Notes & Trends – July 2021

CRIMINAL LAW

JUDICIAL LAW

• Post-conviction: Post-conviction relief is not available after a stay of adjudication. Pursuant to a plea agreement, appellant pleaded guilty to misdemeanor domestic assault, the state dismissed a charge of gross misdemeanor malicious punishment of a child, and adjudication of the domestic assault charge was stayed for one year. Appellant is a citizen of Ireland and lawful permanent U.S. resident, and consulted with an immigration attorney prior to entering his plea. Appellant successfully completed and was discharged from probation, but was then notified of immigration removal proceedings against him. He filed a petition for post-conviction relief seeking to withdraw his guilty plea based on ineffective assistance of counsel, claiming the immigration attorney advised him he would not be subject to presumptively mandatory deportation. The postconviction court denied the petition, as appellant was not eligible for post-conviction relief because he was not convicted of a crime. The court of appeals affirmed.

The Supreme Court holds that the plain meaning of the post-conviction statute requires that a person has a conviction under Minnesota law, and a stay of adjudication is not a conviction. The post-conviction statute, Minn. Stat. §590.01, subd. 1, allows for “a person convicted of a crime” to seek postconviction relief. Section 609.02, subd. 5, explains that a conviction is either a plea of guilty, jury verdict of guilty, or a finding of guilty by the court, once accepted and recorded by the court. The Court finds its holding in State v. Dupey, 868 N.W.2d 36 (Minn. 2015), binding. In Dupey, the Court considered when a person “has” a conviction, and held that a stay of adjudication under Minn. Stat. §152.18, subd. 1, is not a judgment of conviction or sentence for post-conviction purposes, because there is never an adjudication of guilt. This analysis also applies to determine whether a person has been “convicted of a crime” under section 590.01, subd. 1. To be “convicted of a crime,” a person must have a conviction. Thus, as in Dupey, appellant’s stay of adjudication does not meet the definition of conviction because his guilty plea was not recorded by the district court. The denial of appellant’s post-conviction petition is affirmed. Johnston v. State, 955 N.W.2d 908 (Minn. 3/10/2021). 

• 6th Amendment: Motion seeking photos of defendant’s arm is not a critical stage requiring the presence of counsel. Appellant was charged with fourth- and fifth-degree criminal sexual conduct. When the complaint was filed, the state also filed a motion to conduct a physical examination of appellant under Minn. R. Crim. P. 9.02, subd. 2(1), to inspect his arms for scratches and take photographs. Appellant appeared for his first court appearance without an attorney and the court appointed a public defender to represent appellant thereafter. The court also granted the state’s discovery motion and photographs of appellant’s arm were taken after the hearing. The court later denied appellant’s motion to suppress the photographs, finding that appellant’s right to counsel did not attach during his first appearance. The photographs were admitted at trial and he was ultimately convicted. The Minnesota Court of Appeals also found no 6th Amendment violation.

The 6th Amendment guarantees the right to counsel at trial and all critical stages before trial. The Minnesota Supreme Court has not yet considered whether a discovery motion for physical examination is a critical stage in a criminal prosecution. The Court finds this situation analogous to Gilbert v. California, 388 U.S. 263 (1967), in which the United States Supreme Court found that taking writing exemplars from a defendant is not a critical stage in a criminal proceeding. Like a handwriting sample, there is no “grave potential for prejudice” in the taking of photographs that would prevent appellant’s attorney from effectively representing him at trial. Challenges to authenticity of the photographs, how they were taken, etc. could have been made during cross-examination or in a motion to suppress, or could have been addressed through a defense expert witness. The Court holds the state’s motion in this case was not a critical stage in the proceedings. The court of appeals is affirmed. State v. Zaldivar-Proenza, 957 N.W.2d 93 (Minn. 3/31/2021).

• Confrontation clause applies to testimonial pre-trial statement by co-conspirator who does not testify at trial. Appellant was charged with theft and being an ineligible person in possession of a firearm after allegedly stealing a co-worker’s gun from their place of employment. He and a co-conspirator gave police conflicting statements about their whereabouts. At trial, the state was permitted to play bodycam video of an interrogation of the co-conspirator. The co-conspirator did not testify at trial. A jury found appellant guilty of both offenses. The court of appeals affirmed his convictions.

In State v. Brist, 812 N.W.2d 51 (Minn. 2012), the Supreme Court held that admitting a nontestifying co-conspirator’s unwitting statement to a government informant does not violate the confrontation clause, but the Court declines to extend that holding to include testimonial statements from a nontestifying co-conspirator. Such statements are still subject to the confrontation clause.

Here, the co-conspirator’s statements were in response to direct police questioning and were not made in the course of an ongoing emergency, and, thus, were testimonial. The admission of the statements violated appellant’s right to confrontation. However, the Court finds the error harmless, given the amount of additional evidence used to establish a conspiracy. The court of appeals is affirmed. State v. Sutter, A19-1045, 2021 WL 2125795 (Minn. 5/26/2021).

• DWI: Court may not enter convictions for both DWI and test refusal arising from the same behavioral incident. Appellant appealed his convictions for DWI, test refusal, and driving after suspension of his license. Appellant, the state, and the court of appeals agree the district court erred by entering judgments of conviction and imposing sentences for both the DWI and test refusal offenses. Minn. Stat. §609.04 bars “multiple convictions under different sections of a criminal statute for acts committed during a single behavioral incident.” State v. Jackson, 363 N.W.2d 758, 760 (Minn. 1985). Under Jackson, which the court finds controlling in this case, this rule is violated if multiple convictions were entered for offenses that arise under different sections of the same statute, and the offenses were committed as part of a single behavioral incident.

Both DWI and test refusal arise under different sections of section 169A.20. Pursuant to prior appellate court decisions, DWI and test refusal committed as part of a continuous course of conduct arise out of a single behavioral incident. Within a few hours, appellant drove while intoxicated, was arrested, and refused a breath test. This is sufficient to qualify as a single behavioral incident. Thus, the entry of judgments of conviction for both DWI and test refusal violates section 609.04. Remanded for the district court to vacate one of the convictions. State v. Bonkowske, 957 N.W.2d 437 (Minn. Ct. App. 3/15/2021).

• DWI: Driver need not know controlled substance was in their body. Appellant was reported for sitting unresponsive in a running vehicle and was arrested for DWI. Police obtained a warrant to search his blood, which revealed the presence of amphetamine. Appellant pleaded guilty to operating a motor vehicle with a controlled substance in his body. On appeal, he argued that his plea was invalid because he never admitted that he knew or had reason to know that amphetamine was present in his body at the time he was operating the vehicle. The court of appeals affirmed his conviction. 

The controlled substance DWI statute, Minn. Stat. §169A.20, subd. 1(7), does not contain a specific intent or knowledge requirement. The Supreme Court finds this omission by the Legislature was intentional. An express knowledge requirement is included for other offenses in the same statute, but not the controlled substance DWI offense. The Legislature also included an affirmative defense to controlled substance (a valid prescription), showing that the Legislature “proactively addressed concerns about imposing strict criminal liability for any blameless conduct.” The Court also finds that controlled substance DWI is a public welfare offense, an offense for which the Legislature may dispense with mens rea through silence. 

Ultimately, the Court concludes that the state need not prove that appellant knew or had reason to know his body contained a controlled substance while operating his motor vehicle. His conviction is affirmed. State v. Schwartz, 957 N.W.2d 414 (Minn. 4/7/2021).

• Predatory offender registration: Registration is not required for aiding an offender to avoid arrest where conviction did not arise from the same circumstances as the charged offenses. After appellant’s husband held his former co-workers at gunpoint in a breakroom, appellant helped him flee the state. Appellant’s husband was charged with kidnapping, false imprisonment, and threats of violence, and appellant ultimately pleaded guilty to aiding an offender to avoid arrest in exchange for the dismissal of charges of aiding and abetting her husband. The district court ordered appellant to register as a predatory offender and the court of appeals affirmed. 

