March 2009

CIVIL LITIGATION
JUDICIAL LAW

• Negligence: Duty of Care for Open and Obvious Condition. Plaintiff was injured while shopping at a Walgreens store.  He tripped over an empty pallet which was on the floor, when he turned and started walking towards a product on a display to which he was pointed by a store clerk.

The trial court granted Walgreens’ motion for summary judgment, finding that defendant did not owe a duty to protect its customer from injury caused by an open and obvious condition.  The Court of Appeals disagreed, reversed and remanded for trial.  The court reasoned that here defendant should have reasonably anticipated the harm despite the obviousness of the condition, because of the potential for distraction of the customer, such as by displays, clutter, etc.  The court restated the standard of care as follows: a possessor has a duty to act as a reasonable person in anticipating whether the invitee will be distracted to the point that he will not discover what is obvious, will forget what he has discovered, or will fail to protect himself.  Here the court applied the standard to restate the issue: should defendant’s employee have anticipated the harm to plaintiff, despite the obviousness of the pallet, and taken preventative steps.  The court found this to be a genuine issue of material fact precluding summary judgment.  Andre Gilmore v Walgreen Co., A07-2387, 2009 WL 113244 (Minn. App. 01/20/09). www.lawlibrary.state.mn.us/archive/ctappub/0901/opa072387-0120.pdf

—Andrew Shern
Murnane Brandt

March 2009

CRIMINAL LAW
JUDICIAL LAW

• Sentencing: Assessment for Costs of Confinement.  Appellant was arrested, charged, and convicted upon a plea to three counts of aggravated robbery.  He was sentenced to an executed 78-month prison term and transferred to a state correctional facility.  During the pendency of the action, he was held in Olmsted County Jail.  Seven days after his conviction, he was transferred to a state prison.  The county charged appellant for room and board pursuant to Minn. Stat. §641.12, subd. 3(a) which provides that “… A county board may require the offender convicted of a crime and confined in a county jail … to pay the costs of the offender’s room, board ... .”  The Court of Appeals rejects the appellant’s argument that because he was not convicted until seven days before he was transferred to state prison, that for most of the time that he spent in county jail, he was not a “offender convicted of a crime.” Statutory construction supports the interpretation that this law permits a county board to require a convicted offender to pay for confinement that accrues both before and after the date of the conviction. The court rejects the appellant’s due process and equal protection challenges, as well.  Andrew Tyler Jones v. Steven C. Borchardt, A08-0556 (Minn. App. 01/06/09). www.lawlibrary.state.mn.us/archive/ctappub/0901/opa080556-0106.pdf

• Search and Seizure: Dog Sniff of Apartment Hallway. During the holiday season, the manager of an apartment complex called police with her suspicions concerning the high volume of individuals coming and going in a certain unit in the complex, and staying for a short period of time.  Through driver’s license information, police learned that the occupant of the apartment had prior contacts with the police.  Armed with this information, police brought a drug-sniffing dog to the apartment building and walked along the common hallway to “sniff the air outside several apartment doors.”  The dog hit on apartment number 8, which was the appellant’s unit.  Based on this information, police obtained and executed a search warrant and found drugs.

Held, the police had reasonable and articulable suspicion of an illegal activity to justify the common hallway drug sniff. The high amount of short-term traffic, together with inferences to be drawn from those facts, satisfied the reasonable, articulable suspicion requirement. This result then provided probable cause for the search warrant.  While there was a “paucity of detail” as to the high volume of traffic, the court notes that an apartment resident’s expectation of privacy in a common hallway is “minimal,” and that the use of a dog-sniff in that hallway in minimally intrusive.  State v. Allan James Baumann, A08-0331 (Minn. App. 01/13/09).  www.lawlibrary.state.mn.us/archive/ctappub/0901/opa080331-0113.pdf

• Search and Seizure: License Plate Covers:  Appellant was the subject of a traffic stop, based upon a clear plastic cover over his license plate.  At trial, the arresting officer could not recall if the cover affected the plate’s visibility or reflectivity, nor could he recall whether he was able to read the numbers. Following the stop, a weapon was found in the vehicle.

Held, Minn. Stat. §169.79, subd. 7, prohibits the use of any covering over a license plate, whether clear or not.  The law states: “It is unlawful to cover any assigned letters and numbers or the name of the state of origin of a license plate with any material whatever, including any clear or colorless material that affects the plate’s visibility or reflectivity.”   The Court of Appeals concludes that this language is ambiguous. After reviewing the legislative history, however, the Court of Appeals construes the statute to prohibit “any material whatever” covering letters or numbers.  The Court of Appeals concludes that the use of the word “including” is illustrative rather than exclusive, following civil precedent. State of Minnesota v. Donte Demarco White, A08-0012 (Minn. App. 01/27/09). www.lawlibrary.state.mn.us/archive/ctappub/0901/opa080012-0127.pdf

• Prosecutorial Misconduct: “Were They Lying” Questions.  During trial, the prosecutor cross examined the appellant, in part, as follows: “Question:  You got to listen to testimony of [T.B.], right?  Answer:  Yes I did.  Question:  She didn’t get to listen to yours, right? Answer:  I don’t know that.”  While the implication of these questions is obvious, there was at least an arguable objective suspicion of tailoring of the facts because the appellant omitted from the statements to the police certain facts and issues which he may have heard from the victim in trial.  However, the court notes that these brief questions “came dangerously close” to violating and impugning the defendant’s exercise of his right of confrontation.  The court notes that any such attack without substantiation is “seriously improper” because it impinges on a basic constitutional right.  In this case, however, if the questions were error, they were not plain error.  “For future guidance, prosecutors must adhere to the Swanson rule and their failure to do so surely will be in the realm of prosecutorial misconduct rather than prosecutorial error.”

