. Ins. Co., 2009 WL 1386157 (D. Minn. 05/14/09).

• Pleading Elements of Diversity Jurisdiction II. In a similar case, Judge Ericksen sua sponte questioned the plaintiff limited liability company’s diversity allegations, and allowed the plaintiff one week to establish its citizenship. Judge Ericksen later determined that the plaintiff’s response was deficient as well, as it failed to address the citizenship of the members of an underlying LLC. Plaintiff’s response alleged the “residence” (as distinguished from the “citizenship”) of some of the LLC’s members, and instead of affirmatively alleging the citizenship of certain members it merely alleged that none of the members were citizens of California where the defendant was both incorporated and had its principal place of business. Rather than dismissing the action, Judge Ericksen again allowed the plaintiff a second chance to cure the numerous jurisdictional defects.

Judge Ericksen has issued similar orders in at least two other recent cases (Interplastic Corp. v. Hudson Solid Surfaces Int’l, L.L.C., 2009 WL 1228249 (D. Minn. 05/05/09); Acuity Capital Mgmt., LLC v. MGI Pharma, Inc., 2009 WL 1291479 (D. Minn. 02/12/09). In light of Judge Ericksen’s complaints, litigants are now well advised to make sure that all of their bases are covered when pursuing diversity claims in the District of Minnesota in general, and Judge Ericksen’s courtroom in particular. North Star Grain Int’l, LLC v. Hyundai Syscomm Corp., 2009 WL 1312879 (D. Minn. 05/01/09); North Star Grain Int’l, LLC v. Hyundai Syscomm Corp., 2009 WL 1290228 (D. Minn. 05/11/09).

—Josh Jacobson
Law Office of Josh Jacobson

July 2009

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Copyright: Requirements to Assert Infringement. Judge Frank recently decided a copyright issue of first impression in this circuit: does a plaintiff asserting copyright infringement have to have a certificate of registration before filing suit or is delivering the necessary materials to the Copyright Office enough? The court decided that, although there was a split of authority among other jurisdictions, delivering a deposit, application, and the fee to the Copyright Office for each asserted copyright is enough.

TRI-Marketing sued Border Calls for copyright infringement concerning alleged copying of TRI’s website. TRI did not have a certificate of copyright registration for its website. However, before filing suit, TRI delivered deposits of its website, applications, and fees to the Copyright Office. Bolder Calls brought a motion to dismiss arguing that the court did not have jurisdiction because TRI did not have a certificate of registration from the Copyright Office. In other words, jurisdiction required more than a complete application on file, it required approval by the Copyright Office. The court noted that although the Copyright Act seems to address this point in Section 410: “the day on which the application, deposit, and fee, which are later determined by the Register of Copyrights ... to be acceptable for registration,” is the effective date of registration, it does not specify whether that date is effective upon deposit or only after the registration is later deemed acceptable. The court worked through the two competing approaches (dubbed the “broad” or “application approach” and the “narrow approach”) and sided with TRI and the application approach. “[T]his court endorses the ‘application approach’ to federal jurisdiction over copyright claims. ... [T]he language used ... by the [8]th Circuit suggests that it would adopt the application approach.” TRI-Marketing, Inc. v. Mainstream Marketing Services, Inc. d/b/a Bolder Calls, et al., Civ. No. 09-13 (D. Minn. 05/19/09).

• Copyright Infringement: “Frivolous” or “Baseless” Claim; Attorneys Fees. Judge Frank denied a request for attorneys fees in a different copyright case. Thomsen sued Famous Dave’s for copyright infringement. But the court found that Famous Dave’s owned the copyrights that Thomsen asserted and dismissed Thomsen’s claims. Famous Dave’s asked for its attorney fees under the Copyright Act, which gives courts discretion to award fees and costs “to the prevailing party.” The court agreed that Famous Dave’s was the prevailing party, but declined to award fees because it did not conclude that Thomsen’s claims were frivolous or brought with improper motive and the court was not convinced that Thomsen had no basis for statutory damages. Relying on its discretion, the court reasoned “the [c]ourt rejects the notion that an award of attorney fees ... is appropriate based solely on Thomsen’s claim for statutory [copyright infringement] damages where the crux of his lawsuit was not frivolous or baseless.” Thomsen v. Famous Dave’s of America, Inc., et al., Civ. No. 07-1989 (D. Minn. 06/01/09).

—Tony Zeuli
Merchant & Gould

JUVENILE LAW
JUDICIAL LAW

• Termination of Parental Rights; Risk of Harm to Others; Equal Protection. Where an individual whose parental rights had been involuntarily terminated challenged the Department of Human Services’ refusal to set aside her disqualification from providing direct contact services to persons served by licensed facilities, the Minnesota Court of Appeals held that prohibiting the commissioner from issuing a waiver for one whose parental rights were involuntarily terminated violated equal protection in circumstances when the commissioner was not similarly prohibited from setting aside the disqualification for those whose parental rights had been terminated voluntarily.

Under the Department of Human Services Background Studies Act, an individual whose parental rights were involuntarily terminated is permanently disqualified from providing direct contact services to persons served by a licensed facility, and the Commissioner of Human Services is prohibited from setting aside the disqualification. The relator argued that disqualifying her based on the involuntary termination of her parental rights or refusing to set aside the disqualification without considering evidence that she poses no risk of harm constitutes an abuse of discretion and violates the equal protection, due process, and remedies clauses of the Minnesota Constitution.

