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Notes & Trends – April 2019

CIVIL PROCEDURE

 

JUDICIAL LAW

• Minn. R. Civ. P. 12.02(e); affirming dismissal of defamation case due to absolute privilege and immunity. Plaintiff Keane brought a defamation action against defendant attorney Groth for statements regarding the relationship of the parties made in an answer during a prior breach of contract action. Defendant brought a motion to dismiss under Minn. R. Civ. P. 12.02(e) for failure to state a claim upon which relief can be granted, arguing that the statements were barred by absolute privilege and absolute immunity. The district court granted defendant’s motion. 

The general rule is that “defamatory statements published during a judicial proceeding are absolutely privileged.” On appeal, Keane argued that the district court’s dismissal was improper because the defendant had not explicitly cited privilege as an affirmative defense. Moreover, the plaintiff asserted that the statements were not privileged because they were not relevant to the legal dispute under Matthis v. Kennedy, 67 N.W.2d 413 (Minn. 1954) (enumerating test for whether a statement is “relevant” to a legal dispute, and therefore privileged). The court of appeals disagreed with the plaintiff, finding that the allegedly defamatory statements were “relevant” to the previous legal dispute, and therefore privileged. As a result, the statements could not form the basis of a defamation action. The court of appeals affirmed the district court’s dismissal under Minn. R. Civ. P. 12.02(e). Keane v. Groth, A18-0614, 2019 WL 907498 (Minn. Ct. App. 2/15/2019) (unpublished). 

 

• Minn. R. Civ. P. 24.01; affirming denial of motion to intervene by insurer in motion to approve Miller-Shugart settlement.Plaintiff’s child was injured by a dog at an in-home daycare run by the defendant. The defendant’s home insurer, American Family, denied coverage due to an exclusion in the insurance policy. The plaintiff and defendant reached a Miller-Shugartsettlement agreement and sought approval and judgment by the court. American Family sought to intervene in the approval and judgment hearing under Minn. R. Civ. P. 24.01. The district court denied the insurer’s motion to intervene, and did not allow it to argue on the merits. The insurer appealed. 


The Minnesota Court of Appeals affirmed, finding that the insurer did not meet the four-factor test laid out in Minn. R. Civ. P. 24.01. Daberkow, at *2 (“a non-party seeking to intervene…must show (1) timely application for intervention, (2) an interest relating to the property or transaction that is the subject of the action; (3) circumstances demonstrating that the disposition of the action may as a practical matter impair or impede the applicant’s ability to protect that interest; and (4) that the applicant is not adequately represented by the existing parties.”). The court found that the insurer’s motion failed on the third prong because an insurer may challenge an approved Miller-Shugartsettlement in a garnishment or declaratory judgment action. The court also found that the district court properly denied the insurer the opportunity to participate in oral argument. Daberkow by and Through Daberkow v. Remer, A18-0472, 2019 WL 664505 (Minn. Ct. App. 2/19/2019) (unpublished). 

 

• Minn. R. Civ. P. 60.02; affirming denial of motion to reopen commitment proceedings. In 2014 plaintiff Dooley was civilly committed as a sexually dangerous person (SDP) due in part to a stipulation whereby he agreed to be civilly committed. Four years later, Dooley sought to reopen his civil commitment proceeding under Minn. R. Civ. P. 60.02, arguing that his counsel in the 2014 action was ineffective, and the stipulation should be withdrawn. The district court denied Dooley’s Rule 60.02 motion, and Dooley appealed. 

The court of appeals found that Dooley’s interpretation of the stipulation was incorrect. The stipulation, according to the court, was not that Dooley agreed to be committed as a SDP, but rather that he agreed to submit the case based on a stipulated record. Moreover, the court found that even if the motion to reopen was timely, it failed on the merits. The court held that Dooley’s counsel in the 2014 proceeding was not ineffective despite that counsel’s drug convictions more than four years later. Additionally, the court held that the stipulation was a “knowing, voluntary, and intelligent decision” and therefore that the motion to reopen the commitment proceeding was not warranted under Rule 60.02. Matter of Civil Commitment of Dooley, A18-0944, 2019 WL 661662 (Minn. Ct. App. 2/19/2019) (unpublished).

 

• Minn. R. Civ. P. 37; attorneys’ fees assessed against non-parties. This dispute centered on whether trust assets are part of the marital estate subject to distribution upon dissolution of a marriage. Though many of the issues in this case were unrelated to civil procedure, one Rule 37 issue arose—namely, whether attorneys’ fees as sanctions under Minn. R. Civ. P. 37 may be assessed against non-parties. The husband, the corporation he worked for, and the husband’s father, who owned that corporation, failed to comply with discovery orders and were placed in contempt. The district court found that the husband, the corporation he worked for, and the husband’s father owed the wife over $89,000 in attorneys’ fees resulting from contempt-related litigation. 

The husband’s father argued that because he was not a party to the dissolution, Rule 37 sanctions in the form of attorneys’ fees could not be assessed against him. The court of appeals found that the father “misconstrued the limitation of the rule.” The court compared the case to Bowman v. Bowman, 493 N.W.2d 141 (Minn. Ct. App. 1992), wherein attorneys’ fees were affirmed against a non-party business partner of one of the parties because he was “an officer of the partnership.” Similarly, in this case, the court found that the father was an officer of the business and therefore that assessing attorneys’ fees against him was appropriate under Rule 37. Kazeminy v. Kazeminy, A18-0029, 2019 WL 664893 (Minn. Ct. App. 2/19/2019) (unpublished). 

 

• Minn. R. Civ. P. 19; landowners as necessary and indispensable parties in ordinance dispute.The plaintiffs in this case sought judicial review of a township’s zoning variance decision. The plaintiffs served the township, but failed to timely serve the landowners who received the variance. The district court found that the landowners were necessary and indispensable parties under Minn. R. Civ. P. 19, and therefore, because they had not been joined, the case must be dismissed. The court of appeals affirmed, finding that the zoning variance was related to the landowner’s property, and therefore that they “obviously have an interest in the township’s zoning-variance decision.” The court was persuaded by the fact that the landowners had already expended over $75,000 in construction costs in reliance on the variance decision. Further, the court found that disposition of the case could impair or impede the landowner’s ability to protect their property interests, and thus that the landowners were necessary and indispensable parties. Schulz v. Town of Duluth, ___ N.W.2d ___, 2019 WL 510023 (Minn. Ct. App. 2019). 

 

• Minn. R. Civ. P. 60.02; seeking relief from prospective order based on an unconstitutional statute. Plaintiff Lougee sued the defendant for defamation and other related torts arising out of statements the defendant made to the police concerning Lougee. The suit was dismissed under the Minnesota anti-SLAPP statute, which was later found to be unconstitutional as applied to tort claims. Based on the finding that the anti-SLAPP statute was unconstitutional in certain circumstances, Lougee moved for relief from the dismissal of his suit under Minn. R. Civ. P. 60.02(e)-(f). The district court denied Lougee’s motion. 

Rule 60.02(e) permits a court to relieve a party from a final judgment, order, proceeding, etc. if “it is no longer equitable that the judgment should have prospective application.” The issue was whether an order for dismissal is “prospective” and therefore whether it falls within the purview of Rule 60.02(e). Lougee argued that dismissal is prospective in nature, and therefore covered by 60.02(e), because it has the effect of prohibiting him from bringing a law suit in the future. The court of appeals disagreed, finding that because an order for dismissal does not require a court to supervise changing conduct or conditions, it is not prospective in nature, and therefore not covered by the rule. 