Minn. Stat. §243.166, subd. 1b(a), requires registration as a predatory offender if a person is charged with one or more enumerated offenses and is “convicted of… that offense or another offense arising out of the same set of circumstances.” Both kidnapping and false imprisonment convictions require registration, but a conviction for aiding an offender to avoid arrest does not. For the registration requirement to apply to appellant, her aiding an offender to avoid arrest conviction must be based on the same set of circumstances as the kidnapping or false imprisonment charges. 

The Supreme Court affirms that the “same set of circumstances” phrase requires that the “same general group of facts gave rise to both the convicted offense and the charged offense,” and that “there must be sufficient overlap with regard to time, location, persons involved, and basic facts.” Merely related circumstances are not enough.

In this case, the offense of conviction—aiding an offender to avoid arrest—occurred after appellant’s husband committed kidnapping and false imprisonment. The kidnapping and false imprisonment occurred entirely within appellant’s husband’s former employer’s building, while appellant helped her husband avoid arrest outside of the building by driving hundreds of miles away. Appellant’s husband’s former co-workers were the victims of his offenses, while the public at large was the victim of the offense of aiding an offender to avoid arrest. The basic facts underlying the kidnapping and false imprisonment offenses are also vastly different from those underlying the aiding an offender to avoid arrest offense. Thus, appellant’s conviction for aiding an offender to avoid arrest did not arise from the same set of circumstances as the offenses for which predatory offender registration is required. The court of appeals is reversed and the district court is directed to vacate its order requiring appellant to register as a predatory offender. State v. Berry, 959 N.W.2d 184 (Minn. 5/5/2021).

• Juvenile protective services: Proof that a child actually needs protection or services is not required for offense of encouraging the need for protection or services. Appellant was charged with contributing to the need for protection or services. The evidence at a bench trial showed he had spent time with his daughter’s 10-year-old friend, A.G., and left her a note encouraging her to meet him in the middle of the night at a certain location. A.G. told authorities appellant told her he loved her and wanted to marry her. Appellant made corroborating statements to the county. Appellant also previously gave A.G. a cell phone. A.G.’s legal guardian obtained a harassment restraining order against appellant on A.G.’s behalf. The district court found appellant guilty. The court of appeals reversed, finding the evidence insufficient to prove A.G. was actually in need of protection or services, but also found the evidence sufficient to find appellant guilty of attempt.

Minn. Stat. §260C.425, subd. 1, provides that “[a]ny person who by act, word, or omission encourages, causes, or contributes to the need for protection or services” is guilty of a crime. The issue in this case centers on the meaning of “encourages,” which is not defined in chapter 260C. Looking to dictionary definitions of the term, the Supreme Court finds that the focus of the word “is an effort to persuade the listener, to overcome,” and whether the listener acts on that effort is immaterial. To require the state to prove a child was actually in need of protection or services would convert “encourages” to “causes,” which would alter the meaning of the statute.

The Court finds sufficient evidence to prove appellant encouraged A.G.’s need for protection or services and affirms his conviction. State v. Boss, 959 N.W.2d 198 (Minn. 5/5/2021).

• Controlled substances: Child “exposed to methamphetamine” is subjected to risk of harm from the methamphetamine. Appellant and her nine-year-old son were staying at a residence when a search warrant was executed. In the room where they stayed, police found methamphetamine between a mattress and the wall. Appellant was charged with possession, child endangerment, and knowingly exposing a child to methamphetamine. She appealed her conviction on the methamphetamine exposure charge, arguing her son was never physically subjected to the methamphetamine. The Minnesota Court of Appeals upheld her conviction.

Minn. Stat. §152.137, subd. 2(b), in relevant part, prohibits “knowingly caus[ing] or permit[ting] a child… to… be exposed to… methamphetamine….” “Expose” is not defined in the statute, so the Supreme Court looks to dictionary definitions and various canons of construction, particularly the canon against surplusage. Adopting appellant’s interpretation, that “expose” means “physically subjected to,” renders the remaining verbs in the statute surplusage. Instead, the court holds that “expose” in section 152.137 means that a child is “subjected to risk of harm from the methamphetamine.”

The Court also finds the evidence was sufficient to support the jury’s finding that appellant subjected her son to risk of harm from methamphetamine. Her conviction is affirmed. State v. Friese, 959 N.W.2d 205 (Minn. 5/5/2021). 

•  Minnesota Uniform Mandatory Disposition of Detainers Act: UMDDA provides a right to final disposition of untried charges only when the charges remain pending. In 2017, appellant was charged with domestic assault on June 6, and two DANCO violations on August 18. He made a speedy trial demand on the DANCO violation charges on August 21 and was found guilty of the domestic assault offense on August 25. Appellant requested final disposition of the DANCO violations under the UMDDA, which was received by the state on November 7. The state dismissed the charges on November 13. In 2018, appellant was granted a new trial on the domestic assault charge. On October 25, the state filed a new complaint charging appellant again with the 2017 DANCO violations. Appellant was found guilty of both DANCO charges on 1/18/2019. The court of appeals affirmed.

An imprisoned person may request final disposition of any untried indictment or complaint pending against the person under the UMDDA. Once a request is made, the state must bring the charges to trial within six months, or the case is to be dismissed with prejudice. First, the Supreme Court determines that the UMDDA is ambiguous as to whether a request remains effective even when the state dismisses the pending charges before the end of the six-month period. The Court looks to the legislative purpose and history of both the UMDDA and its counterpart, the Interstate Agreement on Detainers (IAD), to resolve the ambiguity. Both were passed to ensure “prompt disposition of untried charges for the benefit of prisoners so as to not inhibit their ability to secure certain privileges or participate in various rehabilitative programs.” 

Here, the state dismissed the DANCO violation charges against appellant shortly after receiving his UMDDA request. At that time, the state did not intend to refile the charges, having secured a conviction on the domestic assault charge. The dismissal of the charges fulfilled the principal purpose of the UMDDA, ensuring appellant did not suffer negative consequences from the pending charges while detained. Thus, the state did not violate appellant’s rights under the UMDDA.

Second, a separate analysis shows that appellant’s right to a speedy trial was not violated as to the DANCO violation charges. The time between the state’s dismissal of the original charges and refiling of new charges do not count in calculating the length of the delay in completing the prosecution, as the dismissal was not done to avoid appellant’s speedy trial demand. However, even excluding the time between dismissal and refiling, the delay between the initial filing in August 2017 and the trial in January 2019 was presumptively prejudicial, because it still amounted to nearly six months. While most of the reasons for this delay were the state’s responsibility, there is no reason to believe the state acted deliberately to hamper the defense.

Also, while appellant made “insistent and persistent efforts to secure a prompt trial” before the dismissal of the initial charges, he did not reassert his right to a speedy trial after the charges were dismissed (understandably) or after the new charges were filed. The Court also finds no other compelling evidence of prejudice appellant experienced as a result of the delay.

The Court ultimately concludes that, while the delay here was presumptively prejudicial, the state brought appellant to trial quickly enough so as not to endanger the values protected by the right to a speedy trial. Appellant was not deprived of his right to a speedy trial. State v. Mikell, A19-0732, 2021 WL 2125793 (Minn. 5/26/2021).

Samantha Foertsch
Bruno Law PLLC
samantha@brunolaw.com

Stephen Foertsch
Bruno Law PLLC
stephen@brunolaw.com

EMPLOYMENT & LABOR LAW

JUDICIAL LAW

• Compulsory arbitration; waiver ruling reversed. A determination that an employer waived its right to seek arbitration of an employee’s claim for violation of the Fair Labor Standards Act (FLSA) for overtime wages as part of a class action was reversed. The 8th Circuit Court of Appeals held that the trial court’s determination that the employer waived its right to arbitration was erroneous and the matter was required to be arbitrated. Morgan v. Sundance, Inc., 992 F.3d 711 (8th Cir. 3/30/2021).

• Disability benefits; split ruling by 8th Circuit. The 8th Circuit Court of Appeals split in its rulings on a couple of long-term disability policy claims by employees. 

