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April 2021


Notes & Trends April 2021

CRIMINAL LAW

JUDICIAL LAW

• Homicide: For third-degree murder, death-causing act aimed at single person is sufficient. Appellant, a former police officer, and his partner were on patrol at night when they responded to a call of yelling in an alley behind the victim’s home. Appellant’s partner drove the squad car into the dark alley with appellant in the passenger seat. They did not hear or see anything suspicious, so waited for a bicyclist to pass them before responding to another call. Before the bicyclist passed, a silhouette of a person near the driver’s side window appeared and the officers heard something hit the squad. Appellant testified he saw the person, a woman, raise her arm. Appellant fired his weapon across his partner, through the driver’s side door of the squad. He said he did so to protect his partner, who he noticed was unable to unholster his weapon and “feared for his life.” The victim was shot in the abdomen and died. Appellant was convicted after a jury trial of third-degree murder. On appeal, he argues the evidence was insufficient to prove he acted with a depraved mind because he “directed his actions at a particular person” and “did not act with a mind bent on mischief.”

Third-degree murder requires proof of an act that “(1) causes the death of another, (2) is eminently dangerous to others, and (3) evinces a depraved mind without regard for human life.” Appellant argues he did not act with a depraved mind, based on the statement in State v. Lowe, 68 N.W. 1094, 1095 (Minn. 1896), that third-degree murder is “intended to cover cases where the reckless, mischievous, or wanton acts of the accused were committed without special regard to their effect on any particular person or persons, but were committed with a reckless disregard of whether they injured one person or another” (emphasis added). Appellant’s act was aimed at a particular person, the person outside his squad car, so he argues he cannot be convicted of third-degree murder. 

The court of appeals notes that Lowe goes on to say, “We do not deem it necessary that more than one person was or might have been put in jeopardy by such act... It is, however, necessary that the act was committed without special design upon the particular person or persons with whose murder the accused is charged.” Id. Thus, third-degree murder may occur even where the death-causing act endangers only one person. 

State v. Mytych, 194 N.W.2d 276 (Minn. 1972), also affirmed a third-degree murder conviction based on victims known to and targeted by the defendant. In Mytych, the court stated that “[t]he fact that a person evinces a depraved mind by shooting and injuring one person and killing another does not necessarily mean that such killing was committed with such particularity as to exclude a conviction of third-degree murder. Each case must be determined on its own facts and issues.” Id. at 277.

Per State v. Hall, 931 N.W.2d 727 (Minn. 2019), the phrase “without intent to effect the death of any person” in the third-degree murder statute does not establish a separate element, but “serves to differentiate the offense of [unintentional] third-degree murder from the more serious offense of second-degree intentional murder.” Id. at 741 n.6. Thus, the evidence could be sufficient to sustain appellant’s conviction even though he directed the death-causing act at the person outside of his squad car. 

The mens rea required for third-degree depraved mind murder is equivalent to a reckless standard. That is, the depraved mind element “requires proof that the defendant was aware that his conduct created a substantial and unjustifiable risk of death to another person and consciously disregarded that risk.” State v. Coleman, 944 N.W.2d 469, 479 (Minn. Ct. App. 2020). Per case law, “the reckless nature of a defendant’s act alone may establish that the defendant acted with a depraved mind…,” so “the evidence could be sufficient to sustain the jury’s finding of guilt even if [appellant]’s act was the result of a split-second decision.”

Ultimately, the court concludes the evidence was sufficient to sustain appellant’s third-degree murder conviction, based on evidence that appellant fired his weapon from inside the squad across his partner’s body, without seeing the victim’s hand or any weapon, without ascertaining who she was or what she was doing, whether she had a weapon, or whether she posed a threat, and moments after observing a bicyclist approaching the squad.

Judge Johnson disagrees with the majority as to the sufficiency of the evidence on the third-degree murder charge, arguing that precedent calls for a “no-particular-person” requirement. He argues appellant’s act directed at a single person precludes a third-degree murder conviction and also that the evidence shows appellant did not act with a sufficiently depraved mind or without regard for human life. The Minnesota Supreme Court accepted review of this case. State v. Noor, A19-1089, 2021 WL 317740 (Minn. Ct. App. 2/1/2021).

•  Procedure: Complaint may not be considered to supplement plea testimony unless defendant expressly admitted to truthfulness and accuracy of allegations. Appellant pleaded guilty to two counts of first-degree burglary and one count of second-degree assault after he kicked open a door to the victim’s father’s house, assaulted the victim once inside, and threatened the victim with a knife. Appellant petitioned for postconviction relief to withdraw his guilty pleas on counts one (first-degree burglary with a dangerous weapon) and three (second-degree assault—fear), arguing there was not a sufficient factual basis for either count. 

As to the first-degree burglary with a dangerous weapon charge, appellant admitted to entering the victim’s father’s home without consent and with a dangerous weapon and that he took and drank a beer from the fridge once inside. This admission established that appellant committed theft after entering the victim’s father’s home without consent and, therefore, was a sufficient factual basis to establish appellant’s guilt of first-degree burglary.

However, appellant’s plea to second-degree assault with a deadly weapon was not accurate, because there was not a sufficient factual basis to establish he acted with the specific intent to cause fear in the victim. The state was required to prove appellant intended to cause the victim fear of immediate bodily harm with the knife. During the plea colloquy, appellant was not asked about whether he acted with this intent. A district court may draw inferences from the facts admitted to by the defendant, but the court finds that appellant admitted no act from which specific intent for an assault might be inferred. He admitted solely an act of the general intent crime of assault—harm.

The court rejects the state’s request to consider the contents of the complaint to supplement appellant’s testimony. A postconviction court is permitted to consider record evidence, but appellant did not expressly testify as to the truthfulness and accuracy of the allegations in the complaint during his plea colloquy, so they are not part of the record that may be considered in assessing the accuracy of his plea. The court reverses the district court’s denial of appellant’s petition to withdraw his guilty plea to second-degree assault. State v. Rosendahl, A20-0439, 2021 WL 416699 (Minn. Ct. App. 2/8/2021).

Samantha Foertsch  Bruno Law PLLC

Stephen Foertsch  Bruno Law PLLC

 

EMPLOYMENT & LABOR LAW

JUDICIAL LAW

• Retaliation rejected; employee did not report claim. An employee lost her retaliation claim on grounds of sex harassment because she did not report any sex harassment before the adverse action was taken against her. The 8th Circuit Court of Appeals, affirming a ruling of U.S. District Court Judge Wilhelmina Wright of Minnesota, also held that the company had genuine reasons to terminate her and they were not, as the claimant asserted, “fishy.” Kempf v. Hennepin County, 987 F.3d 1192 (8th Cir. 2/16/2021).

•  ADA claim denied; lack of standing. A disabled man in a wheelchair, who was trying to “test” whether a restaurant in Red Wing complied with accommodations requirements under the Americans with Disabilities Act (ADA), had his case dismissed by the 8th Circuit. Affirming a ruling of U.S. District Court Judge John Tunheim in Minnesota, the 8th Circuit held that the claimant lacked standing because he did not suffer any injuries since he was not seeking to actually patronize the facility. Smith v. Golden China of Red Wing, 987 F.3d 1205 (8th Cir. 2/16/2021).