Rule 60.02(f) permits a court to relieve a party from a final judgment, order, proceeding, etc. for “[a]ny other reason justifying relief from the operation of judgment.” The court of appeals held that this provision did not apply. The court found that Rule 60.02 was intended to strike a balance between the need for finality of judgments and the need for relief in certain circumstances, and that Rule 60.02(f) should only be used in “extraordinary situations.” Since this was not an “extraordinary circumstance,” the court found that the district court correctly determined that a 60.02(f) motion could not be granted in this case. Lougee v. Pehrson, A18-0026, 2019 WL 418516 (Minn. Ct. App. 2/4/2019) (unpublished). 

 

MAYA DIGRE

HKM, PA

 

 

COMMERCIAL AND CONSUMER LAW

 

JUDICIAL LAW

• When do some requirements of UCC Article 9 arise?Uniform Commercial Code (UCC) §9-610(b) requires every disposition of collateral to be commercially reasonable. The Official Comments to §9-610 are of some assistance on the question of what is commercially reasonable, as is §9-627, but ultimately a comprehensive definition of the term is not possible and the resolution of whether a disposition qualifies depends on the facts in a particular case. Given that the sanctions for a misstep can be severe (see §9-625), this issue of what is commercially reasonable has caused trouble for many a secured party.

Recently the Minnesota Court of Appeals, in Bremer Bank, N.A. v. Matejcek, was faced with the question of when the commercially reasonable requirement arises. A married couple had obtained a secured loan to purchase a motor home. The debtors divorced and the loan went into default. The wife then requested permission from the lender to sell the motor home after which the proceeds would be turned over to the lender, who agreed to release its lien so the sale could be accomplished. The wife also got a court order transferring sole title to the motor home to her. After the sale, which did not entirely satisfy the debt, the lender sought a deficiency from both debtors, got judgments against both debtors, and the husband appealed asserting he was given no notice of the sale and it was not a commercially reasonable one as required by UCC Article 9. The court said because the lender had taken no part in the sale, the UCC requirements did not apply to it, and the fact the lender had released its lien was not sufficient to trigger those requirements.

The decision seems absolutely correct and does not seem to create a loophole in the Article 9 requirements because the selling debtor has every incentive to maximize the sale price. Indeed, Comment 2 to UCC §9-610 states the section encourages private dispositions. In short, this procedure seems an attractive alternative to secured party foreclosure if the debtor is informed and willing. It is something to consider because at least it is cheaper than judicial action for both parties and perhaps less risky for a secured party that is not accomplished or wise enough to employ a person who is experienced in conducting foreclosure sales. Bremer Bank, N.A. v. Matejcek, 916 N.W.2d 688 (Minn. App. 2018).

 

FRED MILLER

Ballard Spahr

 

CRIMINAL LAW

 

JUDICIAL LAW

• Minnesota Imprisonment and Exoneration Remedies Act: “Consistent with innocence” means “agrees with innocence.” Appellant was arrested and tried for a 1993 robbery of a convenience store, with charges including aggravated robbery, kidnapping, second-degree assault, and attempted second-degree criminal sexual conduct. A jury convicted him, but the court of appeals later reversed, finding the district court erred in introducing Spreiglevidence. At his second trial, appellant was found not guilty. The district court subsequently denied appellant’s petition for certification of eligibility for compensation based on exoneration under the Minnesota Imprisonment and Exoneration Remedies Act (MIERA), concluding that a reversal and remand for a new trial based on erroneously admitted Spreiglevidence was not “on grounds consistent with innocence” and that appellant did not establish his innocence by a preponderance of the evidence.

A claim for compensation under the MIERA may be filed only if a person first petitions a court for and receives an order certifying they are eligible for compensation based on exoneration, which requires the person to (1) meet the statutory definition of “exonerated,” and (2) either have the prosecutor join the petition or prove their innocence by a preponderance of the evidence. The court of appeals does not reach the second part of this test, as it concludes that the district court correctly concluded that the reversal of appellant’s conviction was not on “grounds consistent with innocence.” 

A person is exonerated under the MIERA of a Minnesota court “ordered a new trial on grounds consistent with innocence and the prosecutor dismissed the charges or the petitioner was found not guilty at the new trial,” and that decision becomes final. Minn. Stat. §590.11, subds. 1(1)(ii), 1(2). The court rejects appellant’s argument that the earlier reversal of his conviction was based on improper Spreiglevidence as well asalibi evidence that exonerated him, clarifying that the court’s decision made only fleeting references to the alibi evidence in its consideration of whether the admission of the improper Spreiglevidence was harmless error. 

The court then finds that reversal for erroneously admitted Spreiglevidence is not a reversal “on grounds consistent with innocence.” The court notes that there are two reasonable interpretations of “on grounds consistent with innocence”: “does not contradict innocence” and “agrees with innocence.” The prohibition on introducing Spreiglevidence is a procedural safeguard, which is irrelevant to the defendant’s actual guilt or innocence, and thus does not “agree with innocence,” but “does not contradict innocence.” However, the court finds that the Legislature intended for “consistent with innocence” to mean “agrees with innocence,” both to avoid absurd results and because any other interpretation would render the term ineffectual and superfluous, as the statute already contemplates a conviction that has been reversed or remanded.

The district court’s denial of appellant’s petition is affirmed. Jonathan Edward Buhl v. State, No. A18-0245, 2019 WL 114172 (Minn. Ct. App. 1/7/2019).

 

• Implied consent: Police permitted to execute search warrant for blood test over driver’s objection when police did not read implied consent advisory.After appellant’s arrest for an unrelated matter, police suspected he had been driving while under the influence of methamphetamine. Police did not read appellant the implied consent advisory, but instead obtained a search warrant. Over appellant’s objection, police executed the warrant to obtain a sample of appellant’s blood, which tested positive for controlled substances. Prior to trial, the district court denied appellant’s motion to suppress, and appellant was subsequently found guilty after a jury trial. The issue on appeal is whether police were permitted to execute the search warrant after appellant’s DWI arrest (in 2016), even though appellant did not consent and objected to the test. Although nonconsensual blood draws are constitutionally permissible if performed pursuant to a valid search warrant, appellant argues that a test may not be given if a person refuses under the 2014 version of Minn. Stat. §169A.52, subd. 1 (in effect at the time of the offense). The question is whether that statutory provision applies if law enforcement did not read the implied consent advisory to a driver after arresting him or her for DWI. 

Section 169A.52, subd. 1, falls within the portion of Minnesota’s “Driving While Impaired” chapter, chapter 169A, that lays out the “Implied Consent Laws.” Section 169A.52, specifically, establishes civil consequences for test refusal or failure. In contrast, another portion of chapter 169A, titled “Criminal Provisions,” sets criminal offenses and penalties for driving while impaired, and yet another portion, titled “Procedural Provisions,” contains provisions that may apply in a criminal DWI prosecution. “The implied-consent law provides a means by which a person who has been arrested for DWI may be tested (or not tested) and thereafter denied driving privileges in an administrative process, with an opportunity for judicial review of a license revocation in a civil proceeding.” Other provisions in chapter 169A govern criminal DWI prosecutions, one of which permits evidence of breath, urine, or blood test at trial, without regard to whether the sample was obtained pursuant to the implied-consent law. The court also notes that the implied consent law does not require an officer to invoke the implied consent law, nor does anything in the law prevent an officer from obtaining and executing a search warrant for a sample.

The court holds that section 169A.52, subd. 1, applies only if the implied consent law is invoked by an officer’s reading of the implied consent advisory to a driver arrested for DWI. The court finds, therefore, that section 169A.52, subd. 1, unambiguously did not prevent police from executing the search warrant authorizing the taking of a sample of appellant’s blood.

