Administrative Law
JUDICIAL LAW
• Supreme Court overturns MPCA grant of water pollution permit. A unanimous Minnesota Supreme Court found the MPCA’s decision to issue a water pollution permit for PolyMet’s proposed NorthMet mine to be arbitrary and capricious based on “danger signals” in the agency’s handling of EPA comments on the project. In reaching this result, the Court provided guidance on the Minnesota Administrative Procedure Act’s section 14.68 process for investigating “alleged irregularities in [agency] procedure” and on the “arbitrary and capricious” standard for challenging agency action in section 14.69(f).
The dispute concerned a series of conversations between MPCA and EPA officials about PolyMet’s draft permit. In a special fact-finding process requested under section 14.68 by environmental groups and the Fond du Lac Band of Chippewa, a district court determined that MPCA officials had asked EPA officials to withhold their written comments on the draft permit until after the close of the public comment period. The district court found that “the MPCA’s primary motivation was its belief that there would be less negative press about the NorthMet Project if EPA comments were delayed until after public comments and verbally expressed EPA concerns were incorporated into the draft permit.” Additionally, the district court found that MPCA failed to preserve notes and emails relating to its arrangements with EPA. And although EPA officials verbally raised concerns with MPCA about the draft permit, EPA ultimately never submitted any written comments, either before or after the public comment period.
Based on these findings, the environmental groups and Band challenged the permit decision as “made upon unlawful procedure” under section 14.69(c) and as “arbitrary and capricious” under section 14.69(f). But the district court largely rejected these challenges on the grounds that that although MPCA’s actions may have been “irregular,” they did not rise to the level of “unlawful.” The district court stated that there “is no statute, rule, regulation, or other formally adopted policy or procedure that prohibited MPCA from asking EPA to delay its comments.” The court of appeals affirmed, holding that even if there had been unlawful process, the challengers had not shown that MPCA’s actions had caused them “actual prejudice” under section 14.69, which empowers courts to “reverse or modify the decision if the substantial rights of the petitioners may have been prejudiced” because of unlawful, unsupported, or arbitrary and capricious agency action.
The Supreme Court reversed, describing the approach of the lower courts as “too constrained.” The Court explained that the phrase “arbitrary and capricious” functions as a “catchall, picking up administrative misconduct not covered by the other more specific paragraphs” for judicial review under the Minnesota Administrative Procedure Act. Thus, even if a procedural irregularity uncovered under section 14.68 doesn’t rise to the level of being unlawful under section 14.69(c), it may nevertheless constitute what the court described as a “danger signal” that the agency has acted arbitrarily and capriciously under section 14.69(f). The Court emphasized that “agency’s procedures are at the heart of the Minnesota Administrative Procedure Act,” which “focuses on ‘procedural rights with the expectation that better substantive results will be achieved in the everyday conduct of state government by improving the process by which those results are attained.’ Minn. Stat. §14.001.”
Applying this reasoning, the Supreme Court stated that the “motivation of the MPCA—to avoid public awareness and scrutiny of the EPA’s concerns because of the intense public interest in the NorthMet project—is contrary to the express ‘purposes of the Administrative Procedure Act’ to increase transparency and ‘public access to governmental information.’ Minn. Stat. §14.001(4).” The Court concluded that “the MPCA’s request that the EPA refrain from providing written comments on the draft permit during the public comment period is an irregularity in procedure that constitutes a danger signal of arbitrary and capricious decision-making.”
The Court also rejected the court of appeals’ conclusion that persons challenging agency action must demonstrate actual prejudice to their substantial rights. The Court emphasized that the statute authorizes courts to reverse agency action where the challenger’s substantial rights “may have been prejudiced” and concluded that challengers “need not show actual prejudice.” (Emphasis in Court’s opinion.) The Supreme Court observed that the “court of appeals recitation of the prejudice requirement of section 14.69 placed a higher, and therefore improper, burden on appellants.” The Court concluded that based on the circumstances, there was ample basis to conclude that the challengers’ interests may have been prejudiced by MPCA’s conduct because EPA’s concerns were not adequately reflected in the administrative record. The Court remanded the matter to MPCA to receive EPA’s comments into the record. In re Denial of Contested Case Hearing Requests and Issuance of NPDES Permit for the Proposed NorthMet Project, No. A19-0112 (Minn. 8/2/2023).
Mehmet Konar Steenberg
Mitchell Hamline School of Law
mehmet.konarsteenber@mitchellhamline.edu
Criminal Law
JUDICIAL LAW
• Probation revocation: The need for confinement outweighs policies favoring probation when a defendant repeatedly violates probation by having contact with a minor after a criminal sexual conduct conviction. Appellant pleaded guilty to first-degree criminal sexual conduct in 2018. He was sentenced to a stayed sentence of 144 months in prison, with a 30-year probationary term. Conditions of his probation included completing sex offender treatment, no unsupervised contact with minor females, and no use of sexually explicit materials. He violated all these conditions, including multiple violations of the no-unsupervised-contact condition, so the district court revoked his probation and executed his sentence.