•  Sex harassment and gender claim denied; no protected activity. A claim of sex harassment and gender discrimination by a female college athlete was denied. The 8th Circuit upheld dismissal of the lawsuit brought by the woman on grounds that the woman did not engage in any “protected activity” and there was no basis for her to claim discrimination because she was denied the opportunity to “red shirt” by sitting out one year of eligibility. Du Bois v. Board of Regents of the University of Minnesota, 987 F.3d 1199 (8th Cir. 2/16/2021). 

•  Age discrimination dismissed; legitimate reason to terminate. An employee who claimed that she was subject to age discrimination after she was let go due to a restructuring of her workplace lost her claim. The 8th Circuit upheld dismissal of her lawsuit on grounds that the company had legitimate basis to engage in a restructuring of the financial department where the claimant worked. Starkey v. Amber Enterprises, 987 F.3d 758 (8th Cir. 2/4/2021). 

•  Employee reinstatement upheld; arbitration award confirmed. An arbitration award reinstating an employee under the Railway Labor Act was upheld on grounds that the arbitrator had authority to make the determination. The 8th Circuit rejected the employer’s claim that the decision was outside the scope of the collective bargaining agreement. Union Pacific Ry. Co. v. International Association of SMART, 2021 WL 608938 (8th Cir. 2/17/2021) (unpublished). 

• Discrimination claims; trio of employees lose per curiam. Three employees lost their claims for racial discrimination in per curiam rulings of the 8th Circuit. A panel that included Judge James Loken of Minnesota upheld an adverse judgment entered after a bench trial against a pair of related pro se claimants, who asserted hostile work environment due to their race and ethnicity at a meat packing facility in South Dakota. Naambwe v. John Morrell & Co., 2021 WL 397742 (Minn. Ct. App. 2/4/2021) per curiam (unpublished). 

• Ineligibility due to misrepresentation; untimely appeal. An employee at a bank in Iowa met the same fate in challenging dismissal by summary judgment in a claim for discrimination due to age. Batcher v. Wells Fargo Bank, N.A., 2021 WL 485727 (Minn. Ct. App. 2/10/2021) per curiam (unpublished).

•  Unemployment compensation; high schoolers eligible. In a deviation from the state statute barring unemployment benefits for high school students, Minn. Stat. §268.085, subd. (3), the Minnesota Court of Appeals held that they may receive benefits under the federal Coronovavirus Aid Relief, and Economic Security (CARES) Act. Chief Judge Susan Segal authored the opinion, concluding that students are not ineligible to receive Pandemic Unemployment Assistance (PUA) under the Act. Matter of Muse, 2021 WL 669865(Minn. Ct. App. 2/22/2021) (unpublished).

•  Unemployment compensation; quitting employee loses. An employee who quit his job due to a claimed hostile work environment was ineligible for unemployment benefits; the court of appeals held that he did not have good reason to quit caused by the employer. DePaul v. Dept. of Veterans Affairs, 2021 WL 669054 (Minn. Ct. App. 2/22/2021) (unpublished).

LOOKING AHEAD

• Wage case at high court. The Minnesota Supreme Court will soon decide whether a property owner’s payment to a part-time caretaker by rent credit violates the minimum wage requirements under the state Fair Labor Standards Act, Minn. Stat. §177:2-35. The court will also determine two other issues heard in early March in Hagen v. Steven Scott Management, No. A 19-1224: whether payment by rent credits is an impermissible wage payment under Minn. Stat. §181.79 and whether the caretaker is entitled to be paid for on-call time under §177.23.

Marshall H. Tanick  Meyer, Njus & Tanick

 

ENVIRONMENTAL LAW 

JUDICIAL LAW

• Minnesota Supreme Court allows MERA claim against Minneapolis’s 2040 Comprehensive Plan to proceed. On 2/10/2021, the Minnesota Supreme Court issued an opinion regarding an issue of first impression involving the Minnesota Environmental Rights Act (MERA). The case involved a challenge under MERA brought by several environmental groups (collectively, Smart Growth) to the City of Minneapolis’s 2040 Comprehensive Plan. Smart Growth claimed implementation of the plan would cause increased density and related complications—including increased impervious surface and runoff, increased population and thus increased domestic wastewater and traffic, and loss of green space affecting birds and other wildlife—that are “likely to materially adversely affect the environment” under MERA. 

The city, in a motion to dismiss, first argued that because comprehensive plans are exempt from environmental review under EQB rules implementing the Minnesota Environmental Policy Act (MEPA), Minn. R. 4410.4600, subp. 26, Smart Growth’s MERA claim must be rejected. If the claim were allowed to proceed, the city argued, it would create inconsistency between MEPA and MERA because plaintiffs could obtain environmental review under MERA of a project intended to be exempt from environmental review under MEPA. The city also argued that Smart Growth had failed to plead a prima facie case under MERA, since it had not pleaded any specific facts to support allegations that the plan had caused or was likely to cause material and adverse impacts to natural resources. Minn. Stat. §116B.04(b). The district court granted the city’s motion to dismiss and the court of appeals affirmed. 

The Supreme Court granted Smart Growth’s petition for review and reversed the lower courts. The court undertook a statutory analysis of MERA and MEPA and determined that an exemption from the broad scope of MERA should not be presumed absent express statutory language. Whereas the Legislature on other occasions has expressly exempted certain statutes from MERA, e.g., Minn. Stat. §115A.30 (exempting the Waste Management Act), the Legislature included no language in MEPA exempting it from MERA. The Court further found the two statutes did not conflict. “It is not inconsistent to recognize,” the Court wrote, “that a MERA challenge might result in environmental review that would not be required under MEPA, given that MERA is broader in scope than MEPA and applies to ‘any conduct” of “any person’—including municipal governments.” Moreover, Minn. R. 4410.4600, subp. 26, the rule that exempts comprehensive plans from environmental review, by its terms only provides exemption from MEPA procedures, not MERA.

This issue of first impression involved a procedural aspect of the city’s second argument—i.e., that Smart Growth’s complaint failed to set forth a legally sufficient claim for relief. The Court noted that it has “not previously had the opportunity to consider a MERA claim at the Rule 12.02(e) dismissal stage.” Specifically, the city’s argument focused on causation. It claimed Smart Growth had not alleged sufficient facts showing that adoption of the 2040 plan is likely to cause the type of environmental damage that MERA aims to prevent; reliance on alleged damage from a projected buildout under the plan is too speculative to establish causation, the city asserted. The Supreme Court disagreed. Its holding rested on the procedural posture of the case as a motion to dismiss. The Court emphasized that it did not need to determine whether Smart Growth made a MERA “prima facie showing” with regard to causation; this would be premature at the Rule 12.02(e) stage. Rather, the issue was whether the allegations in Smart Growth’s complaint, accepted as true and given all reasonable inferences, were sufficient to allege causation. The Court held that it did not appear “to a certainty” that Smart Growth would be unable to introduce facts supporting its allegations. Accordingly, the Court held that dismissal of the complaint was premature and that Smart Growth must be able to proceed with its claim. State by Smart Growth Minneapolis v. City of Minneapolis, 954 N.W.2d 584 (2021). 

• MN Supreme Court holds MPCA is not obligated to consider “sham” permitting during minor air permit application process. The Minnesota Supreme Court, on 2/24/2021, issued an opinion concerning allegations of “sham permitting” for PolyMet Mining Corp.’s copper-nickel-platinum NorthMet mining project, finding that while a permitting agency may investigate sham permitting at the synthetic minor source permit application stage, it is not required to do so. 