Also during cross-examination, the prosecuting attorney asked the appellant if the victim was lying in several respects, and whether she made up the accusation.  One of the questions was “Or was she lying about that?”  There was no objection by the prosecution.   While such questions should rarely be allowed, an exception exists when the defense expressly or by unmistakable insinuation accuses a witness of a falsehood. When the appellant, on direct examination, stated that the victim’s allegations were “absolutely untrue,” he was arguably insinuating that the victim was fabricating.  While it is reasonably debatable whether the “were they lying” questions were error, they were not plain error.  State v. Larry Leutschaft, A07-1844 (Minn. App. 01/13/09). www.lawlibrary.state.mn.us/archive/ctappub/0901/opa071844-0113.pdf

• Accomplice Liability: Failure to Instruct Jury Regarding Accomplice Liability Law.  Appellant was convicted of first-degree arson from a fire that destroyed the home he shared with his wife and 14-year-old stepson, “J.C.”  Evidence concerning culpability of both appellant and J.C. was circumstantial.  Neither provided any confession to the police.  J.C. gave conflicting statements and police found an empty gasoline can in the trunk of the appellant’s car.  Videotapes from a gas station also showed that the appellant was purchasing gasoline at almost the exact time the fire was reported by a neighbor.  At trial, the prosecutor seemingly argued that the defendant either set the fire himself or in conjunction with J.C., stating that the appellant was “responsible for this fire.”  The jury instruction which was submitted to the jury used only CRIMJIG 18.02, which states, in part: “… The defendant (or another for whose act the defendant is liable) caused the fire.”  The optional parenthetical language was given to the jury over the objection of the defendant.  No accomplice liability instruction was requested, or given.

Held, it was plain and reversible error for the district court to omit the jury instructions on accomplice liability laws. When the state proceeds on an aiding-and-abetting theory, the state must prove beyond a reasonable doubt that the defendant knew his accomplice was going to commit a crime and intended his presence or actions to further the commission of the crime.  Without any instruction regarding accomplice liability, the jury is free to speculate regarding any meaning of the term “liability,” including even the possibility that the jury found the appellant guilty merely because J.C. was his stepson. The Court of Appeals finds that the possibility that the conviction rested upon an aiding-and-abetting theory without regard to the proper standards compromises the fairness and integrity of the judicial proceedings. State v. Ray Anthony Williams, A07-2079 (Minn. App. 01/20/09). www.lawlibrary.state.mn.us/archive/ctappub/0901/opa072079-0120.pdf

• Accomplice Liability: Jury Instruction.  A party present at the killing for which the appellant was convicted testified against the appellant. This individual, “A.C.” was present with the group while appellant and his friends participated in the murder.  She opened the house door while the group carried the victim to a vehicle, in which he was ultimately conveyed to his death.  A.C. also initially lied to the police about the events of the night, and fled after the killing. Because there was no testimony that A.C. actually contributed in any material way to the murder, her role as an accomplice was not undisputed, nor did it compel but a single inference that she was an accomplice.  In such a situation, the conclusion of whether A.C. was an accomplice was better left to the jury. The judge did, in fact, give a general accomplice instruction, but was only required to name specific accomplices in the jury instructions if the facts are “undisputed or compelled by the single inference,” citing State v. Robledo-Kinney, 615 N.W.2d 25 (Minn. 2000). State v. Jeffrey C. Pendleton, A07-2313 (Minn. 01/29/09). www.lawlibrary.state.mn.us/archive/supct/0901/OPA072313-0129.pdf 

• Sex Offender: End-of-Confinement Classification; Review.  Appellant received a Level III classification by the Department of Corrections after an end-of-confinement review by committee. Appellant originally sought review by an administrative law judge (ALJ), but withdrew his appeal before determination.  Subsequently, appellant filed suit in district court, contesting the classification as a wrongful, retroactive application of the statute.  Held, the law prescribes a process of administrative review, which is inappropriate in district court, for lack of subject-matter jurisdiction.  Further judicial review is only by a writ of certiorari to the Court of Appeals.  Appellant had the opportunity to review the application of the statute by the ALJ, who has the power to interpret statutes and determine applicability; however, appellant withdrew the challenge. The district court, finding lack of jurisdiction,  properly dismissed the appellant’s action.  R.G.C.,Jr., v. Minnesota Department of Corrections, A08-0669 (Minn. App. 01/27/09). www.lawlibrary.state.mn.us/archive/ctappub/0901/opa080669-0127.pdf

• Alford/Norgaard Pleas: Requirements for Entry. The Court of Appeals rejects the appellant’s appeal of the denial of post-conviction petition to convert a stay of execution to a stay of imposition. The original plea was entered as a Norgaard plea, in which the appellant stated she was too intoxicated to remember the events and therefore cannot attest to the elements constituting the offense.  In this case of first impression, the Court of Appeals essentially equates the requirements necessary for the entry of an Alford plea to that of a Norgaard plea: a strong factual basis, and the defendant’s acknowledgment that the evidence would be sufficient for a jury to find the defendant guilty beyond a reasonable doubt.  These two items should combine to provide the court with the basis to independently conclude that there is a “strong probability” that the defendant would be found guilty of the charge to which the Norgaard plea is being entered. Portrice Williams v. State of Minnesota, A07-2447 (Minn. App. 01/27/09). www.lawlibrary.state.mn.us/archive/ctappub/0901/opa072447-0127.pdf

—Frederic Bruno
Frederic Bruno & Associates

March 2009

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

• Employment Termination:  Reliable Hearsay.  A hearing officer properly relied upon hearsay, which was deemed to be reliable, to support the termination of a public sector employee superintendent of streets. The Minnesota Court of Appeals held that the reliance by a hearing officer on hearsay evidence was reasonable because the circumstances reflected credibility of the testifying witnesses and supporting exhibits among the substantial evidence to justify the employee’s termination for “cause.”  Jerdee v. City of Albert Lea, A08-50, 2009 WL 66133 (Minn. App. 2009) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0901/opa080050-0113.pdf

• Whistleblower: “Job Duty” Doctrine.  A key case involving the rights of whistleblowers in Minnesota was heard recently by the Minnesota Supreme Court.  In early February, oral arguments were presented in Kidwell v. Sybaritic Inc., No. A07-584.  The Court of Appeals in June 2008 overturned a large jury verdict for the claimant, an in-house attorney, who complained to management about illegal corporate activities.  The appellate court reasoned that the lawyer was not covered by the state whistleblower law, Minn. Stat. §181.932, because he was acting within his “job duties.”  The Supreme Court is expected to issue a ruling soon on the applicability of the statute to employees whose revelations of improprieties occur within the scope of their job responsibilities.  Kidwell v. Sybaritic Inc., A07-584, A07-0788 (Minn. App. 06/03/08). 

