EMPLOYMENT & LABOR LAW
JUDICIAL LAW
• ERISA; claim by trustees fails. The trustees of three Minnesota-based employee benefits funds under the Employment & Retirement Income Security Act (ERISA) were unsuccessful in a lawsuit against the employer and its affiliates for unpaid pension contributions. Affirming a ruling of U.S. District Court Judge Paul Magnuson in Minnesota, the 8th Circuit Court of Appeals held that the evidence failed to show that the company’s corporate affiliates were “alter- egos” or that there was a joint venture between them and the employer or a joint enterprise, either. Therefore, the trustees could not pursue claims against them for the unpaid contributions. Johnson v. Scharps Welding & Fabricating, Inc., 950 F.3d 510 (8th Cir. 2/7/2020).
• Sex harassment; not severe or pervasive. The allegation of several isolated incidents of inappropriate conduct failed to establish actionable sexual discrimination or harassment. The 8th Circuit held that the allegations did not establish either the “severe or pervasive” standard for a hostile work environment claim, and could not state a prima facie claim of sex discrimination. Additionally, the claimant failed to exhaust remedies on a retaliation claim that was not asserted in the administrative complaint. Packert v. Kenna-Asa Auto Plaza, Inc., 950 F.3d 535 (8th Cir. 2/13/2020).
• ADA; prima facie case not required in complaint. A dismissal of a claim of discrimination in hiring under the Americans with Disabilities Act (ADA) was reversed on grounds that the trial court improperly determined that the plaintiff failed to adjust the elements of her prima facie case of discrimination in the complaint. The 8th Circuit, overturning the decision, pointed out that the prima facie standard was “an evidentiary matter” rather than a “pleading standard,” and there were sufficient facts alleged to state an ADA claim. A dissent by Judge David Stras of Minnesota would have upheld the dismissal on grounds that the complaint was “woefully inadequate” because it did not state that the plaintiff was “qualified” for the position. Cook v. George’s, Inc., 2020 WL 11606673 (8th Cir. 3/11/2020) (unpublished).
• Racial discrimination; federal jurisdiction upheld. An employee who sued for race discrimination was entitled to pursue his claim in federal court under the Labor Management Relations Act (LMRA). Affirming a lower court ruling, the 8th Circuit held that the suit invoked a federal question because of “complete pre-emption” of such claims under the LMRA. Johnson v. Humphreys, 949 F.3d 413 (8th Cir. 2/4/2020).
• Unfair labor practice; failure to recognize bargaining representative. An employer engaged in an unfair labor practice under the National Labor Relations Act (NLRA) by refusing to recognize the union as the exclusive collective bargaining representative for some of the facility’s employees. Granting the petition for enforcement of the order by the National Labor Relations Board, the 8th Circuit held that the employee of the union did not have “apparent authority to act as its agent” and his “objectionable behavior” during a union election campaign did not invalidate the result or warrant failure to recognize the union as the prevailing party in the election. Dolgen Corp., LLC v. NLRB, 950 F.3d 540 (8th Cir. 2/13/2020).
• Whistleblower retaliation; railroad ruling reversed. A petition for review of an adverse determination of retaliation under the Federal Railroad Safety Act due to the suspension of a locomotive engineer under federal regulation by the Administrative Review Board and administrative law judge was granted. The 8th Circuit reasoned that the administrative process was tainted by legal error because it did not follow the precedent that an employee must prove “intentional retaliation prompted by the employee engaging in protected activity” in order to maintain a retaliation claim under the Act. Dakota, Minnesota & Eastern Railroad Company v. U.S. Department of Labor Administrative Review Board, 948 F.3d 940 (8th Cir. 1/30/2020).
• Race, whistleblower, defamation claims; teacher’s case dismissed. A teacher’s lawsuit against the Minneapolis School District for race discrimination under the Minnesota Human Rights Act, violation of the whistleblower statute, and defamation was dismissed. The Minnesota Court of Appeals, affirming a decision of the Hennepin County District Court, held that the teacher did not bring her discrimination claim within the statutory deadline and also did not establish a prima facie case that she engaged in statutorily protected conduct under the whistleblower law. Gibson v. Special School District # 1, (Minneapolis), 2020 WL 1129871 (8th Cir. 3/9/2020) (unpublished).
• Unemployment compensation; a pair of employees lose. Two employees lost their claims for unemployment compensation benefits in a variety of circumstances. An employee who worked as an in-home care giver was ineligible for unemployment compensation benefits because she engaged in “misconduct.” Upholding a determination by the Department of Employment & Economic Development, the Minnesota Court of Appeals held that the caregiver’s failure to follow directives to use a lift device for the ailing father constituted a “serious violation of the standards” that the employer was reasonably entitled to expect, was not a good faith error in judgment, and was not justified under the “single incident” doctrine. Hughes v. Bacaner, 2020 WL 1130359 (8th Cir. 3/9/2020) (unpublished).
Another claim for unemployment benefits failed because the employee was deemed to have quit without just cause. The appellate court rejected the claim that the employee took a leave of absence or was entitled to quit due to a medical condition, because he never requested a leave of absence. Swantz v. Premier Transportation, 2020 WL 773492 (8th Cir. 2/18/2020) (unpublished).
Marshall H. Tanick
Meyer, Njus & Tanick
ENVIRONMENTAL LAW
JUDICIAL LAW
• SCOTUS clarifies Clean Water Act jurisdiction over groundwater discharges. On 4/23/2020, the U.S. Supreme Court issued a highly anticipated Clean Water Act decision, holding that the Act requires a National Pollutant Discharge Elimination System (NPDES) permit when there is a direct discharge from a point source into navigable waters or when there is the “functional equivalent” of a direct discharge.
The case involved a municipal wastewater treatment plant in West Maui, Hawaii, that pumped treated sewage (about 4 million gallons per day) into wells hundreds of feet underground for disposal to groundwater. The wells were located about half a mile from the Pacific Ocean, and there was a direct hydrological connection between the groundwater and the ocean, through which pollutants flowed into the ocean, as demonstrated by tracer dye studies. Under the Act, an NPDES permit must be obtained before any pollutant is “added” to “navigable waters” from a “point source.” 33 U.S.C. §1311(a). In 2012 several environmental groups sued the county, which operated the plant, claiming it was adding pollutants to a navigable water from a point source without obtaining an NPDES permit. In February 2019, the 9th Circuit Court of Appeals agreed with the environmental groups, holding that discharges to groundwater, which is not a “navigable water” under the Act, are nonetheless subject to the Act where “the pollutants are fairly traceable from the point source to a navigable water such that the discharge is the functional equivalent of a discharge into the navigable water.” Hawai’i Wildlife Fund v. County of Maui, 886 F.3d 737 (9th Cir. 2018).