This dispute arose in December 2018, when several environmental groups and the Fond du Lac Band of Lake Superior Chippewa raised concerns that the production capacity of the existing facilities at the PolyMet mine site were higher than the rate stipulated in the company’s application for a minor air permit. The parties alleged, and the Minnesota Court of Appeals agreed, that the Minnesota Pollution Control Agency (MPCA) failed to investigate whether PolyMet intended to operate within the limits of the “synthetic” minor permit or whether it actually intended to increase its capacity to major-permit levels shortly after receiving the permit. The appeals court applied the Minnesota Administrative Procedure Act in finding that the MPCA had failed to take a “hard look” into the evidence of the possible “sham” permitting. In re Issuance of Air Emissions Permit No. 13700345-101 for PolyMet Mining Inc., 943 N.W.2d 399, 409 (Minn. App. 2020); citing Stat. §14.69 (2020). 

Under the Clean Air Act, a source must seek permitting based on its tonnage per year of pollution. A facility that emits over 250 tons per year of any regulated pollutant constitutes a major stationary source, triggering various requirements under the Clean Air Act, including the requirement to implement best available control technology measures. 40 C.F.R. §52.21(b)(12). The review process and permit requirements for major source permits are more rigorous than for minor source permits. “Sham permitting” can occur when a source obtains a minor source permit and, following construction of the facility, seeks permit modifications to become a major source, which could result in a less rigorous process and less stringent pollution control measures than would have been required if the source had initially sought a major source permit.

The allegations of sham permitting in this case focused on an investor report filed by PolyMet’s Canadian parent company with Canadian regulatory authorities 10 days after the comment period closed on the proposed NorthMet air permit. The report provided a preliminary economic analysis of scenarios where NorthMet would increase its ore-processing rates to levels that would result in major-level air emissions. This, appellants alleged, constituted evidence of sham permitting that MPCA had failed to properly consider. The court of appeals agreed. 

However, the Minnesota Supreme Court did not agree and reversed. At issue was whether MPCA was required to prospectively evaluate an intent to pursue a sham permit during the permit application stage, or whether it was only required to do so once the minor source, having obtained its minor permit, subsequently in bad faith sought to exceed the minor limits and become a major source. The Court analyzed provisions in EPA minor-source permitting regulations, 40 C.F.R. §50.21, and in longstanding EPA guidance on sham permitting. Terrell E. Hunt & John S. Seitz, Guidance on Limiting Potential to Emit in New Source Permitting, U.S. EPA (6/13/1989). The Court concluded that these regulations and guidance, which provide EPA concurrent authority with state agencies to enforce operational restrictions in synthetic minor permits, were solely focused on enforcement of operational limits within minor permits and punishment after the fact of sources that could be shown to have obtained a minor permit through deceit. 

As a result, the Court concluded the regulations and guidance did not provide a basis for requiring MPCA to evaluate sham permitting during the application process for PolyMet’s minor air permit. And while the Court concluded certain statements in the preamble to the federal regulations indicated a state agency such as MPCA could look at sham permitting in the minor-source permit application stage, it is not required to do so. As a result, the Court concluded, MPCA did not have a legal obligation to investigate sham permitting issues as part of PolyMet’s minor-source application process; the Court thus reversed the court of appeals and remanded. In re Issuance of Air Emissions Permit No. 13700345-101 for PolyMet Mining Inc., Nos. A19-0115 and A19-0134, 2021 WL 710490 (Minn. 2/24/2021).

ADMINISTRATIVE ACTION

• EPA swears in new administrator Michael Regan. On 3/11/2021, Michael S. Regan was sworn in as the 16th administrator of the U.S. Environmental Protection Agency (EPA), having been confirmed by the Senate the day before. Regan was nominated by then-President-elect Joe Biden on 12/17/2020. Along with promising to make climate change a top priority, Biden promised to have the most diverse presidential cabinet in the history of the country, stating that his administration, “both in the White House and outside in the Cabinet, is going to look like the country.”

Accompanied by many other historic first nominations—such as Rep. Deb Haaland, who, if confirmed, would be the first Native American in a president’s cabinet; and Pete Buttigieg, the first openly gay secretary in a president’s cabinet—Regan is the first Black man, and the second person of color, to run the EPA.

Prior to this, Regan was the secretary of the North Carolina Department of Environmental Quality (DEQ) since 2017. Many parallels can be drawn between his time as DEQ secretary and the work he will face as EPA chief. During his time as DEQ secretary, Regan implemented the state’s first environmental justice equity board, negotiated the cleanup of Cape Fear River (which was contaminated with dangerous levels of PFAS chemical compounds), and secured the nation’s largest coal ash cleanup agreement with Duke Energy. Following Democratic Gov. Roy Cooper’s environmental Executive Order No. 80, Committing to Address Climate Change and Transition to a Clean Energy Economy (2018), Regan implemented an overhaul of the state’s climate policies; and in 2019, Regan’s DEQ published the Clean Energy Plan to reduce power sector greenhouse gas emissions by 70% below 2005 levels by 2030 and to achieve carbon neutrality by 2050. Now, as head of the EPA, Regan will be tasked with putting the EPA on track to accomplish President Biden’s ambitious goals of achieving a carbon pollution-free power sector by 2035 and a net-zero emission economy by 2050.

Administrator Regan has worked at the EPA twice before, once as a summer intern and again as national program manager for the Office of Air Quality Planning and Standards during the Clinton and George W. Bush administrations. Before that, Regan was the associate VP of U.S. Climate and Energy, and Southeast regional director of the Environmental Defense Fund.

He studied environmental science at North Carolina A&T State University and earned a master’s degree in public administration from George Washington University.

•  President Biden signs environmental executive orders and agreement. On 1/20/2021, hours after being inaugurated as the 46th President of the United States, Joseph R. Biden Jr. signed over a dozen executive orders (EO), presidential memoranda, determinations, and proclamations, reversing many of the former administration’s policies and guidelines. The executive actions covered topics ranging from immigration enforcement and racial equity to mask-wearing and other covid-19 priorities, as well as environmental policies and actions.

One EO issued that day was Executive Order No. 13990, Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis. 86 Fed. Reg. 7037 (2021). The EO has many aims, including, inter alia: to ensure access to clean air and water; to reduce greenhouse gas emissions; to bolster resilience to the impacts of climate change; and to prioritize environmental justice in communities of color and low-income communities. In order to fulfill those aims, the EO directs all agencies to review and, when applicable, consider suspending, revising, or rescinding federal regulations and other actions of the last four years that conflict with those objectives, and to immediately commence work to confront the climate crisis.

Specifically, the EO addresses the administrator of the Environmental Protection Agency to consider proposing regulations to establish new emission guidelines and standards for methane and other compounds in the oil and gas sector, including exploration and production, transmission, processing, and storage segments.

Similarly, the EO addresses the Coastal Plain Oil and Gas Leasing Program in the Arctic National Wildlife Refuge. The EO places a temporary moratorium on all activities of the federal government for review of the program, and reinstates an Obama administration EO withdrawing certain offshore areas in Arctic waters and the Bering Sea from oil and gas drilling.

The EO explicitly states that “[I]t is essential that agencies capture the full costs of greenhouse gas emissions as accurately as possible, including by taking global damages into account.” In doing so, the EO directs agencies to determine the damages associated with incremental increases in greenhouse gas emissions by calculating the social cost of carbon, nitrous oxide, and methane, when conducting cost-benefit analyses of regulatory actions.