Finally, the court notes it would reach the same result even if it had found section 169A.52, subd. 1, to be ambiguous. The district court’s denial of appellant’s motion to suppress evidence of the result of the blood test is affirmed. State v. Brett Michael Wood, No. A17-1853, 922 N.W.2d 209 (Minn. Ct. App. 1/7/2019).

 

• Domestic assault: Case-by-case analysis of factors in Section 518b.01, subd. 2(b), required to determine if “significant romantic or sexual relationship” exists. Appellant was convicted of felony domestic assault under Minn. Stat. §609.2242, subd. 4, for “intentionally inflict[ing]… bodily harm” “against a family member or household member as defined in Minn. Stat. § 518B.01, subd. 2.” On appeal, he argues the evidence at trial was insufficient to prove the victim, C.P., fit the definition of “household or family member.” This definition includes someone with whom the defendant has a “significant romantic or sexual relationship.” Minn. Stat. §518B.01, subd. 2(b)(7). “Significant” is not defined, but the statute directs courts to “consider the length of time of the relationship; type of relationship; frequency of interaction between the parties; and, if the relationship has terminated, length of time since the termination.” The Supreme Court confirms that these factors in section 518B.01, subd. 2(b), are incorporated in the criminal statute, section 609.2242, subd. 4, by explicit reference and must be considered to determine whether a “significant romantic or sexual relationship” existed. The Supreme Court also finds that the phrase “significant romantic or sexual relationship” is not ambiguous, as its plain meaning is understood by reference to the list of statutory factors in section 518B.01, subd. 2(b).

Appellant and C.P. met in March 2016 at a homeless shelter, where C.P. was employed. They began dating, although C.P. had been living with another man for 12 years, whom C.P. claimed was just a roommate but whom she lied to in order to spend time with appellant. In June and July 2016, appellant and C.P. stayed in hotel rooms together for a number of days, during which time C.P. relapsed after 14 years of sobriety. C.P.’s family reported her missing after she did not communicate with them for 24 hours and missed several shifts at work. When C.P. was located at a hotel with appellant, where she had been for five days, intoxicated and without food, and with bruises and lacerations on her face. C.P. described appellant to police as a “friend,” but admitted to having sexual intercourse with him on a number of occasions and that she was “failing in love with him.” The court of appeals affirmed appellant’s conviction, as does the Supreme Court, finding this evidence sufficient to support the jury’s finding that appellant and C.P. were in a “significant romantic or sexual relationship” when the assault occurred. State v. Gerald Robinson, No. A17-0525, 921 N.W.2d 755 (Minn. 1/9/2019).

 

• Robbery: “Personal property” is all property that is not real property. Appellant was convicted of simple robbery for taking a bottle of liquor from a liquor store without paying. He argued on appeal that the evidence was insufficient to support his conviction because a bottle of liquor owned by a business is not “personal property.” The court of appeals affirmed his conviction, as does the Supreme Court.

Under the simple robbery statute, Minn. Stat. § 609.24, it is a crime when someone “having knowledge of not being entitled thereto, takes personal property from the person or in the presence of another…” The Supreme Court notes that it must look beyond the common and ordinary meaning of “personal property,” as it has acquired a clear and specialized meaning: any property that is not real property. This meaning is the only reasonable interpretation of the phrase in the context of the robbery statute. State v. John Lee Bowen, No. A17-0331, 921 N.W.2d 763 (Minn. 1/16/2019). 

 

• Sentencing: If felony conviction received misdemeanor or gross misdemeanor sentence, count conviction in criminal history score as misdemeanor or gross misdemeanor. After a jury trial, appellant was convicted of first-degree assault for causing great bodily harm to his live-in girlfriend’s 23-month-old child, B.G.D. After appellant alone put a protesting B.G.D. down for a nap, B.G.D. started seizing and vomiting, and was rushed to the hospital for a severe brain injury. Testing revealed significant trauma to B.G.D.’s brain. Dr. Swenson, the child abuse pediatrician who evaluated B.G.D. in the hospital, testified as an expert for the state at trial, testifying regarding “abusive head trauma” (formerly called “shaken baby syndrome”) as well as her examination of B.G.D., concluding with an opinion that B.G.D.’s injuries were caused by abusive head trauma. Appellant argues the evidence was insufficient to prove he caused B.G.D.’s injuries, the district court erred by admitting Dr. Swenson’s testimony about the cause of B.G.D.’s injuries, and the district court erred in calculating his criminal history score.

The court of appeals first finds the evidence was sufficient to prove appellant caused B.G.D.’s injuries. Next, the court finds that Dr. Swenson’s testimony had foundational reliability, because the record establishes it is based on a reliable scientific theory. Here, other theories or evidence were introduced, through the testimony of defense experts, that tended to contradict Dr. Swenson’s opinion. However, that does not justify excluding Dr. Swenson’s testimony. Assessing the weight and credibility of the experts’ opinions is the province of the fact finder. The court also rejects appellant’s argument that Dr. Swenson improperly offered an opinion as to appellant’s intent. Instead, the court finds Dr. Swenson testified as to an opinion that “embraces the ultimate issue.” She gave her opinion—based on her professional experience, the nature, extent, and timing of B.G.D.’s injuries, B.G.D.’s medical history, and B.G.D.’s test results—that his injuries were not accidental. Her testimony did not decide the question of appellant’s intent, but provided a medical context for the jury to make its own determination.

Finally, the court rules that appellant’s criminal history score was incorrectly calculated. The district court assigned two criminal history points for Appellant’s 2014 theft conviction (property exceeding $5,000)—one felony point and one custody status point, as appellant was on probation at the time. Appellant initially received a stay of imposition and was placed on probation for the theft conviction. In 2016, the court amended his sentence and executed a sentence of 342 days, which is within the gross misdemeanor sentencing limits. Thus, for purposes of the sentencing guidelines, appellant received a gross misdemeanor sentence, not a felony sentence. Based on the language of the guidelines, the sentencing commission’s comments, and historical application of the guidelines, the court conclude that a felony conviction that results in a gross misdemeanor or misdemeanor sentence should be treated as a gross misdemeanor or misdemeanor for purposes of calculating a defendant’s criminal history score. Thus, appellant should not have received a felony point for a theft conviction that received a non-felony sentence. State v. Matthew Scott Stewart, No. A17-2039, 2019 WL 272858 (Minn. Ct. App. 1/22/2019).

 

• Criminal sexual conduct: Minn. Stat. §617.247’S 10-year conditional release term required if, at time of commitment for violation of § 617.247, defendant has an earlier qualifying conviction. Appellant committed child pornography and first- and second-degree criminal sexual conduct offenses. In August 2009, he committed criminal sexual conduct, and entered a plea to second-degree criminal sexual conduct in January 2010. Adjudication on the criminal sexual conduct charge was stayed in April 2010, but a sentence was executed in January 2012 after two probation violations. In March 2010, child pornography was found on a computer to which appellant had access, and he was charged with child pornography possession in April 2010, to which he pleaded guilty in October 2012. As part of his child pornography sentence, the court imposed a 10-year conditional release term, under Minn. Stat. §617.247, subd. 9. 