The court of appeals held that because the voluntary or involuntary nature of a termination proceeding is not a rational basis for predicting the risk of harm that an individual poses to persons served by a licensed facility, prohibiting the commissioner from setting aside the disqualification of an individual whose parental rights were involuntarily terminated under circumstances where the commissioner could set aside the disqualification if the individual’s parental rights had been voluntarily terminated is a denial of equal protection under the Minnesota Constitution. Murphy v. Minnesota Commissioner of Human Services and Minnesota Commissioner of Health, A08-1042, A08-1148 (Minn. App. 05/05/09). www.lawlibrary.state.mn.us/archive/ctappub/0905/opa081042-0505.pdf

• Termination of Parental Rights; Default Judgment; Due Process. In an unpublished decision, the Court of Appeals reviewed a challenge by a mother to the district court’s default termination of her parental rights but found no procedural defect to support her due process claim. Hennepin County filed a CHIPS petition against the mother based on an incident of domestic violence that occurred between the mother and the one of the fathers of her children, and on reports that the mother used alcohol and marijuana daily. Her two children were placed under protective supervision conditioned on her compliance with a court-ordered case plan. The case plan required her to submit to urinalysis, attend domestic abuse counseling, provide safe and suitable housing for her two children, attend individual therapy, remain available to her social worker, and complete a parenting assessment and follow those recommendations. Subsequently, an amended petition was filed, asserting a new finding of maltreatment based on neglect of the children and allegations that she was not in compliance with provisions of her case plan. A second emergency protective hearing was held and the children were ordered to out-of-home placement.

The district court then held a pretrial hearing. Here the mother waived her right to a trial and admitted her chemical dependency affected her ability to parent. The district court transferred legal and physical custody to the county and ordered a case plan for reunification. After the mother once again failed to comply with the terms of her case plan, the department filed a permanency petition to terminate her parental rights or to transfer permanent, legal, and physical custody of her children. She was personally served with a summons and permanency petition and she denied the petition at the admit/deny hearing. A pretrial conference was scheduled and the mother signed a hearing notice that explained the consequences for failure to appear, including permanent termination of her parental rights.

The mother again failed to appear at the pretrial hearing and the pretrial conference was rescheduled. The district court then scheduled a trial on the permanency petition and the mother did not appear at the trial because she was incarcerated at the Hennepin County Public Safety Facility on suspicion of kidnapping and deprivation of parental rights following her alleged abduction of one of her children. Her attorney was present at the permanency trial and participated in rescheduling the trial to another date. The district court sent notice of the new trial date to the mother at her home address. The notice was returned to the district court as undeliverable. The mother’s attorney appeared at the permanency trial but the mother did not appear. Her social worker testified that her whereabouts were unknown. The district court granted the county’s request to proceed by default. The mother’s attorney did not object. The assigned social worker and the guardian testified in support of the termination of the mother’s rights and the district court received several documents into evidence. At the time of the default proceeding, the mother’s children had been in continuous out-of-home placement for 13 months.

The mother subsequently filed a motion to reopen the default termination, explaining that on the day of the default proceeding she had appeared in Hennepin County District Court for a hearing on a criminal case and was arrested on an outstanding felony warrant. The mother’s attorney argued that she was unaware that both of the court dates were at the same time, that she was in custody while the district court held the termination of parental rights trial, but as soon as she realized, she called her attorney immediately. The district court denied the mother’s motion to reopen the default judgment and the mother appealed.

Two of the three court of appeals judges hearing the matter held that the district court did not abuse its discretion by refusing to reopen the default termination of the mother’s parental rights because mother failed to establish a reasonable defense on the merits and failed to establish that reopening the default judgment would not substantially prejudice an opposing party. The majority noted that while the mother had a reasonable excuse for her failure to appear because she was taken into custody on a bench warrant and that she had acted with due diligence by promptly contacting her attorney following the default judgment, they also noted that the mother had failed to comply with her case plan and other issues, and that delaying permanency would substantially prejudice the children’s best interest as represented by the guardian ad litem. The majority also found that the mother failed to demonstrate a procedural defect that justified reopening the default judgment based on a due process argument, even though the notice of the trial date that was sent to the mother’s address was returned to the court as undeliverable.

Judge Stauber dissented from the majority, observing that the mother was denied fundamental due process rights and was entitled to have an opportunity to appear and present a defense. He further observed that any inconvenience to the system would have been minimal when weighed against the mother’s due process rights. He went on to note that the district courts and the state continue to ignore the cautionary suggestions of the court of appeals and the supreme court that a trial court should not adopt verbatim a party’s proposed findings and conclusions. “This troublesome policy continues unabated.” In the Matter of the Welfare of the Children of: M.F., C.J., and R.T., A08-1688 (Minn. App. 05/19/09).

—Gary A. Debele
Walling, Berg & Debele PA

July 2009

PROBATE & TRUST LAW
JUDICIAL LAW

• Trust Administration; Distributions that Discharge Trustee’s Support Obligation; Remedy for Violation. The Minnesota Court of Appeals has affirmed a trial court’s finding that no damages should be awarded against a trustee for making distributions to pay for nursing home and medical costs of a trust beneficiary who was the trustee’s wife, even though the distributions were in violation of Minn. Stat. §501B.14.