To that effect, the EO revokes the March 2019 permit for the Keystone XL Pipeline. Citing the increase in extreme weather events, the need to create clean-energy jobs, and the undercutting of credibility and influence of the U.S. as a global leader in climate action, the EO states that leaving the Keystone XL pipeline permit in place would disserve the U.S. national interest.

On that same day, President Biden signed back on to the Paris Climate Agreement, which the U.S. officially left under the previous administration on 11/4/2020. 

On January 27, during the White House “Climate Day,” President Biden issued Executive Order No. 14008, Tackling the Climate Crisis at Home and Abroad. 86 Fed. Reg. 7619 (2021). With a focus on putting the climate crisis at the center of U.S. policy and government activity, this EO orders a pause on all new oil and natural gas leases on public lands or in offshore waters. And notably, the EO discusses the need to rebuild our infrastructure toward a sustainable, clean-energy economy by setting the ambitious goals of achieving a carbon pollution-free power sector by 2035 and a net-zero emission economy by 2050. Exec. Order No. 13990, 86 Fed. Reg. 7037 (Jan. 20, 2021); Paris Climate Agreement, whitehouse.gov/briefing-room/statements-releases/2021/01/20/paris-climate-agreement/ (1/20/2021); Exec. Order No. 14008, 86 Fed. Reg. 7619 (1/27/2021).

Jeremy P. Greenhouse The Environmental Law Group, Ltd.

Jake Beckstrom Vermont Law School, 2015

Audrey Meyer  University of St. Thomas School of Law,  2020

Erik Ordahl Barna, Guzy & Steffen

 

FAMILY LAW

JUDICIAL LAW

• Joint legal custody; child’s primary residence. The parties to this action never married. They had a child together in 2010 and separated in 2011. The custody order awarded the parties joint legal and joint physical custody. The order was later amended in 2016 to designate father’s address as the child’s “primary residence.” For first through third grade, the child attended school at Belle Plaine Elementary. In 2019, father moved to Eden Prairie and unilaterally changed the child’s school enrollment from Belle Plaine to Eden Prairie schools over mother’s objection. Following multiple motions, and a complicated procedural history, the district court ordered the child to be returned to Belle Plaine schools. 

Father appealed the district court’s school decision, arguing that the primary residence designation gave him authority to decide which school the child attends. The court of appeals was not convinced by father’s arguments. The court reviewed prior discussions of “legal custody,” “primary residence” and the “interplay between ‘joint legal custody’ and ‘primary residence,’” concluding that primary residence relates more to physical custody than to legal custody. The court noted that there is nothing in the statute defining primary residence, and neither is there a basis for leveraging primary residence as a tie-breaker when joint legal custodians disagree: “[E]ducational decisions are within the ambit of legal custody.” The court noted that while school attendance may be indicative of a client’s primary residence, primary residence is not determinative of school attendance. Finally, the court noted that the parties did not ask the district court to modify the meaning of the terms and so the generally applicable definitions of these words control. In re the Matter of: Brian Eugene Wolf vs. Mandy Marie Oestreich, ___N.W.2d ___, A20-0235, 2021 WL 668013 (Minn. Ct. App. 2/22/2021).

• When a third-party custody petition is opposed, the district court should hold an evidentiary hearing before granting the petition. This case arises from two competing third-party custody petitions. The mother of the minor child A.J. died in a car accident in 2019. The child’s biological father was never identified. The child spent several years of her youth living with mother and stepfather, until they divorced in 2019. Mother’s sisters filed the competing petition for third-party custody. After a non-evidentiary hearing, the district court dismissed the sisters’ petition and granted the ex-stepfather’s petition after determining he has a substantial relationship with the minor child, awarding him permanent sole legal and sole physical custody. Mother’s sisters appealed. The Minnesota Court of Appeals determined that after finding ex-stepfather had a substantial relationship with the minor child, the district court should have held an evidentiary hearing on the facts contained in his petition and reversed the granting of his petition and remanded for an evidentiary hearing. Jamison John Stewart vs. John Doe; Hoda Ahmed Sulub, Malko Ibrahim, et al., third-party intervenors, A20-0754 (Minn. Ct. App. 3/1/2021). 

•  Child’s therapist may not disclose records to one joint custodian over the other’s objection. Parties are the parents of minor child B.L.F. Mother and father had been in court several times over the years. Most recently, mother moved for sole legal and sole physical custody. Father filed a responsive motion asking, among other things, that the district court terminate the minor child’s relationship with their therapist since mother unilaterally signed the child up for therapy without father’s input. The district court denied mother’s motions, but granted father’s motions regarding therapy. The court ordered that the parties terminate the child’s relationship with the therapist mother selected and mutually select a new therapist; that letters from the therapist filed by mother be excluded absent a waiver from the client; and that future filings related to the child’s mental health are limited. 

Mother appealed. The court of appeals affirmed, stating that mother made “a substantial unilateral decision inconsistent with the parties’ joint legal custody” and the ordered the parties to find a mutually agreeable therapist. The second therapy issue mother appealed was the district court’s decision to exclude letters from the therapist. The court of appeals concluded that the minor child’s records are privileged absent a valid waiver, pursuant to Minn. Stat. §595.02. The therapist shall not waive the client’s privilege without the client’s consent, and one joint custodian cannot unilaterally waive the child’s privilege without the consent of the other party. Therefore, the records are inadmissible unless both parties agree. In re the Custody of: B.L.F., Cherries Chamberlain vs. Neil Fleahman, A20-0658 (Minn. Ct. App. 2/16/2021).

Amy M. Krupinski  Collins, Buckley, Sauntry & Haugh, PLLP

 

FEDERAL PRACTICE

JUDICIAL LAW

Article III standing; nominal damages. Where the plaintiffs’ request for injunctive relief was mooted by defendants’ change in policy, the United States Supreme Court held that the case was not entirely moot because the plaintiffs had also sought an award of nominal damages, and this request satisfied the “redressability” element of Article III standing. Uzuegbunam v. Preczewski, ___ S. Ct. ___ (2021). 

Sanctions; due process. Where the defendant sought sanctions against plaintiff’s counsel for alleged discovery-related misconduct pursuant to 28 U.S.C. §1927 and the district court’s inherent powers, and the court instead imposed sanctions under Fed. R. Civ. P. 37(d)(3), the 8th Circuit denied counsel’s due process challenge to those sanctions, rejecting his argument that the district court’s reliance on Rule 37 violated his due process rights because he should have been warned before sanctions were imposed that the court might rely on that rule. Lopez v. Whirlpool Corp., ___ F.3d ___ (8th Cir. 2021). 

Injunction; amendment of statute; mootness; request for vacatur denied. Where the statute giving rise to the plaintiffs’ claims was replaced sometime after its enforcement was permanently enjoined by the district court and the defendants appealed the permanent injunction, the 8th Circuit held that the new statute did not disadvantage the plaintiffs “in the same fundamental way,” meaning that the defendants’ appeal of the injunction was moot. 

Despite finding that the appeal was moot, the 8th Circuit also declined to exercise its equitable authority to vacate the injunction where the public interest did not favor vacatur. SD Voice v. Noem, ___ F.3d ___ (8th Cir. 2021). 