Subdivision 9 of section 617.247 addresses the conditional release term to be imposed on a person who violates that section. Under subdivision 9, an enhanced conditional release term of 10 years is imposed if the person has previously been convicted of a violation of section 617.247 or other listed statutes related to criminal sexual conduct. The Court finds no ambiguity in subdivision 9 and finds that the single plain meaning of its provisions are as follows: “[A] person convicted under section 617.247 must be sentenced to either a 5-year term of conditional release or, if the person has an earlier qualifying conviction, a 10-year term of conditional release.” The Court further holds that the time for determining whether the “earlier qualifying conviction” condition is satisfied is, as the statute explicitly states, “when a court commits a person to the custody of the commissioner of corrections for violating” section 617.247. 

Appellant’s second-degree criminal sexual conduct conviction is a qualifying conviction listed in section 617.247 and the conviction occurred in August 2011. His warrant of commitment for violating section 617.247 was signed by the district court in October 2012. Appellant plainly qualified for the enhanced conditional release term. State of Minnesota v. Everett Overweg, No. A17-1978, 922 N.W.2d 179 (Minn. 1/23/2019).

 

• Criminal sexual conduct: Substantial step made toward committing third-degree criminal sexual conduct. Appellant was convicted of attempted third-degree criminal sexual conduct, electronic solicitation of a child, and electronic distribution of material describing sexual conduct to a child for making contact online with a BCA agent posing as a young male. Appellant initiated the conversation, asked the decoy if he wanted to meet up, requested nude pictures from the decoy, and sent the decoy explicit photographs. Even after being told the decoy was 14 years old, appellant continued to ask for nude pictures, asked about the decoy’s sexual experience, told the decoy he wanted to engage in sexual acts with him, and made arrangements to meet the decoy at the decoy’s “home” while the decoy’s “mother” was at work the next day. Appellant went to the address given by the decoy the next day and was arrested when he knocked on the door. On appeal, appellant argues he did not take a substantial step toward committing third-degree criminal sexual conduct.

What constitutes a “substantial step” is defined in case law. There must be an intent to commit the crime, followed by an overt act or acts tending, but failing, to accomplish it, and which amount to more than mere preparation, remote from the time and place of the intended crime. State v. Dumas, 136 N.W. 311, 314 (Minn. 1912). Appellant argues his acts were nothing more than mere preparation. He points to cases that he argues hold that some physical contact, words delivered in person, or an attack are required for acts to constitute a “substantial step” toward committing third-degree criminal sexual conduct. However, the court of appeals notes that social media has changed how sexual encounters occur and how sexual crimes are perpetrated. “Actions that historically demonstrated a substantial step toward commission of a sex crime, such as preliminary physical contact, may no longer apply when social media is used to initiate the sexual encounter.” The court holds that appellant’s actions here were not remote in time or location from the intended criminal sexual conduct and directly tended in some substantial degree to accomplish the crime. State v. Brian James Wilkie, No. A18-0288, 2019 WL 333483 (Minn. Ct. App. 1/28/2019).

 

• 4th Amendment: No reasonable expectation of privacy in identifying information given to hotel to rent room. Police obtained a hotel guest list from the hotel’s clerk and learned appellant had rented a room for six hours using a Pennsylvania identification card and paid with cash. This prompted police to check appellant’s criminal history, where they discovered numerous drug, firearms, and fraud arrests. Appellant allowed police to enter his room, and police observed a large amount of cash, two printers, and several envelopes. After obtaining a search warrant, police found several fake paychecks from various hotels to “Spencer Alan Hill” at various addresses, a large amount of cash, and check-printing paper that had been loaded into a printer. The district court denied appellant’s motion to suppress evidence obtained from his hotel room and convicted appellant of check forgery and offering a forged check after a stipulated evidence trial. 

Minn. Stat. §327.12 requires hotel operators to maintain registration records and make them “open to the inspection of all law enforcement.” The question on appeal is whether appellant had a reasonable expectation of privacy in the identifying information the hotel collected and was required to share with police under this statute. The court of appeals holds that appellant had no such reasonable expectation of privacy. Appellant voluntarily turned over his identifying information to the hotel, and prior cases have held that, even though appellant may have assumed his information would only be used for a limited purpose, he assumed the risk that the hotel would reveal it to police. Thus, the warrantless search of the hotel’s registration records, through which police obtained appellant’s identifying information, did not implicate appellant’s 4th Amendment rights. State v. John Thomas Leonard, No. A17-2061, 2019 WL 418508 (Minn. Ct. App. 2/4/2019).

 

• Indecent exposure: Indecent exposure a general intent offense. Appellant was convicted of indecent exposure. The arresting officer testified at trial that appellant appeared to be intoxicated, but no chemical tests were administered. Appellant testified he smoked what he believed to be shisha, flavored tobacco in a hookah, at the home of an unidentified acquaintance, but that he had an intense reaction, causing him to vomit and black out prior to the incident. The district court found appellant was not entitled to instructions on voluntary or involuntary intoxication, because indecent exposure is a general intent offense, and the court of appeals affirmed appellant’s conviction. 

The Supreme Court rejects appellant’s argument that previous interpretations of the indecent exposure statute added a specific intent requirement. The Court notes that these cases merely draw a distinction between volitional and accidental acts, requiring the state to prove that a lewd exposure was volitional. Furthermore, the court holds that the plain and unambiguous language of the indecent exposure statute creates a general intent crime, as it merely prohibits a person from intentionally engaging in the prohibited conduct (an openly lewd act). The court of appeals is affirmed. State v. Mohamed Musa Jama, No. A17-0481, 2019 WL 944371 (Minn. 2/27/2019). 

 

SAMANTHA FOERTSCH

Bruno Law PLLC

STEPHEN FOERTSCH

Bruno Law PLLC

 

EMPLOYMENT & LABOR LAW

 

JUDICIAL LAW

• Disability discrimination; reasonable accommodations rejected. A municipal accountant’s disability discrimination claim was dismissed under the Americans with Disabilities Act (ADA) for several reasons. The 8th Circuit Court of Appeals, affirming a ruling of U.S. District Court Judge Donovan Frank in Minnesota, held that the employee did not show that returning to his original position after a leave of absence while working from home was a reasonable accommodation. He did not establish that his position was eliminated and he was terminated because of a disability, or that the city failed to participate in the required “interactive process” under the ADA. Brunckhorst v. City of Oak Park Heights, 914F.3d 1177 (8th Cir. 2/4/19).

 

• Public policy; not grounds to overrule arbitrator. In a much-anticipated ruling, the Minnesota Supreme Court held that the doctrine of “public policy” cannot be invoked to overturn an arbitration decision reinstating a police officer discharged for police brutality and failure to properly report the encounter. The Court held that the arbitrator’s determination that the officer did not use “excessive force” and that the reporting requirements were ambiguous established lack of “just cause” for discharge and would not be set aside on appellate review. City of Richfield v. Law Enforcement Labor Services, 2019 WL 575866 (Minn. Ct. App. 2/13/2019) (unpublished).

 

• Sex discrimination; ‘similarly situated’ claim denied. A woman who sued for pregnancy and disability discrimination after she was denied reinstatement following a leave of absence had her claim dismissed. The lower court dismissed the case on grounds that it was time barred, and the 8th Circuit affirmed on other grounds, including the failure to plead that a competing candidate for the same situation was “similarly situated” and went through the reinstatement process, which negated the alleged disparate treatment sex discrimination claim. Jones v. Douglas County Sheriff’s Dept., 915 F.3d 498 (8th Cir. 2/6/2019).

 

• Age discrimination; position elimination upheld. An employee whose position was eliminated after she had discussed retiring within the next year was unsuccessful in her age discrimination claim under the Minnesota Human Rights Act. The Minnesota Court of Appeals, affirming a decision of the Blue Earth County District Court, held that there were no genuine issues of material facts regarding whether the claimant’s age motivated the employer’s decision to eliminate the position, pointing out that there was no direct evidence of discrimination or a prima facie case established by her. Apel v. Mankato Rehabilitation Center, Inc., 2019 WL 418537 (Minn. Ct. App. 2/4/2019) (unpublished). 