The Supreme Court, in a majority opinion written by Justice Breyer, affirmed the 9th Circuit’s determination that the county’s discharge was illegal under the Act without an NPDES permit. The four wells, it concluded, were “point sources,” and pollutants from the wells were “added” to the ocean, which is a “navigable water.” The fact that the pollutants were added to the ocean indirectly after being conveyed there by groundwater, a non-point source, did not trouble the Court. But the Court did find that the 9th Circuit’s “fairly traceable” test was too broad, writing: “Virtually all water, polluted or not, eventually makes its way to… groundwater. Given the power of modern science, the Ninth Circuit’s limitation, ‘fairly traceable,’ may well allow EPA to assert permitting authority over the release of pollutants that reach navigable waters many years after their release (say, from a well or pipe or compost heap) and in highly diluted forms.”
Interpreting the statutory term “from” a point source in this way was not reasonable. Plus, this broad interpretation would inevitably give the federal government significant authority over nonpoint sources, an approach that Congress deliberately rejected when drafting the CWA, the Court held.
Nonetheless, the Court also rejected Maui’s and the federal government’s arguments that the Act could never apply to discharges to groundwater, concluding this interpretation would “risk serious interference with EPA’s ability to regulate ordinary point source discharges” and create “a large and obvious loophole” for dischargers to avoid NPDES permitting. The Court struck a middle ground, retaining the 9th Circuit’s “functional equivalent” requirement but not the broader “fairly traceable” test: “We hold that the statute requires a permit when there is a direct discharge from a point source into navigable waters or when there is the functional equivalent of a direct discharge.”
The Court acknowledged its new jurisdictional standard for groundwater-to-surface-water discharges lacked specificity and left significant room for interpretation, observing that “there are too many potentially relevant factors applicable to factually different cases for this Court now to use more specific language.” Rather, the Court indicated the standard would have to be developed through court decisions in individual cases and through potential EPA guidance. The Court did, however, provide a list of nonexclusive factors that “may prove relevant” depending upon the circumstances of a particular case: transit time; distance traveled; the nature of the material through which the pollutant travels; the extent to which the pollutant is diluted or chemically changed as it travels; the amount of pollutant entering the navigable waters relative to the amount of the pollutant that leaves the point source; the manner by or area in which the pollutant enters the navigable waters; and the degree to which the pollution (at that point) has maintained its specific identity. The Court noted that “time and distance will be the most important factors in most cases, but not necessarily every case.”
Notably, the Court did not clearly deny Maui’s and the government’s claim that its holding could “vastly expand the scope of the statute, perhaps requiring permits for each of the 650,000 wells like petitioner’s or for each of the over 20 million septic systems used in many Americans’ homes.” The Court simply noted that EPA had managed in the past to require permits for some but not all groundwater-to-surface-water discharges and that EPA and the states have tools at their disposal to address potential broad application of the new standard, including issuing general NPDES permits.
Justice Kavanaugh wrote a concurring opinion, emphasizing that the majority’s holding is consistent with former Justice Scalia’s opinion in Rapanos v. United States, 547 U.S. 715 (2006), that the Act encompasses indirect discharges to navigable water as well as direct discharges. Justice Kavanaugh also offered a preemptive defense of the majority’s failure to provide a “bright-line” standard, asserting, “The source of the vagueness is Congress’ statutory text, not the Court’s opinion.”
Justices Thomas and Alito both wrote dissenting opinions. Justice Thomas interpreted the statutory requirement of an “addition” of pollutants from a point source as being limited to an addition of pollutants directly from the point source, not indirectly via a nonpoint source such as groundwater. Likewise, Justice Alito concluded that for an addition of pollutants to be “from” a point source, it must be directly from the point source, in this case the wells, not “from” the intervening groundwater.
Notably, the Supreme Court’s decision moots a 4/23/2019 U.S. Environmental Protection Agency interpretative statement, 84 Fed. Reg. 16810, in which the agency concluded that “the Act is best read as excluding all releases of pollutants from a point source to groundwater from NPDES program coverage… regardless of a hydrologic connection between the groundwater and a jurisdictional surface water.” County of Maui v. Hawai’i Wildlife Fund, 590 U. S. ____ (2020).
• Supreme Court addresses CERCLA jurisdictional issues. On 4/20/2020, the United States Supreme Court issued its opinion in Atlantic Richfield Company v. Gregory A. Christian, et.al. This case addressed the scope of state court jurisdiction over claims made under state common law concerning “Superfund” sites under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. § 9601 et seq. (CERCLA), as well as the authority of the Environmental Protection Agency (EPA) over cleanups of Superfund sites.
CERCLA requires that any removal or remedial action proposed by a potentially responsible party (PRP) must first be approved by the EPA. Under CERCLA, United States district courts have exclusive jurisdiction over all controversies arising under CERCLA, 42 U.S.C. §9613(b), although once EPA has approved a cleanup plan, federal courts’ ability to review challenges to such a plan are very limited. Id. §9613(h).
At issue in the case is a Superfund site of roughly 300 square miles located near Butte, Montana and owned by the Atlantic Richfield Company (ARCO). In 1983, the EPA designated the site as a Superfund site under CERCLA. Since its designation, ARCO and the EPA have been working together to remediate the site under an EPA-approved cleanup plan.
In 2008, a group of 98 surrounding property owners brought suit against ARCO in Montana state court, alleging that the smelter had caused damage to their properties, and asserted trespass, nuisance, and strict liability claims under state common law. The landowners sought restoration damages, among other forms of relief. Under Montana law, in order to collect restoration damages, a plaintiff must show that “[t]he ability to repair [the] injury must be more than a theoretical possibility.” Sunburst School Dist. No. 2 v. Texaco, Inc., 165 P. 3d 1079, 1086 (2007). In response to this, the landowners proposed a restoration plan that went beyond what the EPA’s own cleanup plan provided. The EPA’s cleanup plan had been deemed sufficient because it met the standard of being “protective of human health and the environment.” EPA, Community Soils Operable Unit, Record of Decision (1996), App. 62. See also 42 U.S.C. §9621(d)(1).
The Montana Supreme Court upheld the state district court’s holding that the landowners’ claim for restoration was not precluded by CERCLA because the claims made by the landowners were not challenges to the EPA cleanup plans and would therefore not stop, delay, or change the work the EPA is doing. The court also rejected ARCO’s argument that the landowners were PRPs and were thus prohibited from taking remedial action without approval from the EPA.
On review, the U.S. Supreme Court addressed two key issues: (1) Are state courts stripped of jurisdiction under the Act for claims made under state common law involving a Superfund site? and (2) are the landowners considered PRPs and thus subject to the Act’s requirement to seek approval from the EPA prior to undertaking remedial actions on the Superfund site?