Fed. R. Civ. P. 56(f)(3); sua sponte grant of summary judgment reversed. Where the district court awarded the plaintiff summary judgment sua sponte, and then denied the defendant’s unopposed motions to alter or amend the judgment and for reconsideration, the 8th Circuit agreed with the defendant that the district court had erred in granting summary judgment without first complying with the notice requirements of Fed. R. Civ. P. 56(f)(3). Kiddie v. Copeland, ___ F. App’x ___ (8th Cir. 2021). 

Attorney-client privilege; clawback; email attachments. In a dispute over allegedly privileged materials that were the subject of a “clawback” request by the plaintiff months after the disputed materials were produced, Magistrate Judge Menendez found that the weight of authority and the “better course of action” prohibited the defendants’ “use” of the allegedly privileged material once a privilege claim was asserted, but she declined to penalize the defendants for using their knowledge of the material in support of their motion to compel. 

In addition, and after thoroughly surveying the law, Magistrate Judge Menendez found that otherwise unprivileged attachments to a privileged email do not become privileged simply because they were attached, but that they need not ordinarily be produced so long as other versions of the attachments are available. Willis Elec. Co. v. Polygroup Trading Ltd., 2021 WL 568494 (D. Minn. 2/16/2021). 

Expedited discovery; no “good cause.” Denying the plaintiffs’ motion for a preliminary injunction, Judge Tostrud also denied their request for expedited discovery, finding an absence of the required “good cause” where no preliminary injunction motion was pending, there was no articulated risk of spoliation, the plaintiffs did not argue that they were unable to proceed without the information they sought, and the plaintiffs made no attempt to limit the scope of the proposed discovery. Let Them Play MN v. Walz, 2021 WL 423923 (D. Minn. 2/8/2021). 

Arbitration; subpoena; motion to quash denied. Magistrate Judge Menendez denied a motion to quash a deposition subpoena issued to a St. Louis resident by the arbitrator in a Minneapolis arbitration, disagreeing with decisions from other circuits finding pre-hearing subpoenas invalid, rejecting the argument that the request for a remote deposition violated the territorial limits of Fed. R. Civ. P. 45, and also rejecting relevance and burdensomeness arguments. Int’l Seaway Trading Corp. v. Target Corp., 2021 WL 672990 (D. Minn. 2/22/2021). 

Removal; remand; burden to show the citizenship of the plaintiff. Where the plaintiff limited partnership commenced an action in the Minnesota courts, the defendant corporation removed the action on the basis of diversity jurisdiction, and the plaintiff moved to remand, Judge Wright found that “nothing in the record” identified all of the members of the plaintiff or any of its owners’ members, meaning that the defendant was unable to meet its burden to establish that complete diversity existed. Therefore, the motion to remand was granted. Carebourn Capital, L.P. v. Darkpulse, Inc., 2021 WL 614524 (D. Minn. 2/17/2021). 

Sealing and redaction of documents; multiple decisions. Emphasizing the common law right of access to judicial records, Magistrate Judge Wright denied the plaintiff’s motion to redact the transcript of a hearing before Judge Schiltz on a motion for summary judgment, where there was no evidence that the plaintiff had attempted to seal the hearing from the public and the asserted property and privacy interests were “weak.” ARP Wave, LLC v. Salpeter, 2021 WL 406466 (D. Minn. 2/5/2021). 

One month later, Magistrate Judge Wright applied the prevailing six-factor test and rejected most of defendants’ requests for continued sealing of documents that were opposed by the plaintiffs. Wright v. Capella Educ. Co., 2021 WL 856912 (D. Minn. 3/8/2021). 

Josh Jacobson  Law Office of Josh Jacobson 

 

INTELLECTUAL PROPERTY

JUDICIAL LAW

•  Copyright: 4th Amendment does not protect property interest of copyright. Judge Brasel recently adopted the magistrate’s report and recommendation and dismissed inmate Nathan Braun’s claims. Braun sued Minnesota state officials, including Gov. Tim Walz and several officials of the Department of Corrections (DOC) alleging that the DOC deprived him of his 1st, 4th, 5th, 8th, and 14th Amendment rights. Braun alleged that an officer entered his cell and removed two sketches of a medical marijuana plant leaf, which he argued were two original works of art that were protected under federal copyright law as well as the 1st Amendment. The court found that while Braun may have a property interest in the artwork, the 4th Amendment does not protect such interest. Braun v. Walz, No. 20-cv-331, 2021 U.S. Dist. LEXIS 46051 (D. Minn. 3/9/2021), adopting report and recommendation, 2021 U.S. Dist. LEXIS 44941 (D. Minn. 1/29/2021).

•  Copyright: Asserting copyright infringement against a licensee. Judge Nelson recently denied Fairview Health Services’ motion to dismiss Quest Software, Inc’s breach of contract and copyright infringement counterclaims. In 2004, Fairview purchased licenses for Quest’s Active Roles software, a program that facilitates the administration and management of a company’s information technology accounts. Fairview continued to purchase licenses until 2019, when it notified Quest that it would not renew its maintenance services for the following year.

Quest then conducted an audit of Fairview’s use and alleged that Fairview had deployed the software in excess of the licenses purchased. Quest demanded payment of over $4 million in owed license fees. Fairview filed an action for declaratory judgment, and Quest counterclaimed for breach of contract and copyright infringement. A copyright owner who grants a nonexclusive, limited license ordinarily may not sue licensees for copyright infringement. The copyright owner, however, may recover for infringement if (1) the copying exceeds the scope of the license and (2) the copyright owner’s complaint is grounded in an exclusive right of copyright (e.g., unlawful reproduction or distribution). Fairview argued that because the license contained a true-up provision that contemplated Fairview’s right to exceed the scope of the license, subject to additional payments, Quest could not allege a nexus between the alleged breach and a violation of Quest’s copyright rights. The court disagreed. The court found Quest alleged Fairview used more copies than it had purchased and did not pay for the excess use as provided for by the true-up provision. Consequently, Quest plausibly alleged the required nexus between the numerical limitation in the contract and Quest’s exclusive rights. The motion to dismiss was denied. Fairview Health Servs. v. Quest Software, Inc., No. 20-cv-01326 (SRN/LIB), 2021 U.S. Dist. LEXIS 32382, at *12 (D. Minn. 2/22/2021).