 

• Conflict with boss; quitting employee loses.A bookkeeper for a liquor store in Duluth, who quit her job because she had a conflict with her manager, was denied unemployment compensation. Upholding a decision of the Department of Employment & Economic Development (DEED), the court of appeals held that while the circumstances may have bothered the claimant, giving her a good “personal” reason to quit, the conditions were not so extreme that an average, reasonable worker would have quit and, therefore, warranted denial of unemployment compensation benefits. Giernot v. Lake Aire Bottle Shoppe,2019 WL 418619 (Minn. Ct. App. 2/4/2019) (unpublished).

 

• “At will” employee; LLC termination upheld. The termination of the chief executive officer of a limited liability company was upheld by the Minnesota Court of Appeals. It held that he was an “at will” employee, was not wrongfully denied a bonus, and that the other LLC member did not breach any fiduciary duties or tortiously interfere with his employment. Roberts v. HydraMetrics, LLC, 2019 WL 509976 (Minn. Ct. App. 2/11/19) (unpublished).

 

LEGISLATIVE ACTION

• Bill to amend MHRA.H.F. 10, a measure to amend the state Human Rights Act to expand the definition of sexual harassment in the workplace, is pending in the House of Representatives. The bill would amend Minn. Stat. §363A.03, by stating that conduct giving rise to a claim does not have to be “severe or pervasive” if it creates or occurs in an “intimidating, hostile, or offensive environment.” The measure, which currently lacks a companion bill in the Senate, was given a hearing and is advancing in the DFL-dominated House, but faces an uncertain future in the GOP-dominated Senate, where a similar effort failed last year.

The proposal is supported by many plaintiff-oriented lawyers, employees, and their advocates, who chafe under the restrictive prevailing judicial standard derived from federal litigation under Title VII of the Civil Right Act. But it is opposed by many business interests, their attorneys, and others who view its language as too vague and likely to encourage undue and costly litigation in the workplace. 

 

• Withholding wages. A bill that would make it a gross misdemeanor for employers to wrongfully withhold wages from employees is pending in the state House of Representatives. H.F. 6 would impose criminal punishment for unpaid aggregate wages of $10,000, or more, and also would empower the Department of Labor and Industry to issues fines of up to $1,000, along with other administrative remedies. The proposal would supplement existing civil penalties for unpaid wages. It is likely to pass the DFL-dominated House but faces uncertainty in the Senate, where Republicans hold a three-member majority.

 

MARSHALL H. TANICK

Meyer, Njus & Tanick

 

FEDERAL PRACTICE

 

JUDICIAL LAW

• Fed. R. Civ. P. 23(f); equitable tolling not available. In August 2018, this column noted the Supreme Court’s grant of certiorariin a case presenting the issue of whether the 14-day appeal deadline found in Fed. R. Civ. P. 23(f) is subject to equitable tolling. Reversing the 9th Circuit, the Supreme Court recently unanimously held that Rule 23(f), while a nonjurisdictional claim-processing rule, is not subject to equitable tolling because the plain language of the rule precludes equitable tolling. 

The case was remanded to the 9th Circuit to allow it to consider alternative grounds for relief advanced by the plaintiff that it did not consider in its prior ruling. Nutraceutical Corp. v. Lambert, ___ S. Ct. ___ (2019). 

 

• 28 U.S.C. §§1821 and 1920; 17 U.S.C. §505; costs.Reversing the 9th Circuit’s award of $12.8 million in litigation expenses including expert witness fees, e-discovery expenses, and jury consulting costs, and agreeing with the 8th Circuit decision in Pinkham v. Camex, Inc.(84 F.3d 292 (8th Cir. 1996)), the Supreme Court held that the Copyright Act’s allowance of “full costs” means only those costs specified in 28 U.S.C. §§1821 and 1920. Rimini Street, Inc. v. Oracle USA, Inc., ___ S. Ct. ___ (2019). 

 

• En banc majority; death of judge. Where the 9th Circuit appeared to split 6-5 in a case decided en banc, and one judge in the majority died before the decision was filed, the United States Supreme Court unanimously held that the deceased judge’s vote could not be counted as part of the en bancmajority, noting that “federal judges are appointed for life, not for eternity.” Yovino v. Rizo, ___ S. Ct. ___ (2019). 

 

• Motion to stay discovery pending resolution of motions to dismiss granted in part.Where the parties to putative class actions were able to agree on the scope of some—but not all—discovery while motions to dismiss were pending, Magistrate Judge Bowbeer acknowledged the factors governing the resolution of motions to stay discovery while a motion to dismiss is pending, but declined to “take a peak” and consider the merits of the motion to dismiss. In re Pork Antitrust Litig., 2019 WL 480518 (D. Minn. 2/7/2019). 

 

• Fed. R. Civ. P. 26(b)(4)(E); motion for payment of expert fees denied. Magistrate Judge Wright denied the defendant’s motion to compel the plaintiff to pay the defendant’s expert’s travel costs, finding that it was the defendant or its counsel who were responsible for the decision to have the East Coast-based expert deposed in Minneapolis, and that the parties had not discussed the payment of the expert’s travel expenses prior to the deposition. Wing Enters. v. Tricam Indus., Inc., 2019 WL 522162 (D. Minn. 2/11/2019). 

 

• Fed. R. Civ. P. 26(b)(4)(E); payment of expert fees.In a decision involving multiple disputes over costs relating to expert depositions, Magistrate Judge Leung ordered the plaintiffs and their counsel to compensate the defendants’ experts for the “few hours” they spent preparing for their depositions and the “relatively short” amount of time one expert spent reviewing his transcript. Magistrate Judge Leung also found that it would be a “manifest injustice” to require defendants to compensate one of the plaintiffs’ experts where that expert had experienced health issues, was unable to recall a number of details during his deposition, and the plaintiffs agreed that it was “no longer feasible” to call him as a trial witness. G.C. ex rel. Tsiang v. S. Washington Cty. School Dist. 833, 2019 WL 586676 (D. Minn. 2/13/2019). 

 

• Discovery; waiver of objections; attempt to withdraw allegations rejected. Finding it “axiomatic” that a failure to serve timely objections to discovery results in a waiver of those objections, Magistrate Judge Leung concluded that the plaintiffs had waived most of their objections to one defendant’s discovery requests. Magistrate Judge Leung also rejected the plaintiffs’ attempt in their response to that defendant’s motion to compel to withdraw certain allegations in an attempt to make certain of the discovery requests no longer relevant, finding that plaintiffs could only amend their allegations with the consent of the defendants of a motion to amend. Godfrey v. State Farm Fire & Cas. Co., 2019 WL 586675 (D. Minn. 2/13/2019). 

 

• Voluntary dismissal of certain defendants; remaining defendants’ request for conditions denied. Granting the plaintiffs’ motion to dismiss settling defendants pursuant to Fed. R. Civ. P. 41(a)(2), Chief Judge Tunheim denied the non-settling defendants’ request that the dismissal be conditioned on plaintiffs’ willingness to provide settlement-related discovery and the court’s retention of personal jurisdiction over the settling defendants, finding that the discovery issue was “more properly suited” to a discovery motion before Magistrate Judge Leung, and that there was “no need” to retain jurisdiction over the settling defendants. City of Wyoming v. Procter & Gamble Co., 2019 WL 458388 (D. Minn. 2/5/2019). 