The use by an insurer of an in-house nurse to review a long-term disability claim was proper. Affirming a lower court judgment, the appellate court held that there was substantial evidence that supported denial of a long-term disability claim and no evidence supporting the claimant’s argument that she was entitled to benefits under the policy provided by the employer. Roebuck v. USAble Life, 992 F.3d 732 (8th Cir. 4/1/2021).

A nurse anesthetist who was terminated from unemployment was entitled to short-term and long-term disability benefits under the Employment Retirement Income Security Act (ERISA). Reversing a decision of the lower court, the 8th Circuit held that the insurer abused its discretion in denying benefits on the basis that the claimant was not disabled at the time of his termination. Bernard v. Kansas City Life Insurance Company, 993 F.3d 5882 (8th Cir. 4/5/2021).

• Defamation claim against union; case may proceed. The dissemination by a labor union of statements that the largest private property owner in downtown St. Paul had wrongfully deprived security guards of overtime compensation may proceed as a defamation claim. The Minnesota Court of Appeals, upholding a decision of the Ramsey County District Court, held that the defamation claim against the union was not preempted by federal law, permitting the claim to proceed upon remand to the trial court. Madison Equities, Inc. v. SEIU Minnesota State Council, 2021 WL 1082040 (Minn. Ct. App. 3/22/2021) (unpublished). 

•  Prevailing wage law; district court has jurisdiction. A challenge to a final determination by a county that had not violated prevailing wage laws in procuring and awarding public contracts involving a yard waste management and hauling company could properly be reviewed by the Ramsey County District Court. The court of appeals held that the state law unambiguously provides for original jurisdiction in the district courts of such actions, warranting dismissal of the county’s challenge to the court’s authority to hear the case. OTI, Inc. v. Ramsey County, 2021 WL 1167027 (Minn. Ct. App. 3/29/2021) (unpublished). 

Marshall H. Tanick
Meyer, Njus & Tanick
mtanick@meyernjus.com

ENVIRONMENTAL LAW

JUDICIAL LAW

n 2nd Circuit affirms FERC’s bright line CWA Section 401 one-year deadline. In March the United States Court of Appeals for the 2nd Circuit issued a unanimous decision upholding the Federal Energy Regulatory Commission’s (FERC) determination that states must act within the one-year deadline established under the Clean Water Act (CWA) when reviewing Section 401 water quality certification requests for proposed natural gas projects. 

Section 401 of the CWA prohibits a federal agency from issuing a permit or license to conduct activity that may result in any discharge into waters of the United States unless the state or authorized tribe in which the proposed discharge would occur certifies that the discharge complies with applicable state water quality requirements. 33 U.S.C. §1341, et seq. However, Section 401(a)(1) mandates that if a state “fails or refuses to act on a request for certification, within a reasonable period of time (which shall not exceed one year) after receipt of such request,” then certification requirements are waived for the federal application. 33 U.S.C. §1341(a)(1).

In the 2nd Circuit case, petitioners New York State Department of Environmental Conservation (DEC) and Sierra Club asked the court to vacate FERC’s determination that DEC had waived its certification authority for a proposed natural gas pipeline project to be built by National Fuel Gas Supply Corporation and Empire Pipeline, Inc. after DEC denied the project application 36 days after the one-year deadline from receiving the initial application.

The initial application was received by DEC on 3/2/2016, but it became clear that the final determination could not be made within the one-year deadline. Therefore, DEC entered into an agreement with National Fuel to revise the date on which the application was received by DEC to 4/8/2016. On 4/7/2017, DEC denied National Fuel’s application, one day prior to the extended one-year deadline.

After the denial of its application, National Fuel asked FERC to declare that DEC had waived its certification authority by not acting within the original one-year time limit (i.e., by 3/27/2017), established when it received the initial application on 3/2/2016. On 8/6/2018, FERC concluded that DEC had waived its authority under Section 401. The court held that DEC could not escape the “bright-line” one-year limit by coordinating with an applicant to alter the date on which DEC received the application.

In making its determination, the court looked at the text and legislative history of Section 401 of CWA. In reviewing the legislative history, the court highlighted the fact that Congress acknowledged that without the one-year limit, there would be no way to guard against a state sitting on its hands and doing nothing, at the expense of the applicant or other states that may be involved in a multistate project. Thus, in specifying a deadline for state action, Congress intended to protect the regulatory structure of the section, and would not permit the arrangement advocated by petitioners, which would introduce the sort of uncertainty that the one-year limitation period was intended to eliminate.

The 2nd Circuit looked to previous case law to make its decision. The court compared this case to the D.C. Circuit case Hoopa Valley Tribe v. FERC, wherein the court recognized that the coordinated, repeated withdrawals and re-submissions of certification requests between the applicants and state agencies for over a decade to circumvent the one-year deadline clearly undermined the statutory time limit requirement and congressionally granted authority. 913 F.3d 1099 (D.C. Cir. 2019). 

The 2nd Circuit was sympathetic to DEC’s argument that states should be afforded flexibility when reviewing Section 401 certification applications, given the complexity of the projects, and the importance of protecting the state’s water quality, as well as recognizing that an extra 36 days may be a modest and reasonable extension of the deadline. However, the court ultimately concluded that Section 401’s bright-line one-year time limit precludes the deadline-blurring arrangement under review in this case, which would turn the bright-line rule into a subjective standard.
The court thus held that the DEC waived its certification authority by failing to act within one year of the actual receipt of the application.

On 3/29/2021, FERC published a final rule amending its regulations under Section 401 of the CWA to establish a categorical reasonable period of time of up to one year deadline for states to act on a request for water quality certification under Section 401 of the CWA for proposed natural gas and liquid natural gas projects. 86 Fed. Reg. 16298 (3/29/2021). The rule will become effective 6/28/2021. New York State Dep’t of Env’t Conservation, et al. v. Fed. Energy Regul. Comm’n, No. 19-1610-ag (2d Cir. 3/23/2021).

n Minnesota federal district court remands climate change case to state court. In March the United States District Court for the District of Minnesota granted the state of Minnesota’s motion to remand to state court a climate change-related case Minnesota brought against the American Petroleum Institute, Exxon Mobil Corporation, ExxonMobil Oil Corporation, Koch Industries, Inc., Flint Hills Resources LP, and Flint Hills Resources Pine Bend. 

Minnesota commenced the action in state court, alleging defendants undertook “a widespread campaign to deceive the public about the dangers of fossil fuels and to undermine the scientific consensus linking fossil fuel emissions to climate change.” Minn. v. API at *2. The state asserted five causes of action for violations of Minnesota common law and consumer protection statutes, alleging (1) violations of Minnesota’s Consumer Fraud Act, Minn. Stat. §325F.69; (2) failure to warn under common law theories of strict liability and negligence; (3) common law fraud and misrepresentation; (4) violations of the Minnesota Deceptive Trade Practices Act, Minn. Stat. §325D.44; and (5) violations of the Minnesota False Statement in Advertising Act Minn. Stat. §325F.67. Id. at *8. On 7/27/2020, defendants removed the action to federal court, and on 8/26/2020, Minnesota moved to remand to state court. 

Defendants claimed federal jurisdiction on seven grounds: (1) The claims arise under federal, not state, common law; (2) the action raises disputed and substantial federal issues that must be adjudicated in a federal forum (the “Grable doctrine”); (3) removal is authorized by the federal officer removal statute, 28 U.S.C. §1442(a)(1); (4) federal jurisdiction arises under the Outer Continental Shelf Lands Act, 43 U.S.C. §1349(b); (5) the claims are based on conduct arising out of federal enclaves; (6) the action is actually a class action governed by the Class Action Fairness Act, 28 U.S.C. §1332(d), 28 U.S.C. §1453(b); and (7) the court has diversity jurisdiction under 28 U.S.C. §1332(a), on the theory that the real parties in interest are not the state, but the citizens of Minnesota. Id. at *9. 