Joe Dubis  Merchant & Gould

 

REAL PROPERTY

JUDICIAL LAW

• Material fact dispute precluded summary judgment on implied easement claim. Plaintiff was conveyed property under two deeds, the second of which conveyed the property “subject… to a 33 foot wide easement for ingress and egress across the existing roadway running generally east and west across the middle of [the property].” After defendant blocked plaintiff from using the easement to access her property, she sued to enforce and establish her easement rights. The district court granted summary judgment for defendant, finding no facts to support the existence of an implied easement on elements of “continued and apparent use” and “necessity” at the time of the conveyance. To support the first element, the plaintiff supplied an affidavit from the attorney who drafted the deeds providing his recollection of the phrase “existing roadway” in the deeds and the use of the easement at the time of the conveyance. Plaintiff also provided an affidavit listing the ways in which she used the easement at issue, including for snowmobiling, hayrides, and deer hunting. Defendant countered with affidavits regarding plaintiff’s non-use of the easement. Regarding necessity, the record contained evidence that the road along the northern edge of the property was, at one time, the only public road providing access to the property and that it was in dispute whether that road had been vacated by the township. Plaintiff also provided an affidavit stating that the aforementioned road did not permit access to the property at issue. The appellate court reversed the district court, finding that the “continuous and apparent use” prong is not a requirement to establish an implied easement, only a “consideration,” and further held that there was a dispute of fact in the record regarding this and the “necessity” elements. Kalahar-Grissom v. Stroschein, A20-0692, 2021 WL 856094 (Minn. Ct. App. 3/8/2021) (unpublished)

•  Borrower entitled to surplus after foreclosure by action. Defendants borrowed $1.8 million from plaintiff and secured the loan with a mortgage on two properties. Borrowers failed to make timely payments under the loan. Creditor brought suit to obtain a judgment against the debtors for the outstanding amount. Creditor, in addition, commenced two other actions to foreclose on each property. The parties entered into stipulations for each case wherein the parties agreed that the borrowers were in default, agreed on the amount of the debts, and agreed that the court may enter judgment against the borrowers, jointly and severally. The district court thereafter entered judgment for $1,983,815.63 in the first action, for $1,990,012.67 in the second action regarding the TCP Property, and for $2,005,371.35 in the third action regarding the MIG Property. The properties were sold at auction, with plaintiff submitting the highest bid on each: $600,000 and $1.8 million, respectively. The borrowers moved to have the surplus after the second property sale turned over, arguing that they were entitled to the surplus of approximately $296,000. Lenders opposed the motion, arguing there was no surplus after the sale of the MIG Property. 

Rejecting each of the lender’s arguments, the court held that the stipulated judgment amount was to be substituted for the mortgage debt when determining a surplus and concluded that the borrower’s mortgage debt was satisfied after the sale of the second property because the total of the two bids exceeded the amount of the judgment, a fact agreed to by the lender’s counsel. The court also held that the surplus calculation was governed by Minn. Stat. §581.06, as the statute did not contradict the language of the earlier judgments, which did not specify the method for calculating any surplus. An overall focus of the court was on the lender’s decision to bring three different actions on one note and alluding to the fact that the three cases should have been consolidated into one action. The appellate court concluded by affirming the district court and holding that the lender had forfeited its equitable arguments on appeal by failing to raise them at the district court. SW Partners, LLC v. Trade Center Property, LLC, A20-0773, 2021 WL 856071 (Minn. Ct. App. 3/8/2021) (unpublished).

Zack Armstrong  DeWitt LLP

 

TAX LAW

JUDICIAL LAW

• Couple’s $300,000+ of rewards acquired from American Express not “income.” In a dispute “rest[ing] squarely in the legal chasm between the basic principle to broadly define income and [the IRS’s own policy]” on credit card rewards programs, the tax court held that a taxpaying couple’s “clever[] and relentless[] manipulation” of the AmEx Rewards Program did not result in gross income, despite the hundreds of thousands of dollars of economic benefit the couple realized. The methodology for the scheme is described in several popular press articles. In a gross simplification, the taxpayers took advantage of the 5% rewards on purchases and the lower fees on gift cards and money orders. See, e.g., Richard Rubin, He Got $300,000 From Credit-Card Rewards. The IRS Said It Was Taxable Income, Wall St. J., 4/7/2021. Anikeev v. Comm’r, T.C.M. (RIA) 2021-023 (T.C. 2021).

•  Malpractice settlement not “on account of physical injury” and therefore taxable. Taxpayer Debra Jean Blum was injured when an admitting clerk at a hospital instructed Ms. Blum to sit in a wheelchair that turned out to be broken. As Ms. Blum attempted to sit down, the wheelchair collapsed, and she suffered injuries. She hired a personal injury attorney to represent her in her lawsuit against the hospital. Her first attorney retired and withdrew. She hired another attorney from the same firm. Ms. Blum lost on summary judgment and lost her pro se appeal. Ms. Blum subsequently brought a legal malpractice claim against both former attorneys. The attorneys settled with Ms. Blum for $125,000. 

Ms. Blum did not report the settlement on her return. Ms. Blum raised two arguments in favor of exclusion of the settlement amount: First, she argued that the settlement should be excluded under Section 104, which excludes from gross income “any damages… received (whether by suit or agreement…) on account of personal physical injuries or physical sickness.” Ms. Blum argued that the settlement was received “on account of personal physical injuries or physical sickness” because “but for” her former attorneys’ allegedly negligent representation, she would have received damages from the hospital and those damages would have been excluded under 104(a). 

The tax court rejected her argument and noted that similar arguments have also been rejected by the 9th Circuit. Ms. Blum argued in the alternative that the settlement should be excluded under an expansive view of the return of capital exclusion. Again, the court rejected the argument, explaining that the court “[did] not view her recovery in the malpractice case as restoring her capital but instead as compensating her for distinct failings by her former lawyers. Consequently, this amount is not a recovery of capital and is includable in her gross income.” Blum v. Comm’r, T.C.M. (RIA) 2021-018 (T.C. 2021).

• Petitioner’s failure to cooperate in preparing cases for trial and failure to appear for trial results in default judgment. Petitioners concealed income for several years. The Service issued a deficiency notice and made numerous attempts to engage the pair. Other than a filing containing “hundreds of pages of tax-protester rhetoric,” neither petitioner engaged meaningfully with the Service or the court in the settlement discussions or trial. When parties fail to plead or otherwise proceed, the court has authority to enter a default judgment under Rule 123(a). That is exactly what the court did in this case, holding that the taxpaying pair was responsible for just over $100,000 in tax deficiencies and about $25,000 in failure-to-file penalties. Mr. Kramer, but not Ms. Arabuli, was also responsible for fraud-related penalties. The opinion thoroughly discusses the process the Service must follow when imposing additions to tax and penalties. Kramer v. Comm’r, T.C.M. (RIA) 2021-016 (T.C. 2021). 

•  Noncash charitable deductions denied in two cases for similar reasons. Veterinarian Dr. Duane Pankratz grew up on a farm in South Dakota in a home with no running water. He left South Dakota for vet school at Iowa State, and became a successful veterinary scientist. He developed a vaccine and built a vaccine company that he eventually sold for $85 million. Following the sale, Dr. Pankratz returned to South Dakota, where he acquired and operated about a dozen business in the seemingly divergent industries of tourism and ranching.

Dr. Pankratz’s commitment to South Dakota included several significant charitable donations, which form the basis of this dispute with the Service. In 2008 and 2009, he made three significant donations. First, in 2008 he donated four oil and gas projects to Missionary Church, Inc.; he valued this first donation at $2 million, based on the purchase price and his approximation of appreciation. That same year, he donated 5.78 acres of land to Rapid City, South Dakota for road and utility improvements. (Pankratz conceded that this deduction should be disallowed.) In 2009, he donated a conference center—both the building and surrounding land—to Keystone Project, Inc., a religious charity. Dr. Pankratz worked with an appraiser to determine the conference center’s value. The appraiser was not comfortable providing a qualified appraisal—the property was too large and complex for the appraiser. The appraiser did, however, explain in general terms the three methods used for professional appraisal. He also told Dr. Pankratz that the replacement method likely would be best in appraising the conference center. Dr. Pankratz took that information, totaled up the cost of the conference center and claimed that amount as a deduction.