In 1994, Naomi Margolis established a revocable trust and named herself and her husband, Jack, as trustees. In 2001, Naomi’s health deteriorated and she became incapacitated. Jack admitted Naomi to a nursing home, and signed a contract under which he became jointly and severally liable with Naomi for the nursing home’s charges. Between 2001 and Naomi’s death in 2004, Jack spent over $200,000 of trust assets on Naomi’s nursing home and medical expenses. The trust document authorized distributions to provide for Naomi’s support, maintenance and health, but under Minn. Stat. §501B.14, a trustee is prohibited from making discretionary distributions to discharge any support or other legal obligation of the trustee. Because Jack was legally obligated to pay Naomi’s nursing home costs, the court of appeals held in a prior decision that his distributions violated the statute. In re Revocable Trust of Margolis, 731 N.W.2d 539, 544-45 (Minn. App. 2007) (“Margolis I”). The Margolis I decision remanded the case to the trial court, for a determination of the appropriate damages, if any.

On remand, the trial court found that no damages should be awarded. The trial court based its order on two grounds. First, the trust document authorized distributions to provide for Naomi’s support, maintenance and health, and the trial court found that it was Naomi’s intention that the trust funds be used to pay for her nursing home and medical expenses. Second, the trust document provided that individual trustees would not be held liable for any loss or injury “except as a result of actual fraud or willful misconduct.” The trial court found that this exculpation clause excused Jack from liability because he was unaware that his distributions were illegal.

The court of appeals affirmed the trial court’s order. In its decision, the court of appeals noted that in Margolis I, it had rejected Jack’s argument that his violation of Minn. Stat. §501B.14 should be ignored because the statute was enacted for the purpose of avoiding adverse gift and estate tax consequences (under federal tax law, a trustee who can make distributions to discharge a support obligation has a general power of appointment over the trust assets). The court held, however, that the tax-avoidance purpose of the statute was relevant in determining the appropriate remedy for a violation. The court held that because the purpose of the statute was not to avoid self-dealing, but to avoid adverse tax results, there was no public policy reason not to enforce the exculpatory clause. The court also affirmed the trial court’s finding that Jack’s attorney fees should be paid from the trust, and that he was not liable for the attorney fees of the beneficiaries who challenged the distributions. In re: The Naomi Margolis Revocable Trust A08-1407 (Minn. App. 06/02/09). www.lawlibrary.state.mn.us/archive/ctappub/0906/opa081407-0602.pdf

• Medical Assistance; Support Trust vs. Discretionary Trust. The Minnesota Court of Appeals held that a trust was a support trust even though the trust document did not specifically require or authorize distributions for the beneficiary’s “support.” The trust document directed the trustee to distribute all income to the beneficiary unless the beneficiary “has other adequate income,” and authorized distributions of “such sums of principal (including all thereof) as the trustee deems advisable.” The court of appeals held that the trust was a support trust as to both income and principal.

Under Minnesota law, a “support trust” is an available asset for purposes of determining a beneficiary’s eligibility for medical assistance, because the beneficiary has a legal right to compel distributions to provide for his support. See Appeal of Lillian Flygare for Medical Assistance, 725 N.W.2d 114, 120 (Minn. App. 2006). A beneficiary’s interest in a discretionary trust, on the other hand, is a “mere expectancy” which does not rise to the level of a property interest and does not disqualify the beneficiary from receiving medical assistance. See United States v. O’Shaughnessy, 517 N.W.2d 574, 577 (Minn. 1994); Flygare, 725 N.W.2d at 120.

In this case, the court of appeals held that because the trustee was directed to determine whether the beneficiary’s other income was “adequate,” the beneficiary had a right to compel income distributions if she did not have adequate income to provide for her support. In addition, although the trust document allowed distributions of principal “as the trustee deems advisable,” the court held that this language should be interpreted as requiring a determination of whether the beneficiary had adequate other income to provide for her support, in light of the income distribution language. Judge Ross dissented from this second part of the holding, stating that “I believe that the language directing disbursement of the trust principal vests sole disbursement discretion in the trustee.” In the Matter of the Wilcox Trust, A08-1458 (Minn. App. 05/19/09). (unpublished) www.lawlibrary.state.mn.us/archive/ctapun/0905/opa081458-0519.pdf

• Attorney Fees; Calculation of Contingent Fee Payable from Trust. Where a contingent fee arrangement signed by trust beneficiaries required a fee based on the “amount recovered,” and the beneficiaries obtained an order directing that their attorney fees be paid from the trust, the court of appeals affirmed the trial court’s determination that the contingent fee should be based on the amounts recovered by the beneficiaries not including the attorney fee award. The court of appeals held that an ambiguous fee agreement should be construed against the drafting attorney. In the Matter of the Lyons Family Trust, A08-1134 (Minn. App. 05/12/09). (unpublished) www.lawlibrary.state.mn.us/archive/ctapun/0905/opa081134-0512.pdf

• Appointment of Special Administrator; Duty to Ascertain Existence of Interested Parties. The Minnesota Court of Appeals held that appointment of a special administrator is improper where the petitioning party does not exercise reasonable diligence to ascertain the identity of the interested parties. A person injured in an automobile accident petitioned for appointment of a special administrator of the estate of the driver of the other vehicle, who had died after the accident. A special administrator was appointed, and the injured party served the administrator with a complaint. The decedent’s daughter was later appointed as personal representative, and took the position that appointment of a friend of the plaintiff’s attorney as special administrator was improper because the daughter and the other parties interested in the estate had priority for appointment as personal representative and could have been identified easily by reading the decedent’s obituary. The trial court found that appointment of the special administrator was improper and that service of process on the administrator was ineffective. The Minnesota Court of Appeals affirmed.  Artishon v. Estate of Swedberg, A08-0492 (Minn. App. 04/21/09). (unpublished) www.lawlibrary.state.mn.us/archive/ctapun/0904/opa080492-0421.pdf