The court methodically analyzed each asserted basis for federal jurisdiction, concluding that none supported federal jurisdiction. In general, while the court acknowledged that “the vast threat of climate change requires a comprehensive federal, and indeed, global response,” and while the court admitted “some reluctance in remanding such significant litigation to state court,” the court concluded that the state’s action is “far more modest than the caricature Defendants present,” arising solely under state consumer protection statutes. Id. at *36. The limited nature of Minnesota’s claims, the court speculated, would likely “restrict the ultimate possible recovery in this case and thus, its possible impact on climate change.” Id. at *37. But, the court held, that is the choice the state has made. The court concluded that because it does not have original jurisdiction over Minnesota’s action, and because the claims neither explicitly raise federal claims nor fall within one of the exceptions to the well-pleaded complaint rule, the court must decline to exercise jurisdiction.  

In remanding to the state court, the court also denied defendants’ motion for a stay pending the resolution of two federal cases that defendants argued, unsuccessfully, could affect the outcome of the court’s decision. Minnesota v. Am. Petroleum Inst., CV 20-1636 (JRT/HB), 2021 WL 1215656 (D. Minn. 3/31/2021).

• US Supreme Court holds CERCLA contribution action must be predicated on resolution of CERCLA-specific liability.
In May the United States Supreme Court issued an opinion holding that in order to trigger a right of contribution under section 113(f)(3)(B) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), a party must resolve a CERCLA-specific liability; a broader array of settlements involving environmental liability will not suffice. The case involved a long-running dispute regarding liability for environmental hazards at the Ordot Dump in Guam. The dump was constructed by the U.S. Navy in the 1940s; both the U.S. and Guam deposited waste into the dump. In the late 20th Century, the U.S. Environmental Protection Agency (EPA) sued Guam under the federal Clean Water Act (CWA), alleging that Guam was discharging pollutants from the dump into waters of the U.S. without a discharge permit. In 2004, Guam and the U.S. entered a consent decree, settling the litigation and requiring Guam to close and cover the dump. 

Over a decade later, Guam sued the U.S., seeking to hold the U.S. responsible for some of the cost of closing and covering the dump. Guam brought two claims: (1) a cost-recovery claim under section 107(a) of CERCLA, which allows a state (or in this case, a territory) to recover clean-up costs from a former owner or operator of the property in question, and (2) a contribution claim under section 113(f)(3)(B) of CERCLA, which provides that a “person who has resolved its liability to the United States... for some or all of a response action or for some or all of the costs of such action in [a ] settlement may seek contribution from any person who is not [already] party to a [qualifying] settlement.” CERCLA §113(f )(3)(B).

The D.C. Circuit Court of Appeals dismissed Guam’s complaint. It stated first that where a person meets the requirements to bring a contribution claim under section 113(f), the person may not bring a cost-recovery claim under section 107(a). Here, the court concluded, while Guam had a contribution claim against the U.S. after it entered the 2004 consent decree with EPA, the three-year statute of limitations for CERCLA contribution claims had long since run. CERCLA §113(g)(3). As a result, the circuit court held, neither of Guam’s claims was viable. 

The Supreme Court reversed and remanded. Looking at the language of section 113(f) within the greater CERCLA context, the Court held that the requirement that a party has “resolved its liability” in section 113(f) refers to CERCLA-specific liability. For example, the Court noted that section 113(f)(3)(B)’s reference to a party “resolving its liability… for some or all of a response action…” echoed repeated uses of the key phrase “response action” in other parts of CERCLA, suggesting the term refers to resolution of CERCLA-specific claims. In addition, the term “resolve” indicates finality, the Court wrote; resolution of related environmental liabilities not specific to CERCLA (e.g., the CWA liabilities in this case), would not be final as to CERCLA because it would leave the settling defendant still potentially liable under CERCLA.  “The most natural reading of §113(f)(3)(B),” the Court concluded, “is that a party may seek contribution under CERCLA only after settling a CERCLA-specific liability, as opposed to resolving environmental liability under some other law.” 

In this case, because Guam’s 2004 consent decree with EPA resolved CWA liability, not CERCLA-specific liability, Guam never had a right to bring a contribution claim under section 113(f). Accordingly, Guam was not barred from proceeding with its section 107(a) cost-recovery action against the U.S. Guam v. United States, No. 20-382, __ S.Ct. __; 2021 WL 2044537 (5/24/2021).

ADMINISTRATIVE ACTION

• EPA publishes notice of intent to revise 2020 CWA Section 401 Certification Rule. In June the U.S. Environmental Protection Agency (EPA) published a proposed rule declaring a notice of intent by the agency to reconsider and revise the Water Quality Certification Rule under Section 401 of the Clean Water Act (CWA). 40 C.F.R. §121. EPA is doing so in response to the 1/20/2021 Executive Order 13990, “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis,” which directed the agency to review and take action to revise or replace the 2020 Section 401 Certification Rule.

Section 401 of the CWA prohibits a federal agency from issuing a permit or license to conduct activity that may result in any discharge into waters of the United States unless the state or authorized tribe in which the proposed discharge would occur certifies that the discharge complies with applicable state water quality requirements. 33 U.S.C. §1341, et seq. Furthermore, Section 401(d) allows states to impose conditions upon the certification of the project if it determines the project will have a negative impact on the water quality within the state. 33 U.S.C. §1341(d).

When initially reviewing the 401 Certification Rule, EPA considered many factors in making its determination, including the text of CWA Section 401, congressional intent, the principles outlined in the Executive Order, and other issues that are currently being challenged in court. EPA identified substantial concerns related to specific provisions of the rule, including whether the rule effectively ensures cooperative federalism principles, as well as whether certain procedural components of the rule improve, or impede, the certification and permitting process.

EPA identified 10 key issues on which it would like to receive comments. Some of the key issues identified for potential revision include: the requirement for applicants to submit a prefiling meeting request with the certifying agency 30 days before submitting the water quality certification application; whether the definition and elements of a certification request are too limited to allow the state enough information to review the request; whether states have a sufficient role in determining the timeline for review and whether the rule limits the factors that federal agencies may use to determine a reasonable period of time for a certifying agency to act; whether the current rule’s scope of certification is too narrow; and whether the agency should revise the scope to include potential impacts to water quality not only from the “discharge” of the project, but also from the “activity as a whole.”

The other key issues on which the EPA solicited feedback include: certification actions and federal agency review; enforcement authority of certification conditions; modifications of certifications and permits to adapt to changing circumstances; the “neighboring jurisdiction” process to determine what federal activity may affect downstream water quality as well as the timeframe in which a federal agency must notify EPA under CWA Section 401(a)(2); receiving any data or information from stakeholders about the application of the 401 Certification Rule; and facilitation and implementation of rule revisions.

The agency is currently hosting web-based listening sessions to solicit feedback, as well as receiving written comments. The public comment period will remain open until 8/2/2021. Docket ID No. EPA-HQ-OW-2021-0302. 86 Fed. Reg. 29541 (6/2/2021).

Jeremy P. Greenhouse
The Environmental Law Group, Ltd.
jgreenhouse@envirolawgroup.com

Erik Ordahl 
Barna, Guzy & Steffen
eordahl@bgs.com

Jake Beckstrom Vermont Law School, 2015

FEDERAL PRACTICE

JUDICIAL LAW

n 28 U.S.C. §1447(d); scope of review on appeal. In November 2020, this column noted the Supreme Court’s grant of certiorari in a case that raised the issue of whether, when a remand order under 28 U.S.C. §§1442 or 1443 is appealed, the appeal is limited only to consideration of the propriety of the removal under these provisions, or whether the appellate court can consider any issue encompassed by the remand order. 

The Supreme Court recently held that the appeal of a remand under Sections 1442 or 1443 permits review of the entirety of the remand order. Justice Sotomayor dissented, asserting that the exception recognized by the majority would “trump the rule,” and expressed “fear” that defendants will raised “strained theories of removal” under Sections 1442 or 1443 in an attempt to “circumvent” the bar on appellate review. BP P.L.C. v. Mayor and City Council of Baltimore, 141 S. Ct. 1532 (2021). 

• Fed. R. App. P. 39(e); district court has no discretion to reduce taxable costs. In a case involving more than $2.2 million in appeal-related costs, the Supreme Court unanimously held that Fed. R. App. P. 39(e) does not permit a district court to alter a court of appeals’ discretionary allocation of taxable costs. City of San Antonio v. Hotels.com, L.P., 141 S. Ct. 1628 (2021). 