In addressing the first issue, the Court found that the Act does not strip state courts of jurisdiction over lawsuits concerning state common law. The Court opined that the Act gives federal courts the exclusive jurisdiction over controversies arising under the Act; however, it does not deprive state courts of jurisdiction over lawsuits concerning state common law. The Court held that “a suit arises under the law that creates the cause of action” (citing American Well Works Co. v. Layne & Bowler Co., 241 U.S. 257, 260 (1916)), meaning in this circumstance, federal courts would have exclusive jurisdiction over controversies that arise under the Act due a specific cause of action created by the Act. Here, the landowners were asserting claims created by state common law (trespass, nuisance, and strict liability claims under Montana common law), not the Act. Therefore, the Court held that because the claims asserted by the landowners arose from state common law, and not the Act, the Montana courts had appropriate jurisdiction over the lawsuit.
In addressing the second issue, the Court found that the Montana Supreme Court erred in not finding the landowners to be PRPs under the Act and thus not requiring the landowners to seek approval from the EPA prior to taking remedial action. In making this determination, the Court relied on the list of “covered persons” provide for in the Act, which, the Court concluded, provided an unambiguous definition of potentially responsible parties. The Court found that because the pollutants created by the ARCO smelter have “come to be located” on the landowners’ properties, the properties meet the definition of a “facility”’ under the Act, and therefore the landowners, as owners of the facilities, are PRPs.
Accordingly, the Court held that the landowners were required to seek approval by the EPA prior to taking remedial actions in order to comply with the Act’s objective of developing a single, comprehensive EPA-led cleanup effort at a site, as opposed to multiple individual efforts that may compete with one another. The Court noted that its holding did not mean the landowners’ proposed restoration plan was inappropriate; it simply meant that before implementing the plan, the landowners must obtain EPA approval. Atlantic Richfield Company v. Gregory A. Christian, et al., 590 U.S. ___ (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
FAMILY LAW
JUDICIAL LAW
Following a jury trial in Ramsey County, defendant Jennifer Ann Culver was found guilty of felony deprivation of parenting rights in violation of Minn. Stat. §609.26, subd.1(3) (2018). Defendant appealed her conviction on the grounds that the evidence presented at trial was insufficient to establish she had the subjective intent to substantially deprive the child’s father of his parenting time and that certain relationship evidence should not have been admitted at trial. The court of appeals reversed her conviction on her first argument, discussed below, and did not reach a decision on the relationship evidence argument.
As the response to the state’s appeal to the Minnesota Supreme Court, defendant stated that her conviction must be reversed because “the circumstances provided support[ed] the reasonable inference that [she] did not intend to substantially deprive [father] of his parental rights.”
The Minnesota Supreme Court analyzed two issues in interpreting and applying Minn. Stat. §609.26. First, it interpreted the phrase “where the action manifests an intent substantially to deprive that parent of rights to parenting time,” determining whether it is appropriately analyzed through an objective or subjective standard. Using the canons of construction for statutory interpretation, the Court concluded that when applying the dictionary definitions to the words “intentional,” “where,” “manifest,” and “an;” and when reading the statute as a whole, the only reasonable interpretation of the stator language is that the Legislature intended the Court to view a defendant’s actions objectively.
Next, the Court considered the meaning of “substantial” with regard to parenting time. Adopting the parties’ concessions, the Court agreed that “substantial” means “considerable in importance, value, degree, amount or extent.” However, in this context, the Court adopted the state’s argument that “substantial” also includes consideration of qualitative and quantitative factors related to parenting time, including both the nature of the days and number of days. For example, the Court noted that the importance or value of parenting time might be different depending on a child’s age or the type of day involved, weighing an overnight as more “substantial” than an evening-only visit because overnights help develop the bond between parent and child, and include more opportunities to share the tender moments that arise during daily routines.
Once the Court established the analytical framework for evaluating cases arising out of Minn. Stat. §609.26, it analyzed defendant’s evidentiary argument. Defendant argued that her uncontradicted evidence that she sent multiple messages to reschedule the parenting time established that the deprivation was not substantial. Viewing evidence in the light most favorable to the jury verdict, the Court found the jury’s verdict was supported by the evidence because the jury could find defendant not credible.
Concluding that mother’s actions were objectively intentional and substantial, the Court reversed the court of appeals’ decision regarding Minn. Stat. §609.26, and remanded the matter to the court of appeals for consideration of the relationship evidence issue that was not properly before the Court on appeal. State of Minnesota v. Jennifer Ann Culver, 941 N.W.2d 134 (Minn. 2020).
Amy M. Krupinski
Collins, Buckley, Sauntry & Haugh, PLLP
FEDERAL PRACTICE
JUDICIAL LAW
• Res judicata; defense preclusion; defense not barred. Where the parties engaged in a series of litigations, but the latter litigation did not arise from a “common nucleus of operative facts,” the Supreme Court unanimously held that the defendant was not barred from asserting a defense that it had not pursued in an earlier action. Lucky Brand Dungarees, Inc. v. Marcel Fashions Group, Inc., ___ S. Ct. ___ (2020).
• Daubert; exclusion of slip and fall expert affirmed. The 8th Circuit affirmed the exclusion of testimony from the plaintiff’s alleged expert where there was nothing in the record that indicated the expert “used reliable principles and methods or applied them reasonably to the facts of this case.” Ackerman v. U-Park, Inc., 951 F.3d 929 (8th Cir. 2020).
• Removal; amount in controversy; judgment vacated sua sponte. Where the parties to an action removed on the basis of diversity jurisdiction conceded at oral argument that the amount in controversy was less than $75,000, the 8th Circuit vacated the underlying judgment and remanded the case with instructions that the action be remanded to state court. Mensah v. Owners Ins. Co., 951 F.3d 941 (8th Cir. 2020).
• Fed. R. App. P. 3(c)(1)(B); deficient notice of appeal; request to dismiss appeal denied. Where the notice of appeal identified the judgment and a memorandum and order granting the defendant’s motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), but did not identify that part of the motion and judgment premised on Fed. R. Civ. P. 12(c), the 8th Circuit “liberally” construed the notice of appeal to include that portion of the order and judgment where “the intent was apparent” and the opposing party was “not prejudiced.” State Farm Mut. Auto. Ins. Co. v. Merrill, 952 F.3d 941 (8th Cir. 2020).
• Fed. R. Civ. P. 12(b)(6); ADA; pleading elements of claim; dismissal reversed. Finding that the elements of an ADA claim are an evidentiary matter rather than a pleading standard, the 8th Circuit reversed the dismissal of an ADA claim where the plaintiff “plausibly alleged” that he was not rehired because of his disability. Judge Stras dissented, arguing that the plaintiff’s claims were “woefully inadequate.” Cook v. George’s, Inc., 952 F.3d 935 (8th Cir. 2020).
• Fed. R. Civ. P. 41(a)(2); dismissal without prejudice; fee-shifting statute. Affirming a district court’s grant of the plaintiff’s motion to voluntarily dismiss its Lanham Act action without prejudice, the 8th Circuit rejected the defendant’s argument that dismissal without prejudice would necessarily cause prejudice because it would eliminate the possibility of the defendant recovering attorney’s fees. SnugglyCat, Inc. v. Opfer Communications, Inc., 953 F.3d 522 (8th Cir. 2020).
