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Notes & Trends – February 2020

ADMINISTRATIVE LAW

JUDICIAL LAW

MORA not a private cause of action. The court of appeals has held that the Minnesota Official Records Act (MORA) does not provide a private cause of action for enforcement separate from the Minnesota Government Data Practices Act (MGDPA).

The dispute involved bids on a request for proposals by Minnesota State Colleges and Universities (MnSCU) to develop a new online registration system. During an online meeting of MnSCU’s selection committee, officials used Adobe Acrobat Reader software to electronically highlight portions of Halva’s bid. After Halva’s bid was rejected, Halva sought a copy of his highlighted bid as well as information about the other bidding vendors. But MnSCU officials were unable to supply a highlighted copy of the document because their highlighting had not been saved when the electronic document used during the meeting was closed. 

Halva then sought damages under the MGDPA and injunctive relief under MORA. The latter requires government officials to “make and preserve all records necessary to a full and accurate knowledge of their official activities” and “carefully protect and preserve government records from deterioration, mutilation, loss, or destruction.” Minn. Stat. §15.17, subd. 1-2. Halva sought injunctive relief based on the theory that the failure to preserve the electronic highlighting of his bid materials violated MORA. The district court granted MnSCU judgment on the pleadings and Halva appealed.

After determining that Halva’s damages claim under the MGDPA was not adequately pleaded, the court turned to Halva’s claim for separate, injunctive relief under MORA. The court noted that under Minnesota precedent, courts are reluctant to find a private statutory cause of action unless expressly stated or clearly implied by the statutory language. In this case, the court found no express or implied private cause of action for injunctive relief in MORA. Instead, the court noted, MORA provides access to government data as defined by MGDPA, which in turn contains its own cause of action. “Therefore,” the court concluded, “the district court did not err in determining that the MORA does not provide for a separate private cause of action and did not err in granting MnSCU judgment on the pleadings.” Halva v. Minnesota State Colleges and Universities, No. A19-0481, 2019 WL 6834659 (Minn. Ct. App. 12/16/2019).

Mehmet K. Konar-Steenberg
Mitchell Hamline School of Law

 

CRIMINAL LAW

JUDICIAL LAW

Conditional release: Simultaneous convictions of multiple sex offenses does not result in a “prior sex offense conviction” subjecting offender to lifetime conditional release. After appellant was convicted of one count of first-degree and one count of second-degree criminal sexual conduct, the district court sentenced him to concurrent 216-month and 140-month prison terms and a lifetime conditional release term. The Minnesota Court of Appeals agrees with appellant that a 10-year, rather than lifetime, conditional release term should have been imposed. 

A 10-year conditional release term is mandatory for criminal sexual conduct convictions, unless the offender has a “prior sex offense conviction.” Appellant had no criminal sexual conduct convictions other than those at issue here, and those two convictions were adjudicated simultaneously. The court interprets Minn. Stat. §609.3455, subd. 1(g) (definition of “prior sex conviction”) to determine whether convictions that are adjudicated simultaneously can result in a prior conviction and a present offense. An offender has a prior sex offense conviction “if the offender was convicted of committing a sex offense before the offender has been convicted of the present offense…”

The Supreme Court held in State v. Nodes, 863 N.W.2d 77 (Minn. 2015), that the definition of “prior sex offense conviction” is unambiguous and that “convicted” means the district court accepts and records a verdict of guilty, “before” means “earlier than” (the first conviction must be adjudicated at an earlier time than the second), and “present offense” means “now existing or in progress.” 

Under these plain meanings, the court here concludes that simultaneous adjudication of convictions does not result in lifetime conditional release. No conviction is entered “before” the other and no conviction can be prior to the other when there is no temporal gap between a district court’s adjudication of offenses. Therefore, the district court improperly imposed a lifetime conditional release term upon appellant. State v. Brown, A18-1880, 2019 WL 6460852 (Minn. Ct. App. 12/2/2019).

 1st Amendment: Stalking by telephone statute violates 1st Amendment. Appellant was charged with two counts of stalking by repeatedly making phone calls to various Rice County employees, during which he swore, yelled, and threatened the sheriff and other employees. A jury found appellant guilty on both counts. On appeal, appellant argues the stalking by telephone statute, Minn. Stat. §609.749, subd. 2(4), violates the 1st Amendment. 

The court of appeals applies the four-step overbreadth analysis clarified by the Supreme Court in In re Welfare of A.J.B., 929 N.W.2d 840 (Minn. 2019): (1) interpret the challenged statute; (2) determine whether the statute’s reach is limited to unprotected categories of speech or expressive conduct; (3) if the statute is not limited to unprotected speech or expressive conduct, determine if a “substantial amount” of protected speech is criminalized; and (4) evaluate whether the statute’s construction may be narrowed or specific language severed to cure constitutional defects.

Combining the plain language of Minn. Stat. §609.749, subd. 2(4), with the common meaning of its terms in context, the court concludes that the stalking-by-telephone statute requires the state to prove beyond a reasonable doubt that the defendant repeatedly made telephone calls or sent text messages to the victim or induced the victim to call the defendant, and by doing so (1) the defendant knew or had reason to know his conduct would cause the victim to feel fear, loss of power, worry, or ill-treated; and (2) the defendant’s conduct caused this reaction in the victim. The court finds the stalking-by-telephone statute similar to the stalking-by-mail statute held unconstitutional in A.J.B., in that both proscribe similar conduct, require conduct to occur “repeatedly,” have the same broad mens rea element, and require the state to prove the victim’s reaction, which limits the statute.

The court also finds the stalking-by-telephone statute contains broad language that restricts protected speech. The statute criminalizes repeated telephone calls and text messages regardless of the content of the telephone call or text message. It also criminalizes both intentional and unintentional speech by including a mens rea element that is satisfied by proof of negligence. Also, the requirement of proof of the victim’s reaction is only an ancillary requirement, given that the types of reaction that must be proved are described with undefined and broad terms, which does not restrict the protected communications the statute reaches. Moreover, the subjective harm element is troubling because it need not be objectively reasonable.

Next, quoting A.J.B., the court finds the stalking-by-telephone statute overbroad “due to the substantial ways” in which the statute “can prohibit and chill protected expression.” A.J.B. 929 N.W.2d at 856. As in A.J.B., and drawing on the reasoning in State v. Hensel, 901 N.W.2d 166 (Minn. 2017), the court is unable to remedy the statute to render it constitutional. 

In so holding, and based on the Supreme Court’s analysis in A.J.B., the court expressly overrules State v. Hall, 887 N.W.2d 847 (Minn. Ct. App. 2016), which held section 609.749, subd. 2(4), was not unconstitutionally overbroad on its face or as applied, for reasons rejected by the Supreme Court in A.J.B. State v. Peterson, A18-2105, 2019 WL 6691516 (Minn. Ct. App. 12/9/2019).