• Unemployment Compensation: Late, Absent Employees. In unpublished decisions, the Court of Appeals rejected unemployment claims by two tardy or absent employees.  In the first case, the court ruled that an employee who was consistently late for work and warned of her tardiness was disqualified for benefits due to “misconduct” under Minn. Stat. §268.095, Subd. 4(1).  An unemployment claim also was denied for an employee who “repeatedly” refused to work on a particular day and gave no legitimate reason for the absence.  Ojogwu v. U.S. Bank National Association, A08-0306, 2009 WL 173901 (Minn. App. 2009) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0901/opa080306-0127.pdf  

Ess v. ALD Enterprises, Inc., A08-0318, 2009 WL 174027 (Minn. App. 2009) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0901/opa080318-0127.pdf

• Unemployment Compensation; Lack of Transportation.  An employee who quit due to lack of transportation to work was not eligible for unemployment compensation benefits. Reciting that Hill v. Contract Beverages, Inc., 307 Minn. 356, 240 N.W. 2d 314 (1976) is still “good law,” the Court of Appeals held that the employee could not receive unemployment benefits because, after she was fired for performance reasons, she turned down an offer by the employer of another job assignment that was only 5-10 minutes further away from her home.  The employee’s inability to obtain a ride with a relative was a “legally insufficient” reason to be entitled to benefits for “good reason” under Minn. Stat. §268.095 subd. 3(a). Hahn v. Adecco U.S.A., Inc., A08-542, 2009 WL 113375 (Minn. App. 2009) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0901/opa080542-0120.pdf

LEGISLATION

• Retirement Plan Contributions. One of the final laws left behind by President Bush, the Worker-Retiree and Employer Recovery Act of 2008, waives required minimum distributions from retirement plans for 2009.  Under the law, those who turned 70-1/2 in 2008 and chose to take their first distribution by April 1st of this year must do so.  However, they can, but are not required, to take any further distribution in 2009.  Additionally, some ceilings for contributions to retirement plans have increased for 2009.  Employees under 50 this year who meet income guidelines can contribute a maximum of $5,000 to an individual retirement account (IRA) for the year.  Those over 50 by the end of 2009 have a $6,000 ceiling.  The same limits apply for Roth IRAs. 

While the IRA and Roth contribution limits remain the same, the contribution limits increased for those with 401(k) plans.  In 2009, the maximum contribution to a 401(k) plan for someone under 50 is $16,500, a $1,000 increase from the previous year.  Employees 50 or over can put away an additional $5,500 this year, in addition to the $16,500 allowed last year, for a total of $22,000 in 2009.

• Pay Discrimination. The opening law signed by President Obama gives employees more time to sue for pay discrimination.  The Lilly Ledbetter Fair Pay Act enacted during the first ten days of the new administration overturns the Supreme Court ruling in Ledbetter v. Goodyear Tire & Rubber Co., 550 U.S. 618 (2007), a 5-4 decision that required suits for gender bias in pay be filed within 180 days from each pay disparity.  The new measure, named for the unsuccessful litigant, extends the limitations period for an additional 180 or 300 days from the date of the offending paycheck, depending upon state law, effectively elongating claims for pay discrimination for the entire duration.  In Minnesota, the 300-day period would apply, running from the last biased payment.

LOOKING AHEAD

• Outsourcing.  Efforts to reduce outsourcing are expected to be undertaken under the Patriot Employers Act, which was cosponsored by President Obama when he was a senator.  It would provide a tax credit to employers who increase the number of full-time workers in this country compared to the number of full-time workers outside of the United States.

• Independent Contractors. A proposed amendment to the Fair Labor Standards Act, which governs minimum wages and overtime pay, would increase penalties for employers who misclassify workers as independent contractors.  Under the proposed Employee Misclassification Prevention Act, employers are required to inform their workers when classifying them as independent contractors and of their right to challenge the classification.  An employer who willfully or repeatedly misclassifies workers can be subject to fines of up to $10,000 per incident.

• Definition of Supervisor. Federal legislation may narrow the definition of “supervisor” under §2(11) of the National Labor Relations Act.  Many employees now classified as supervisors could become employees and eligible to unionize under the Re-Empowerment of Skilled and Professional Employees and Construction Trade Workers Act, known as the RESPECT Act.  If the measure is adopted, individuals must spend the majority of time engaged in supervisory activities in order to be classified as a “supervisors” for collective bargaining purposes and to be outside the protection of the collective bargaining laws.

• Federally Financed Projects.  An executive order entered by President Bush banning labor agreements for federally financed projects is likely to be overturned, which would permit the expanded use of labor agreements on federal projects.  This is particularly important in light of the Obama Administration pledge to rebuild the nation’s infrastructure, which is likely to lead to many more federally financed construction projects.

• Arbitration Agreements. Use of companies’ predispute management arbitration agreements is likely to be curbed if the Arbitration Fairness Act is adopted.  It would apply to employment and consumer disputes, invalidating predispute agreements that conflict with any statutes intended to protect rights of individuals in contracts or transactions between parties of “unequal bargaining power.” 

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

March 2009

FEDERAL PRACTICE
JUDICIAL LAW

• Bench Trial; Remand; Incomplete Findings of Fact. After the entry of judgment for the defendant following a bench trial in an ADEA case, the 8th Circuit remanded the action for further findings of fact where the district court’s opinion failed to address one important piece of direct evidence offered by the plaintiff at trial.  King v. United States, ___ F.3d ___ (8th Cir. 2009). 