Appellant argues the district court did not make sufficient factual findings to support the revocation, but the court of appeals disagrees. The district court designated the specific conditions that were violated, found the violations intentional and inexcusable, and found the need for confinement outweighed the policies favoring probation (“Austin factors”). State v. Austin, 295 N.W.2d 246, 250 (Minn. 1980). As to the third Austin factor, the court specifically found that confinement was necessary to protect the public from further criminal activity by appellant (State v. Motland, 695 N.W.2d 602, 607 (Minn. 2005)), pointing to specific evidence presented regarding appellant’s behavior and the risks of such behavior. State v. Smith, A22-1715, 2023 WL 441161040 (Minn. Ct. App. 7/10/2023).
• Postconviction: Statute of limitations for petition does not restart when a stayed sentence is executed. After his conviction in June 2019 for felony domestic assault, appellant’s 15-month sentence was stayed for five years. In August 2021, appellant’s probation was revoked, and his sentence was executed. In July 2022, appellant filed a postconviction petition, arguing prosecutorial misconduct deprived him of a fair trial. The district court denied appellant’s petition, finding it time-barred.
Postconviction petitions must be filed within two years of the entry of judgment of conviction or sentence, if no direct appeal is filed, or an appellate court’s disposition of the petitioner’s direct appeal. Minn. Stat. §590.01, subd. 4(a). Appellant argues the two-year period began in his case when the district court executed his sentence in August 2021, because the execution of his sentence was a modification of his sentence.
The court of appeals disagrees. The district court executed the sentence it had previously imposed per the requirements of Minn. Stat. §609.14, subd. 3(2), which governs revocation of a stay of execution. Appellant’s sentence remains unchanged from when it was imposed in 2019. As appellant did not file a direct appeal, the postconviction statute of limitations expired two years after he was sentenced in June 2019, and his July 2022 petition was untimely. Brouillette v. State, A23-0020, 2023 WL 4411614 (Minn. Ct. App. 7/10/2023).
• 4th Amendment: A vehicle impounded following a lawful search that revealed controlled substances may be searched again while in law enforcement’s custody and control. Police had stopped appellant’s vehicle for brake light and license plate violations when they noticed a firearm in the vehicle. As neither appellant nor his passenger had permits to carry, the vehicle was searched for weapons, turning up heroin and methamphetamine. Appellant and his passenger were arrested, and the vehicle was impounded. After the passenger posted bail, she asked to retrieve items from the vehicle. When brought to the vehicle, she acted suspiciously and tried to conceal something from the vehicle in her jacket. Police found a black plastic lockbox in the jacket, which contained a variety of controlled substances. Appellant was thereafter charged with first-degree and fifth-degree controlled substance offenses. His motion to suppress evidence in the lockbox was denied. After a stipulated facts trial, appellant was convicted of the first-degree offenses.
Appellant does not argue the initial search of the vehicle was unlawful, and the court of appeals notes that the automobile exception to the warrant requirement authorized police to conduct the search for concealed firearms or controlled substances. Appellant argues, however, that the lockbox was removed from the vehicle before any probable cause arose to believe it contained contraband.
The court explains that probable cause to search a vehicle does not expire when it is impounded. As police had probable cause to search the vehicle for weapons and controlled substances when it was first impounded, the vehicle remained in the custody and control of police, and no other circumstances dispelled probable cause to believe additional contraband could be found in the vehicle, police were authorized by the automobile exception to search appellant’s vehicle at the time the passenger arrived at the impound lot to remove property from the vehicle.
The court also rejects appellant’s argument that the passenger’s removal of the lockbox from the vehicle rendered it unsearchable. Under the automobile exception, police are permitted to search any container that was inside a vehicle at the time there was probable cause to search it. Police were authorized to search the lockbox even after it was removed from the vehicle because they had probable cause to search the vehicle when the lockbox was removed. State v. Schell, A22-1115, 2023 WL 4692914 (Minn. Ct. App. 7/24/2023).
• Public trial: Excluding public from a courtroom due to covid-19 implicates the right to a public trial. Appellant was charged with first-degree aggravated robbery and all spectators were excluded from the courtroom during his trial, pursuant to a covid-19 trial plan. The trial was broadcast via a one-way video feed in a nearby courtroom. Appellant was convicted and argued for a new trial, claiming his right to a public trial was violated. The court of appeals found the trial was partially closed, but ultimately concluded appellant’s public trial right was not violated.