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

REAL PROPERTY
JUDICIAL LAW

• Equitable Subrogation; Failure to Timely Record Mortgage. A property owner refinanced two existing mortgages on its property with a new mortgage to a bank, which intended to have a first lien on the property. The funds from the bank’s mortgage paid off and satisfied the two existing mortgages. The bank’s mortgage was not recorded until approximately 50 days after closing due, in part, to an incorrect mortgage registry tax amount accompanying the mortgage the first time it was sent for recording. Before the bank’s mortgage was recorded, the property owner gave a mortgage to another entity, which on its face indicated the mortgage was subject to the previous two mortgages that were paid off by the bank’s mortgage. The subsequently given mortgage was recorded before the bank’s mortgage. Neither mortgagee had knowledge of the other’s mortgage. The bank sought to have its later recorded mortgage equitably subrogated to the lien rights of the previous two mortgages its loan refinanced and paid off. The parties agreed that, absent the application of equitable subrogation, the recording act gave the earlier recorded mortgage priority over the bank’s later recorded mortgage.

The district court granted the application of the equitable subrogation based on the fact that the mortgagee of the subsequently given, but earlier recorded mortgage would not be prejudiced by the application of the equitable subrogation. The district court reasoned that the subsequently given, but earlier recorded mortgagee bargained to have a third mortgage behind the two previous mortgages that were paid off by the bank’s mortgage, and in fact, would receive a windfall if it were elevated to a first mortgage priority due to the bank’s mistake.

The court of appeals reversed and held that, despite the resulting windfall to the earlier recorded mortgage, the bank was not entitled to equitable subrogation because by failing to timely record its mortgage, the bank did not act under a “justifiable or excusable mistake.” The court of appeals also noted that the bank was a sophisticated party and is held to a higher standard than an unsophisticated party.

A concurring opinion joined the result of the majority based on a single prior court of appeals opinion that mandated reversal, but concurred separately because the prior court of appeals opinion relied upon by the majority deviated from well-established supreme court precedent on equitable subrogation. The concurring opinion noted that no supreme court case had ever refused to apply equitable subrogation where the application would not prejudice a third party. The concurrence stated a license for an unjustified windfall by a third party due to another’s mistake erodes the long-established principles of real estate law and practice in Minnesota. The long established supreme court precedent, according to the concurring opinion, is that a party claiming equitable subrogation will be excused from its mistake where (1) the claimant made a good faith payment of a prior obligation, and (2) the intervening mortgagee knew it had a lower-priority mortgage so it would not be prejudiced by the application of equitable subrogation. The concurring opinion further noted that the well-established supreme court precedent on equitable subrogation is consistent with the Restatement of Property.  Citizens State Bank v. Raven Trading Partners, Inc., A08-1560, 2009 WL 1515585 (Minn. App. 2009). (unpublished) www.lawlibrary.state.mn.us/archive/ctapun/0906/opa081560-0602.pdf

• Registered Land Survey; Boundary Dispute; Statute of Limitations. Lake property containing a peninsula was registered in 1960. The property owners thereafter received a registered land survey, which failed to show the peninsula. In 1962, the property owners conveyed the northern portion of the property and retained the southern portion of the property. In 1965, the owners of the southern portion obtained a new registered land survey and subdivided some of their remaining land into individual tracts. The 1965 registered land survey showed the peninsula as part of new Tract K, but also locates the peninsula north of the boundary line established by the 1962 conveyance. The owners of Tract K commenced proceedings subsequent to initial registration to cancel the certificate of title of the owner of the northern portion and issue a new certificate of title altered it to exclude the peninsula, pursuant to Minn. Stat. §508.71. The owners of the northern portion commenced a similar proceeding subsequent. The two proceedings were consolidated. The district court found that the peninsula was part of Tract K pursuant to the 1965 registered land survey, and that the owners of the northern portion were time-barred from challenging the 1965 registered land survey pursuant to Minn. Stat. §508.28, which prohibits any action for the recovery of any right, title, interest, or estate in registered land adverse to the decree unless it is brought within six months of the decree. The owner of the northern portion appealed. The court of appeals reversed and remanded. The court of appeals ruled that the six-month statute of limitations set forth in section 508.28 applies to decrees of registration and not registered land surveys. The owner of Tract K argued that the statute of limitations for a challenge to the original certificate of title of Tract K, based on the 1965 registered land survey, began upon the issuance of that certificate of title in 1965. The court of appeals disagreed and ruled that neither the filing of the 1965 registered land survey, nor the subsequent certificate of title for Tract K arose out of a decree of registration or a proceeding subsequent to the initial registration. The court of appeals found no time limitation for actions to challenge registered land surveys or to determine legal descriptions or boundary lines not determined in registration action or proceeding subsequent. In this case, the 1960 registration action did not establish the legal description of the peninsula or the boundary lines in dispute and neither party has challenged the 1960 registration decree. Thus, the court of appeals reversed the district court’s ruling and remanded for further proceedings to decide a laches claim and suggested the parties amend their complaints to plead a boundary line determination pursuant to Minn. Stat. §508.671. In re Petition of Hauge, A08-0908, 2009 WL 1444110 (Minn. App. 2009). www.lawlibrary.state.mn.us/archive/ctappub/0905/opa080908-0526.pdf