Dr. Pankratz did not obtain qualified appraisals for any of these donations. Such a failure usually results in the denial of the claimed deduction and can also result in penalties. There was, however, one “hope for Pankratz,” as the court explained—when Congress “codified many of the old substantiation regulations in section 170(f)(11), [it] added an escape hatch from non-deductibility for well-intentioned taxpayers.” The Code allows the deduction despite a qualified appraisal where “it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect.” 

The court here engaged in the “fact-intensive inquiry that requires a case-by-case examination of all the facts and circumstances presented” to decide if Pankratz acted with “reasonable cause.” The court explained that “reasonable cause” would be met if Pankratz exercised ordinary business care and prudence. The court concluded that he did not. A number of facts and circumstances supported the court’s decision, including Pankratz’s business sophistication, his reliance on individuals who were not tax professionals, and his failure to review his tax returns before they were submitted. The opinion also addresses a number of penalty issues outside this charitable contribution question. Pankratz v. Comm’r, T.C.M. (RIA) 2021-026 (T.C. 2021).

In the second case, a Wisconsin attorney’s failure to comply with the substantiation requirements led to the denial of over $250,000 in claimed charitable deductions. Although this taxpayer hired a qualified appraiser, he failed to report additional required information, such as the dates that he acquired the donated property, and how he determined the basis in the donated property. The petitioner “wholly failed to comply with the substantiation requirements under section 170 and its regulations” and did not act in good faith. Consequently, the deductions were denied and the imposed penalties were upheld. Chiarelli v. Comm’r, T.C.M. (RIA) 2021-027 (T.C. 2021). 

• Petitioner may withdraw abatement petition. The tax court is a court of limited jurisdiction, and most of the cases it hears are petitions to re-determine deficiencies. “In deficiency cases, ‘a decision of the Tax Court dismissing the proceeding shall be considered as its decision that the deficiency is the amount determined by the Secretary.’ In these cases, a taxpayer may not withdraw a petition in order to avoid a decision.” In contrast, petitioners are permitted to withdraw their petitions in collection actions, determination of innocent spouse relief, and whistleblower award determinations. The tax court has statutory jurisdiction over the preceding actions, as well as abatement of interest actions, and the issue presented in this case was whether petitioners in abatement of interest actions are permitted to withdraw their petitions. The court looked to the Federal Rules of Civil Procedure for guidance and concluded that the tax court has the authority to allow a petition to be withdrawn voluntarily in a case for review of the secretary’s failure to abate interest. Mainstay Bus. Sols. v. Comm’r, No. 6510-18, 2021 WL 832046 (T.C. 3/4/2021).

•  Revenue agent report was “initial determination” for penalty assessment purposes. Taxpayers prevailed in a partial summary judgment motion in which the court held that the revenue agent’s report was an “initial determination” for penalty assessment purposes. The IRS may not assess certain penalties unless the “initial determination” of the penalty assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination. The court candidly acknowledged that the statute does not set out the contours of what agency action constitutes an “initial determination,” so the court turned to a “developing body” of case law. Because the agent’s report in this dispute was a “communication with a high degree of concreteness and formality” and represented a “consequential moment” of IRS action, the report was an “initial determination.” Since the agent did not get the supervisory approval prior to the report, the taxpayers were entitled to summary judgment on the penalty issue. Beland v. Comm’r, No. 30241-15, 2021 WL 777184 (T.C. 3/1/2021).

•  Appellants fail to state a claim; court dismisses action. Appellants Mikel and Tanya Kunza timely filed their Minnesota 2015 individual income tax return and property tax refund claim. On 9/11/2017, the commissioner received a report and Form CP 2000 from the IRS that adjusted appellants’ federal income upward by $15,299 for the 2015 tax year. This adjustment resulted in a corresponding adjustment to appellants’ Minnesota income tax return and property tax refund claim for 2015. Appellants did not notify the commissioner of the federal adjustment.

On 9/24/2019, the commissioner issued a tax order assessing appellants $3,394 in tax, penalty, and interest. Appellants filed an administrative appeal of the order. The commissioner subsequently abated a 10% penalty but affirmed the tax and interest. Appellants timely filed a notice of appeal with the tax court, alleging the assessment in the notice of determination on appeal was barred by a statute of limitations.

This motion was originally scheduled for 8/25/2020, but was postponed until 9/25/2020 to allow appellants the opportunity to retain an attorney. On 9/24/2020, Mr. Kunza emailed the commissioner and the court with several arguments against the motion, and also noted he would try to attend the hearing, but it would be difficult with his children home as a result of distance learning. The court subsequently postponed the hearing “to allow Mr. Kunza a final opportunity to file a response with documentation.” On 10/1/2020 and 10/5/020, the court received written submissions from Mr. Kunza and an “IRS transcript for 2015,” respectively. The motion hearing was rescheduled for 11/5/2020. Appellants did not appear. The commissioner moved to dismiss the action for failure to state a claim. The commissioner argues that appellants’ defense—that the commissioner’s assessment is untimely— is without merit.

Commissioner orders are prima facie valid. Minn. Stat. §271.06, subd. 6 (2020); Minn. Stat. §270C.33, subd. 6 (2020). “Because Commissioner orders are presumptively valid, appellants bear ‘the burden of going forward with the evidence to rebut or meet the presumption.’” Congo Corp. v. Comm’r of Revenue, 868 N.W.2d 41, 53 (Minn. 2015). Minn. R. Civ. P. 12.02(e) allows a party to “move to dismiss an action for failure to state a claim upon which relief can be granted.” “If, on a motion asserting the defense that the pleading fails to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment....” Minn. R. Civ. P. 12.02. The grant must grant summary judgment if the moving party shows that there is “no genuine issue of material fact,” and the moving party is “entitled to judgment as a matter of law.” Minn. R. Civ. P. 56.01.

Minn. Stat. §289A.38 specifies the “time limitations within which the Commissioner must make assessments. Generally, ‘the amount of taxes assessable must be assessed within 3-1/2 years after the date the return is filed.’” Id., subd. 1. However, relevant here, the statute of limitations is “extended by 6½ years after the due date of the return, or the date the return was filed, whichever is later, when a taxpayer omits from gross income an amount properly includable in it that is in excess of 25 percent of the amount of gross income stated in the return.” Id., subd. 6(1). Additionally, “if a taxpayer fails to file amended income tax and property tax refund returns after the Internal Revenue Service changed or corrected a federal return, ‘the commissioner may recompute the tax... within six years after the [amended returns] should have been filed....’” Id., subds. 7-8.

In his prehearing emails, Mr. Kunza reiterated his statute of limitations arguments, stating that his federal return was not changed until January 2020, so any amended filing would not be due until June 2020. To support his argument, Mr. Kunza attached an Internal Revenue Service Account Transcript for “tax period” 12/31/2015. The court concluded that the transcript did not support Mr. Kunza’s assertions.

The court concluded that the commissioner was “within the statutory time limitation to adjust appellants’ 2015 Minnesota income and to issue the contested assessment.” The Internal Revenue Service’s upward adjustment by $15,299 was 49% of what appellants originally reported. Because appellants both underreported their income by more than 25% and failed to file amended returns with the commissioner, the court ruled that appellants failed to point to any material fact that would overcome the prima facie validity of the notice of determination on appeal and granted the commissioner’s motion for dismissal. Kunza v. Comm’r of Revenue, 2021 WL 161986 (Minn. Tax Court 1/8/2021).