 1st Amendment: Nonconsensual dissemination of private sexual images statute violates 1st Amendment. Appellant was charged with felony nonconsensual dissemination of private sexual images. He logged into his ex-girlfriend’s wireless and television provider accounts and obtained photos and videos containing sexual images of his ex-girlfriend. He threatened to, and later did, disseminate one of the images online. The district court denied appellant’s motion to dismiss, finding the relevant statute, Minn. Stat. §617.261, did not violate the 1st Amendment. After a stipulated facts trial, appellant was convicted as charged.

The court of appeals applies the same overbreadth analysis outlined in A.J.B. and summarized by the court in Peterson, supra. First, the court finds that section 617.261 has a broad sweep. The statute makes it a crime “to intentionally disseminate an image of another person who is depicted in a sexual act or whose intimate parts are exposed…, when: (1) the person is identifiable…; (2) the actors knows or reasonably should know that the person depicted in the image does not consent to the dissemination; and (3) the image was obtained or created under circumstances in which the actor knows or reasonably should have known the person depicted had a reasonable expectation of privacy.” Minn. Stat. §617.261, subd. 1. A violation of the statute is generally a gross misdemeanor, unless certain circumstances listed in subdivision 2(b) apply.

The court points to the broad mens rea requirement, contained in numbers (2) and (3) above, noting it creates a negligence mens rea that allows for a conviction under section 617.261 even if he did not actually know that the person depicted in the image did not consent to the dissemination or that the image was obtained or created under circumstances in which the person depicted had a reasonable expectation of privacy. The court also notes that the statute does not require proof of any actual or intended harm, only allowing for enhancement to a felony if harm or intent to harm is shown. See Minn. Stat. §617.261, subd. 2(b)(1), (5).
Next, the court rejects the state’s argument that section 617.267 regulates only unprotected expressive conduct, specifically, content that appeals to the prurient interest, or obscene material. The court points out that the definition of obscenity requires, in part, that the material “portray sexual conduct in a patently offensive way.” While nonconsensual dissemination of another’s private sexual image is offensive, the focus of this inquiry is not on the circumstances surrounding an image’s dissemination. Not every image subject to regulation under section 617.261 portrays sexual conduct in a patently offensive way, so the statute’s sweep is not limited to expressive conduct that is categorically excluded from 1st Amendment protection.

The court then finds that the statute does serve a legitimate harm-preventing interest by proscribing disseminations that knowingly cause or are intended to cause a specified harm. However, the statute reaches much further by requiring only a negligence mens rea and lacking an intent-to-harm element, the combination of which allows the statute to reach protected 1st Amendment expression that neither causes nor is intended to cause specified harm.

The court holds that section 617.261 prohibits a substantial amount of constitutionally protected speech, and, as such, is overbroad in violation of the 1st Amendment. Images can be disseminated, received, and observed with ease “[i]n this age of expansive internet communication.” This makes the statute’s negligence mens rea particularly problematic, as the statute does not “define or explain the circumstances that should cause someone who observes an image described in [the statute] to reasonably know that the person depicted in the image did not consent to its dissemination or that the image was obtained or created under circumstances in which the person depicted had a reasonable expectation of privacy.” This makes the statute’s “reasonable knowledge” standard highly subjective. There are too many circumstances under “which impermissible disseminations under the statute may be further disseminated without the intent to harm necessary to proscribe expressive conduct without violating the First Amendment.”

 Finally, the court determines section 617.261 cannot be narrowly construed or problematic language severed to remedy its constitutional defect, as doing so would be inconsistent with the statute’s plain language or require the court to rewrite the statute. Minn. Stat. §617.261 is declared facially invalid under the 1st Amendment, and appellant’s conviction is reversed. State v. Casillas, A19-0576, 2019 WL 7042804 (Minn. Ct. App. 12/23/2019).

 Tribal authority: Licensed peace officer employed by tribe may seize and arrest outside of reservation for offense that occurred outside reservation if officer is acting within course and scope of employment. While driving in Becker County, appellant failed to stop for a school bus, after which he was seized by a police officer employed by the White Earth Band of Ojibwe and admitted to not stopping for the school bus’s stop signal arm and flashing lights, claiming his brakes had failed. Appellant received two charges of failure to stop for a school bus. Appellant moved to suppress the statements he made to the White Earth police officer, arguing the officer did not have authority to seize him outside of the White Earth reservation for an offense that occurred off the reservation. Appellant’s motion was denied and the case proceeded to a stipulated facts trial. He was found guilty of both charges, but pursuant to an agreement between the parties, imposition of sentence on one count was stayed and the second was dismissed. On appeal, appellant argues that the White Earth officer was not authorized by statute or the cooperative agreement between the White Earth Band and Becker County to seize and cite him outside the boundaries of the reservation.

In certain circumstances, Minn. Stat. §629.40 specifically allows a state-licensed peace officer to make an arrest within the state but outside the geographic area of his or her appointing authority. Specifically, section 629.40, subdivision 3, provides that when a licensed peace officer “in obedience to the order of a court or in the course and scope of employment or in fresh pursuit… is outside of the person’s jurisdiction, the person is serving in the regular line of duty as fully as though the service was within the person’s jurisdiction.” A number of appellate cases have applied the phrase “in the course and scope of employment” and upheld peace officers’ authority to stop and arrest offenders outside the officers’ jurisdiction. The court of appeals rejects appellant’s argument that his case is distinguishable due to the cooperative agreement between the White Earth Band and Becker County, which he argues exclusively defines the course and scope of the White Earth officer’s employment and does not expressly authorize him to enforce state laws outside of the reservation. The agreement confers some state law enforcement authority on White Earth officers when they are on the reservation, but does not make any mention of what occurs outside the White Earth reservation boundaries.

The record makes clear that the Becker County dispatcher contacted the White Earth dispatcher to request assistance in locating appellant, and that the White Earth officer in question was on duty when he responded. The officer also testified that he occasionally provided assistance to Becker County outside of the reservation boundaries. He also testified that he intended to be outside the reservation only briefly in his attempt to locate appellant. Under these facts, the court finds that the White Earth officer was acting in the course and scope of his employment when he seized and cited appellant. The district court’s denial of appellant’s motion to suppress evidence is affirmed. State v. Bellcourt, A19-0100, 2019 WL 6834143 (Minn. Ct. App. 12/16/2019).

 Giving a fictitious name: “Fictitious name” includes any name or variant that would tend to mislead officer from true identity. To avoid revealing an arrest warrant during a traffic stop, appellant Dakota James-Burcham Thompson identified himself to police as Dakota James Burcham. The officer was able to determine appellant had withheld his last name and found the outstanding arrest warrant. Appellant was arrested under the warrant and charged with giving a “fictitious name” to a peace officer. At trial, appellant testified that “Dakota James Burcham” was his name prior to being adopted at nine or ten years of age, and that he used that name for tribal matters because the tribe allegedly lacked his adoption records. He also testified that he has gone by “Dakota James-Burcham Thompson,” his actual and legal name, for 11 to 13 years. The jury found appellant guilty, and on appeal appellant argues there was insufficient evidence to prove he gave a fabricated or concocted name to the deputy, as he had merely given a shortened version of his actual name.