 

JOSH JACOBSON

Law Office of Josh Jacobson 

IMMIGRATION LAW

 

JUDICIAL LAW

• Harm suffered by petitioner does not rise to level of past persecution, nor does he show well-founded fear of future persecution.The 8th Circuit Court of Appeals held that the harm a Cameroonian asylum applicant suffered in the past (one detention for four days and a subsequent detention for three days that entailed “members of the gendarmerie beat[ing] him with sticks, step[ping] on him, and smash[ing] him with their military boots”) did not rise to the level of past persecution. Furthermore, the general and overly broad statements and reports submitted by the applicant, acknowledging that “the Cameroonian government represses, monitors, and even detains political dissidents and activists,” failed to show that he, himself, or other ordinary members of the Southern Cameroon National Council (SCNC) are or would be specifically targeted for future persecution. Consequently, Njong failed to meet the more stringent standard of either “clear probability” for the relief of withholding of removal or showing that it was more likely than not he would be tortured upon a return to Cameroon for the relief afforded by the Convention Against Torture (CAT). Njong v. Whitaker, 2018 WL 6815724 (8th Cir. 12/28/2018). https://ecf.ca8.uscourts.gov/opndir/18/12/173460P.pdf

 

• Credible fear, expedited removal orders, and the suspension clause.In a case involving credible fear review of an expressed fear of persecution in the asylum context, the 9th Circuit Court of Appeals reversed the district court’s dismissal of the petitioner’s habeaspetition challenging procedures leading to his expedited removal order for lack of subject matter jurisdiction. It held that 8 U.S.C. §1252(e)(2) violates the suspension clause as applied to the petitioner and remanded the case for the district court to exercise jurisdiction to consider his legal challenges to the procedures leading to the expedited removal order. Under the suspension clause, the petitioner must be given a “meaningful opportunity to demonstrate that he is being held pursuant to ‘the erroneous application or interpretation’ of relevant law.” Thuraissigiamv. USDHS, 2019 WL 1065027 (9th Cir. 3/7/2019). http://cdn.ca9.uscourts.gov/datastore/opinions/2019/03/07/18-55313.pdf

But, see Castro, et al. v. USDHS, 835 F.3d 422, 450 (3rdCir. 2016). The 3rd Circuit affirmed dismissal of the habeaspetitions, finding the district court lacked subject matter jurisdiction under 8 U.S.C. §1252, which restricts judicial review for expedited removal orders issued under section 1225(b)(1). The court also rejected an argument under the suspension clause of the U.S. Constitution: “we cannot say that this limited scope of review is unconstitutional under the Suspension Clause.” http://www2.ca3.uscourts.gov/opinarch/161339p.pdf

Petition for Writ of Certiorari filed on 12/22/2016. Petition denied on 4/17/2017. https://www.supremecourt.gov/search.aspx?filename=/docketfiles/16-812.htm

Stay tuned.

 

ADMINISTRATIVE ACTION

• Continuation of documentation for beneficiaries of temporary protected status—Sudan, Nicaragua, Haiti, and El Salvador. The Department of Homeland Security announced that beneficiaries under the temporary protected status (TPS) designations for Sudan, Nicaragua, Haiti, and El Salvador will retain their TPS. This will be the case as long as the preliminary injunction issued on 10/3/2018 by the Northern District of California in Ramos v. Nielsen, No. 18-cv-01554 (N.D. Cal. 10/3/2018) enjoining the Department of Homeland Security (DHS) from implementing and enforcing its decisions to terminate TPS for those four nations remains in effect. Furthermore, TPS-related employment authorization is automatically extended through 1/2/2020. And, DHS TPS-related documentation (employment authorization documents, approval notices for those applications for employment authorization, and Forms I-94 (Arrival/Departure Record) is automatically extended through 1/2/2020. 84 Fed. Reg.7103-09 (3/1/2019). https://www.govinfo.gov/content/pkg/FR-2019-03-01/pdf/2019-03783.pdf

 

• Secretary of Homeland Security Extends Temporary Protected Status for South Sudan.On 3/8/2019, Secretary of Homeland Security Kirstjen M. Nielsen announced the extension of the temporary protected status (TPS) designation for South Sudan for an additional 18 months through 11/3/2020. She found that “the ongoing armed conflict and extraordinary and temporary conditions that support South Sudan’s current designation for TPS continue to exist.” Further details about the extension, re-registration process, and employment authorization documentation will appear in the Federal Register at some point in the future. https://www.dhs.gov/news/2019/03/08/secretary-homeland-security-kirstjen-m-nielsen-announcement-temporary-protected

 

R. MARK FREY

Frey Law Office

 

INTELLECTUAL PROPERTY

 

JUDICIAL LAW

• Copyright: SCOTUS holds registration required for bringing infringement claim.The U.S. Supreme Court unanimously held that a party suing for copyright infringement must have a federal copyright registration prior to bringing such a claim. Fourth Estate Public Benefit Corporation licensed journalism content to Wall-Street.com, LLC. Wall-Street canceled the license and continued to display Fourth Estate’s articles following the license termination. Fourth Estate sued Wall-Street for copyright infringement, even though Fourth Estate had only filed applications to register the articles for copyright protection and had not yet received federal copyright registrations. The Southern District of Florida dismissed the complaint because Fourth Estate’s copyright was unregistered, and the 11th Circuit affirmed. The 5th and 9th Circuits, however, have held that registration is made under 17 USC §411(a) when the copyright claimant’s application for registration is received by the Copyright Office. The Supreme Court heard the case to resolve this circuit split and to determine the meaning of when “registration of the copyright claim has been made” for the purpose of bringing a copyright infringement claim. The Court held that a copyright owner can only sue for infringement “when the Copyright Office registers a copyright.” In its decision, the Court noted the statutory language clearly stated that no infringement action should be instituted until the copyright registration was complete. The statute also provides an exception for a suit to proceed where registration is refused, and it was unreasonable for the registration requirement to be based only on an application for copyright protection since the exception would be superfluous. Although registration processing times have increased, the Court refused to change Congress’s statutory mandate. Fourth Estate Pub. Benefit Corp. v. Wall-Street.com, LLC, No. 17-571, 2019 WL 1005829 (U.S. 3/4/2019).

 

• Copyright: Failure to produce original copyrighted work fatal to infringement claim. Judge Frank recently granted a defendant’s summary judgment motion for a copyright infringement claim because the plaintiff could not produce an original copy of the software code that was allegedly infringed. Plaintiff Neil Haddley owns the copyright registration of a software program for scanning paper documents into electronic form. Next Chapter Technology (NCT) licensed Haddley’s software for use in an NCT product licensed to several Minnesota counties. Haddley sued NCT for allegedly creating an infringing derivative work based on Haddley’s software. NCT brought a partial summary judgment motion arguing that its new scanning software, NCT SCAN, was not derivative of the Haddley software source code. The court first noted that Haddley submitted only portions of the software source code for copyright protection. Furthermore, Haddley also admitted that he made subsequent changes to the registered source code and that his claim relied on NCT’s creation of a derivative from the original source code. Haddley, however, could not produce a complete copy of the protected source code. Without such a copy, the court could not analyze whether NCT SCAN was substantially similar to the copyrighted software and determine whether NCT SCAN was an infringing derivative work. Because there was no complete copy of Haddley’s registered source code available, the court granted NCT’s summary judgment motion and dismissed Haddley’s copyright infringement claim. Haddley v. Next Chapter Tech., Inc., No. CV 16-1960 (DWF/LIB), 2019 WL 979151 (D. Minn. 2/28/2019).