The Supreme Court first determines that the district court’s complete exclusion of the public from the trial courtroom was a “true closure subject to constitutional scrutiny.” Not a single member of the public was allowed into the trial courtroom. Although a video feed was provided, “[t]he constitutional values of having trial participants understand they are being observed and providing the support of family to the defendant… are undermined when the public is only allowed to view the proceedings from a secondary location via a one-way video feed.”
The Court goes on to recognize that protecting trial participants and the public during the covid-19 pandemic was an overriding interest that justified some restrictions on attendance at the trial. However, even if an overriding interest is present, the district court must make specific detailed findings showing how the restrictions are no broader than necessary to protect the overriding interest and that the district court considered reasonable alternatives to closure.
Here, the district court’s decision to exclude all spectators was supported by adequate findings regarding the size of the courtroom and social distancing guidelines. However, the district court did not make adequate findings for the Supreme Court to assess whether the district court considered reasonable alternatives to closure or made any findings explaining why a one-way video feed to another courtroom made the closure no broader than necessary. The case is remanded to the district court to make a record on the reasonable alternatives to closure it considered and on whether the trial closure was broader than necessary. State v. Bell, A20-1638, 2023 WL 4750955 (Minn. 7/26/2023).
• Evidence: Victim’s statements did not fall within excited utterance exception to hearsay rule. Respondent was charged with misdemeanor domestic assault. The state moved to introduce a body-worn camera recording showing the victim’s statement regarding respondent’s physical abuse after the victim refused to respond to the state’s subpoena. The district court granted respondent’s motion to suppress the recording, concluding the victim’s statements did not fall within the excited utterance hearsay exception and that her statements were testimonial under the confrontation clause. The court of appeals affirmed, finding that admission of the recording would violate respondent’s right to confrontation.
The Supreme Court first concludes that the district court properly found the excited utterance hearsay exception inapplicable. Courts are to consider a number of factors, including the length of time between the utterance and the event at issue, the nature of the event, the declarant’s physical condition, and any possible motive to falsify. The Court notes that, while not required, a physical manifestation of stress is often a key indicator of “an aura of excitement.” The district court found here that the victim had an unexcited demeanor, enough time had passed for the victim to suggest that respondent may have fallen asleep, and nearly all the victim’s recorded statement was made in response to questions by the police. Under these findings, the Court decides the district court properly excluded the body-worn camera recording of the victim’s statement as inadmissible hearsay. The Court does not address respondent’s claim of a confrontation clause violation. State v. Tapper, A22-0161, 2023 WL 4751211 (Minn. 7/26/2023).
Samantha Foertsch
Bruno Law PLLC
samantha@brunolaw.com
Stephen Foertsch
Bruno Law PLLC
stephen@brunolaw.com
Employment & Labor Law
JUDICIAL LAW
• Fair Labor Standards Act; nominal attorney’s fees. An award of nominal attorney’s fees to a prevailing party in a claim under the Fair Labor Standards Act for nonpayment of wages was upheld by the 8th Circuit, based upon the “egregious” conduct by the attorney for the class action claimants. Affirming a lower court ruling, the 8th Circuit held that the attorney’s fees should be substantially reduced from the lodestar amount because of the wrongful behavior of the attorney for the class. Vines v. Welspun Pipes, Inc., WL 2023 4685888 (8th Cir. 7/21/2023) (unpublished) (per curiam).
• Misconduct in wage case; dismissal upheld. Litigation misconduct also was central to dismissal of a claim for unpaid wages, based upon the counsel for claimant repeatedly filing premature, meritless motions; making ex parte calls to the district court in a discovery dispute; asserting improper objections during depositions; and instructing a witness not to attend a deposition. That behavior warranted the trial court to dismiss the lawsuit as a sanction for “bad faith” litigation conduct, which the 8th Circuit affirmed. Bachman v. Bachman, WL 2023 4286722 (8th Cir. 6/30/2023) (unpublished) (per curiam).
• Race discrimination claim, termination upheld. A delivery driver who was fired after striking a homeowner’s mailbox with his truck, which he denied, lost his claim of race discrimination after he was terminated due to the incident. The 8th Circuit upheld summary judgment on grounds that the termination was due to the driver’s failure to report the accident and being dishonest about it and the claimant did not show that there was any pretext in the decision-making process. Cross v. United Parcel Service, Inc., WL 2023 3858611(8th Cir. 6/7/2023) (unpublished) (per curiam).
• ERISA benefits; claim denied. An employee who was denied health insurance benefits under his employer’s ERISA plan after he had surgical treatment in connection with weight reduction lost his claim on summary judgment. The 8th Circuit upheld the dismissal on grounds that the ERISA plan expressly excluded medical services in connection with weight reduction, and no federal or state law ordered coverage for that type of treatment. Schafer v. Zimmerman Transfer, Inc., 70 F.4th 471 (8th Cir. 6/7/2023).