• Argument not raised in opening brief waived. Where the appellant listed the elements of one of his claims in his opening brief, but offered no argument in support of that claim until his reply brief, the 8th Circuit held that the absence of “meaningful argument” in the opening brief resulted in the waiver of that claim. Liscomb v. Boyce, 954 F.3d 1151 (8th Cir. 2020).
• Lanham Act; request for attorney’s fees; no exceptional case. Affirming Chief Judge Tunheim, the 8th Circuit found that the defendants’ Lanham Act violations were not so “exceptional” as to warrant an award of attorney’s fees. Safeway Transit LLC v. Discount Party Bus, Inc., 954 F.3d 1171 (8th Cir. 2020).
• Class certification; multiple cases. After granting review under Fed. R. Civ. P. 23(f), the 8th Circuit reversed a district court’s certification of a class of ADA plaintiffs, finding that individualized issues predominated. Harris v. Union Pac. Rwy. Co., 953 F.3d 1030 (8th Cir. 2020).
The 8th Circuit found no abuse of discretion in a district court’s decertification of a previously certified class despite the fact that the basis for the decertification was an affirmative defense. Stuart v. Global Tel*Link Corp., 956 F.3d 555 (8th Cir. 2020).
Chief Judge Tunheim granted in part and denied in part plaintiffs’ motion for class certification, finding that he could apply Minnesota law to certain class claims, but that other claims would require applying the law of all 50 states, meaning that the proposed class was not judicially manageable. Hudock v. LG Elecs. U.S.A., Inc., 2020 WL 1515233 (D. Minn. 3/30/2020).
Judge Brasel denied the plaintiffs’ motion for class certification, finding that the proposed class included plaintiffs who lacked standing, and that predominance and case management issues also weighed against class certification. Johannessohn v. Polaris Indus, Inc., 2020 WL 1536416 (D. Minn. 3/31/2020).
• Personal jurisdiction; multiple cases. Affirming Judge Wright, and rejecting the plaintiff’s attempt to rely on the so-called Calder v. Jones “effects” test, the 8th Circuit affirmed the dismissal of claims for lack of personal jurisdiction where the defendants directed hundreds of phone calls and emails to the plaintiff in Minnesota, but were not alleged to have ever visited Minnesota or to have “purposefully availed themselves” of the state’s “benefits and protections.” Pederson v. Frost, 951 F.3d 977 (8th Cir. 2020).
Relying in part on Pederson, Judge Brasel granted the individual defendants’ motion to dismiss for lack of personal jurisdiction, finding that they were not subject to general or specific jurisdiction. CH Robinson Worldwide, Inc. v. House of Thaller, Inc., 2020 WL 1442856 (D. Minn. 3/24/2020).
Chief Judge Tunheim denied the defendant’s motion to dismiss for lack of personal jurisdiction, finding that a forum selection clause constituted consent to jurisdiction. St. Jude Medical S.C., Inc. v. Suchomel, 2020 WL 1853653 (D. Minn. 4/13/2020).
Judge Tostrud denied German defendants’ motions to dismiss for lack of personal jurisdiction despite the absence of significant direct contacts with Minnesota, finding that the plaintiff had offered sufficient evidence of conspiracy-based personal jurisdiction to withstand the motions to dismiss. DURAG, Inc. v. Kurzawski, 2020 WL 2112296 (D. Minn. 5/4/2020).
• Fed. R. Civ. P. 43(a); covid-19; testimony by videoconference; bench trial. In mid-March 2020, Judge Nelson ordered that the two remaining witnesses in a bench trial would be permitted to appear by videoconference pursuant to Fed. R. Civ. P. 43(a), while acknowledging that the result might be different if this had been a jury trial. ResCap Liquidating Trust v. Primary Res. Mortgage, Inc., 2020 WL 1280931 (D. Minn. 3/13/2020).
• Removal; remand; multiple cases. Where the plaintiff’s product liability action was removed to the District of Minnesota on the basis of the federal contractor defense and the plaintiff moved to remand, Chief Judge Tunheim found that the defense was not “colorable” and granted the plaintiff’s motion to remand. Graves v. 3M Co., ___ F. Supp. 3d ___ (D. Minn. 2020).
Rejecting the defendant’s attempt to rely on damages sought in other lawsuits brought by plaintiff’s counsel, Judge Nelson granted the plaintiff’s motion to remand an action which involved an insurance policy with total policy limits of only $50,000. Huseynova v. Liberty Mut. Fire Ins. Co., 2020 WL 1528010 (D. Minn. 3/31/2020).
• Taxation of costs; deposition videography. Where the plaintiff challenged the clerk’s taxation of costs, Judge Nelson found that costs of video depositions were not taxable where all of the disputed witnesses would be available at trial, and that “[t]o hold otherwise would result in blanket support for the award of costs for video depositions in all cases.” Yousefzadeh v. Hill-Rom Co., 2020 WL 2175373 (5/5/2020).
Josh Jacobson
Law Office of Josh Jacobson
IMMIGRATION LAW
JUDICIAL LAW
• Family membership not a central reason for persecution. On 2/12/2020, the 8th Circuit Court of Appeals upheld the Board of Immigration Appeals’ denial of withholding of removal under INA §241(b)(3)(A) to the petitioner, concluding there was substantial evidence to support the board’s finding that her family membership was not a central reason for the persecution she feared in Guatemala. “On this record, a reasonable factfinder could conclude Silvestre-Giron’s family membership is not a central reason for the threat posed by the extortionists but is only ‘incidental or tangential to the [extortionists’] motivation’—money.” Garcia–Moctezuma, 879 F.3d at 868 (quoting J–B–N– & S–M– , 24 I & N Dec. at 213). Nor, for that matter, had the petitioner proven that it is more likely than not that she would be tortured if removed to Guatemala. Silvestre-Giron v. Barr, 949 F.3d 1114, 1118 (8th Cir. 2020).
• No persecution based on membership in the social group “individuals with schizophrenia exhibiting erratic behavior.” On 3/9/2020, the 8th Circuit Court of Appeals upheld the Board of Immigration Appeals’ denial of the petitioner’s application for asylum based on his claim that he was a member of the particular social group “individuals with schizophrenia who exhibit erratic behavior.” The court concluded, “the evidence that the Mexican government persecutes certain mentally-ill citizens on account of group membership is not so substantial as to compel remand.” Perez-Rodriguez v. Barr, No. 18-3269, slip op. (8th Cir. 3/9/2020). https://ecf.ca8.uscourts.gov/opndir/20/03/183269P.pdf
• Inadmissibility and public charge grounds: An update. On 8/14/2019, the Department of Homeland Security (DHS) published its final rule amending regulations addressing inadmissibility, on public charge grounds, of foreign nationals seeking admission or adjustment of status. The rule was scheduled to go into effect on 10/15/2019. 84 Fed. Reg., 41,292-508 (8/14/2019). https://www.govinfo.gov/content/pkg/FR-2019-08-14/pdf/2019-17142.pdf
As noted in the November 2019 issue of Bench & Bar, litigation ensued across the nation that involved various states (including Minnesota), organizations, and individual plaintiffs. On 10/11/2019, the U.S. District Court in the Southern District of New York issued a nationwide order enjoining and restraining the government from “enforcing, applying, or treating as effective, or allowing persons under their control to enforce, apply, or treat as effective, the Rule” until such time as the order is terminated and the rule goes into effect.