 

TONY ZEULI 

Merchant & Gould

JOE DUBIS

Merchant & Gould

RYAN BORELO

Merchant & Gould

 

REAL PROPERTY

 

JUDICIAL LAW

• Zoning; Legal Nonconforming Use. Landowner owned and operated a paper mill and a landfill, on adjoining parcels. The landfill permit was granted by the city in 1984 and was a permitted use under the city’s zoning ordinance at that time. In 1989, the city amended the zoning ordinance so that the landowner’s use of the landfill was a legal nonconforming use. From 1989 to 2012, the landowner operated the landfill with the narrow purpose of accepting its paper mill waste. The landfill did not accept any other waste. The landowner’s permit applications to the MPCA, and the permits issued by the MPCA, from 1992 to 2012 specifically listed the use of the landfill as being limited to disposing of its paper mill waste. The paper mill ceased operations in 2012 and the property was sold in 2013. The new owner applied for, and received, a transfer of the MPCA permit in 2013 solely to reflect the change in ownership. In 2014, the new owner submitted an application to MPCA seeking authority to deposit waste generated from operations other than the paper mill. 

The city objected to the application that the new owner did not receive local permits for operation of the landfill, and that the proposed use of the landfill was a dramatic change to the nature and source of the landfill. The MPCA indicated it would deny the permit based on the city’s objection. The new owner sued the city seeking a declaration that it was entitled to deposit waste generated from operations other than the paper mill into the landfill, consistent with what would have been allowed under the ordinance as it existed in 1984. The district court ruled in favor of the city, finding that the legal nonconforming use of the landfill is limited to waste generated by the paper mill operation. The new owner appealed and the court of appeals affirmed. The issue was whether the new owner may accept waste from outside sources that were outside the terms of the land-use permit that was transferred to the new owner when it purchased the property in 2013, but that may have been permitted in the original 1984 permit. The court of appeals held that the nonconforming use may not be expanded beyond what was present at the time the use became nonconforming. The actual use at the time of the transfer must be the criteria. Therefore, the court of appeals held that the proposal to accept waste from other sources constituted an impermissible expansion of the prior nonconforming use. AIM Development (USA), LLC v. City of Sartell,A18-0443, 2019 WL 1006800 (Minn. Ct. App. 2019).

 

• Landlord-tenant; eviction; rent abatement. Tenant notified landlord of habitability claims, but landlord did not fix the issues. Tenant stopped paying rent and landlord commenced an eviction action. The housing court and district court held that tenant had submitted a proper abatement defense to the eviction action. The court of appeals affirmed and held that tenants need not follow the statutory procedures in Minn. Stat. §504B.385 to assert a defense of breach of the covenant of habitability in an eviction case. The court of appeals held that the procedures in Minn. Stat. §504B.385 apply to rent escrow actions and do not constitute a constraint upon the assertion of defenses in an eviction action. The Supreme Court granted review and affirmed. The Supreme Court based its decision on Fritz v. Warthen, 298 Minn. 54 (1973), providing that habitability is a defense in an eviction action and held that Fritznot expressly modified or abrogated by section 504B.385, which is an affirmative action by a tenant. The Supreme Court also refused to clarify Fritz as requiring the tenant to provide written notification of its rent abatement in order to invoke a habitability defense to an eviction. Ellis v. Doe,A17-1611, 2019 WL 1051400 (Minn. Ct. App. 2019).

 

• Landlord tenant; eviction; appeal. When a party to an eviction action has filed a proper and timely notice for judicial review of a housing court referee’s confirmed decision under Minn. R. Gen. Prac. 611(a), the 15-day appeal period under Minn. Stat. §504B.371, Subd. 2 does not begin to run until judgment is entered on the district court’s review order. A party is not required to seek judicial review of a referee’s confirmed decision. If judicial review of a referee’s confirmed decision is not sought, then the confirmed order is an appealable order. But if a judicial review is sought, any appeal to the court of appeals will be dismissed as premature if it is filed before entry of judgment on the district court order on review. Dominium Management Services, LLC v. LeeA18-1916, 2019 WL 907755 (Minn. Ct. App. 2019).

 

MICHAEL KREUN

Beisel & Dunlevy PA

 

TAX LAW

 

JUDICIAL LAW

• “Weird” deductions not permitted to offset amounts received as settlement for emotional distress. The taxpayer was a successful inventor and business person. After joining a new company, he became concerned about potentially anticompetitive and even possibly illegal activity at his workplace. He consulted an attorney, and then he approached the company with his concerns. He was promptly fired. The termination caused the taxpayer to suffer significant stress, and the resulting physical manifestations included insomnia, trouble digesting food, chronic headaches, trouble concentrating, and neck, shoulder, and back pain. 

The tax court found that the physical ailments were a result of the emotional distress caused by the termination. The taxpayer had received no severance pay when he was fired. Eventually, the taxpayer sued the former employer alleging five different causes of action: breach of contract, antitrust violations, civil conspiracy, failure to pay wages, and wrongful discharge. The parties reached a settlement. A portion of the settlement was attributable to unpaid wages, and a portion attributable to “alleged emotional distress.” The tax controversy arose when the taxpayer used two deductions to offset the settlement portion attributable to the “alleged emotional distress.”

The taxpayer, working with an experienced CPA, timely filed the return and attached to it a Schedule C, Profit or Loss From Business, which included the settlement payment of $125,000. The taxpayer reported on the Schedule C that the trade or business was an “[u]nclassified establishment[ ],” and deducted $23,584 for “[l]egal and professional services” and $101,416 for “personal injury.” The taxpayer also deducted another $33,000 for legal fees for that year on the Schedule A, Itemized Deductions. (The settlement was paid over two years, and the taxpayer’s approach was similar in the second year.) The commissioner disallowed the deduction of “personal injury” and the tax court agreed. Although settlements on account of personal injury need not be included in income, amounts attributable for emotional distress have no such tax advantage. Payments on account of emotional distress must be included in income, and the payment cannot then be offset through a deduction. The court candidly acknowledged that, “[i]n the end, it may indeed be imprecise to label any psychological ailment nonphysical—and we do find [the taxpayer] to be entirely credible in his description of the distress he suffered. But the Code says what it says... [t]hose payments are therefore not excludable from income under that section, and any unusual deductions… to offset them are disallowed.” Doyle v. Comm’r of Internal Revenue, T.C.M. (RIA) 2019-008 (T.C. 2019).

 

• Tax court refuses to consider new issues in a Rule 155 proceeding.Rule 155 permits the tax court to withhold entry of its decision for the purpose of “permitting the parties to submit computations... showing the correct amount to be included in the decision.” Rule 155(a). Rule 155 computations allow the parties to “do the math” so that they have an opportunity to be heard on the “bottom-line tax effect of the determinations made in the Court’s opinion.” (Vento v. Comm’r of Internal Revenue, full citation below.) In an earlier opinion involving these taxpayers, the tax court determined that the taxpayers were not entitled to foreign tax credits for certain amounts paid to the U.S. Virgin Islands because the taxpayers were and always had been citizens of the United States. The payment of taxes in the U.S. Virgin Islands was an attempt to reduce taxation of their U.S.-source income. In their computations, the taxpayers took the novel position that the amounts at issue were deductible as state or local taxes. 