• Eminent Domain. An economic development authority (“EDA”) targeted an area for redevelopment because it fell short of its economic potential and redevelopment would not occur solely through private investment in the reasonably near future. The city that created the EDA established a tax-increment-financing district (“TIF”), adopted a redevelopment plan, and resolved that the city, along with the EDA, would implement the plan. The redevelopment plan incorporated in the city council’s resolution stated that prior to the acquisition of any property, the city will require the execution of a binding development agreement. At no point did the city enter into a binding development agreement. The EDA began purchasing properties but could not negotiate purchases on all the properties before the expiration of the TIF, whose funds were necessary to acquire the properties. The EDA exercised eminent domain on the remaining parcels based on its findings that the area was blighted, the redevelopment would lead to substantial economic development, the area was detrimental to the safety and welfare of the residents, redevelopment would help eliminate blight and increase the tax base, and it needed to acquire the properties before the TIF expired. The EDA sought a quick-take condemnation in district court. After an evidentiary hearing, the district court concluded the EDA’s action would further a public purpose, was necessary to redevelop the district, and could use the quick-take condemnation provisions because condemnation was necessary to obtain a binding development agreement and to utilize the TIF reimbursement funds. On appeal, the court of appeals reversed. The court of appeals noted that whether a condemning authority has the power to condemn property is a question of law. The court of appeals found that the EDA’s powers are limited by the scope of the authority that the city transfers to it. In this case, the city placed a restriction on itself that prohibited the acquisition of property until the city had a binding development agreement. The court of appeals ruled that this restriction applied to the EDA. Therefore, the court of appeals concluded that the EDA had no authority under the city’s resolution to condemn property before the city executed a binding development agreement. Eagan Economic Development Authority v. U-Haul Co. of Minnesota, A08-0767, 765 N.W.2d 403 (Minn. App. 2009). www.lawlibrary.state.mn.us/archive/ctappub/0905/opa080767-0519.pdf

—Michael E. Kreun
Beisel & Dunlevy PA

TAX
JUDICIAL LAW

• Tax Strategy Patents; Test for Patentability. The U.S. Supreme Court granted certiorari in a case in which the Federal Circuit implicitly rejected the test for patentability that permitted business methods to be patentable, and instead stated that a “machine-or-transformation” test is the sole test for subject matter eligibility for a claim of patentability for a process. Although the case does not address directly the patentability of tax strategies, the case nonetheless impacts tax strategy patents. Bilski v. Doll, No. 08-964 (cert. granted U.S. 06/01/09) (2009).

• Cert. Denied: Riverboat Casinos, Filing False Tax Returns; Federal Preemption. The Supreme Court declined to take up several tax-related cases, including an Illinois case in which the taxpayers challenged an Illinois law that imposes a special tax on riverboat casinos. The challengers claimed that the tax constituted a taking, and violated the 5th Amendment. Empress Casino Joliet Corp. v. Giannoulias, No. 08-945 (cert. denied U.S. 06/08/09) (2009). Review was also denied to a 3rd Circuit decision holding that filing false tax returns through the United States mail supported a conviction of mail fraud under the federal international money-laundering statute. Yusuf v. United States, No. 08-981 (cert. denied U.S. 06/08/09) (2009). Yet another cert. denial will leave undisturbed a Utah Supreme Court decision. The question presented was “Whether federal regulations ... barring the payment of interest on escrow funds ‘except as provided by contract’ preempt Utah law … holding that the banks must pay profits earned on ‘pledged’ funds.” Madsen v. JP Morgan Chase Bank NA , No. 08-1098 (cert. denied U.S. 06/08/09) (2009).

• False Claims Act; Government as “Party to Action”; Time to Appeal. The U.S. Supreme Court upheld dismissal of a qui tam action after the plaintiffs failed to file a timely appeal. Several New York City employees challenged a law that subjected nonresident New York City employees to a special fee. The employees alleged that the ordinance violated the Federal False Claims Act, and filed their case as a qui tam action in the United States District Court for the Southern District of New York. The district court dismissed the case for failure to state a claim, and 54 days later, Eisenstein appealed. Litigants have 30 days to file a notice of appeal, unless the government is a party to the action, in which case, the time to appeal is 60 days. The 2nd Circuit found the district court properly dismissed the action, reasoning that the government, while a “party of interest” was not a party to the action for purposes of extending the time to file an appeal. The Supreme Court affirmed: “When the United States has declined to intervene in a privately initiated FCA action, it is not a ‘party’ to the litigation for purposes of either §2107 or Federal Rule of Appellate Procedure 4.” United States ex rel. Eisenstein v. New York, No. 08-660 ___ U.S. ___ (U.S. 06/08/09) (2009).

• Partner-Level Proceedings; Jurisdiction to Review Motivation. Walter J. Hoyt III “organized, promoted, and operated more than 100 cattle- and sheep-breeding partnerships from the 1970s through the 1990s. The cattle partnerships ... were touted as ‘The 1,000 lb Tax Shelter.’” The tax shelters led to a “growing line of cases arising out of the tangled tax liabilities of Hoyt partnerships” including an appeal recently decided by the United States Court of Appeals for the 9th Circuit. In this consolidated appeal, the 9th Circuit reversed the tax court’s determination that it lacked jurisdiction in partner-level proceedings to determine whether the partnerships’ transactions were tax-motivated for the purposes of Section 6621(c). The circuit court upheld other portions of the tax court’s decision. Keller v. Commissioner, No. 06-75466 (9th Cir. 06/03/09).