•  Federal jurisdiction over motion to vacate arbitration; grant of certiorari. The Supreme Court recently granted certiorari in a case thaat raises the issue of whether the “look-through” jurisdictional analysis adopted by the Court in Vaden v. Discover Bank, 556 U.S. 49 (2009), applies to motions to vacate under Sections 9 and 10 of the Federal Arbitration Act. 

The circuits are badly divided on this question, with four circuits applying the “look-through” approach and two circuits rejecting that analysis. Badgerow v. Walters, 975 F.3d 469 (5th Cir. 2020), cert. granted, ___ S. Ct. ___ (2021). 

•  28 U.S.C. §1782; private arbitration; grant of certiorari. The Supreme Court recently granted certiorari in a case that raises the question of whether the discretion afforded district courts under 28 U.S.C. §1782 to render assistance in gathering evidence for use in “a foreign or international tribunal” includes private commercial arbitral tribunals. 

The circuits are divided 3-2 on this question. Servotronics, Inc. v. Rolls-Royce PLC, 975 F.3d 689 (7th Cir. 2020), cert. granted, 141 S. Ct. 1684 (2021). 

• Fed. R. Civ. P. 12(f); striking class action allegations. Following the 6th Circuit, and reversing the district court’s denial of a motion to strike class action allegations, the 8th Circuit held that a district court may grant a Rule 12(f) motion to strike class action allegations even prior to a motion for class certification where it is “apparent from the pleadings that the class cannot be certified.” Donelson v. Ameriprise Fin. Servs., Inc., ___ F.3d ___ (8th Cir. 2021). 

• Motion to dismiss pursuant to Fed. R. Civ. P. 41(a)(2) denied; dismissal with prejudice; no abuse of discretion. Where the plaintiff moved to dismiss her action without prejudice pursuant to Fed. R. Civ. P. 41(a)(2), the defendant opposed the motion and argued that the plaintiff was attempting to avoid summary judgment, the plaintiff offered no explanation for her request for dismissal without prejudice, and the district court dismissed the action with prejudice, the 8th Circuit found no abuse of discretion by the district court where the plaintiff failed to avail herself of multiple opportunities to explain the basis for her dismissal motion. Graham v. Mentor Corp., ___ F.3d ___ (8th Cir. 2021). 

• Punitive damages; remittitur; proportionality; de novo review. Where a jury awarded the plaintiff $50,000 in compensatory damages (later reduced to $47,300) and $1,000,000 in punitive damages on one his claims, the defendant moved for remittitur of the punitive damage award on the basis that it was grossly excessive, the district court granted the request for remittitur and decreased the punitive damage award to $236,500 (a 5:1 punitive-compensatory ratio), and the plaintiff appealed the remittitur, the 8th Circuit, reviewing de novo, agreed with the district court that the original punitive damage award was “disproportionate,” but concluded that an award of $425,700 (a 9:1 ratio) was appropriate. Masters v. City of Independence, ___ F.3d ___ (8th Cir. 2021). 

• Defamation; pleading requirements under Minnesota law and the federal rules. Affirming Judge Montgomery’s grant of summary judgment to a subset of defendants, the 8th Circuit held that any allegedly defamatory statements that were not alleged with specificity in the plaintiff’s amended complaint, and allegedly defamatory statements disclosed during discovery but not incorporated into an amended pleading, were not properly before the Court. Sherr v. HealthEast Care Sys., ___ F.3d ___ (8th Cir. 2021). 

• Denial of motion to amend counterclaim affirmed. The 8th Circuit found no abuse of discretion in Judge Frank’s denial of a motion to amend a counterclaim after the close of discovery and on the eve of trial, where the proposed amendment would have required additional discovery. Select Comfort Corp. v. Baxter, 996 F.3d 925 (8th Cir. 2021). 

• 28 U.S.C. §1404(a); forum selection clause; issues of fact. Where the litigants were parties to an insurance contract that contained a recently added forum selection clause designating Nebraska as the forum for any litigation, but there were issues as to whether the policyholder was properly notified of the new forum selection provision, Judge Magnuson found that a “substantial question” existed regarding the validity of the forum selection clause and denied the defendant’s 28 U.S.C. §1404(a) motion to transfer without prejudice. Sunlight Logistics, Inc. v. County Hall Ins. Co., 2021 WL 1946658 (D. Minn. 5/14/2021). 

•  Interlocutory appeal; effect on district court’s jurisdiction. Where two defendants filed an interlocutory appeal under the collateral order doctrine, the remaining parties filed cross-motions for summary judgment, one party questioned whether the appeal divested the district court of jurisdiction over the remainder of the case, and supplemental briefing was ordered on the jurisdictional issue, Judge Nelson determined that it would be “improper” to proceed while the appeal is pending, and stayed the remainder of the action. Mille Lacs Band of Ojibwe v. County of Mille Lacs, 2021 WL 1400069 (D. Minn. 4/14/2021). 

• Appeal of denial of motion to compel arbitration; effect on district court’s jurisdiction. Where an appeal from the denial of a motion to compel arbitration was filed but the parties were unable to agree on the effect of that appeal on the district court’s jurisdiction, Magistrate Judge Leung acknowledged a split in the circuits and within the District of Minnesota as to whether the appeal divested the district court of jurisdiction over the remainder of the case but, finding that a discretionary stay was warranted, declined to reach the jurisdictional issue. Benchmark Ins. Co. v. SUNZ Ins. Co., 2021 WL 1904927 (D. Minn. 5/12/2021). 

• Motion for leave to file untimely brief denied; no excusable neglect. Where counsel for one defendant moved for leave to file an untimely opposition to the plaintiff’s motion to compel, blaming his failure on the fact that he had just completed a two-week trial and criticizing plaintiff’s counsel for their “lack of professional courtesy,” Magistrate Judge Leung denied that motion, finding no excusable neglect where there were three other attorneys assigned to the case, and the motion failed to explain why those attorneys could not have contacted plaintiff’s counsel or the court prior to the deadline to file a response. Eng’g & Constr. Innovations, Inc. v. Bradshaw Constr. Corp., 2021 WL 1634468 (D. Minn. 4/27/2021). 

• No subject matter jurisdiction in removed action; dismissal or remand? Where the defendants removed the action on the basis of diversity jurisdiction, the plaintiff later amended its complaint to add another seemingly diverse defendant, the plaintiff ultimately disclosed that it had members and sub-members who were not diverse from the defendants, and defendants argued that the appropriate remedy was the dismissal (rather than remand) of the action, Judge Schiltz found that 8th Circuit authority “unambiguously holds that where a district court lacks subject-matter jurisdiction over a removed case, remand rather than dismissal is required, even if the plaintiff filed an amended complaint in federal court after the case was removed.” Marco Techs., L.L.C. v. Midkiff, 2021 WL 1577653 (D. Minn. 4/22/2021). 

• FDCPA; attorney’s fees; hourly rates. Rejecting a challenge to the accuracy of plaintiff’s counsel’s billing records, Judge Nelson granted a motion for attorney’s fees in an FDCPA case, approving an hourly rate of $550 an hour for a “very experienced” attorney. Hashi v. Law Offices of David M. Katz, P.C., 2021 WL 1263720 (D. Minn. 4/6/2021). 

• Taxable costs; surcharge for expedited and rough ASCII transcripts rejected. Where plaintiffs filed an objection to the defendant’s bill of costs, and the defendants conceded that some of their claimed costs were not taxable but attempted to explain the need for other of their costs, Judge Nelson determined that the cost of certain expedited transcripts was taxable, but reduced the costs claimed for two depositions by 20 percent where the corresponding invoices were not sufficiently itemized, and she “suspect[ed]” that the invoices included nontaxable charges, but Judge Nelson did allow the plaintiffs seven days to produce an itemized invoices to support these costs. Grupo Petromex, S.A. v. Polymetrix AG, 2021 WL 1258334 (D. Minn. 4/5/2021). 