The taxpayers also moved for leave to amend their petitions under Tax Court Rule 41(b)(1), setting forth another new legal argument and asserting that both new issues had been tried by consent. Finally, the taxpayers filed a motion to reopen the record to permit the introduction of new evidence relating to their second new legal theory. Reminding the taxpayers that “Rule 155 is not an ‘open sesame’ for either party to get adjustments for issues not raised in the deficiency notice, in the pleadings, in the pre-trial memoranda, or at trial,” the court rejected the taxpayers’ attempt to raise new issues in the Rule 155 proceeding and adopted the commissioner’s computations. Vento v. Comm’r of Internal Revenue, No. 1168-06, 2019 WL 453762 (T.C. 2/4/2019) (quoting Litzenberg v. Commissioner, T.C. Memo. 1988-482, 56 T.C.M. (CCH) 413, 417.).

 

• Written approval not required for substantial understatement penaltyA taxpaying couple failed to file a return and throughout their interactions with the commissioner and the court, the couple persistently advanced frivolous arguments. Eventually, the commissioner imposed a penalty. One of several issues in this dispute was whether written approval is required when the penalty imposed is one for substantial underpayment. The court held that it is not. The Code provides that “the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty.” IRC Sec. 7491(c). The Code also requires that penalties be “personally approved (in writing) by the immediate supervisor of the individual making such determination” except in two instances. Supervisory approval is not required for “any addition to tax under section 6651, 6654, or 6655.” Sec. 6751(b)(2)(A). And supervisory approval is not required for “any other penalty automatically calculated through electronic means.” Sec. 6751(b)(2)(B). 

In this case, the tax court addressed the novel issue of “whether an accuracy-related penalty determined by an IRS computer program is a ‘penalty automatically calculated through electronic means’” such that it does not require written approval. Relying on a plain language analysis, and bolstered by the IRS’s interpretation of its own obligations, the court held that penalties determined under Sec. 6662(a) and (b)(2) by an IRS computer program without human review are “automatically calculated through electronic means” within the meaning of I.R.C. sec. 6751(b)(2)(B) and thus are exempt from the written supervisory approval requirement. Walquist v. Comm’r, No. 25257-17, 2019 WL 962901 (T.C. 2/25/2019). 

 

• More on penalties.In a dispute involving the commissioner’s disallowance of a claimed $33 million dollar deduction for a purported charitable easement, the tax court held that when the Service asserts multiple penalties, the Code, in particular Sec. 6751(b)(1), does not require that the “initial determination” of all the penalties be made at the same time or by the same individual. Similarly, there is no requirement that supervisory approval be made on any particular form. Palmolive Bldg. Inv’rs, LLC v. Comm’r, No. 23444-14, 2019 WL 994184 (T.C. 2/28/2019). 

 

• Tax court must follow Rule 8100. On appeal to the Minnesota Supreme Court, the Court was required to decide whether the Minnesota Tax Court must follow Minnesota Rule 8100 for valuing utilities for tax purposes. Rule 8100 requires the cost approach for determining the value of utilities. However, since the rule states that it applied to commissioner valuations, the tax court determined that it was not obligated to follow the rule and did not apply the cost approach at trial. The Supreme Court overruled the tax court decision and held that the Minnesota Tax Court had to follow Rule 8100. The Minnesota Supreme Court reasoned that administrative rules can only be ignored if they conflict with statute and not merely because the court believes that it would result in an inaccurate valuation. Comm’r of Revenue v. Enbridge Energy, LP,2019 Minn. LEXIS 66 (Minn. 2019).

 

• Property tax: Reduction in pipeline operating system value. Northern Natural Gas Company (NNG) appealed the commissioner’s determination on the value of their pipeline operating system for property tax purposes. The tax court agreed with NNG that the commissioner had overvalued the property. In reaching this conclusion, the court disagreed with the commissioner on several aspects. First, the tax court increased the capitalization rate utilized by the commissioner in her income approach. The commissioner argued for a lower capitalization rate because NNG had an above-average debt rating. The tax court disagreed, stating that the debt rating needs to be for a hypothetical buyer and not the company holding the property at issue. Next, the tax court disagreed with the commissioner for failing to apply external obsolescence due to regulations under the cost approach. The commissioner argued that any loss from the regulation was due to internal factors and not a result of any external factors. The tax court said it would be contrary to appraisal theory to hold as the commissioner suggests. Thus, the tax court held that the assessed value of the pipeline operating system should be lowered. Northern Natural Gas Co. v. Comm’r of Rev., Nos. 8864-R & 8976-R (Minn. T.C. 1/30/2019).

 

• Failure to disclose leads to dismissal.In 2017 and 2018, Wal-Mart timely served and filed petitions under Minn. Stat. Ch. 278 (2018) challenging the 1/2/2016 and 1/2/2017 assessed value of four store locations for property tax purposes. However, Wal-Mart failed to disclose income and expense information to the respective counties. When a property tax petition has been filed with respect to income-producing property, Minn. Stat. §278.05, subd. 6(a) (2018) requires the petitioner to provide certain information to the respondent county assessor by August 1 in the year taxes are due. Failure to comply results in dismissal of the petition. Id., subd. 6(b) (2018). Therefore, the Minnesota Tax Court dismissed all four of Wal-Mart’s petitions. Wal-Mart Real Estate Business Trust v. Cnty of Mille Lacs, Nos. 48-CV-17-886 & 48-CV-18-854 (Minn. T.C. 2/21/2019); Wal-Mart Real Estate Business Trust (Cottage Grove #2448) v. Cnty of Washington, No: 82-CV-17-1776 (Minn. T.C. 2/21/2019); Wal-Mart Real Estate Business Trust (Oak Park Heights/Stillwater #1861) v. Cnty of Washington, No: 82-CV-17-1781 (Minn. T.C. 2/21/2019); Wal-Mart Real Estate Business Trust (Woodbury #2643)v. Cnty of Washington, No. 82-CV-17-1777 (Minn. T.C. 2/21/2019).

 

LOOKING AHEAD

• Supreme Court poised to answer whether due process prohibits states from taxing trusts based on the trust beneficiaries’ in-state residency.The Supreme Court granted North Carolina’s petition for certiorariafter North Carolina’s Supreme Court affirmed a lower court holding that the state could not justify taxation of a trust on the basis of the residency of a beneficiary. The state argued in support of its petition: “Eleven states, including North Carolina, tax trust income when a trust’s beneficiaries are state residents.… There is now a direct split spanning nine states. Four state courts have held that the Due Process Clause allows states to tax trusts based on trust beneficiaries’ in-state residency. Five state courts… have concluded that the Due Process Clause forbids these taxes…. The question presented… [d]oes the Due Process Clause prohibit states from taxing trusts based on trust beneficiaries’ in-state residency?” North Carolina Dept. of Revenue v. The Kimberly Rice Kaestner 1992 Family Trust, 2018 WL 4942045 (U.S.) at 1. The decision below is reported at Kimberley Rice Kaestner 1992 Family Tr. v. N. Carolina Dep’t of Revenue, 814 S.E.2d 43 (N.C. 2018), cert. granted sub nom. N. Carolina Dep’t of Revenue v. Kimberly Rice Kaestner 1992 Family Tr., No. 18-457, 2019 WL 166876 (U.S. 1/11/2019). Note that Minnesota is one of the states in the “split.” In Fielding v. Commissioner of Revenue, 916 N.W.2d 323 (Minn. 2018), the Minnesota Supreme Court held that “the Minnesota residency of [the] beneficiary... does not establish the necessary minimum connection to justify taxing the trust’s income” and therefore a beneficiary’s in-state residency is an insufficient basis for taxation.

 

MORGAN HOLCOMB 
Mitchell Hamline School of Law

MATTHEW WILDES 

Mitchell Hamline School of Law

JESSICA DAHLBERG

Grant Thornton