Minn. Stat. §609.506, subd. 1, criminalizes giving a “fictitious name other than a nickname” to a peace officer “with intent to obstruct justice.” “Fictitious” is not defined. The statute evidences the Legislature’s awareness that an officer is authorized to ask a person of interest his name during a stop or arrest to inquire in police databases. So, the person’s “name” refers to his full and actual name to determine his actual identity. Thus, it follows that a “fictitious” name is one that would tend to mislead in the investigatory context.

The court of appeals rejects appellant’s argument that shortening his name did not result in a concocted or fabricated name, as misidentification can certainly result from adding to or omitting one’s last name. Moreover, appellant admitted he identified himself as he did to prevent the deputy from identifying who he really was, and by doing so, he provided a fiction. The court ultimately concludes “that the term ‘fictitious name’… is not limited to a name consisting entirely of made-up components; it includes any name or name variant that would tend to mislead an inquiring police officer away from one’s true identity.” State v. Thompson, A19-0253, 2019 WL 7042803 (Minn. Ct. App. 12/23/2019).

  Criminal procedure: Each final judgment on severed criminal charges is appealable. Appellant was charged with two counts of first-degree and three counts of second-degree criminal sexual conduct, which related to his abuse of four victims. One count was dismissed prior to trial and the counts relating to the remaining three victims were severed. He was first found guilty of two counts of first-degree criminal sexual conduct toward one victim (J.R.) and sentenced to concurrent terms of 86 months and 110 months. Two weeks later, he was tried for one count of second-degree criminal sexual conduct against C.S., and a jury found him guilty. Appellant was sentenced to 21 months, to be served consecutively to his previous sentence. On appeal, appellant argues the court improperly admitted evidence of his other bad acts, and the state argues the appeal of his first-degree convictions is untimely.

First, the court of appeals holds that the appeal of appellant’s first-degree criminal sexual conduct convictions is untimely. For a felony, an appeal of a final judgment must be made within 90 days under Minn. R. Crim. P. 28.02, subd. 4(3)(a). Appellant was sentenced for the first-degree convictions on 4/11/2018, but did not appeal them until 9/14/2018. Thus, his claims regarding his first-degree convictions are untimely.

Next, the court finds the district court did not abuse its discretion when it permitted appellant’s other victims to testify at the trial relating to his abuse of C.S. The district court made thorough findings and conclusions that satisfied each element of the five-step Spreigl test. State v. Tomlinson, A18-1522, 2019 WL 7042800 (Minn. Ct. App. 12/23/2019).

Samantha Foertsch
Bruno Law PLLC

Stephen Foertsch
Bruno Law PLLC


EMPLOYMENT & LABOR LAW

JUDICIAL LAW

Age discrimination; law firm partner not covered. An equity partner in a law firm is not covered by the Federal Age Discrimination Employment Act (ADEA). The 8th Circuit Court of Appeals held that the firm could implement and enforce a mandatory 70-year-old retirement plan because the partners are not considered “employees” under the Act. von Kaenel v. Armstrong Teasdale, 943 F.3d 1139 (8th Cir. 12/3/2019). 

•  Gender discrimination; not similarly situated. A man’s claim of gender discrimination by his employer failed because of the absence of direct evidence of discrimination. The 8th Circuit affirmed summary judgment because an unsupported allegation of disparate treatment of a similarly situated female employee did not create a triable issue of fact. Rinchuso v. Brookshire Grocery, 944 F.3d 725 (8th Cir. 12/9/2019).

• Sex discrimination; fee award for employer. An employer who prevailed in sex discrimination litigation brought by the Equal Employment Opportunity Commission (EEOC) was entitled to its attorney’s fees and costs. The 8th Circuit upheld a lower court award on grounds that the lawsuit was frivolous or groundless. EEOC v. CRST Van Expedited, 944 F.3d 750 (8th Cir. 12/10/2019).

• ERISA benefits; exhaustion required. An employer’s challenge to termination of disability benefits under the Employees’ Retirement & Income Security Act (ERISA) was rejected by the 8th Circuit. The employee’s claim of breach of fiduciary duty failed because the employee did not first exhaust his administrative remedies. Jones v. Aetna Life Insurance Co., 943 F.3d 1167 (8th Cir. 12/6/2019).

• Workplace injury; not several liability. Because an employer and a third party are not severally liable for workplace injury to an employee, the tortfeasor’s liability is not reduced by the share or percentage of fault ascribed to the employer. The state Supreme Court, applying its decision in Lambertson v. Cincinnati Welding Corp., 257 N.W.2d 679 (Minn. 1977), held that the “plain language” of the joint and several statutory language of Minn. Stat. §604.02 bars a reduction. Fish v. Ramler Trucking, 935 N.W.2d 738 (Minn. 11/27/2019).

• Unemployment compensation; two denials, one grant. The Minnesota Court of Appeals upheld a pair of adverse determination by Unemployment Law Judges (ULJ) against employees seeking unemployment compensation benefits on grounds of misrepresentation, but granted unemployment benefits to another employee. 

An employee who covertly did work for a different employer at a trade show and misrepresented that to her employer was deemed ineligible for benefits on grounds of disqualifying misconduct. Ruhland v. Big Island Swim & Surf, LLC, 2019 WL 6284245 (Minn. Ct. App. 11/25/2019) (unpublished).

An employee who received benefits for inaccurately reporting the hours she worked was subject to a mandatory penalty for misrepresentation. Vasko v. Dominion Care, 2019 WL 6284260 (Minn. Ct. App. 11/25/2019) (unpublished).

An employee who was alleged to have performed her work poorly was granted benefits. Because the determination by a ULJ that the employee’s work was “merely inefficient,” her behavior did not rise to the level of disqualifying “misconduct,” and the administrative law decision in the employee’s favor was affirmed. Dzurak v. Discover Personal Strength Fitness Center, Inc., 2019 WL 6284230 (Minn. Ct. App. 11/25/2019) (unpublished).

ADMINISTRATIVE LAW

• Fast food industry; wage violations. The Trump Administration is curbing lawsuits by franchise workers, mainly applicable to low-wage earners in the fast food industry. The U.S. Department of Labor’s new regulation imposes a four-part test for determining when employees may sue a franchisor for wage violations and other wrongdoing by a franchise that employs others. The standard takes into account who makes hiring and firing decisions; supervisor decisions and scheduling matters; determines pay; and manages employment records. The upshot will roll back a more employee-friendly standard in place under the Obama administration, which the DOL justified “to promote economic strength,” while a previous franchise industry spokesperson calls it a “much needed clarity for the 739,880 franchise establishments across America.” But opponents counter that it will make it more difficult for workers to pursue claims or collect damages.