• 28 U.S.C. §1291; “Final Order”; Jurisdiction. A recent 8th Circuit decision reversing a judgment against a large local law firm was notable for the panel’s disagreement over its jurisdiction.  While the majority of the panel concluded that the order dismissing a bankruptcy trustee’s claims against the law firm was a final order for purposes of 28 U.S.C. §1291, Judge Colloton argued that the 8th Circuit lacked jurisdiction over the appeal, and also noted the absence of a “hard and fast rule” governing the treatment of consolidated cases within the Circuit.  Leonard v. Dorsey & Whitney LLP, ___ F.3d ___ (8th Cir. 2009). 

• Class Action Fairness Act; Remand; Burden of Proof. Citing a “consensus” among the federal courts on the issue, Judge Montgomery found that the burden of establishing an exception to CAFA jurisdiction rests on the party seeking a remand, and that the plaintiff could not meet its burden to establish that the so-called “home-state controversy exception” required that the action be remanded to the Minnesota courts.  Moua v. Jani-King of Minnesota, Inc., 2009 WL 212425 (D. Minn. 01/27/09). 

• Corporate Citizenship for Purposes of Diversity Jurisdiction; “Total Activity Test.”  Judge Rosenbaum remanded an action to the Minnesota courts, finding that the parties were not diverse after applying the so-called “total activity test” to determine the location of the corporate plaintiff’s principal place of business and rejecting the defendant’s argument for the application of the so-called “nerve center” test. 
Domaine Serene Vineyards and Winery, Inc. v. Rynders, 2009 WL 81079 (D. Minn. 01/09/09).    

• Order Certified for Appeal; Stay of Judgment Pending Appeal Denied. Judge Frank certified an order as a final judgment under Fed. R. Civ. P. 54(b) to allow an immediate appeal, but also declined to stay enforcement of that judgment under Fed. R. Civ. P. 62(h) pending that appeal.   Imation Corp. v. Koninklijke Philips Elecs. N.V., 2009 WL 250357 (D. Minn. 2009). 

• Requests for Admissions; Failure to Respond; Summary Judgment. Judge Ericksen ordered the entry of summary judgment for the defendants in an ADA action, finding that the plaintiff had admitted crucial facts due to his failure to respond to the defendant’s request for admissions, and had not availed himself of the opportunity offered by the court to amend or withdraw those admissions.  A subsequent request for reconsideration was denied.  Quasius v. Schwan Food Co., 2008 WL 5382352 (D. Minn. 12/23/08), reconsideration denied, 2009 WL 113286 (D. Minn. 01/15/09).  

• Motion to Remand Granted; Fraudulent Joinder Argument Rejected. Rejecting defendants’ argument that an individual defendant had been fraudulently joined in order to defeat diversity jurisdiction, Judge Montgomery granted plaintiffs’ motion to remand the action to the Minnesota courts.  Heffron v. Burlington Northern and Santa Fe Rwy. Co., 2008 WL 5273711 (D. Minn. 12/17/08). 

• First-Filed Rule; Motion to Dismiss Granted. Applying the so-called “first-filed rule,” Judge Ericksen dismissed a second-filed declaratory judgment action in favor of a previously filed action pending in the Western District of Missouri.  Beskau v. Lone Tree Farms, Inc., 2008 WL 5382251 (D. Minn. 12/23/08). 

• Motion to Remand Denied; Amount in Controversy; Other Paper. Judge Frank denied plaintiff’s motion to remand a diversity action, finding that while the complaint had demanded judgment “for a reasonable sum in excess of Fifty Thousand ($50,000) Dollars,” defendant’s removal was timely when it was made within 30 days after receipt of a written settlement demand for $85,000, and that the demand letter constituted “other paper” for purposes of 28 U.S.C. §1446(b).  Groeneweg v. Flint Hills Resources, LP, 2008 WL 4951494 (D. Minn. 11/18/08).  

—Josh Jacobson
Law Office of Josh Jacobson

March 2009

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Patents: Claim Construction Principles; Intrinsic Evidence Sufficient. Judge Frank recently reviewed patent claim construction principles.  In the suit, Synovis Life Technologies alleged that W.L. Gore & Associates had infringed a number of patent claims involving circular surgical staplers.  Because the parties disputed the proper interpretation of over a dozen terms in the claims, the court held a claim construction hearing.  The court set forth a methodology for construing claims following the principles outlined in Philips v. AWH Corp., 415 F.3d 1303 (Fed. Cir. 2005).  First, the court reviewed the words of the claims themselves.  Those terms which were readily understandable required no further analysis.  However, terms whose meanings were more ambiguous did need more analysis.  In continuing the analysis of the ambiguous terms, the court relied upon virtually every portion of the patent at issue including the specification, the drawings, and other claims in the patent.  The court also relied upon the prosecution file history of the patent including prior art patents.  The patent and its prosecution file history are considered intrinsic evidence.  The next step was to consult extrinsic evidence, such as a dictionary or technical treatise, but only where intrinsic evidence is insufficient to resolve the disputed ambiguity.  In this case, the court declined to consider this evidence after holding that intrinsic evidence was sufficient to resolve all claim term ambiguities. Synovis Life Technologies, Inc. v. W.L. Gore & Associates, Inc., Civ. No. 07-1396 (D. Minn. 01/23/09).

• Patents:  Claim Construction Principles; Dictionary Definition. The Court of Appeals for the Federal Circuit also recently issued a split decision on claim construction methodology.  Kinetic Concepts brought suit against Blue Sky Medical Group alleging infringement of patents involving a wound treatment system.  The meaning of the term “wound” was heavily disputed and Blue Sky sought to introduce a definition from Steadman’s Medical Dictionary.  However, the panel majority stressed the importance of using the specification, not dictionaries, to resolve the meaning of a claim term and instead relied solely upon the patent and its prosecution file history.  The majority then used examples of wounds presented in the specification to resolve the meaning of the term “wound.”  In declining to use the dictionary definition, the majority stated that it is improper to read a claim term to encompass a definition broader than the patent simply because it may be found in a dictionary, treatise or other extrinsic source.  However, Judge Dyk dissented arguing that the use of a well-established dictionary frequently used by a person skilled in the art would be proper because the examples in the specification were not meant to limit the invention and the dictionary definition did not contradict any definition found in the patent.  Kinetic Concepts, Inc. v. Blue Sky Medical Group, Inc., 2007-1340, -1341, -1342 (Fed. Cir. 02/02/09).