Josh Jacobson
Law Office of Josh Jacobson 
joshjacobsonlaw@gmail.com 

INTELLECTUAL PROPERTY

JUDICIAL LAW

• Trademark: Likelihood of confusion may precede the time of purchase under initial-interest theory. The United States Court of Appeals for the 8th Circuit recently held that a district court erred by granting judgment as a matter of law regarding the issue of consumer sophistication and granting summary judgment rejecting the theory of initial-interest infringement. Select Comfort Corp. and Select Comfort SC Corporation sued defendants Baxter and Dires, LLC for trademark infringement, trademark dilution, federal unfair competition, and false advertising claims, related to the infringement of trademarks such as “SLEEP NUMBER” and “WHAT’S YOUR SLEEP NUMBER.” Select Comfort alleged that the defendants purposefully used phrases confusingly similar or identical to Select Comfort’s registered trademarks in their website URLs and online advertising. Select Comfort also alleged that the defendants purposefully furthered confusion on their phone lines. 

Before considering when confusion must occur to be actionable, the court first determined the sophistication level of the mattress customers. The district court found that mattress customers were sophisticated as a matter of law because mattresses are expensive. The 8th Circuit reversed this ruling as customer sophistication is a jury question, because the expense of mattresses needed to be weighed against the frequency of purchase. Following the precedent in Sensient Techs. Corp. v. SensoryEffects Flavor Co., the district court ruled a theory of initial-interest confusion could not apply because it had found that customers were sophisticated. 13 F.3d 754 (8th Cir. 2010). Due to the 8th Circuit’s reversal, the court addressed the novel issue of whether actionable confusion is limited to the time of purchase or if initial-interest confusion is actionable. To protect the goodwill of established marks at all times, the 8th Circuit held that initial-interest confusion is actionable as infringement. The case was remanded for further proceedings. Select Comfort Corp. v. Baxter, 996 F.3d 925 (8th Cir. 2021).

• Copyright: Illegal access pertains to authorization rather than motive. The Supreme Court of the United States recently ruled that an individual does not violate the Computer Fraud and Abuse Act of 1986 (CFAA) by accessing information with an improper motive if the information is otherwise available to him. Nathan Van Buren was charged with violating the CFAA because his accepting of a bribe to look up an individual in a law enforcement database exceeded his authorized access under 18 U. S. C. §1030(a)(2). The CFAA defines “exceeds authorized access” as “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter.” §1030(e)(6). On appeal, Van Buren asserted the interpretation adopted by several circuits that one “exceeds authorized access” when one obtains information from somewhere in a computer, such as files, folders, or databases, that are not within the scope of the individual’s authorization to use on said computer. The government argued for a broader interpretation of “exceeds authorized access” adopted by other circuits in which individuals would be criminally or civilly liable under the CFAA if information is accessed for an inappropriate reason or improper purpose. 

The Court rejected the government’s interpretation, as it would find individuals liable under the CFAA for things such as paying bills on their work computers. As both parties agreed that Van Buren was authorized to use the law enforcement database, and under the Court’s interpretation Van Buren did not access information on the computer that was off-limits to him, the Court reversed the judgment of the 11th Circuit and remanded the case for further proceedings. Van Buren v. United States, No. 19-783, 2021 U.S. LEXIS 2843 (6/3/2021).

Joe Dubis & Katherine F.K. Mares
Merchant & Gould
jdubis@merchantgould.com

TAX LAW

JUDICIAL LAW

• Attorney’s travel expenses for “schmoozing a client” not deductible. Section 162 permits a deduction for all ordinary and necessary business expenses. Marketing is often one such deductible expense. But taxpayers bear the burden of proving their right to deductions, and taxpayers must also produce records to substantiate claimed deductions. Substantiation requirements are particularly stringent for meals, entertainment, and travel expenses. Even when a taxpayer has proper documentation, the taxpayer must also show that the expenses were for a business purpose. In this case, the taxpayer was able to show some records to substantiate her trip from Minnesota to New York. She was unable, however, to persuade the court that the trip had a business purpose and her claimed deductions for the trip were denied. The court addressed various other deductions denied on audit, and it found for the Service on most issues. Ward v. Comm’r, T.C.M. (RIA) 2021-032 (T.C. 2021).

• Tax opinions as beach reading? Tax court Judge Mark V. Holmes’s opinions do not disappoint. This month provides two charming examples. For a primer on rights in music in IP for tax lawyers, see Est. of Jackson v. Comm’r, T.C.M. (RIA) 2021-048 (T.C. 2021) (discussing extensive tax dispute involving pop mega-star Michael Jackson’s estate and noting that “Jackson’s most valuable assets were intellectual property” and explaining that “any tax specialists reading this might benefit from a primer on three key concepts: composer, performer, and right of publicity.”) For a history of “frontier pharmacies” and an entertaining discussion of the challenges of proving valuation in small-town Montana, see Plentywood Drug, Inc. v. Comm’r, T.C.M. (RIA) 2021-045 (T.C. 2021).

• Calculation in ongoing “split-dollar” life insurance arrangement. In a previous case, De Los Santos v. Comm’r (De Los Santos I), T.C. Memo. 2018-155, the tax court determined that petitioners’ participation in an employee welfare benefit plan constituted a compensatory “split-dollar” life insurance arrangement under section 1.61-22(b), Income Tax Regs., and that the economic benefits that flowed to petitioners generated current taxable income. In this second opinion, the court computed the exact amounts to be included in petitioners’ gross income for each year. De Los Santos v. Comm’r, No. 5458-16, 2021 WL 1345503 (T.C. 4/12/2021).

•  Investment in solar power scheme designed to “zero out taxes” does not entitle investors to deductions or credits. A Utah businessperson with no engineering experience devised a scheme to sell interests in a far-fetched solar energy project. The project never saw the light of day, but the scheme raised millions from investors eager to “zero out their taxes.” The instant case involved the investors—project promoters had already faced separate liability. Although this case involves only two investors in the tax shelter scheme, more than 200 cases involving other investors in the same scheme depend on its outcome. The tax court determined that the investors were not entitled to trade or business deductions, deductions for property held for the production of income, or deductions for passive activity losses. The taxpayers were not entitled to any credits. In this instance, the taxpayers were not liable for penalties because the IRS did not secure timely supervisory approval for them. Olsen v. Comm’r, T.C.M. (RIA) 2021-041 (T.C. 2021).

•  Tax court determines disclosure of discovery requests. On 4/12/2019, JMIR Marquette Hotel LLC filed a property tax petition for property taxes payable in 2019 for the subject property located at 710 and 730 Marquette Avenue in Minneapolis. 

On 9/18/2020, JMIR served its first set of interrogatories and requests for production of documents on the county. The county returned its answers and responses to the requests on 11/2/2020. Over the following months, “counsel for the parties engaged in ongoing communications regarding disputes over the completeness of the County’s discovery responses.” JMIR alleged that the county failed to provide substantive answers to various interrogatories and document requests. JMIR filed a motion to compel discovery and for attorney fees. On the same day as JMIR’s motion, the county served supplemental answers and responses to JMIR’s requests. Additionally, the county opposed the motion to compel and a hearing on the motion was set for 1/26/2021.

The purpose of discovery is to exchange relevant information between the parties to prevent surprise and prejudice at trial. See Gale v. Hennepin Co., 609 N.W.2d 887, 891 (Minn. 2000). Generally, trial courts have discretion over whether to grant or deny discovery requests. See generally Erickson v. MacArthur, 414 N.W.2d 406, 407 (Minn. 1987). Minn. R. Civ. P. 26.02 provides in part that parties may obtain discovery that is relevant to any party’s claim, important to resolving the issues, and possesses a benefit that likely outweighs the burden or expense to the other party. The court can limit discovery methods upon determining that the “discovery is unreasonably cumulative or duplicative, is obtainable from another source, or the burden of proposed discovery is outside the scope.” Minn. R. Civ. P. 26.02 (b). Federal rules of procedure may be helpful and instructive when state practices are modeled after federal rules. Federal Rule 26(b) is nearly identical to Minn. R. Civ. P. 26.02(b), in that relevancy is “’broadly construed’ and a discovery request should be considered relevant if there is ‘any possibility’ that the information sought may be relevant to the claim or defense of any party.”