LOOKING AHEAD

• SCOTUS workplace litigation cases. The U.S. Supreme Court has taken on its second multiple case workplace litigation during the current 2019-20 term. Before the end of the year, the Court agreed that it would review a pair of cases to determine how broadly federal employment discrimination laws applied to schools run by religious organizations. The two cases, Our Lady of Guadalupe School v. Morrisey-Berru, No. 19-267 and St. James School v. Darry Biel, No. 19-348, will address the provision under federal law known as a “ministerial exception” to employment discrimination laws, which allow educational institutions to discriminate against school employees who perform religious-related work in the schools.

The term began with the high court hearing a trio of consolidated cases raising the issue of whether LGBT status is covered by Title VII and federal anti-discrimination law. Both cases are pending and probably will be decided before the end of this term in June.

Marshall H. Tanick
Meyer, Njus & Tanick

 

ENVIRONMENTAL LAW

JUDICIAL LAW

• Minnesota Court of Appeals orders contested case for PolyMet’s mining permit. The Minnesota Court of Appeals issued a decision on consolidated certiorari appeals brought by environmental groups and tribes challenging decisions by the Minnesota Department of Natural Resources (DNR) to deny petitions for a contested-case hearing (CCH) and to issue two (and transferring a third) dam-safety permits as well as a permit to mine (PTM) to PolyMet Mining for the NorthMet project, a proposed copper-nickel mine near Babbitt, Minnesota. Following a lengthy environment review process that commenced in 2004, the DNR in March 2016 issued a decision determining the final environmental impact statement for the project was adequate. Subsequently, in November 2018, the DNR issued the PTM and dam safety permits. Appellants submitted comments on the permits and requested a CCH on the PTM pursuant to Minn. Stat. §93.483. DNR denied the CCH request and issued the permits.

Key to the court’s decision was the interpretation of statutory provisions governing CCHs for mining permits. Minn. Stat. §93.483, subd. 1, provides that a petition for a CCH concerning a PTM may be brought by any person owning property that will be “affected by” a proposed mining operation; it also provides that the DNR commissioner “may, on the commissioner’s own motion,” order a CCH on a PTM application. In addition, subdivision 3 of section 93.483 provides that the commissioner “must” grant a CCH petition if the commissioner finds three statutory criteria are satisfied: (1) there is “a material issue of fact in dispute concerning the completed application”; (2) the commissioner has “jurisdiction to make a determination on the disputed material issue of fact”; and (3) “there is a reasonable basis underlying a disputed material issue of fact so that a contested case hearing would allow the introduction of information that would aid the commissioner in resolving the disputed facts in order to make a final decision on the completed application.” 

The court first rejected DNR’s position that the only property that will be “affected by” the NorthMet project is property directly adjacent to the project. Looking to the broad common meaning of “affected” as “influenced or changed,” the court held that members of appellant organizations had sufficiently demonstrated their properties—which were located between 8.6 and 66 miles from the project area—would be “affected” by the NorthMet project. Accordingly, appellants met the threshold requirement for requesting a CCH in Minn. Stat. §93.483, subd. 1, triggering a duty for DNR to evaluate whether a CCH was required under statutory criteria in subd. 3. DNR’s denial of the CCH petitions, the court therefore held, was based upon an erroneous legal interpretation. The court further held that even if appellants had not requested a CCH, under the language of subd. 3 (i.e., that DNR “must” grant a CCH petition if the statutory criteria are satisfied), DNR had an independent duty to determine whether the statutory criteria were met. 

Regarding the three statutory criteria, the DNR argued that the court should defer to the commissioner’s determination of whether, under the third criterion, the introduction of information in a CCH would “aid the commissioner in resolving the disputed facts.” The court rejected DNR’s arguments, citing case law interpreting almost identical criteria evaluated by the Minnesota Pollution Control Agency when considering CCH requests. Minn. R. 7000.1900. The statutory phrase in the third criteria “so that,” the court concluded, “reflects legislative judgment that a contested-case hearing will be helpful in cases where there are genuine, material disputes of fact” (emphasis added). Where there exists “probative, competent, conflicting evidence on material fact issues,” the court held, the DNR must hold a CCH before the DNR makes its final permit decisions. The court reviewed the evidence of material fact issues provided by appellants—including evidence concerning construction of the project’s tailings basin dam, alternatives to wet closure of the tailings basin, financial assurance, and the role of a major shareholder in PolyMet, the Swiss company Glencore—and concluded it met this standard, notwithstanding the fact that the evidence identified by appellants was not new and had already been considered by DNR during the environmental review process. 

For these reasons, the court reversed DNR’s decisions granting the PTM and dam-safety permits and remanded for the DNR to hold a CCH. The court made two additional holdings of note. First, the court held that DNR erred by issuing a PTM without a set term. Second, the court upheld DNR’s approval of a transfer of the one preexisting dam-safety permit to PolyMet. In the Matter of the NorthMet Project Permit to Mine Application, No. A18-1952, No. A18-1953, No. A18-1958, No. A18-1959, No. A18-1960, No. A18-1961 (Minn. App. 1/13/2020).

ADMINISTRATIVE ACTION

• CEQ proposes revisions to NEPA regulations. The Council on Environmental Quality (CEQ) published proposed revisions to its regulations implementing the National Environmental Policy Act (NEPA). 85 Fed. Reg. 1684 (1/10/2020). Signed into law in 1970, NEPA is a procedural statute that requires federal agencies to assess the environmental impacts of proposed major federal actions. The CEQ regulations, which govern preparation of environmental assessments and impact statements, have not been substantially updated for over 40 years. The CEQ’s impetus for the revisions was President Trump’s 2017 Executive Order 13807 establishing a “One Federal Decision” policy, which set a two-year goal for completion of environmental reviews for major infrastructure projects. 

Citing the often-lengthy process of conducting environmental impact statements, the CEQ proposed revisions aiming to simplify and streamline federal environmental review requirements. Among other things, CEQ’s proposed rule would: 

  • establish time limits to complete environmental reviews;
  • streamline communication between state, tribal, and local agencies;
  • simplify the definition of environmental “effects,” clarifying that they must be reasonably foreseeable and have a reasonably close causal relationship to the proposed action; 
  • remove any requirement to analyze cumulative effects; 
  • define “major federal action” to exclude non-discretionary decisions and non-federal—or minimally federal-funded—projects; and
  • provide that “reasonable alternatives” to a proposed project must be technically and economically feasible. 

The result of these changes, the CEQ asserts in the rulemaking documents, would be to limit the number of projects subject to rigorous review, expand the number of projects that would not require any review, and limit the scope of environmental effects requiring review.

Notably, CEQ declined commenters’ requests to include in the proposal specific regulations addressing the analysis of greenhouse gas emissions (GHGs) and potential climate change impacts in environmental reviews. Focusing on a single category of impacts in the regulations would be “inappropriate,” CEQ concluded, noting that the agency has published proposed NEPA guidance on consideration of GHGs. Nonetheless, the CEQ, in the proposal, “invites comments on whether it should codify any aspects of its proposed GHG guidance in the regulation, and if so, how CEQ should address them in the regulations.”

The public comment period will remain open until 3/10/2020. To submit a comment, visit www.regulations.gov, Docket ID No. CEQ-2019-003. 85 Fed. Reg. 1684 (1/10/2020).