—Tony Zeuli
—Patrick Johnson
Merchant & Gould

March 2009

REAL PROPERTY
JUDICIAL LAW

• DNR Shoreland Regulations; Municipal Ordinances.  This matter involves two lots—one vacant, the other with a residence upon it—both located on the St. Croix River and regulated by a municipal shoreland ordinance. During the 1970s and part of the 1980s, both lots were owned by the same person.  The current property owner acquired the developed lot in 1986 and the vacant lot in 2000.  Neither lot was platted nor did they meet the minimum dimensional standards for development imposed by the city.

In 2000, the owner applied for a variance from the city to allow him to build on the vacant lot.  The city granted the variance, but did not obtain certification from the Department of Natural Resources (DNR) as was required by ordinance.  The owner did not build at that time and the variance expired.  In 2006, the owner applied for another variance to build.  The city granted variance and, this time, sent the matter to the DNR for certification.  The DNR refused to grant certification and the property owner challenged that denial before an administrative law judge (ALJ).  The ALJ determined that the denial was proper and the owner appealed.

The Court of Appeals held that the DNR’s refusal to certify the variance was proper.  At issue on appeal was the interplay between DNR and city regulations.  The DNR regulations allowed for building on nonconforming lots if certain conditions were met, one of which was that the lot had been under separate ownership from abutting properties since 1974.  Because the neighboring lots had been under common ownership, the rule prohibited building.  The city’s ordinance had a similar prohibition, but it was only applicable to platted property.  By implication, this meant that granting a building permit was acceptable for property that was not platted even if it abutted another property under common ownership.  But a municipality cannot enact a law that conflicts with state law.  As a result, the Court of Appeals held that to the extent the municipal ordinance permitted development where the DNR rule did not, it was invalid.

The court also rejected the property owner’s claim that the DNR was estopped from arguing that the municipal ordinance was not in compliance with DNR rules because the DNR had previously certified the city’s ordinances as being in substantial compliance with the DNR rules.  The court concluded that estoppel did not apply because the certification of substantial compliance did not mean that the ordinances were wholly compliant.  Affirmed.  In re Denial of Certification of the Variance to Haslund, A08-427 (Minn. App. 01/27/08). www.lawlibrary.state.mn.us/archive/ctappub/0901/opa080427-0127.pdf

• Section 8 Housing: “Serious Violation” of Lease.  Tenant was the recipient of Section 8 rental assistance.  Tenant resided in a townhome, but had a history of late rental payments.  At the end of the term, landlord gave tenant notice to vacate the property.  Tenant did not vacate the premises and landlord regained possession through an eviction action.  Following the eviction, the county terminated tenant’s rental assistance.  A hearing officer found that the county properly terminated tenant’s rental assistance and tenant appealed.

The Court of Appeals affirmed.  The court observed that an agency administering Section 8 rental assistance must terminate the benefits if the tenant is evicted for a serious violation of the lease.  Whether failing to timely vacate the property is a serious violation was an issue of first impression for the court.  The court held that failing to vacate constituted a serious violation.  In so holding, the court distinguished between minor and serious violations by considering the impact on the landlord.  In a minor violation, the landlord’s property and economic interest are not significantly affected.  On the other hand, a serious violation deprives the landlord of a tangible property interest or a significant economic benefit.  The court noted that holding over deprives a landlord of its right to re-let the property and causes the loss of rental income.  As a result, tenant’s actions constituted a significant violation of the lease.  Affirmed.  Wilhite v. Scott County Hous. & Redev. Auth., A07-2103, 759 N.W.2d 252 (Minn. App. 01/13/09). www.lawlibrary.state.mn.us/archive/ctappub/0901/opa072103-0113.pdf

• Prelien Notice for Mechanics Liens on Multiple Lots.  Sellers agreed to sell 22 vacant lots to buyer.  While the purchase agreement was pending, the buyer hired an engineer and contractor to perform work on the property.  The buyer also assigned its interest in the purchase agreement to the contractor.  Eventually, the sellers terminated the contract.  Subsequently, the engineer and the contractor commenced mechanics lien foreclosure proceedings for the work done.  The engineer had not provided the sellers with prelien notice, while the contractor had provided notice.  The district court concluded that the contractor had a valid lien, but that the engineer’s lien was invalid for failure to provide prelien notice.  Both the engineer and the sellers appealed.

The Court of Appeals affirmed the district court’s determination that the contractor’s lien was valid and reversed the finding that the engineer’s lien was invalid.  As to the engineer’s lien, the issue on appeal was whether the engineer was required to provide prelien notice.  Typically providing prelien notice is a prerequisite to enforcing the lien.  However, there are some exceptions to that general rule.  One exception provides that prelien notice is not required when the property improved consists of more than four residential “family units.”  The term “family units” is not defined by statute and the sellers argued that it could only mean a multifamily building, not multiple lots.  The court disagreed and held that “family units” included vacant lots.  Because the property consisted of more than four lots, prelien notice was not required and the engineer’s lien was valid.