On 1/27/2020, the Supreme Court issued a stay of the 10/11/2019 nationwide injunction, thereby allowing the final rule to go into effect pending disposition of the appeal before the Court of Appeals for the 2nd Circuit Court. The sole exception was an injunction issued in the state of Illinois, which was allowed to remain in place. Department of Homeland Security, et al. v. New York, et al., 589 U.S. ____ (2020). https://www.supremecourt.gov/opinions/19pdf/19a785_j4ek.pdf
On 2/21/2020, the Supreme Court issued a stay of the 10/14/2019 injunction issued in the state of Illinois pending disposition of the government’s appeal in the United States Court of Appeals for the 7th Circuit. Wolf, et al. v. Cook County, Illinois, et al., 589 U.S. _______ (2020). https://www.supremecourt.gov/opinions/19pdf/19a905_7m48.pdf
On 2/22/2020, USCIS announced the final public charge rule would go into effect, including Illinois, for those relevant applications or petitions postmarked or electronically filed on or after 2/24/2020. https://www.uscis.gov/news/news-releases/dhs-implement-inadmissibility-public-charge-grounds-final-rule-nationwide
ADMINISTRATIVE ACTION
• President Trump bans immigrants from the United States. On 4/22/2020, President Trump issued a proclamation, in view of the covid-19 pandemic, suspending the entry of certain immigrants into the United States for 60 days. The proclamation (Suspension of Entry of Immigrants Who Present a Risk to the United States Labor Market During the Economic Recovery Following the 2019 Novel Coronavirus Outbreak) went into effect on 4/23/2020 at 11:59pm (EDT). It affects those individuals seeking entry into the United States as immigrants who: 1) are outside the United States on the effective date of the proclamation; 2) do not have a valid immigrant visa on the effective date of the proclamation; and 3) do not have a valid official travel document other than a visa (such as a transportation letter, boarding foil, or advance parole document) on the effective date of the proclamation, or issued on any date thereafter, that permits travel to the United States to seek entry or admission.
The proclamation does not apply to the following: 1) lawful permanent residents of the United States; 2) individuals, and their spouses or unmarried children under the age of 21, seeking to enter the United States on an immigrant visa as a physician, nurse, or other healthcare professional; to perform medical research or other research intended to combat the spread of covid-19; or to perform work essential to combating, recovering from, or otherwise alleviating the effects of the covid-19 outbreak (as determined by the secretaries of State and Department of Homeland Security (DHS), or their respective designees); 3) individuals applying for a visa to enter the U.S. pursuant to the EB-5 Immigrant Investor Visa Program; 4) spouses of U.S. citizens; 5) children of U.S. citizens under the age of 21 and prospective adoptees seeking to enter on an IR-4 or IH-4 visa; 6) individuals who would further important U.S. law enforcement objectives (as determined by the secretaries of DHS and State based on the recommendation of the Attorney General (AG), or their respective designees); 7) members of the U.S. Armed Forces and their spouses and children; 8) individuals and their spouses or children eligible for Special Immigrant Visas in the SI or SQ classification; 8) individuals whose entry would be in the national interest (as determined by the secretaries of State and DHS, or their respective designees).
Other key points: 1) Nonimmigrant visa holders are not affected by the proclamation but the proclamation requires that within 30 days of the effective date, the secretaries of Labor and DHS, in consultation with the Secretary of State, shall review nonimmigrant programs and recommend to the president other appropriate measures to stimulate the U.S. economy and ensure “the prioritization, hiring and employment” of U.S. workers. 2) The proclamation expires 60 days from its effective date but may be continued as necessary. Within 50 days from the effective date, the secretary of DHS shall, in consultation with the secretaries of State and Labor, recommend whether the president should continue or modify the proclamation. 3) The proclamation states that it does not limit the ability of individuals to apply for asylum, refugee status, withholding of removal, or protection under the Convention Against Torture. 85 Fed. Reg., 23,441-444 (4/27/2020). https://www.govinfo.gov/content/pkg/FR-2020-04-27/pdf/2020-09068.pdf
• Liberian Refugee Immigration Fairness (LRIF): An update. On 4/20/2020, U.S. Citizenship and Immigration Services (USCIS) announced additional instructions regarding eligibility requirements for applicants (and their family members), grounds of inadmissibility, and the filing and adjudication of permanent residence applications—all based on the Liberian Refugee Immigration Fairness provision of the National Defense Authorization Act for Fiscal Year 2020 that was signed into existence on 12/20/2019. The application period runs to 12/20/2020. Further information about LRIF and the process may be found at the webpage setup by USCIS. https://www.uscis.gov/green-card/other-ways-get-green-card/liberian-refugee-immigration-fairness
R. Mark Frey
Frey Law Office
INDIAN LAW
JUDICIAL LAW
• State court has jurisdiction over civil claims brought against a tribal-member-founded nonprofit corporation organized under Minnesota state law. A non-tribal member former employee of Honor the Earth nonprofit corporation filed suit against the organization under the Minnesota Human Rights Act. The Minnesota Court of Appeals rejected the nonprofit’s motion to dismiss for lack of subject matter jurisdiction, finding that because no tribal member was a party to the litigation and at least some of the allegations in the complaint occurred outside the White Earth Reservation, the restrictions of Public Law 280 were not implicated in the case. The court of appeals specifically rejected the argument that the nonprofit was “merely a tool owned by” its tribal-member founder, and emphasized that while the White Earth Tribal Court did not have exclusive jurisdiction over this civil litigation between two non-Indian parties, it did share concurrent jurisdiction over the claims with the state court. Campbell v. Honor the Earth, No. A19-1232, 2020 WL 1909717 (Minn. Ct. App. 4/20/2020).
• Pro se complaint filed against casino employees barred by sovereign immunity. Plaintiff filed suit against several employees of the Grand Casino following his failure to appear at work and the resulting welfare check completed by Mille Lacs County deputy sheriffs. The district court accepted the magistrate judge’s report and recommendation that the defendants’ motion to dismiss be granted. The court held that because the complaint failed to name the casino employees in their individual—rather than official—capacities, the suit was barred by the tribe’s sovereign immunity, which extends to Mille Lacs Corporate Ventures, an agency of the Mille Lacs Band of Ojibwe, conducting business as Grand Casino. The court also dismissed the claims filed against the county sheriffs in their individual capacities, finding they were entitled to qualified immunity. Gilliam v. Roach, No. 19-cv-2749 (NEB/LIB), 2020 WL 2193985 (D. Minn. 5/6/2020).