Jeremy P. Greenhouse
The Environmental Law Group, Ltd.

Jake Beckstrom Vermont Law School, 2015

Erik Ordahl Flaherty & Hood, P.A. 

Audrey Meyer  University of St. Thomas School of Law, J.D. candidate 2020

 

FEDERAL PRACTICE

JUDICIAL LAW

• Attempted deposition of counsel; Shelton rule. Affirming an order by Judge Magnuson, the 8th Circuit rejected the plaintiff’s attempt to avoid the rule established in Shelton v. American Motors Corp. (805 F.2d 1323 (8th Cir. 1986)) and found no abuse of discretion in Judge Magnuson’s grant of the defendant’s request for a protective order to prevent the deposition of its counsel. Smith-Bunge v. Wisconsin Central Ltd., ___ F.3d ___ (8th Cir. 2019). 

• Personal jurisdiction; multiple decisions. Reversing a dismissal for lack of personal jurisdiction, the 8th Circuit held that the defendants’ contacts with Arkansas were sufficient to establish personal jurisdiction where the individual defendant twice traveled to the state in connection with his alleged fraudulent scheme, and where all parties anticipated doing business with Walmart, which is headquartered in Arkansas. Whaley v. Esebag, ___ F.3d ___ (8th Cir. 2020). 

Judge Brasel granted defendants’ motion to dismiss for lack of personal jurisdiction in an action arising out of the sale of cattle, which was brought by a Minnesota corporation against residents of Texas and South Dakota, finding that while the defendants knew that the plaintiff was headquartered in Minnesota, any contact with the state was “random, fortuitous, or attenuated.” Fredin Bros., Inc. v. Anderson, 2019 WL 7037674 (D. Minn. 12/20/2019). 

• Qui tam action; common interest privilege; timing. Rejecting efforts to shield the relator’s pre-disclosure communications with the government under the common interest privilege in a qui tam action, Magistrate Judge Schultz found that the date of the pre-filing disclosure provided “a clear point of demarcation,” and that the plaintiffs had waived any privilege that might have attached to documents or communications shared prior to that date. United States ex rel. Fesenmaier v. Cameron-Ehlen Group, Inc., 2019 WL 6875354 (D. Minn. 12/17/2019). 

• Forum selection clause enforced; venue proper in any event. Finding that the defendants had the burden to establish that venue was improper, Magistrate Judge Thorson recommended the denial of their motion to dismiss for improper venue or transfer the action to the District of New Jersey, finding that a forum selection clause in an agreement between the plaintiff and the individual defendant was valid and enforceable against both defendants, and that venue was proper in the District of Minnesota even absent that clause. 

No objection was made to the report and recommendation, and Judge Davis denied the motion in a brief order. C.H. Robinson Worldwide, Inc. v. Tu, 2019 WL 7494686 (D. Minn. Dec. 20, 2019), Report and Recommendation adopted by, 2020 WL 85183 (D. Minn. 1/7/2020). 

• Attorney’s fees; lodestar; hourly rates; duplicative work; vague entries. Where the prevailing plaintiff in an ERISA action sought an award of more than $206,000 in attorneys’ fees, Judge Frank reduced hourly rates requested by each of the attorneys, and further reduced the fees sought by two of the attorneys for “duplicative, work, unsuccessful or abandoned work, vague entries, and clerical or administrative work performed by an attorney,” and awarded the plaintiff just over $98,000 in attorney’s fees. Christoff v. Unum Life Ins. Co. of Am., 2019 WL 6715067 (D. Minn. 12/10/2019). 

• Motion to modify permanent injunction pending appeal denied. Chief Judge Tunheim denied defendants’ motion to modify a permanent injunction during the pendency of their appeal, finding that none of the four elements of the controlling test favored the defendants. Portz v. St. Cloud State Univ., 2019 WL 6727122 (D. Minn. 12/11/2019). 

• Motion to vacate arbitration award denied; award not affirmed. Where the plaintiff moved to vacate an arbitration award, the defendant did not cross-move to affirm the award, and Magistrate Judge Menendez issued a report and recommendation in which she recommended the denial of the plaintiff’s motion and that the award be affirmed, Judge Wright denied the plaintiff’s motion to vacate but declined to affirm the award because no motion to affirm had been filed. Zean v. Comcast Broadband Security, LLC, 2019 WL 6873983 (D. Minn. 12/17/2019).

• 28 U.S.C. §1292(b); motion to certify interlocutory appeal denied. Judge Frank denied the defendant’s “extraordinary” request for interlocutory review, finding that it had “failed to demonstrate the existence of a controlling legal question suitable for interlocutory review,” and that interlocutory review would “actually delay the litigation.” Beseke v. Equifax Information Services LLC, 2020 WL 133289 (D. Minn. 1/13/2020).

Josh Jacobson
Law Office of Josh Jacobson 

 

INDIAN LAW

JUDICIAL LAW

• Indian Child Welfare Act is constitutional. In an adoption dispute concerning a non-enrolled child, the district court applied ICWA and MIFPA, and decided to place the child with the maternal grandmother instead of the child’s foster placement, and the foster placements appealed. The Minnesota Court of Appeals rejected the appellants’ challenge to the application of ICWA and MIFPA to the case, explaining that it could not inquire into an Indian tribe’s internal eligibility determinations as a matter of tribal sovereignty, and that the White Earth Band met the statutory definition of an Indian tribe. 

The court also rejected each of the appellants’ three constitutional challenges to ICWA. It first rejected an equal-protection challenge, reaffirming that ICWA’s classifications based on tribal membership are not racial, but are instead based on the unique legal status of tribal members, and the law is thus subject to rational-basis review. Because “ICWA’s placement preferences favoring Indian homes for adoptive placement of Indian children are rationally tied to Congress’s unique obligation to the Indians,” appellants’ equal-protection challenge to ICWA failed. The court next rejected appellants’ argument that ICWA exceeds Congress’s legislative authority to regulate commerce with Indian tribes, explaining that “Congress’s power to legislate in the field of Indian Affairs is plenary.” Finally, the court rejected appellants’ anti-commandeering-doctrine argument regarding ICWA’s placement preferences because Minnesota had specifically enacted those preferences into state law. In re Child of S.B., No. A19-0225, 2019 WL 6698079 (Minn. Ct. App. 12/9/2019).

•  Cross-deputized tribal police officer had authority to cite outside reservation boundaries. A driver passed a school bus with its four-way lights activated and stop-arm deployed while children were exiting the bus in Becker County, outside the White Earth Reservation. A White Earth tribal police officer responded to the dispatcher’s report, found the driver in a nearby parking lot outside the reservation’s boundaries, and talked with the driver, who admitted he failed to stop for the bus. The tribal officer, who was also licensed by the state of Minnesota as a police officer, issued the driver a citation for three misdemeanor offenses. The driver was later charged with two gross-misdemeanor offenses for passing on the right side and passing while a child is outside the bus. 