As to the contractor’s lien, the sellers argued that the contractor could not place a lien against the property because it had an equitable ownership interest in it through the assignment of the purchase agreement.  The sellers based their argument on a prior decision of the court involving a vendee on a contract for deed.  In that decision, the court concluded that because the vendee was the equitable owner of the property, he could not file a mechanics lien against the property.  In the present case, however, the court concluded that the equitable interest obtained in a purchase agreement was distinguishable from that of a contract-for-deed vendee.  The court focused primarily on the right to possession of the property, which is present for a contract-for-deed vendee, but not for a buyer under a purchase agreement.  Accordingly, the court held that the contractor’s interest in the purchase agreement did not preclude the mechanics lien.  Affirmed in part, reversed in part and remanded.  S.M. Hentges & Sons v. Mensing, A08-0418, 759 N.W.2d 229 (Minn. App. 2009). www.lawlibrary.state.mn.us/archive/ctappub/0901/opa080418-0113.pdf

—C.J. Deike
Edina Home Realty Services

TAX
JUDICIAL LAW

• Income Tax: Intent to Change Domicile.  The Minnesota Tax Court ruled that although the taxpayers left Minnesota in June of 2004, they had not established an intent to be a domiciliary of South Dakota, and therefore, remained Minnesota residents for 2004.  Although severing domiciliary with Minnesota after June 2004, the taxpayers ran afoul of the presumption found in the Minnesota Rule 8001.0300 Subp. 2 (2005), which indicates that the term “domicile” means the bodily presence of an individual in a place coupled with an intent to make such a place one’s home.  A person who leaves home to go to another state for temporary purposes only is not considered to have lost that person’s domicile.  The mere intention to acquire a new domicile, without the fact of physical removal, does not change the status of the taxpayer, nor does the fact of physical removal without the intention to remain change the person’s status.  The court agreed with the commissioner that the taxpayers continued to be domiciled in Minnesota because they did not own or rent real property in South Dakota, kept an open account at the Federal Credit Union in Burnsville, Minnesota, and spent no time in South Dakota after leaving Minnesota in June 2004.  Because the taxpayers’ actions failed to evidence that they integrated their lives in South Dakota after June 18, 2004, they failed to overcome the presumption that their Minnesota domicile continued.  Lastly, the court rejected constitutional objections to Minnesota taxation in 2004 based on Equal Protection and Due Process.  The case is on appeal to Minnesota Supreme Court.  Geronimo J. and Kathleen A. Sanchez v. Commissioner of Revenue, No. 7910 (Minn. T. Ct. 10/15/08).

• Income Tax and Other Taxes: JOBZ Program.  In October 2008 the Ramsey County District Court held that ten businesses, which claimed they directly competed with JOBZ-benefited businesses and asserted they were at a competitive disadvantage because they did not receive JOBZ benefits, lack standing to challenge the constitutionality of the JOBZ economic development program.  Summary judgment was granted in favor of the state.  The court referenced Alec G. Olson v. State of Minnesota, et al., No. A06-2324, 742 N.W.2d 681 (Minn. App. 12/18/07) where the Minnesota Court of Appeals affirmed a prior Ramsey County District Court decision that taxpayers challenging the JOBZ program lacked standing to challenge the constitutionality of the program since they could not show “actual injury-in-fact.”  This marks the second time that the JOBZ program has been upheld on the grounds of lack of standing. Interstate Motor Trucks, Inc., Osvold Company, et al. v. State of Minnesota, Commissioner of Revenue, et al., Ramsey County District Court (10/10/08).

• Income Tax: Minnesota Authority to Independently Audit Resident’s Tax Return. The Minnesota Tax Court held the taxpayers were liable for income taxes for 1998 to Minnesota even though they had not received a Statutory Notice of Deficiency from the IRS for that year.  Minnesota has its own independent authority to determine income, to tax income and the failure, if any, by the IRS to provide a Notice of Deficiency has no bearing on the validity of Minnesota’s assessments.  The court held that the commissioner possesses the powers of the sovereign and that power includes the power of taxation separate and independent from the IRS. Brad J. and Teri L. Montagne v.  Commissioner of Revenue, No. 7556-R, 2008 WL 4906421 (Minn. T. Ct. 11/14/08).

• Real Property: Failure to Qualify as “Public Charity.”  The Minnesota Tax Court held on remand from the Supreme Court that HealthEast had a function and provided services to outside entities that it did not control and did not exist solely for its hospitals and therefore was taxable.  In other words, HealthEast did not exclusively serve the needs of its member hospitals:  HealthEast St. John’s Hospital, HealthEast St. Joseph’s Hospital, HealthEast Woodwinds Hospital, and HealthEast Bethesda Hospital.  HealthEast, the management company, failed to meet the tests of Milwaukee Motor Transportation Co. v. Commissioner of Taxation, 292 Minn. 66, 193 N.W.2d 605 (1971) and Community Hospital Linen Services, Inc. v. Commissioner of Taxation, 309 Minn. 447, 245 N.W.2d 190 (Minn. 1976) that HealthEast was organized and was operated exclusively for the benefit and to perform the functions and carry out the purposes of the hospitals.  Even though its Articles of Incorporation indicated that the sole purpose of HealthEast was to exist and perform services for its hospitals, HealthEast performed and charged for services to several parties outside of its control.  The case is on appeal to the Minnesota Supreme Court. HealthEast and University of Minnesota Physicians v. County of Ramsey, Nos. C4-03-4664, C3-04-4505, and C0-05-4553, 2008 WL 5102621 (Minn. T. Ct. 11/18/08).

• Sales Tax: Fuel Used by Pipeline Company.  Where the taxpayer pipeline companies did not appeal the constitutional arguments but only appealed the state law issues of purchase and use in Minnesota, the Minnesota Court of Appeals affirmed the district court.  The court held that Great Lakes Transmission L.P. was bound by collateral estoppel by the prior decision in Great Lakes Transmission L.P. v. Commissioner of Revenue, 638 N.W.2d 435 (Minn. 2002), in which the supreme court concluded that the compressor fuel at issue was used, purchased, and consumed in Minnesota for the purposes of Minnesota’s use tax statute and such determination was not dictum.  Further, the court lacked the power to overrule the Minnesota Supreme Court in Great Lakes I.  Furthermore, it held that although Northern Border Pipeline Company was not bound by collateral estoppel under Great Lakes I; under the facts, its compressor fuel was also used, purchased and consumed in Minnesota.  Great Lakes Transmission Limited Partnership and Northern Border Pipeline Company v. Commissioner of Revenue, No. A08-8309 and A08-0310, 2008 WL 173959 (Minn. App. 01/27/09).