• Corporate Franchise Tax Assessment; Captive REIT Structure. Transactions and transfers between taxpayer and its subsidiaries under a captive REIT (real estate investment trust) structure were “part of a sophisticated tax avoidance plan” and “had no real business purpose or economic substance.” The Minnesota Tax Court, the Honorable Kathleen H. Sanberg, therefore affirmed the Commissioner of Revenue’s Notice of Change in Tax, assessing additional corporate franchise tax. HMN Financial, Inc. v. Comm’r, No. 7911-R (Minn. Tax Regular Div. 05/27/09).

• REITs as Tax Shelters; Wal-Mart; North Carolina Tax Calculation. The North Carolina Court of Appeals ruled that North Carolina’s state revenue secretary acted within his authority when he combined the finances of multiple subsidiaries to determine Wal-Mart’s North Carolina tax bill. The court reasoned that “[t]he language of the statute is broad, allowing the secretary to require combined reporting if he finds as a fact that a report by a corporation does not disclose the true earnings of the corporation on its business carried on in this state.” Wal-Mart’s strategy involved transferring its stores to REITs (real estate investment trusts) owned by Wal-Mart subsidiaries in Delaware and then deducting rental payments to the REITs. According to a 2007 Wall Street Journal report, Wal-Mart uses, or has used, this strategy in at least 25 states. Wal-Mart Stores East, Inc. v. Hinton, No. 08-450 (N.C. Ct. App. 05/19/09).

ADMINISTRATIVE ACTION

• Work Opportunity Tax Credit (WOTC). The IRS has provided guidance on the extension of the WOTC to unemployed veterans and disconnected youth who begin work for an employer during 2009 and 2010. Transition relief from certification requirements is also available for workers hired during the first part of 2009. The Service said in a news release (IR-2009-55) those businesses have until Aug. 17 to request the certification required for these workers. Employers can use the updated Form 8850 to request certification from their state workforce agency.

• Impact of Government Stock Acquisition for Purposes of 409A Change of Control. The Internal Revenue Service issued Notice 2009-49, which provides that if the Treasury Department (or an entity acting on its behalf) acquires preferred stock, common stock, warrants to purchase common stock or other types of equity of a financial institution or other entity pursuant to the Emergency Economic Stabilization Act of 2008 (Pub. L. No. 110-343), then for purposes of §1.409A-3(a)(5), such a transaction is not a change in ownership or effective control, or a change in the ownership of a substantial portion of the assets of the corporation and, accordingly, is not a permissible §409A payment event.

• Changes for Tax Return Preparers in the Works for This Year. IRS Commissioner Doug Shulman announced in IR-2009-57 that by the end of 2009, he will propose a comprehensive set of recommendations to help the Internal Revenue Service better leverage the tax return preparer community with the twin goals of increasing taxpayer compliance and ensuring uniform and high ethical standards of conduct for tax preparers. Potential recommendations noted in the release include a new model for the regulation of tax return preparers; service and outreach for return preparers; education and training of return preparers; and enforcement related to return preparer misconduct.

• Substantiation Rules for Employer-Provided Cell Phones. Apple recently announced its new iPhone 3G S. On the same day, the IRS announced that it was considering new rules that would allow your employer to give you an iPhone (or any cell phone) on a tax-free basis. 26 U.S.C. §280F requires that employers include in an employee’s W-2 income the value of employer-provided cell phones unless the employee satisfies substantiation rules. In Notice 2009-46, the IRS requested comments on three alternative methods to simplify the substantiation rules for employer-provided cell phones.

• States Face Lowered Revenue Collections. A June 4 report from the National Conference of State Legislatures reports “more than half the states reported that through April, year-to-date revenues from every major tax source were below collections when compared to the same period last year, and many by significant margins.” The report, State Tax Performance Through April 2009, is available at www.ncsl.org/documents/fiscal/StateTaxPerformanceJune2009.pdf.

• Smokers Rethinking Florida Retirements. Florida Gov. Charlie Crist (R) signed a bill (S.B. 1840) to increase the state tax on a package of cigarettes by $1. The new “surcharge” comes on top of a current 33.9 cent per-pack tax.

• California: Revenue Collections to be Revamped? In a speech to a joint session of the Legislature, Gov. Arnold Schwarzenegger (R) cautioned that the state is headed for insolvency unless drastic budget cuts are enacted and the size of state government is quickly and dramatically reduced. In a prepared text of the speech, Gov. Schwarzenegger said, “[B]ecause of [the global financial crisis] and because of California’s outdated and volatile tax system, our revenues have dropped 27 percent from last year.” Schwarzenegger promised to propose legislation to merge state tax collections under one agency, and argued against raising taxes.

• North Carolina: State Tax Incentives for Economic Development. In what has been reported as an incentive for Apple to build a new data center in North Carolina, the state has changed its corporate tax law so that only sales will be considered for purposes of a multistate company’s North Carolina corporate income tax liability under certain conditions specified in a bill (S.B. 575).

LOOKING AHEAD

• Stepped-Up Enforcement Against Tax Evaders. The OECD’s Forum on Tax Administration was held in Paris on May 28-29, 2009. In a speech to the Forum, IRS Commissioner Doug Shulman noted “the IRS has been stepping up enforcement measures” and warned that the IRS is “aggressively tracking down tax evaders hiding their wealth overseas and the promoters who aid and abet these schemes.” He continued, “[w]e are steadily increasing the pressure on offshore financial institutions that facilitate concealment of taxable income.”