The driver moved to suppress the statements he made to the White Earth tribal police officer, but the district court denied the motion, finding that the officer was within the course and scope of his employment as a licensed peace officer when he seized the driver, as permitted by statute. A split Minnesota Court of Appeals rejected the driver’s argument that the “Cooperative Law Enforcement Agreement” between Becker County and the White Earth Reservation limited the course and scope of the officer’s employment only to the geographic limits of the White Earth reservation because the applicable statute does not speak to tribal agreements regarding the enforcement of state criminal laws outside the reservation. Without textual limits in the cooperative law-enforcement agreement, the court found that the officer was within the course and scope of his employment when he seized and cited the driver, in part because he was within his employer’s jurisdiction when he received the dispatch call and he intended to be outside the reservation only briefly. State v. Bellcourt, No. A19-0100, __ N.W.2d __ (Minn. Ct. App. 12/16/2019).

• No treaty-rights defense to gill-net fishing on Gull Lake. When a Fond du Lac tribal member was charged with state law violations relating to netting fish without a license on Gull Lake, the member argued that he had treaty rights protecting his right to fish on the lake. The district court found that uncontradicted expert testimony did establish the usufructuary rights of members of the Mississippi, Leech Lake, and Lake Winnibigoshish bands, but not the Fond du Lac Band, to the lake. The tribal member appealed, arguing the state lacked subject matter jurisdiction over him because he is an “Indian,” that his actions occurred within “Indian country,” and that he has individual usufructuary rights to fish on Gull Lake. 

In a divided, unpublished opinion, the Minnesota Court of Appeals found that because Gull Lake had been reserved under the treaty of 1855, but then later ceded to the United States in 1864 in exchange for the establishment of the Leech Lake reservation, Gull Lake was no longer “Indian country,” and the jurisdictional limitations of Public Law 280 were inapplicable to the lake. The court of appeals also rejected the tribal member’s argument that he held usufructuary rights to Gull Lake under earlier treaties in 1795, 1825, and 1826. It determined these earlier treaties merely recognized an aboriginal right to occupancy of the lands, with an incidental right to hunt, fish, and gather, rather than reserving individual usufructuary rights that would extend beyond the extinguishment of Indian title. State v. Northrup, No. A19-0130, 2019 WL 6838485 (Minn. Ct. App. 12/16/2019). 

Jessica Intermill 
Hogen Adams PLLC

Leah K. Jurss
Hogen Adams PLLC

 

INTELLECTUAL PROPERTY

JUDICIAL LAW

Trademark: Dismissal of counterclaims. Judge Wright recently granted in part plaintiff My Pillow, Inc.’s motion to dismiss counterclaims. My Pillow sued LMP Worldwide, Inc. in 2012 in the Eastern District of Michigan for trademark infringement and unfair competition. The parties reached a settlement agreement dismissing the case. My Pillow commenced the instant action alleging LMP violated the settlement agreement and infringed the MYPILLOW mark. LMP filed nine counterclaims. My Pillow moved to dismiss counterclaims III through VIII. In counterclaim IV, LMP sought to cancel the registration for MYPILLOW as generic or merely descriptive, a claim previously made in the Michigan litigation. My Pillow argued the claim was barred by claim preclusion. Claim preclusion applies where a prior judgment rendered by a court of competent jurisdiction was final and on the merits and involved the same cause of action and the same parties. Finding LMP’s counterclaim to cancel the MYPILLOW registration in the Michigan litigation was dismissed with prejudice, the court found counterclaim IV was barred by claim preclusion. The court also granted My Pillow’s motion to dismiss LMP’s unfair competition counterclaim. While unfair competition under Minnesota law is a tort without specific elements, the underlying tort may not duplicate another claim. Here, LMP alleged that My Pillow disparaged LMP’s products and business, allegations duplicative of LMP’s false advertising claim. Accordingly, the court dismissed counterclaims IV and VII. My Pillow, Inc. v. LMP Worldwide, Inc., No. 18-cv-0196-WMW/DTS, 2019 U.S. Dist. LEXIS 213557 (D. Minn. 12/11/2019).

• Patent: Refusal to strike infringement contentions as insufficient. Judge Wright recently denied defendant St. Jude Medical S.C., Inc.’s motion to strike plaintiff Niazi Licensing Corp.’s infringement contentions. Niazi Licensing sued Boston Scientific Corp. and St. Jude for patent infringement related to U.S. Patent No. 6,638,268, titled “Catheter to Cannulate the Coronary Sinus.” Pursuant to the court’s scheduling order, Niazi Licensing submitted infringement contentions prior to the claim-construction hearing. St. Jude moved to strike the infringement contentions, arguing Niazi Licensing failed to identify an act of direct or indirect infringement. A motion to strike is generally brought under Fed. R. Civ. P. 12(f), which provides that a “court may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.” St. Jude, however, sought to strike infringement contentions, not a pleading. St. Jude argued Niazi Licensing’s infringement contentions were substantively deficient, in violation of the scheduling order. St. Jude provided no authority in support of the proposition that a deficient response was a violation of the scheduling order. At most, St. Jude’s authority indicated that a court had the discretion to impose sanctions for such deficiencies. Accordingly, the court denied St. Jude’s motion to strike Niazi Licensing’s infringement claims. Niazi Licensing Corp. v. Boston Sci. Corp., Nos. 17-cv-5094 (WMW/BRT); 17-cv-5096 (WMW/BRT), 2019 U.S. Dist. LEXIS 181611 (D. Minn. 10/21/2019).

Joe Dubis
Merchant & Gould


TAX LAW

JUDICIAL LAW

Property tax: Court decides to hear petitioner’s arguments on contract interpretation with the county board. Rockstep Willmar, LLC, purchased Kandi Mall, a regional shopping center located in Willmar, Minnesota, in October 2015. In July 2016, Rockstep submitted a formal application for tax abatements to the County of Kandiyohi. On 9/6/2016, the Kandiyohi Board of Commissioners held a public hearing and adopted a resolution, and ultimately an abatement agreement, approving Rockstep’s application for an abatement of county taxes. The primary issue of the agreement provides that Rockstep will not take certain actions with respect to tax assessments for the duration of the agreement. The agreement was signed by a Rockstep official, by the chair of the County Board, and the county auditor. On 4/26/2018, Rockstep filed a Real Property Tax Petition under chapter 278 (2018) in Kandiyohi County District Court challenging the Kandi Mall’s 1/2/2017 property tax assessment for taxes payable in 2018. The county subsequently filed a summary judgment motion asserting that the abatement agreement contractually bars Rockstep’s chapter 278 petition. Rockstep argued, among other things: (1) that the county’s abatement agreement was invalid because the county did not properly approve it; (2) that the county was statutorily prohibited from pleading any affirmative defense to a chapter 278 petition; and (3) that even if the county were authorized to plead waiver, its failure to do so barred it from now asserting that defense by means of a summary judgment motion. 