•  Property tax: Court relies on traditional approaches to market values. The court consolidated these cases for trial regarding the market value, as of 1/2/2016 and 1/2/2017, of a 321-unit self-storage facility located in Oakdale, Minnesota. The assessed values of the property as of 1/2/2016 and 1/2/2017 understated its market value.

Petitioner Chambers Self-Storage timely filed a property tax petition contesting the 1/2/2016 and 1/2/2017 assessment, claiming that both property assessments were overvalued and statutorily unequal. Prior to trial, petitioner brought several motions before the court: “(1) for withdrawal of certain deemed admissions; (2) to consolidate three petitions; (3) to compel Washington County to fully respond to petitioner’s discovery; and (4) for leave to amend its petitions to include constitutional unequal assessment claims.” See Chambers Self-Storage Oakdale, LLC v. Cty. of Washington, No. 82-CV-17-1685 et al., 2020 WL 4459046, at *1 (Minn. T. C. 7/29/2020). Subsequently, petitioner brought a motion to continue trial pending the outcome of a petition for review to the Minnesota Supreme Court in a separate and unrelated matter. See Chambers Self-Storage Oakdale, LLC v. Cty. of Washington, Nos. 82-CV-17-1685 & 82-CV-18-2123, 2020 WL 5520639, at *2 (Minn. T.C. 9/10/2020).

Trial commenced on 9/15/2020 at the Washington County Courthouse. At the start, petitioner noted that it attempted to subpoena Bruce Munneke, a supervisor with the Washington County Assessor’s Office, but was unable to do so. Petitioner argued his testimony was necessary with respect to the office’s mass appraisal process. The court treated petitioners’ “subpoena issue as a motion to order service on Mr. Munneke, or a motion to order Mr. Munneke to appear at trial.” The county opposed petitioners’ request, arguing Mr. Munneke’s testimony would not be relevant, and the court “could not compel appearance of a witness without a validly served subpoena.” The court agreed and denied petitioner’s motion to order service.

Although petitioner contested the assessed values on each assessment date, it did not advocate for a lower market value, stating only that the assessments were “pretty close,” and that they were within range of the subject property’s market value. Petitioner did not present appraisal evidence of the subject property’s market value. An assessor’s estimated market value is prima facie valid. Minn. Stat. §271.06, subd. 6(a) (2020). In this case, the county waived the prima facie validity of the assessment and the court determined the market value based on a preponderance of the evidence. See Minn. Energy Res. Corp. v. Comm’r of Revenue, 909 N.W.2d 569, 573 (Minn. 2018).

Regarding taxation, “market value” is the “usual selling price at the place where the property to which the term is applied shall be at the time of assessment; being the price which could be obtained at a private sale or an auction sale….” Minn. Stat. §272.03, subd. 8 (2020). In this case, the court considered three traditional approaches to valuation in determining market value: sales comparison, income, and cost.

The sales comparison approach assumes “that the value of property tends to be set by the cost of acquiring a substitute or alternative property of similar utility and desirability within a reasonable amount of time.” Appraisal of Real Estate 352. Application of this approach requires analysis of recent sales of similar properties to compare to the subject property, and the adjustment of their sale prices as needed to account for physical characteristics, size, location, and condition to make those properties comparable to the subject property. See id. at 353, 362-65.

Andy Donahue, Washington County’s expert, concluded to an assessment of $2,630,000 for both the 2016 and 2017. “To get there, Mr. Donahue relied upon seven comparable sales, located in: White Bear Township; Fargo, ND; Blaine; Inver Grove Heights; Racine, WI; Coon Rapids; and Omaha, NE.” Sales outside of Minnesota were considered “‘due to the limited transaction volume observed,’ but Mr. Donahue found it reasonable to rely on these sales because ‘this asset type has a regional buyer base.’” Mr. Donahue then made several adjustments to the comparable properties’ sale prices, including conditions of sale, quality, and age. Petitioner did not cross-examine, nor contest Mr. Donahue’s sales comparison approach.

Under the income approach, a “suitable discount rate is used to reduce to a present value the anticipated income stream of an income-producing property.” Citation omitted. The amount to be capitalized is net operating income. To determine net operation income, one must: “(1) estimate potential gross income; (2) subtract anticipated vacancy and collection losses to derive effective gross income; (3) subtract total operating expenses to derive net operating income; and (4) ‘[a]pply one or more of the direct or yield capitalization techniques to this data to generate an estimate of value....’” Appraisal of Real Estate 432. Mr. Donahue’s income approach yielded values of $2,770,000 for 2016, and $2,860,000 for 2017.

“The cost approach supposes that ‘an informed buyer would pay no more for the property than the cost of constructing new property having the same utility.’” This approach is used “when market or income data is unavailable.” Lowe’s Home Ctrs., LLC (Plymouth) v. Cty. of Hennepin, No. 27-CV-16-04306, 2019 WL 333004, at *12 (Minn. T.C. 1/17/2019). This approach is best applied when “the improvements are new or suffer only minor depreciation.” Citation omitted. The county concluded, given the age and difficulty of calculating depreciation, that the cost approach was less applicable to the subject property. The court agreed and did not consider the approach.

In a lengthy analysis, the court found the appraisal testimony of Mr. Donahue to be credible and accepted the conclusions of the subject property’s market value for the 2016 and 2017 assessments. The court did, however, take issue with Mr. Donahue’s 100% reliance on the income approach. Instead, the court placed 80% weight on Mr. Donahue’s income approach, and 20% weight on his sales approach, concluding that the value of the 2016 assessment of the subject property is $2,742,000, and $2,814,000 for the 2017 assessment. Chambers Self-Storage Oakdale, LLC v. Washington Co., 2021 WL 278358 (Minn. Tax Court 1/25/2021).

Morgan Holcomb  Mitchell Hamline School of Law

Sheena Denny  Mitchell Hamline School of Law 

 

TORTS & INSURANCE

JUDICIAL LAW

• Statute of limitations; improvements to real property. Plaintiff hired defendant to remove his broken, asbestos-insulated boiler and asbestos pipe insulation in 2013. A subsequent contractor installed a new, asbestos-free heating system. Plaintiff alleged that he witnessed defendant’s workers violate safety protocols, resulting in contamination of his home. An environmental report dated 3/12/2014 confirmed that substances tracked through plaintiff’s home contained asbestos, but plaintiff did not commence suit until 2018. The district court dismissed the complaint, concluding that the 2-year statute of limitations in Minn. Stat. §541.051 barred plaintiff’s claims. The court of appeals affirmed the dismissal.

The Minnesota Supreme Court affirmed. The main issue before the Court was whether defendant’s work constituted an “improvement to real property.” Plaintiff argued that because defendant simply removed a heating system and asbestos, it performed demolition work rather than construction resulting in an improvement to real property. The Court rejected this argument, focusing on the work performed on the heating system as a whole and noting that because “the new asbestos-free boiler could not be installed until [defendant] removed the old boiler, [defendant’s] work moved the project toward completion and was therefore construction on the new heating system.” The Court went on to hold that the new heating system constituted an “improvement to real property” because it was a permanent addition to the home, added value, and was designed to make the home more useful and valuable than it was when it used the old heating system. Moore v. Robinson Environmental, A19-0668 (Minn. 2/3/2020). https://mn.gov/law-library-stat/archive/supct/2021/OPA190668-020321.pdf

Jeff Mulder  Bassford Remele

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