• Work-Product Privilege; Tax Accrual Work Papers Case. The U.S. Court of Appeals for the 1st Circuit, sitting en banc, heard argument by government and Textron, Inc. lawyers in a dispute about whether the work-product privilege protects companies’ so-called tax accrual work papers and would have remanded. In January this year, a divided panel held that the IRS was not entitled to the papers, but that the question of whether turning those documents over to Textron’s auditor waived the privilege. The 1st Circuit subsequently voted to hear the case en banc, and therefore the panel opinion and the dissent released on January 21, 2009 were withdrawn, and the judgment entered on January 21, 2009 was vacated. U.S. v. Textron, Inc. 560 F.3d 513 (1st Cir. 2009) (ordering en banc hearing and withdrawal of opinion and dissent).

• Criminal Tax Fraud; Tax Shelters; Attorneys, Accountants Indicted. Three former shareholders of the Jenkens & Gilchrist firm, along with executives from the BDO Seidman accounting firm, have been indicted on charges of tax fraud conspiracy and related crimes arising out of tax shelters promoted by the law and accounting firm. According to a press release from the U.S. Attorney’s Office for the Southern District of New York, the fraudulent tax shelters, including shelters referred to as “Short Sales,” “Short Options Strategy,” (“SOS”), “Swaps,” and “HOMER,” generated more than $7 billion in false and fraudulent tax losses.

Shortly before the indictment was released, a former vice-chairman and board member at BDO Seidman pleaded guilty to a three-count felony Information charging him with conspiracy to defraud the United States in connection with tax shelter transactions involving clients of his firm and of Jenkens & Gilchrist.

• Exclusion from Income of Employer-Sponsored Health Insurance; Elimination Unlikely. The value of employer-provided heath insurance is not included in income for federal tax purposes; this exclusion is one of the largest federal tax expenditures, estimated to cost $226 billion a year (estimate by the congressional Joint Committee on Taxation). The exclusion has been criticized as poorly targeted, and possibly increasing the cost of health care, but the exclusion is longstanding, and surveys of taxpayers suggest the exclusion is popular. Senate Finance Committee Chairman Max Baucus (D-Mont.) is reportedly open to capping the current tax exclusion for employer-provided health coverage and tapping the proceeds to help provide coverage for all of the uninsured. Following a meeting with the president, Senator Baucus suggested that President Obama would be open to a cap.

—Morgan L. Holcomb
Hamline University School of Law

TORTS & INSURANCE
JUDICIAL LAW

• Breach of Fiduciary Duty; Nature of Advisor-Student Relationship. The Minnesota Court of Appeals considered claims arising from counter-allegations of theft of intellectual property, breach of fiduciary duty, and plagiarism between a doctoral candidate and an academic advisor who extensively collaborated in completing the candidate’s dissertation. While the advisor and doctoral candidate discussed a potential business relationship arising from ideas in the dissertation, the business relationship never developed and no money or valuable consideration changed hands. The two ultimately disagreed about how to attribute credit for abstract theoretical concepts that they had discussed. After a bench trial, the district court concluded that the doctoral candidate and her advisor were in a fiduciary relationship and the advisor breached her fiduciary duties. The court of appeals reversed.

The court of appeals held that the advisor-student relationship is not a fiduciary relationship per se, reasoning that the relationship includes none of the pecuniary obligations found in trusting relationships traditionally recognized to be fiduciary per se. The court also held that the circumstances of the case did not support a finding of a de facto fiduciary relationship. Relevant to the court was that the advisor’s independent obligations to the university by which she was employed prevented her from being bound to act only for the doctoral candidate’s benefit on all matters. The court went on to state that even if the advisor and doctoral candidate were in a fiduciary relationship, the evidence did not support the conclusion that the advisor failed to satisfy any purported fiduciary obligation or, more specifically, that she was otherwise obligated to withhold merited accusations of plagiarism. Swenson v. Bender, A08-576 (Minn. App. 04/28/09). http://www.lawlibrary.state.mn.us/archive/ctappub/0904/opa080576-0428.pdf

• No-Fault Jurisdictional Limit for Mandatory Arbitration. A no-fault claimant mailed a no-fault arbitration petition to the American Arbitration Association (“AAA”) on May 27, 2007. The petition claimed medical expenses totaling less than the $10,000 jurisdictional limit for mandatory arbitration and was stamped “received” by the AAA on May 29. The claimant subsequently underwent spinal surgery on May 29, the cost of which was over $40,000. The claimant’s no-fault insurer brought a motion to stay the arbitration, arguing that the claimant’s medical expenses exceeded the jurisdictional limit. The district court agreed and ordered the AAA to dismiss the petition. The court of appeals affirmed.

Minn. Stat. §65B.525, subd. 1, provides for mandatory, binding arbitration of a no-fault claim “where the claim at the commencement of arbitration is in an amount of $10,000 or less.” No-fault arbitration rules provide that arbitration is “commenced” by the filing of the petition and required fee. The court of appeals held that a no-fault arbitration petition is filed when the AAA receives the petition as opposed to when the claimant mails it. Accordingly, the petition at issue was filed on May 29.