Minn. Stat. §373.02 (2018) allows county boards power to exercise their delegated powers in accordance with the law. Written agreements made by the county, such as resolutions, shall be executed by the chair of the board and the clerk of the board. Counties are authorized to abate property taxes only after holding a properly noticed hearing and adopting an abatement resolution stating specific terms. Minn. Stat. §469.1813 (2018). The court disagreed with Rockstep’s argument that the abatement agreement was improperly executed and is therefore invalid and unenforceable. Rockstep argued that the county never adopted a separate resolution approving the abatement agreement to authorize a county official to execute the agreement on the board’s behalf. The court concluded that execution of the agreement by the board’s chair and the county clerk were sufficient to approve the agreement.

Minnesota statute establishes the exclusive procedure for challenging a local property tax assessment. By statute, the Minnesota Rules of Civil Procedure “shall govern the procedures in the Tax Court, where practicable.” Minn. Stat. §271.06, subd. 7 (2018). The Minnesota Supreme Court recently reiterated that civil rules apply to tax court proceedings, so long as no conflict exists between the rules and the tax statutes. Court Park Co. v. Cty. of Hennepin, 907 N.W.2d 641, 645 n.4 (Minn. 2018). “Where a conflict exists, the tax statutes control.” Id. Section 278.05 specifically contemplates that no answer or other responsive pleading will be filed in response to a chapter 278 petition. Minnesota Rules of Civil Procedure 8.02 and 8.03 require that defenses and affirmative defenses must be asserted by responsive pleading. Because there is a direct and unavoidable conflict, the statute controls, and 8.02 and 8.03 cannot practicably govern in chapter 278 proceedings in tax court. Rockstep argued that “if § 278.05, subd. 1 relieves the County of the obligation to plead in response to Rockstep’s petition, it likewise precludes the County from raising any affirmative defense to the petition.” Section 278.05 entails only that counties may not plead defenses in chapter 278 proceedings. It does not provide that counties may not assert defenses. The court rejected Rockstep’s contention that the Legislature intended to prohibit counties from defending chapter 278 actions.

Rockstep argued that “the County waived its waiver defense by failing to timely assert it.” Since Civil Rules 8.02 and 8.03 cannot practicably apply in chapter 278 tax court proceedings, and because the counties are statutorily prohibited from pleading defenses, the court rejected Rockstep’s argument. The county argued that the abatement agreement contractually bars Rockstep’s chapter 278 petition. Rockstep responded that the agreement does not clearly waive its statutory right to appeal the county’s assessment or, in the alternative, that the cited provision is ambiguous and, thus, that its meaning cannot be resolved on summary judgment. This dispute presents a question of contract interpretation.

The goal of contract interpretation is “to ascertain and enforce the intent of the parties.” Valspar Refinish, Inc. v. Gaylord’s, Inc., 764 N.W.2d 359, 364 (Minn. 2009). In so doing, a court looks to the contract as a whole. Art Goebel, Inc. v. N. Suburban Agencies, Inc., 567 N.W.2d 511,515 (Minn. 1997). The meaning of a contract is a question of law unless there is ambiguity. Id. at 515. A contract is ambiguous if, based upon its language alone, it is reasonably susceptible of more than one interpretation.” Id. “It is generally recognized that summary judgment is not appropriate where the terms of a contract are at issue and any of its provisions are ambiguous or uncertain.” Donnay v. Boulware, 275 Minn. 37, 45, 144 N.W.2d 711,716 (1966).

The court agreed with Rockstep that the language of the contract is ambiguous, and therefore denied the county’s motion for summary judgment. Rockstep Willmar, LLC v. Kandiyohi Cty, 2019 WL 7176719 (Minn. Tax. Court 12/11/19).

• Downtown parking ramp market value understated. This property tax case concerns the market value of a parking ramp in downtown Minneapolis as of 1/2/2014 and 2015. The subject property is a multi-level, 850-stall automobile parking ramp with a 12,000-square-foot, street-level retail arcade. The subject occupies a single tax parcel with a land area of 53,500 square feet. It lies between Nicollet Mall and Hennepin Avenue and is adjacent to the Macy’s Department Store in the central business district of downtown Minneapolis. The ramp building was originally constructed in 1959, and comprises two separate parking ramps. A skyway was constructed above the retail arcade in 1961. That addition is used by the adjacent Radisson Hotel. A second addition, an auditorium, was constructed on the 8th floor in 1963. That addition was used exclusively by the adjacent Macy’s Department Store. The parcel also includes a sub-basement, a basement, and a ground-floor loading dock, all of which were also used exclusively by the Macy’s Department Store. The subject’s combined structure has a gross building area of 461,433 square feet and was in below-average condition as of the assessment dates.

The subject’s highest and best use for both valuation dates was continued use as a parking ramp. The assessor estimated the subject’s market value at $14,110,000 as of 1/2/2014, and $15,385,000 as of 1/2/2015. The Macy’s appraiser opined that the fee simple market value of the subject was $12,650,000 as of 1/2/2014 and $13,300,000 as of 1/2/2015. The county’s appraiser opined that the fee simple market value of the subject stood at $16,600,000 as of 1/2/2014 and $18,950,000 as of 1/2/2015. The fee simple market value of the subject property as of 1/2/2014 was $16,116,000. The fee-simple market value of the subject property as of 1/2/2015 was $17,823,000. 

The court found that Macy’s submitted sufficient evidence to rebut the prima facie validity of the assessments, and concluded that the assessor’s estimated market value of the subject property as of January 2014 and January 2015 understated its market value as of that date. The final order of the court stated that the assessed value of the subject property as of 1/2/2014 shall be increased from $14,110,000 to $16,116,000. The assessed value of the subject property as of 1/2/2015 shall be increased from $15,385,000 to $17,823,000. The real estate taxes due and payable in 2015 and 2016 shall be recomputed accordingly and refunds, if any, paid to Macy’s as required by such computations, together with interest from the original date of payment. Macy’s Retail Holdings, Inc., v. Hennepin Cty, 2019 WL 7176742 (Minn. Tax Court 12/17/19).

• Multi-tenant retail property understated and subject to equalization relief. This property tax case concerns the market value of three multi-tenant retail properties on three separate tax parcels all located in Mankato, Minnesota, as of 1/2/2016. The property comprises three multi-tenant retail facilities on three separate tax parcels, all located in Mankato Heights Plaza, and referred to as the North Parcel, the West Parcel, and the Shopping Center. The North Parcel has a land area of 34,682 square feet. The parcel’s principal improvement is a one-story, five-tenant retail building constructed in 2002, with a gross building area (GBA) of 8,040 square feet and a gross leasable area (GLA) of 7,830 square feet. Its five retail suites range in size from 1,333 to 1,667 square feet. The West Parcel has a land area of 38,997 square feet. The parcel’s principal improvement is a one-story, two-tenant retail building constructed in 2002, with a GBA of 6,450 square feet and a GLA of 6,390 square feet. Its two suites are 1,390 and 5,000 square feet, respectively. The Shopping Center constitutes a majority of the Mankato Heights Plaza, and has a land area of 520,916 square feet. Its principal improvement is a community shopping center constructed in 2001-02 with a GBA of 137,968 square feet and a GLA of 136,128 square feet. The center’s 16 retail suites ranged in size from 1,500 to 28,000 square feet. Each subject parcel has adequate parking. Nearby major retailers include Sam’s Club, Wal-Mart, Kohl’s, Cub, and Hy-Vee. 