Generally, “the assessed value of property for tax purposes is not admissible as direct evidence of value for purposes other than taxation of that property.” EOP-Nicollet Mall, L.L.C. v. Hennepin Co., 723 N.W.2d 270, 283 (Minn. 2006). A petitioner does not have uninhibited access to information used by the county when completing a property assessment. Minn. Stat. section 13.51, subd. 2 states that “certain information collected by the government for assessment purposes is nonpublic data.” When determining whether to order disclosure of property assessment data, the court must apply a two-part balancing test: 1) whether the data is discoverable pursuant to the rules of evidence and civil procedure, and 2) whether the benefit of the data “outweighs any harm to the confidentiality interests of the entity maintaining the data.” Additionally, the court must determine “whether notice to the subject of the data is warranted,” and, if so, “what type of notice must be given.” Minn. Stat. section 13.03, subd. 6. 

JMIR categorized its requests in three general ways: “1) those concerning physical aspects of the subject property, 2) requests for underlying information, data, and documents about the subject property usable for appraising the market value; and 3) requests for information or documents the County claims are nonpublic or Assessor’s data.” In a lengthy analysis, the court considered the county’s objections on the grounds that the county does not intend to defend its assessed value of subject property based on the physical aspects that JMIR seeks. Further, the county contends that information regarding how the subject property compares to surrounding property is nonpublic information pursuant to Minn. Stat. section 13.51 and asserts that the MGDPA applies. 

Concerning the physical aspects of the subject property, the court noted that the county failed to address why that information is not relevant. As such, the court granted in part JMIR’s motion pertaining to the physical aspects of the subject property, but denied in part the information that details the assessor’s use of the requested information any assessment of the subject property. In applying the balancing test, regarding discoverability, the court agreed with the county that certain information sought by JMIR is overly broad and partially irrelevant. However, the court limited disclosure of specific documents dealing with surrounding properties so long as the county follows any special instructions concerning nonpublic data with the meaning of Minn. Stat. section 13.51. JMIR Marquette Hotel LLC v. Hennepin Co., 2021 WL 1288720 (MN Tax Court 4/2/21).

•  Change of counsel does not constitute “good cause.” Allina Health System filed two property tax petitions claiming that its Stillwater facility, located in Washington County, was exempt from property taxes in both 2017 and 2018 as a “public hospital and purely public charity as defined in Article X of the Minnesota Constitution” and Minn. Stat. section 272.02. In separate pretrial motions, the county: 1) moved to consolidate the two petitions and extend the scheduling deadlines into 2022, and 2) moved to compel discovery. 

In the county’s motion to amend the scheduling order and consolidate the two petitions, the county states that it is represented by new counsel, and the legal strategy of the original counsel is unacceptable to the current counsel. As such, the new counsel “needs additional time implement the case strategy he recommends.” The court concluded that continuances must be supported by an affidavit showing good cause. Failure to adequately prepare for trial does not constitute good cause. Minn. R. Civ. P. 16.02. Further, “withdrawal or substitution of counsel does not create any right to continuance of any deadline imposed by a scheduling order.” Finding no good cause to amend the scheduling order, the court denied the county’s motion. 

Generally, the tax court would favor consolidating matters for the “sake of judicial economy unless consolidation would significantly inconvenience or prejudice one of the parties.” Enbridge Energy, Ltd. P’ship v. Marshall Co., No. C5-03-133, 2004 WL 434420, at *1. Washington County acknowledges that forcing Allina to conduct additional discovery may be prejudicial, but argues that the benefits of a fuller record outweighs any prejudice to Allina. The court agreed that consolidating matters to re-open discovery in a trial-ready case may prejudice Allina and therefore, denied the county’s motion.

Subsequently, the court issued an order the county’s motion to compel discovery. In November of 2020, the county sought information concerning Allina’s subject property’s value and classification. After receiving Allina’s responses, the county followed up with a letter stating that deficiencies existed in Allina’s responses, and requesting further responses to the county’s requests, including certain emails. The county’s second request included information and emails about Allina’s pricing for services, and services that were provided for free. A hearing was held on 2/2/2021. Minn. R. Civ. P. 26.02 allows parties to “obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim of defense.” The court may limit discovery methods if the proposed discovery is outside the scope. Rule 26.02 (b). 

In response to the county’s request for any and all documents evidencing income and operating expenses, Allina disclosed its annual total operating expenses, income statements, financial statements and its Federal Form 990. The county, however, argued at the hearing that it was still entitled to emails concerning income and operating expenses for the property and other financial documents that Allina used to track and analyze income and operation expenses. Following the hearing, the county narrowed its request to include only emails relating to charity care, sliding scale services, and two additional exhibits. 

The court concluded that the county’s arguments are persuasive regarding Allina’s need to search and disclose further emails concerning income and expenses and declined to order Allina to disclose any other financial documents. The court concluded, however, that if a general ledger existed, Allina must disclose it to the county.

The county further requested several documents relating to service pricing of competitors that Allina argued was overly broad and unduly burdensome. Additionally, Allina argued that the county’s second set of requests were untimely. The court stated that if a study of competitor pricing existed, Allina must disclose it to the county, but added that searching for emails concerning Allina’s pricing structure would be burdensome. The court also agreed that the county’s second set of discovery was untimely and denied the county’s motion to compel Allina to respond. Allina Health System v. Washington Co., 2021 WL 1288267 (MN Tax Court 4/2/21), 2021 WL 1709006 (MN Tax Court 4/27/21), 2021 WL 1825690 (MN Tax Court 5/3/21). 

• Judicial economy wasted by company’s lack of response. Menard, Inc. filed two property tax petitions for taxes payable in 2019 and 2020 for subject property located in Apple Valley. The court filed a scheduling order that cut off discovery by 4/26/2021. In March, Dakota County served Menard with requests and interrogatories, to be due on 4/5/2021. Menard requested and received an extension from the county to 4/13/2021. Menard stated the extension request was to allow settlement discussions to take place. The county refused to partake in settlement discussions until after its assessor had time to review the discovery responses. Menard did not produce discovery by the April 13 deadline, and the county moved the court to compel discovery responses. In its motion, the county used a caption for the Apple Valley cases, as well as West St. Paul cases. Menard objected to the county’s motion to compel, stating that the motion was not filed in accordance with the court’s motion practice. Specifically, the notice of motion and motion “included a proposed order and affidavit of service captioned for the West St. Paul cases,” and was therefore “confusing,” and constitutes a “failure of service.” A hearing was held on 4/29/2021.

When a party fails to respond to a discovery request, “the party seeking discovery may move for an order compelling an answer or production of documents.” Minn. R. Civ. P. 37.0l (b)(2). The court analyzed Menard’s arguments, concluding that Menard did not claim that the incorrect attachment deprived the court of jurisdiction, nor did Menard assert that it did not receive the motion to compel. Additionally, counsel for Menard concedes that he was not genuinely confused about the nature of the motion by the attachments. As of the hearing date, Menard has not responded to the discovery request. The court granted the county’s motion to compel. Menard, Inc. (Store #3047), v. Dakota Co., 2021 WL 2216986 (MN Tax Court 5/25/21).

• Statutory interpretation; tax court affirmed. Minnesota imposes an occupation tax on “[a] person engaged in the business of mining or producing of iron ore, taconite concentrates or direct reduced ore.” Minn. Stat. §298.01, subd. 4 (2012). Hibbing Taconite Company and United Taconite are engaged in the business of mining and are subject to the occupation tax. The occupation tax statute further directs that the occupation tax shall be “determined in the same manner” as the franchise tax that Minnesota imposes on corporations. Both the franchise tax and the occupation tax are taxes imposed on income. Although a tax on income, neither is designed to be a tax on gross income, and certain deductions are permitted. The deduction in dispute here is the depletion deduction. IRC §611 (“In the case of mines… there shall be allowed as a deduction in computing taxable income a reasonable allowance for depletion…”) Corporate taxpayers who are subject to the franchise tax face a limit on the depletion deduction: The depletion deduction must be reduced by 20%. Relying on the statutory phrase “determined in the same manner,” the commissioner argued that the franchise tax limit applies to taxpayers subject to the occupation tax. 