• Adoptive placement petitions of tribal member children domiciled off-reservation following voluntary suspension of parental rights could not be transferred to tribal court. In this unpublished case from the Minnesota Court of Appeals, the court held that although Minn. Stat. §260.771, subd. 3(b) requires the transfer of preadoptive and adoptive placement proceedings involving Indian children domiciled off-reservation to tribal courts absent good cause to the contrary, this state statute could not be interpreted to expand the jurisdiction of tribal courts beyond what Congress dictated in the federal Indian Child Welfare Act (ICWA). Relying on a prior Minnesota Supreme Court opinion that interpreted the ICWA, the court of appeals reversed the district court’s determination that an adoption proceeding involving Indian children domiciled outside the White Earth reservation should be transferred to the White Earth Tribal Court following a petition by the children’s birthmother to reinstate her voluntarily suspended parental rights. In re A.M.G., No. 19-1389, 2020 WL 1488345 (Minn. Ct. App. 3/23/2020).
Leah K. Jurss
Hogen Adams PLLC
INTELLECTUAL PROPERTY
JUDICIAL LAW
• Patents: Denial of motion to amend for lack of diligence and good cause. Judge Menendez recently denied plaintiff Cardiovascular Systems, Inc.’s motion to amend its complaint. Cardiovascular Systems sued Cardio Flow, Inc. for breach of a settlement agreement. In 2012, Cardiovascular Systems entered into a settlement agreement with Lela Nadirashvili dividing the rights to certain rotational device patents. Ms. Nadirashvili then assigned the patents to Cardio Flow, which contends it is not bound by the 2012 agreement. Cardiovascular Systems sought to amend its complaint to add a tortious interference of contract claim related to Cardio Flow inducing Ms. Nadirashvili to transfer her rights in the patent portfolio without requiring Cardio Flow to be bound by the restrictive terms of the settlement agreement. Cardiovascular System’s motion to amend came seven months after the deadline to amend and a month after the close of discovery. Because Cardiovascular’s motion to amend was outside the time permitted by the scheduling order, Cardiovascular Systems was required to show good cause for the amendment. Cardiovascular Systems argued that it failed to learn of the tortious interference until it took Cardio Flow chairman Gary Petrucci’s deposition because of Cardio Flow’s discovery misconduct in delaying its document production. In rejecting Cardiovascular System’s argument, the court found Cardiovascular Systems should have pursued additional discovery through interrogatories, requests for admission, and depositions of other witnesses. The court further found Cardio Flow’s interrogatory response would have triggered a diligent attorney to gather additional evidence on the tortious interference claim prior to the amendment deadline. The court denied Cardiovascular System’s motion for failure to show diligence and good cause. Cardiovascular Sys. v. Cardio Flow, Inc., No. 18-cv-1253-SRN-KMM, 2020 U.S. Dist. LEXIS 33658 (D. Minn. 2/27/2020).
• Trademark: Denial of profits where permanent injunction entered. A panel of the 8th Circuit Court of Appeals recently affirmed Judge Tunheim’s ruling denying plaintiff Safeway Transit LLC disgorgement of profits in a Lanham Act dispute. Safeway Transit sued Discount Party Bus, Inc.; Party Bus MN LLC; and Adam Fernandez for trademark infringement and deceptive trade practices related to defendants’ use of two unregistered description marks—“Rent My Party Bus” and “952 Limo Bus.” Safeway Transit requested a permanent injunction, disgorgement of profits, and attorneys’ fees. Following a bench trial, the district court permanently enjoined defendants’ use of the trademarks or related domain names, keywords, or hashtags in connection with the advertisement, marketing, or sale of transportation services. The district court denied the request for disgorgement of profits and attorneys’ fees. Under the Lanham Act, disgorgement of profits is a remedy to infringement subject to the principles of equity. Because the Lanham Act is grounded in equity and bars punitive remedies, disgorgement of profits is improper where an injunction will satisfy the equities of the case. The district court had found that while confusion between the parties’ use of the marks was likely, the confusion was likely minimal and there was no evidence of actual confusion. Accordingly, the district court found no unjust enrichment and refused to award profits. The 8th Circuit held the district court did not err. Safeway Transit offered no evidence of actual confusion that would support a claim for unjust enrichment and profits. The 8th Circuit also affirmed the denial of attorneys’ fees, holding that the case was not exceptional under the Lanham Act. The district court found the infringement was not deliberate and that Safeway Transit was not an innocent actor based on the totality of the circumstances of the equitable inquiry. Accordingly, the 8th Circuit affirmed Judge Tunheim’s rejection of disgorgement of profits and attorneys’ fees. Safeway Transit LLC v. Disc. Party Bus, Inc., No. 18-2990, 2020 U.S. App. LEXIS 10691 (8th Cir. 4/6/2020).
• Patents: Waiver of attorney-client privilege requires voluntary disclosure. Judge Nelson recently overruled plaintiffs Grupo Petrotemex, S.A. de C.V. and DAK Americas LLC’s objections to the magistrate’s order on plaintiffs’ motion to compel. Plaintiffs sued Polymetrix AG for patent infringement in July 2016. In March 2018, Polymetrix’s parent Bühler Holding, AG negotiated the sale of 80% of the shares in Polymetrix to Beijing Sanlian Hope Shin-Gosen Technical Service Co. Plaintiffs moved to compel July 2017 communications that were exchanged between Polymetrix and Bühler, which were then shared with Sanlian, which publicly revealed certain information from an email. Plaintiffs moved to compel the opinion of counsel provided to Polymetrix, arguing Polymetrix waived attorney-client privilege to “all documents and communications related to the subject matter” of the July 2017 email. Polymetrix argued that Sanlian’s disclosure was a waiver of the particular statement but the waiver did not extend beyond that statement. The magistrate ruled that Polymetrix had not waived attorney-client privilege in the July 2017 email because Polymetrix and Bühler shared a common interest and that the disclosure to Sanlian did not waive attorney-client privilege because it was not authorized by Polymetrix. In its objections, plaintiffs argued that privilege is “automatically waived on the entire underlying opinion… irrespective of context.” The court rejected plaintiffs’ contention. Neither of plaintiffs’ cases “automatically” extended a waiver to the underlying opinion once a portion of the communication was disclosed. Rather, the case law indicates that where a client voluntarily discloses a portion of confidential information to advance commercial interests, the privilege is waived. Here, Polymetrix did not voluntarily disclose the July 2017 email, and Polymetrix did not stand to benefit financially from the public release of the statement. Absent Polymetrix’s consent to the disclosure, Polymetrix never waived privilege, so an analysis of subject-matter waiver was not required. Grupo Petrotemex, S.A. De C.V. v. Polymetrix AG, No. 16-cv-2401 (SRN/HB), 2020 U.S. Dist. LEXIS 72995 (D. Minn. 4/26/2020).