• Excise Tax: Tobacco; “Sale Price.”  The Minnesota Tax Court determined that the proper “sale price” for purchases of tobacco by McLane as a distributor from its supplier was the “sales price” that it paid to the supplier and not the manufacturer’s price to the supplier.  The case involved a construction of Minn. Stat. §279F, et al., the tobacco products tax statute, which imposed a tax on a manufacturer or person distributing tobacco products in Minnesota based on the “wholesale sale price of the tobacco products.”  The court determined that the proper price and person to look to was the affiliate rather than the manufacturer and therefore the price charged McLane by the affiliate was the base of the tax.  The court also dismissed McLane’s contention that the imposition of the tax upon the “sales price” of the affiliate to McLane was an unconstitutional violation of the Commerce Clause and the Equal Protection Clause.  The case is on appeal to the Minnesota Supreme Court. McLane Minnesota, Inc. v. Commissioner of Revenue, No. 7801 (Minn. T. Ct. 02/05/08).

• Sales Tax:  Capital Equipment Exemption; Launderer.  The Minnesota Tax Court determined that a laundry cleaning business was not entitled to the capital equipment exemption since it was not manufacturing “raw materials” nor producing a new article of “tangible personal property” as required by Minn. Stat. §297A.68, Subd. 5.  AmeriPride is one of the five largest uniform and linen rental and supply companies in North America.  AmeriPride argued that its laundering process incorporated modern technology and state-of-the-art capital equipment and the series of activities resulted in the production of newly cleaned rental items.  AmeriPride inserted a small radio-frequency chip containing historical information on how the items could be handled and sorted to improve the efficiency and speed of the laundering process.  Its laundering process involved shrink-wrapping certain items for delivery to customers.  The court rejected, under the plain meaning of the term, the contention that “raw materials” included soiled garments, flats, and other accessories used in a manufacturing process.  “Raw materials” means crude or processed materials that can be converted by manufacture, processing, or combination into new and useful products.  Moreover, AmeriPride’s cleaning process did not “manufacture” clothes into a new product.  Dirty garments, flats, or other accessories were turned into clean items of the exact same type and, therefore, AmeriPride did not meet the requirement of the Minn. Stat. §297.A.68, Subd. 5, to be a manufacturer of “new” items of tangible property. AmeriPride Services, Inc. v. Commissioner of Revenue, No. 7971R, 2008 WL 4472392 (Minn. T. Ct. 10/03/08).

• Sales and Use Tax: Hostess Credits.  The Minnesota Tax Court held that a “hostess credit” offered to individuals hosting sales events did not reduce the “selling price” of products which, therefore, were subject to sales and use tax at their full retail value.  The taxpayer was engaged of the business of manufacturing household and home decorating products, and making wholesale sales of those products to independent contractors called “designers.”  The products were sold on a commission basis through home sales, typically at home-based parties hosted by a “hostess.”  Commissions earned totaled 30 percent to 40 percent of the price of the item and the hostess sponsoring the party received a credit which allowed her to purchase merchandise at a reduced price.  The taxpayer remitted the sales and use tax to the Department of Revenue for its designers and hostesses.  The taxpayer took the position that the retail price of the product would apply only to cash consideration and that the hostess credit was akin to a manufacturer’s coupon which reduces the sales price under Minnesota law.  That is, the taxpayer’s position was that the taxable sale price was the sale price net of any discounts or coupons.  The court cited to the commissioner’s Fact Sheet  No. 168, which indicated that hostess credits did not reduce the sale price and were treated like money.  Minnesota law does not provide that the sales tax is limited only to that portion of the sales price that is paid in cash or by check but includes all “consideration” received, whether or not that consideration is in the form of money. Home and Garden Party, Inc. v. Commissioner of Revenue, No. 7924, 2008 WL 5102624 (Minn. T. Ct. 11/24/08).

• Work Product Privilege; Tax Accrual Workpapers.  The 1st Circuit Court of Appeals, affirming a district court, held that the “tax accrual workpapers” of Textron, Inc. and its subsidiaries were protected by the “work product” privilege.  However, the court set aside the district court’s ultimate determination that “work-product” protection was not waived, and sent the case back to the district court to reassess the question of whether disclosure of the auditors’ workpapers by the CPAs would reveal the information contained in Textron’s workpapers. U.S. Textron and Subs., 103 AFTR 2d ¶2009-372 (8th Cir. 2009).

• Redemption by ESOP; Deductibility.  The 8th Circuit held that a corporation could not deduct payments to redeem stock held in its employee stock ownership plan (“ESOP”) under IRC §404(k).  It ruled that the deduction was barred under the then-applicable version of IRC §162(k)(1).  Contra Boise Cascade Co. v. U.S., 91 AFTR 2d ¶2003-2280 (9th Cir. 2003). .  General Mills, Inc. v. U.S., 103 AFTR 2d ¶2009-389 (8th Cir. 2009).

• Tax Accounting:  Payment to Seller Accrued through Offset Claims.  The Tax Court held that an accrual method corporation had to accrue the full contract price for barges it built for two customers, including deferred payments, in the year of delivery.  It could not postpone including any amount in income because of the buyers’ withholding the deferred payments to offset claims related to other contracts.  The court further held that the amounts withheld under the offset claims were  not deductible under IRC §461(f). Trinity Industries Inc. and Sales, 132 T.C. No. 2 (2009).

ADMINISTRATIVE ACTION

• New IRS Forms for Taxpayers Filing Schedule M-3.  Schedule B (Form 1120) and Schedule C (Form 1065) must be filed by corporations and partnerships for tax years ending on or after December 31, 2008 if they must file Schedule M-3.  Corporations must file Schedule B (Form 1120), Additional Information for Schedule M-3 Filers, and partnerships must file Schedule C (Form 1065), Additional Information for Schedule M-3 Filers.  The schedules are designed to increase transparency about the ownership and relationships between entities that make up complex enterprise business structures.