The Supreme Court disagreed. Reviewing the tax court’s statutory interpretation de novo, the Court held that the statutory phrase “determined in the same manner” (as the franchise tax) did not require the taxpayers to reduce the depletion deduction claimed under federal law by the percentage that federal law imposes on corporations. The “plain meaning of the language in subdivision 4 of section 298.01,” the Court held, “does not require the Taxpayers to reduce the amount of the claimed federal deduction by the percentage imposed on corporations.” Hibbing Taconite Co., J.V. v. Comm’r, 958 N.W.2d 325 (Minn. 2021).

•  Premium tax credits and retroactive Social Security result in surprise tax bill for sympathetic taxpayer. Taxpayer Connie Sue Heston received advance premium tax credits (APTC) during the 2017 tax year. In September of that same year, Ms. Heston learned that her Social Security Disability application had been retroactively approved and she received a lump-sum Social Security distribution that represented SSDI benefits for three years—2015, 2016, and 2017. The SSDI award entitled Ms. Heston to Medicare coverage, which she received. But she also remained enrolled in her marketplace health insurance plan and Treasury continued to pay a portion of Ms. Heston’s premium. Ms. Heston timely filed her 2017 return, and the commissioner issued a deficiency. The deficiency resulted because the commissioner included in Ms. Heston’s 2017 household income all of the lump-sum SSDI payment, which pushed Ms. Heston to about 300% of the federal poverty line (FPL). Premium tax credits are available to taxpayers with household income of up to 400% of the FPL, but the credits phase out as income approaches 400%. 

The tax court rejected Ms. Heston’s argument that because her household income was below 400% of the FPL for most of 2017, she should not be liable for any additional tax relating to the months before she received the lump-sum SSDI payment. As the court notes, Ms. Heston’s argument would require household income to be determined on a monthly, not yearly, basis. The court also observed that despite any 86(e) election, for purposes of determining a taxpayer’s eligibility for premium tax credits, disability payments must be included in the calculation of household income in the year in which they are received. Heston v. Comm’r, No. 24551-18S, 2021 WL 2000180 (T.C. 5/19/2021) (citing Johnson v. Comm’r, 152 TC 121 (2019) (case of first impression holding that 86(e) elections are disregarded for purposes of PTC calculations)).

• Ensuring that taxpayers get a “fair shake,” court sends CDP back due to SO’s abuse of discretion. Taxpayers Victor and Katherine Mason owed back taxes and did not have the funds to pay. Mr. Mason had retired; Mrs. Mason was about to retire and was wrestling with a gambling addiction. The couple had some equity in their home in Shoreview but were relying on that equity to fund their retirement. When an IRS revenue officer made a field call to the Masons’ home and suggested the IRS could seize their home, the couple quickly submitted an offer to compromise the debt. While the Centralized Office in Compromise (OIC) unit was reviewing the couple’s OIC, another part of the IRS began sending collection notices to the Masons. The Masons asked for a hearing with the IRS Appeals Office. The court explains, “What happened then is that the Centralized Unit didn’t consider the Masons’ offer, but returned it to them. IRS Appeals didn’t consider the merits of their offer either, but instead reviewed the decision by the Centralized Unit to return it.” Although taxpayers are entitled to have OICs reviewed on the merits, neither unit did so. Noting that “[w]e’ve had some similar cases, but never one quite like this,” the court held that IRS Appeals abused its discretion by reviewing OIC denial decision for abuse of discretion instead of reviewing the Masons’ offer on its merits. “We can’t guarantee that taxpayers… will have their offer accepted…but we can ensure that they get a fair shake and that the decisions made by Commissioner’s employees aren’t ‘grounded in an error of law.’” Mason v. Comm’r, T.C.M. (RIA) 2021-064 (T.C. 2021).

• Penalty improper: RAR can amount to “initial determination” that requires supervisory approval. The tax court held that the Form 4549, Income Tax Examination Changes, also known as a revenue agent report (RAR), when sent with a Letter 4121, Agreed Examination Report Transmittal, was the “initial determination” by an “individual” to impose a penalty for purposes of section 6751(b). Since supervisory approval must be obtained before a penalty can be assessed under section 6751(b), and the agent did not obtain a supervisor’s signature in this case, the taxpayers were entitled to partial summary judgment on this issue. Battat v. Comm’r, T.C.M. (RIA) 2021-057 (T.C. 2021) (citing Beland v. Comm’r, No. 30241-15, 2021 WL 777184 (T.C. 3/1/2021) for proposition that “[p]roviding the opportunity to consent to assessment of tax and penalty is a ‘consequential moment’ and “[a] signed, completed RAR sent with a Letter 4121 provides the requisite definiteness and formality to constitute an ‘initial determination’ for purposes of [the penalty]”). 

Morgan Holcomb
Mitchell Hamline School of Law
morgan.holcomb@mitchellhamline.edu 

Sheena Denny
Mitchell Hamline School of Law 
sheena.denny@mitchellhamline.edu

TORTS & INSURANCE

JUDICIAL LAW

• Insurance; products-completed operations & Miller-Shugart agreements. Plaintiff commenced suit against a contractor alleging it suffered damages as a result of faulty construction. Plaintiff’s claims included alleged damages to the contractor’s work, as well as damages to other materials and structures caused by the contractor’s work. The contractor tendered the claims to defendant insurer, who defended the case under a reservation of rights but declined to indemnify, alleging a “your work” exclusion barred coverage. As a result, plaintiff and the contractor entered into a Miller-Shugart agreement. The Miller-Shugart agreement did not purport to allocate damages between damages to the contractor’s work and damages to the surrounding materials and structure. The district court found defendant’s insurance policy provided coverage for the claims and found the Miller-Shugart agreement enforceable. The court of appeals reversed, holding some damages—those to the contractor’s work—were excluded. Because the Miller-Shugart agreement did not allocate damages, the court of appeals held it was unreasonable and unenforceable.

The Minnesota Supreme Court affirmed in part, reversed in part, and remanded for further proceedings. The Court initially held “that the plain language of [the “your work” exclusion] bars coverage for the claimed property damage to [the contractor’s] own work, notwithstanding the products-completed operations hazard.” As a result, the Court found that the Miller-Shugart agreement encompassed both covered and uncovered claims. However, the Court went on to hold, at least in the context of a case involving a single defendant, “that the failure to allocate between covered and uncovered claims does not make the Miller-Shugart settlement agreement per se unreasonable.” 

The Court went on to set forth the test to be applied on remand: “We hold that determining the reasonableness of an unallocated Miller-Shugart settlement agreement involves a two-step inquiry. The district court first considers the overall reasonableness of the settlement. If the settlement is reasonable, the district court then considers how a reasonable person in the position of the insured would have valued and allocated the covered and uncovered claims at the time of the settlement.” With respect to the first step of the inquiry, the “relevant evidence regarding reasonableness includes ‘the customary evidence on liability and damages,’ as well as the risks of going to trial, ‘the likelihood of favorable or unfavorable rulings on legal defenses and evidentiary issues if the tort action had been tried,’ expert legal opinions, and ‘other factors of forensic significance.’” Evidence relevant to the second step of the inquiry may include: “(1) information that was available to the parties at the time of the settlement regarding the underlying facts, (2) materials produced in discovery and any court rulings in the underlying litigation, (3) evidence of how the parties and their attorneys evaluated the claims at the time of the settlement, and (4) expert testimony about the value of the settled claims.” Finally, the Court noted that “the district court typically will consider the reasonableness and allocation issues at the same time” and that the judgment creditor will bear the burden of proof on reasonableness and allocation. King’s Cove Marina, LLC v. Lambert Commercial Constr. LLC, A19-0078 (Minn. 4/14/2021). https://mn.gov/law-library-stat/archive/supct/2021/OPA190078-041421.pdf

Jeff Mulder
Bassford Remele
jmulder@bassford.com