• Copyright: Protection of database affirmed. A panel of the United States Court of Appeals for the 8th Circuit recently affirmed the district court’s denial of a motion for judgment as a matter of law. Infogroup, Inc. sued DatabaseLLC and other defendants alleging copyright infringement of its database. Vinod Gupta founded Infogroup, which compiles a database of business information. In 2008, Gupta left Infogroup and within two years formed DatabaseUSA, which also compiles a database of business information. A jury returned a verdict for Infogroup, finding DatabaseUSA infringed its copyrights in its database. The district court denied the motion for judgment as a matter of law. To prevail on copyright infringement, a plaintiff must prove ownership of a valid copyright and copying of original elements of the work. DatabaseUSA argues Infogroup’s database is a compilation of facts and does not have the necessary creativity to support a valid copyright. The court held that while copyright in a factual compilation is thin, protection exists as to the selection and arrangement of facts so long as they are made independently by the compiler and entail a minimal degree of creativity. The court also found Infogroup submitted its certificate of registration, which is entitled to a rebuttable presumption of validity, and that DatabaseUSA did not submit evidence rebutting this presumption. The court also held a reasonable juror could have found copying based on witness testimony and the fact that DatabaseUSA’s database contained Infogroup’s “seed data”—fake data in Infogroup’s database to detect copying. The district court was affirmed. Infogroup, Inc. v. DatabaseLLC, No. 18-3723, 2020 U.S. App. LEXIS 13365 (8th Cir. 4/27/2020).
Joe Dubis
Merchant & Gould
TAX LAW
JUDICIAL LAW
• Petitioner seeks equitable estoppel; court applies mandatory disclosure rule to petitioner’s property. Petitioner filed a property tax petition alleging that the estimated market value of the subject property as of the 2018 assessment date exceeded its actual market value. The petition refers to two properties: one income-producing, the other not income-producing. On 5/30/2019, the Assistant Nicollet County Attorney sent petitioner a letter requesting information on the two subject properties. Receiving no information, on 8/14/2019 the county filed an initial motion to dismiss pursuant Minn. Stat. section 278.05, subd. 6 (2018). On 9/6/2019, petitioner responded to the county’s motion to dismiss, stating she was not aware of the requirement to provide data, and including the information sought by the county in the May 2019 letter. On 12/24/2019, the county amended its motion to dismiss to supplement correspondence between the parties. Petitioner maintained she was unaware of her obligation to provide income-producing information to the county and claims the county should be equitably estopped from obtaining dismissal of petition.
Minn. Stat. section 278.05, subd. 6, sometimes called the “mandatory disclosure rule,” specifies that, in cases where the petitioner contests the valuation of income-producing property, certain information must be provided to the county assessor no later than August 1 of the taxes-payable year. Failure to submit the required documentation by the August 1 deadline results in automatic dismissal of the petition unless an exception applies. Two exceptions exist: (1) if the failure to provide the required information was due to its unavailability at the time; or (2) the petitioner “was not aware of or informed of the requirement to provide the information.” Failure to prove that the petitioner was not aware requires dismissal of the petition. The mandatory disclosure rule ensures the taxing authority receives all information a petitioner actually possesses to arrive at a reliable market value for tax purposes.
To establish equitable estoppel against a governmental entity, four elements must be met: (1) the party must establish “wrongful conduct” on the part of an authorized government agent; (2) the party must reasonably rely on the wrongful conduct; (3) the party must incur “a unique expenditure” in reliance on the wrongful conduct; and (4) the balance of equities must weigh in favor of estoppel.
The county asserts the 8/1/2019 deadline to comply with the mandatory disclosure rule applies, because on 5/30/2019, the county provided petitioner with notice of the requirement to provide information concerning income-producing property to the county assessor. Petitioner does not deny receiving the May 30 letter, but stated the letters were unclear and that she called the Assistant County Attorney for clarification.
The court agreed with the county that its letter dated 5/30/2019 sufficiently informed petitioner of the requirement to provide information to the county assessor concerning income-producing property, and the 8/1/2019 deadline applied. The court also agreed with the county that petitioner did not completely disclose the information required by the mandatory disclosure. The court concluded that petitioner did not met her burden of proof concerning reasonable reliance on communications with the Assistant County Attorney, or the incurrence of a “unique expenditure” based on such reliance and, therefore, equitable estoppel did not apply. Huffer v. Nicollet Cty., 2020 WL 1891183 (Minn. TC 3/26/20).
• Petitioner and county disagree over discovery. Medtronic, Inc filed a petition challenging the 1/2/2017 assessed value of its office building in Columbia Heights, Minnesota. In July 2018, Medtronic sent the assessor a document that listed the property owner as “Medtronic Inc.” The submission stated that income and expense information for the subject property was not available, explaining: “All operating expenses are combined with Medtronic World Headquarters and not separated for this site.” The submission recited the subject’s net rentable area as 134,984 square feet, but indicated that a rent roll containing lease information was not available, explaining with respect to leases: “None in place; property is owner occupied.”
On 3/26/2019, the county served Medtronic with written discovery including interrogatories and document requests. In large measure, the county sought information pertaining to the subject property’s possible status as income-producing. The county also instructed Medtronic to furnish any written or oral representations any Medtronic employee had recently made concerning the subject’s value and demanded the completed file maintained by any tax representative. After repeated requests, Medtronic untimely responded to the county, objecting to several interrogatories and maintaining that the property was owner-occupied, and thereby denied that there were any occupancy-related agreements between the owner and the occupant or any internal transfers related to occupancy.
The day after the county received Medtronic’s responses, the county sent correspondence alleging that Medtronic had not made a good faith effort to respond to Anoka County’s discovery requests, and chastised Medtronic for their objections to interrogatories. Among other things, the county complained that, despite having been served with 26 requests for production, Medtronic had not produced a single responsive document. Approximately one week later, Medtronic both: (1) sent correspondence disputing the county’s criticisms; and (2) served supplemental discovery responses. Medtronic opened its correspondence with a reciprocal recrimination, commenting that the county’s recent letter was far from a good faith effort to resolve anything. Medtronic also asserted that the county’s inquiries exceeded the scope of permissible discovery.
On 7/23/2019, the county filed a motion to compel, stating that it must have the opportunity through discovery to determine whether the subject property is income-producing. The county also seeks an award of expenses, including attorney fees, in pursuing its motion, and an amendment of the governing scheduling order. Medtronic opposes the county’s motion and asserts that there is no need for a significant amendment to the scheduling order.
Minnesota Rule of Civil Procedure, Rule 26 provides for broad discovery in civil proceedings. Parties may obtain discovery by methods including written interrogatories and requests for production of documents. Minn. R. Civ. P. 26.02(a). “Any party may serve written interrogatories upon any other party.” Minn. R. Civ. P. 33.01(a). The responding party generally must “serve separate written answers or objections to each interrogatory within 30 days after service.” Minn. R. Civ. P. 33.01(b). Objections must “state with particularity the grounds for the objection.” Minn. R. Civ. P. 33.01(c). A party seeking discovery may move for an order compelling an answer or production. Minn. R. Civ. P. 37.01(b)(2).