The court then considered when the claimant’s surgery expenses were incurred and determined they were incurred at the time the petition for arbitration was filed as opposed to after it was filed. As such, the claim exceeded the jurisdictional limit for mandatory arbitration. In so holding, the court did not entertain the claimant’s argument that he was not likely billed for his May 29 surgery until after the AAA received his petition in the mail, holding the court had a duty to interpret and uphold the provisions of the No-Fault Act and no-fault arbitration rules without reaching an absurd result. State Farm Mut. Ins. Co. v. Frelix, A8-1045 (Minn. App. 04/28/09). www.lawlibrary.state.mn.us/archive/ctappub/0904/opa081045-0428.pdf

• Negligence; Homeowners; No Duty to Protect from Unforeseeable Harm. A three-year-old child was seriously injured by a falling bookcase while a guest at a neighbor’s home. The child’s father sued the homeowners, alleging that their negligent failure to secure the empty bookcase to the wall caused his son’s injuries. The district court granted the homeowners’ motion for summary judgment, holding that the injury was not foreseeable, and the court of appeals affirmed.

The Minnesota Supreme Court affirmed. The court held that the homeowners owed a duty of reasonable care for the safety of all persons invited upon the premises, which extended to foreseeable risks of harm. The court reasoned that, while it is conceivable that a three-year-old child may climb upon a freestanding bookcase, it is not objectively reasonable to expect homeowners to foresee that a guest—even a child—will climb upon the bookcase or to expect the homeownersto guard against that possibility. The harm to the child in this case was not foreseeable; thus, the homeowners owed no duty to prevent that harm as a matter of law.

Although the homeowners disposed of the bookcase after being contacted by an insurance representative, a discovery sanction was not warranted. Plaintiff claimed the bookcase may have had stickers warning it could fall over. However, the court reasoned that the disposal resulted in no prejudice to plaintiff because the homeowners admitted knowing that the bookcase could fall. Foss v. Kincade, A07-313 (Minn. 05/14/09). www.lawlibrary.state.mn.us/archive/supct/0905/OPA070313-0514.pdf

• Targeted Tender; Constructive Loan Receipt. The Minnesota Court of Appeals was presented with the following certified question: “Can a court order primary insurers, who insure the same insured for the same risks, and whose policies are triggered for defense purposes, to be equally liable for the costs of defense where there is otherwise no privity between the insurers?” Cargill contended that it could select Liberty Mutual as the sole carrier to defend underlying actions without any right of Liberty Mutual to seek contribution from Cargill’s other insurers. Cargill had refused to enter into a loan receipt agreement with Liberty Mutual that would have allowed Liberty Mutual to seek contribution from over 50 other insurers who allegedly had a duty to defend Cargill in the underlying lawsuits. Liberty Mutual, which had already accepted the tender of defense, brought a cross-motion seeking an order creating a constructive loan receipt agreement that would allow it to pursue contribution from other insurers.

Although the Minnesota Court of Appeals agreed with Cargill that Iowa Nat’l Mut. Ins. Co. v. Universal Underwriters Ins. Co., 276 Minn. 362, 150 N.W.2d 233 (1967) controls the issue of whether a loan receipt agreement is necessary to apportion defense costs among other insurers, the court also noted that Cargill had a duty to cooperate with its insured. See Jostens, Inc. v Mission Ins. Co., 387 N.W.2d 161 (Minn. 1986). Therefore, although absent a loan-receipt agreement Liberty Mutual was not entitled to contribution from other co-primary duty-to-defend insurers, a court may order a loan receipt to prevent an insured from strategically selecting one insurer to bear the entire defense burden. “The principles of good faith and fair dealing impose an affirmative obligation on the insured to cooperate by entering into a neutral loan receipt agreement that equitably apportions liability between primary insurers.” Cargill, Inc. v. Ace American Ins. Co., A08-1083 (Minn. App. 05/26/09). www.lawlibrary.state.mn.us/archive/ctappub/0905/opa081082-0526.pdf

• Minn. Stat. §65B.49, Subd. 4A: Liability On Underinsured Motor Vehicles. Plaintiff suffered $134,000 in damages when his motorcycle was struck by a car. At the time of the accident the car’s driver carried only $30,000 in automobile liability coverage.

Plaintiff sued his insurance company, Illinois Farmers Insurance Company (“Illinois Farmers”), and the driver to recover his damages. Plaintiff settled with the driver for $34,000. Plaintiff then asserted that he was entitled to the full $100,000 limit of UIM coverage pursuant to his policy with Illinois Farmers. Illinois Farmers argued that it owed the plaintiff only $66,000 (the $100,000 limit less the $34,000 paid), pursuant to an express clause applying a limits-less-paid structure to plaintiff’s UIM coverage. The district court agreed with Illinois Farmers and granted its motion for summary judgment.

The Minnesota Court of Appeals affirmed, holding that the No-Fault Act does not require insurers to provide motorcycles with UIM coverage and that providing some limited UIM coverage in a motorcycle insurance policy does not bring the policy within the ambit of the No-Fault Act or create any obligation to provide the full amount of UIM coverage required by Minn. Stat. §65B.49, subd. 4a. In reaching its conclusion, the court stated that the No-Fault Act does not require UIM in motorcycle insurance policies and that “the legislature did not intend for us to reform UIM provisions beyond those cases where UIM coverage is mandatory.” Johnson v. Cummiskey, A08-1315 (Minn. App. 05/26/09). www.lawlibrary.state.mn.us/archive/ctappub/0905/opa081315-0526.pdf

—David Turner
Bassford Remele, A Professional Association