• Research Credit Claims.  The IRS has focused on the problem of prepackaged research credit claims backed by inadequate studies.  A recent directive clarifies what research credit claims are covered by a Tier I designation, are subject to mandatory examination, and may result in a IRC §6676 penalty.  Under IRS’s rules of engagement for LMSB examinations, Tier I issues are of high strategic importance to LMSB and have a significant impact on one or more industries.  Tier I issues could include areas involving a large number of taxpayers, significant dollar risk, substantial compliance risk or high visibility, where there are established legal positions and/or LMSB direction. LMSB Memorandum:  Industry Directory Directive No. 2 on Research Credit Claims (LMSB-4-0608-035 (01/15/09)).

• Minnesota Mortgage Recording Tax: Mortgages Issued to United States. Mortgages given to “The United States Department of Treasury” are subject to the mortgage recording tax.  Mortgage Tax – U.S. Department of Treasury (01/21/09).

LEGISLATION

• Minimum Distributions from Retirement Plans.  Many retirees have had to sell retirement plan account or traditional IRA assets at distressed values in order to generate the cash needed to make required minimum distributions (“RMDs”).  Beneficiaries of retirement plan accounts or traditional IRAs have faced similar problems.  The Pension Act enacted late last year (P.L. 110-458, 12/18/08) provided relief by waiving the RMD for calendar year 2009 only.  It also relieved designated beneficiaries of the need to make minimum distributions for 2009.

—Jerry Geis
Briggs & Morgan

March 2009

TORTS & INSURANCE
JUDICIAL LAW

• Insurance Coverage: Employment-Related Practices Exclusion. The U.S. District Court for the District of Minnesota recently granted summary judgment in favor of an insurer on the ground that coverage under a commercial general liability (CGL) policy was precluded by an exclusion for “employment-related practices, policies, acts or omissions.”  In the underlying action, the plaintiff accused her former employer of making false and defamatory statements about her.  The court ruled that the phrase “arising out of” in the employment-related-practices exclusion should be interpreted broadly to apply to statements made after the end of the employment relationship so long as the statements “arise out of” the employment relationship. Capital Indem. Corp. v. Wonder Years Pre-Sch., Inc., No. 08-651 (D. Minn. 01/07/09).

• Premises Liability; Duty to Invitees. The Minnesota Court of Appeals recently held that a storeowner has a duty of reasonable care to protect an invitee from an open and obvious dangerous condition if the storeowner should have reasonably anticipated that other conditions or circumstances in the store would distract the invitee’s attention from the obviously dangerous condition.  The case involved a customer in a drug store who tripped over an empty pallet after a store employee responded to the customer’s inquiry by pointing to where a certain product could be found. Gillmore v. Walgreen Co., A07-2387 (Minn. App. 01/20/09). www.lawlibrary.state.mn.us/archive/ctappub/0901/opa072387-0120.pdf

• Construction Defect: Insurer’s Duty to Indemnify. Insurer argued that it had no duty to indemnify its insured contractor for water damage to a home he had built because the defective construction was a “discrete identifiable event” that occurred before the policy period.  The district court, following a bench trial, found that the damage continued into the policy period, but that no “new” damage occurred during that time, and concluded that the insurer owed no coverage.  The Minnesota Court of Appeals, in an unpublished opinion, affirmed the district court but under a different analysis. 

When determining whether a continuous injury arose from some discrete and identifiable event, the court of appeals said that a court should focus on the timing of the water intrusion or resulting damage—not on the timing of the insured’s conduct.  Based on the district court’s findings, the court of appeals held “[b]ecause it is impossible to ascertain a specific date when property damage began to occur, there is no single discrete and identifiable event.”  The court of appeals proceeded to note, however, that the district court’s findings “support the conclusion that the continuous injury to the house arose from a series of discrete and identifiable events.”  (The court was unclear whether the “series of discrete and identifiable events” referred to by the court are a series of rain events, or separate instances of defective construction.) Tony Eiden Co. v. Auto-Owners Ins. Co., A07-2222 (Minn. App. 01/26/09) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0901/opa072222-0126.pdf

• Construction Defect: Insurer’s Duty to Defend and Indemnify. Insurer argued that the misapplication of stucco by the subcontractor, which occurred prior to the insurer’s policy period, was a “discrete identifiable event” and therefore the insurer on the risk at the time of the misapplication was liable for all damage to the involved homes.  The district court ruled that because the event occurred outside the insurer’s policy period, the insurer had no duty to defend. 
On appeal, the Minnesota Court of Appeals began by noting that the parties agreed that the damage to the homes was continuous and ongoing and that there was evidence of damage during the insurer’s policy period.  On the basis of this evidence, the court of appeals concluded that there was a presumption of coverage thereby triggering a duty to defend.  The court of appeals rejected the insurer’s argument that the defective application of stucco was a “discrete identifiable event” which would rebut this presumption. 

The court concluded that because there were several construction defects that may have caused water intrusion, there was a genuine issue of material fact regarding whether the damage was caused by a discrete event.  There were also fact questions as to when any stucco-related damage occurred.  These questions made summary judgment for the insurer inappropriate but the court held that insurerdid have a duty to defend because of the possibility of the claim resulting in covered damages and remanded the issue of what was the cause of the water intrusion and when it first occurred for trial.  The court noted in a footnote, however, that “We recognize that the factual determination of the timing of the triggering event may be impossible.  In those difficult cases allocation is appropriate.” Donnelly Bros. Const. Co., Inc. v. State Auto Prop. & Cas. Ins. Co., A08-0457 (Minn. App. 01/26/09). www.lawlibrary.state.mn.us/archive/ctappub/0902/opa080457-0126.pdf

• Legal Malpractice: Expert Testimony. In a legal malpractice action, the Minnesota Court of Appeals concluded that an adverse appellate ruling on a legal issue in the underlying case is not necessarily prima facie evidence of legal malpractice obviating expert testimony evidencing a breach of the standard of care. Lady Jayne Fontaine f/k/a Jayne Fraser v. Geraldine Carlen Steen, A07-2327 (Minn. App. 01/27/09). www.lawlibrary.state.mn.us/archive/ctappub/0901/opa072327-0127.pdf

—David A. Turner
Bassford Remele, A Professional Association