In a lengthy analysis, the court found that the IRC submitted sufficient credible evidence and found that the aggregate assessed value of the property’s three constituent parcels understated its market value as of the assessment date. The court ordered that the market value of the North Parcel as of 1/2/2016 shall be increased from $923,100 to $1,209,010, but the parcel’s taxable value shall be reduced as a result of equalization to $1,122,000. The market value of the West Parcel as of 1/2/2016 shall be increased from $912,100 to $936,056, but the parcel’s taxable value shall be reduced as a result of equalization to $869,000. The market value of the Shopping Center as of 1/2/2016 shall be increased from $13,663,100 to $14,640,428, but the parcel’s taxable value shall be reduced as a result of equalization to $13,586,000. IRC Mankato Heights v. Blue Earth Cty, 2019 WL 7176733 (Minn. Tax Court 12/17/19).

• UK Company’s income not exempt from U.S. taxation under statute or treaty. Adams Challenge (UK) Limited is a company incorporated under the laws of the United Kingdom; the company’s only income-producing asset was a multi-purpose support vessel. A multi-purpose support vessel, as the name suggests, can be used for multiple purposes, and in this case, Adams’s vessel was used by a U.S. company to perform work decommissioning oil and gas wells and removing hurricane-related debris on portions of the U.S. outer continental shelf (OCS) in the Gulf of Mexico. Although Adams had only one income-producing asset, the asset produced a lot of income and Adams earned about $45 million during the tax years at issue. Adams treated most of the $45 million as exempt from federal income tax. 

Adams, like other foreign corporations, is subject to federal income tax on income “effectively connected with the conduct of a trade or business within the United States.” I.R.C. sec. 882(a)(1). Generally, the term “United States” does not include the OCS. See I.R.C. sec. 7701(a)(9). However, I.R.C. sec. 638 provides that, for purposes of applying federal income tax provisions “with respect to mines, oil and gas wells, and other natural deposits,” the term “United States” includes “the seabed and subsoil of those submarine areas” within the OCS. 

In addition to the Code, a tax treaty between the United States and the U.K. provides that a U.K. enterprise shall not be subject to federal income tax unless it conducts business in this country through a U.S. “permanent establishment.” Treaty art. 7(1). An enterprise is deemed to have a U.S. permanent establishment “where activities are carried on offshore... in connection with the exploration… or exploitation… of the seabed and sub-soil and their natural resources.” Treaty art. 21(1). 

Applying the plain language of the statute to resolve this summary judgment motion, the court reasoned that all of the projects Adams’s vessel worked on involved decommissioning of oil and gas wells or pipelines connected to oil and gas rigs. Although some time was spent in transit between project sites, performing maintenance and repairs in port, or idle at sea awaiting better weather, these latter activities were indispensable components of its central purpose under the charter—to assist in decommissioning oil and gas facilities. “In sum,” the court concluded, “because the decommissioning activities in which the Challenge Vessel engaged were integral to, and legally required to be undertaken in connection with, the exploitation of oil and gas resources on the OCS, those activities were ‘related to the…. exploitation of… oil and gas wells’ within the meaning of section 1.638-1(c)(4), Income Tax Regs. Section 638(1) accordingly expanded the ‘United States’ to include the OCS.” The court then addressed the taxability of the income under the treaty, and concluded that the income was also taxable under the treaty. Therefore the $45 million was taxable in the United States and summary judgment to the Commissioner was proper. Adams Challenge (UK) Ltd., v. Comm’r, No. 4816-15., 2020 WL 95692 (T.C. 1/8/2020).

• Individual income tax: Deduction for mortgage interest not available for substitutes for rent or personal living expenses. A taxpaying couple that has had nearly continuous litigation with the Service was once again before the court with several issues, including underreporting gross receipts and failure to substantiate Schedule C deductions. One issue the court took up was whether the couple was entitled to substantiated itemized deductions for mortgage interest expenses on a property in which they lived and from which they operated their businesses, but which they did not own. They leased the property from a landlord who charged them a discounted monthly rent. The discount was offered in exchange for improvements the couple made to the property. The couple claimed deductions totaling about $47,000 for mortgage interest expense in 2013 and 2014. Since the couple did not own the property, they were not entitled to the mortgage interest deduction despite the leasehold improvements they made and despite their payment of utilities and insurance on the property. The couple had an option to acquire the property, but they never exercised that option. The court reminded the taxpayers that “[t]hey cannot deduct rent, substitutes for rent, or personal living expenses as ‘mortgage interest.’” All remaining issues were resolved in favor of the Commissioner. McRae v. Comm’r, T.C.M. (RIA) 2019-163 (T.C. 2019).

• Individual income tax: Establishing that he was “far along the path to ruin” did not exempt taxpayer from income tax. Taxpayer Jason Hommel operated a series of coin and precious-metal related businesses. He started the businesses with his father—they operated the business out of their homes and garages, and Mr. Hommel continued after his father died. Eventually, Mr. Hommel moved his business out of the garage and into an existing business. In a detailed opinion that doubles as a fascinating cautionary tale, Judge Holmes sets forth how the taxpayer went from fortune to “ruin”—a tale that includes Mr. Hommel’s being charged with false imprisonment and ends with a notice of deficiency for more than $1 million. In addition to arguing that financial ruin ought to exempt him from paying taxes due, Mr. Hommel argued that he ought not be liable for the deficiency because the ownership of the store (the coin business) was in dispute and because the coin shop’s managers stole inventory during the year. 

The court first addressed the underreported income and noted a procedural quirk: Since this case is appealable to the 9th Circuit, the presumption that the Commissioner’s notices of deficiency are correct is modified. Instead, “the Commissioner [must] first show ‘some evidence... which would support an inference’ of the taxpayer’s involvement in the activity during the year at issue.” The Commissioner easily cleared this threshold procedural issue, and the court turned to the substantive question of whether the Commissioner correctly attributed Mr. Hommel’s unreported income to his businesses. 

Approving the Commissioner’s use of a bank deposits analysis, the court found that Mr. Hommel “underreported his 2009 Schedule C gross receipts by $6,810,339—as the Commissioner determined.” The court similarly upheld the Commissioner’s findings on cost of goods sold (COGS) and theft loss. Mr. Hommel was successful, however, in arguing that he was not liable for an accuracy-related penalty because the Commissioner was unable to establish compliance with Section 6751(b)(1) (requiring certain procedural safeguards when imposing penalties). Jason Hommel v. Comm’r, T.C.M. (RIA) 2020-004 (T.C. 2020).

Morgan Holcomb
Mitchell Hamline School of Law

Sheena Denny
Mitchell Hamline School of Law