In a lengthy analysis, the court granted in part and denied in part the county’s motion to compel with regard to specific answers to interrogatories. Medtronic v. Anoka Cty., 2020 WL 1887765 (Minn. TC 4/7/20).
• Income tax: Charitable deductions of property in excess of $5,000 must be individually itemized and fully documented to sustain the deduction. Complex charitable deductions—and sometimes even less complex ones—require detailed information obtained at the time of donation. Internal Revenue Code §170(f)(11)(E) requires a “qualified appraisal” of charitable contributions of property in excess of $5,000. For an appraisal to be qualified, it must appraise items of property individually, rather than together, if they are donated individually. An item must be valued standing alone, rather than as attached to a home or other real estate, if donated as a detached item.
Documentation for a charitable contribution of property includes “such information regarding such property and such appraisal as the Secretary may require.” IRC §170(f)(11)(c). Required information includes a description of the property, how it was acquired, the date of acquisition, and the cost or other basis of the property. IRC § 1.170(A)13(c)(4)(ii)(B),(D),(E). Failure to provide all of the information for each detached item results in a disallowed deduction if the taxpayer does not provide a reasonable explanation for the lack of information.
In Loube v. Comm’r, the tax court held that when a taxpayer fails to disclose “cost or adjusted basis” on an appraisal summary, it does not meet the substantial compliance necessary to satisfy the regulation. Taxpayers are required to enter the information on Form 8283 in order to make the process manageable, and the IRS is not required to search the return for information to sustain the deduction. Attachment of an appraisal without required signatures and detail will invalidate the deduction.
Petitioners in this case appraised a home with a qualified appraiser. The appraisal was attached to petitioners’ tax return. After the appraisal was complete, petitioners hired a charitable group to remove individual items of value from the home. Petitioners relied on the full appraisal of some items listed in the home to document the charitable deduction. In denying the entire $297,000 charitable deduction taken for the appraisal amount, the tax court noted that required information on Form 8283 to substantiate petitioner’s cost basis and acquisition date of the property was not provided. Loube v. Comm’r, 119 T.C.M. (CCH) 1011 (2020).
• Badges of fraud; taxpayer-attorney liable for deficiency and civil fraud for failure to report income and failure to maintain proper recordkeeping. Taxpayer-attorneys are subject to labeling, recordkeeping, and anti-commingling requirements for client funds received by the lawyer. If funds are treated as “belonging to the [attorney],” funds in client accounts, less amounts paid out to clients, are reportable as income. Healy v. Comm’r, 345 U.S. 278, 282 (1953).
At time of receipt, client funds can be deposited in an account labeled “Client Trust Account.” Placing client advances and settlements into accounts separate from the firm’s operating accounts provides a record that the advances are deposits and not income.
Maintaining a client trust account reduces the risk of commingling the lawyer’s funds with client funds. Bills for firm services and expenses authorized by the scope of work can be paid from the client trust account. A detailed ledger of deposits and authorized expenses for each client demonstrates that the amounts held on behalf of clients are deposits for future services rather than income.
When settlement or other funds are received on behalf of the client, funds should be disbursed when they are not subject to limitations or restrictions. Constructive receipt of client fee income occurs when amounts that are not subjected to substantial limitations or restrictions are received for lawyers who report income using cash basis accounting. Deferring disbursement of earned fee amounts from a client trust account will not defer the lawyer’s obligation to include the earned fee in taxable income. The timing of such transfers is at the discretion of the lawyer because there is an unrestricted right to access the funds.
In this dispute, the tax court detailed circumstances that led to the presumption of earned income: (1) failure to follow client direction regarding settlement funds, (2) failure to segregate earned fee from client settlement funds, (3) use of earned interest on client funds for personal expenses (including a personal trainer), and (4) manipulation of the investments in the non-IOLTA account to demonstrate personal liquidity.
Further, underpayment of tax due to fraud is subject to a 75% penalty. Certain “badges of fraud” prove fraudulent intent, including (1) consistently understating income, (2) failing to maintain adequate records, (3) offering implausible/inconsistent explanations, (4) concealing income or assets, (5) failing to cooperate with authorities, (6) filing false documents, and (7) providing false testimony. Parks v. Comm’r, 94 T.C. 654, 664-665 (1990).
Petitioner in this case established a separate, unreported bank account for settlement funds received on behalf of four clients. Petitioner failed to keep records, kept control over the funds, and did not remove fees from the account when earned. The tax court found that all relevant badges of fraud supported fraudulent intent. A deficiency of $2,583,374 and a civil fraud penalty of $1,937,531 under IRC §6663 were upheld. Isaacson v. Comm’r, 119 T.C.M. (CCH) 1107 (2020).
Morgan Holcomb, Mitchell Hamline School of Law
Sheena Denny, Mitchell Hamline School of Law
TORTS & INSURANCE
JUDICIAL LAW
• Insurance; defense costs. In 2016, defendant contracted with plaintiff to haul a bulk tank. While transporting the tank, defendant’s vehicle rolled over and damaged the tank. Plaintiff sued defendant to recover the damages, and defendant filed a third-party complaint against its insurer. Defendant and its insurer ultimately settled all coverage issues except one—whether or not the insurer was required to reimburse defendant for defense costs incurred in responding to plaintiff’s complaint. The policy language at issue stated: “We have the option to defend any suit brought against you as a result of damage to covered property caused by a covered loss. We may investigate and settle a claim or suit.” The defense cost provision went on to state: “We do not have to provide a defense after we have paid the limit as a result of a judgment or written settlement.” The provision further indicated that defendant could not “admit liability for a loss, settle a claim, or incur expense without [insurer’s] written consent[.]” The district court granted summary judgment in favor of the defendant, finding the language at issue ambiguous.
The Minnesota Court of Appeals affirmed the decision of the district court. The insurer argued that the defense language at issue was unambiguous because it simply provided an “option to defend” to the insurer, and, in this case, it chose not to defend. While the court agreed that the word “option” meant “[t]he power or freedom to choose,” the court still held the policy provision to be ambiguous. In so holding, the court emphasized that the insurer’s interpretation was inconsistent with the subsequent policy language: “it is inconsistent to interpret paragraph 2a as allowing [the insurer] to refuse to defend, and also interpret paragraph 2c as requiring [insured] to obtain [insurer’s] consent before it undertakes a defense. [The Insurer] cannot have it both ways.” The court concluded: “Reading [insurer’s] ‘option to defend’ in light of the other paragraphs in the defense costs provision, as Minnesota law says we must, we conclude that [insurer’s] ‘option to defend’ is ambiguous.” Mississippi Welders Supply Co., Inc. v. Flueger Crane, LLC, No. A19-1590 (Minn. Ct. App. 5/11/2020).
Jeff Mulder
Bassford Remele