• Social Security denied; claimant able to work. A claim by an employee who sought Social Security disability (SSI) benefits due to chronic fatigue was denied by an ALJ with the Social Security Administration. Upholding the ALJ’s ruling, the 8th Circuit held that the claimant’s medical report did not establish any disability to work and she could still perform work that included mostly computer-related tasks. Bentley v. Kijakazi, 2023 3862562 (8th Cir. 6/7/2023) (unpublished).
• Federal vaccination requirement; dismissed for mootness. Revocation of an executive order signed by President Biden to require federal contractors to have their employees vaccinated for covid made a lawsuit over that policy moot. The 8th Circuit dismissed an appeal by the government of an adverse lower court decision on grounds that, due to revocation, the executive order could no longer be enforced, which made the case moot and warranted dismissal of the appeal. State of Missouri v. Biden, 2023 WL 3862561(8th Cir. 6/7/2023) (unpublished) (per curiam).
• Paid time off (PTO); no right to accrued amount. An executive director of a nonprofit organization who resigned and then sought his accumulated paid time off (PTO) lost his case. Affirming a decision of the Ramsey County District Court, the Minnesota Court of Appeals held that the claims consisting of breach of contract and violation of Minn. Stat. §181.14, the Payment of Wages Act (PWA), were not actionable because the claimant did not have a contractual right to a payout of accrued PTO and the statute does not provide any “independent” right to such a payment. Hightower v. Community Action Partnership of Ramsey & Washington Counties, WL 2023 4199084 (Minn. Ct. App. 6/26/2023) (unpublished).
• Unemployment compensation; translation claim fails. An employee who worked at stocking shelves for Walmart lost his claim for unemployment compensation benefits after he was discharged. The court of appeals affirmed a decision of an unemployment compensation judge with the Department of Employment & Economic Development (DEED) on grounds that the employee committee disqualifying “misconduct.” It further rejected the contention that the claimant was not provided with adequate translation services during the hearing, an issue that was raised for the first time on appeal. Guffe v. Wal-Mart Associates, Inc., WL 2023 4167863 (Minn. Ct. App. 6/26/2023) (unpublished).
• Former police officer prevails. A former police officer successfully challenged the decision of an administrative law judge (ALJ) who had denied his request that the claimant city must provide continuing health insurance coverage to him because he suffered a duty-related disability, as required under Minn. Stat. §352B.10. Reversing a denial by an ALJ, the appellate court held that the ALJ improperly imposed a burden of proof on the employee to establish eligibility, which was arbitrary and capricious. City of Waite Park v. Weeks, WL 2023 393565 (Minn. Ct. App. 6/12/2023) (unpublished).
• Unemployment compensation; covid vaccination denials. The Minnesota Court of Appeals recently addressed a quartet of covid-related unemployment claims.
An employee who refused to comply with the employer’s covid vaccine requirement was denied unemployment compensation benefits because her refusal was based on “purely secular reasons” regarding the efficacy and safety of the vaccine, rather than a “sincerely held religious belief.” Reiterating the standard for the determination of these type of cases, the appellate court, in a published decision, ruled that vaccination-refusing employees cannot successfully assert a claim of violation of their exercise of religious freedom rights under the First Amendment unless they show that their resistance is based upon “sincerely held” religious beliefs, rather than questioning the validity of the testing or the vaccination process. Goede v. Astra Zeneca Pharms., LP, 992 N.W.2d 700 (Minn. Ct. App. 6/7/2023).
But the appellate court reversed a pair of denials of benefits by an unemployment law judge (ULJ) with the Department of Employment & Economic Development (DEED). Benefits were proper because the employees had “sincerely held religious beliefs” that supported their position, and there was insufficient evidence in the record to support the ULJ’s contrary determinations. Benish v. Berkley Risk Administrators Co., LLC, 2023, WL 3938996 (Minn. Ct. App. 6/12/2023) (unpublished) and Millington v. Fed. Reserve Bank of Minneapolis, 2023 WL 3939525 (Minn. Ct. App. 6/12/2023) (unpublished).
An employee who claimed that it was too burdensome for him to submit to covid testing and was not able to establish that his refusal to participate in testing was based on his sincere religious belief lost his claim. Daniel v. Honeywell International, Inc., 2023 WL 3941697 (Minn. Ct. App. 6/12/2023) (unpublished).
• Unemployment compensation; availability for employment. An employee who suffered a significant job-related injury during a relatively short time working won her claim for unemployment benefits. Reversing a decision of an ALJ, the appellate court held that the record did not support the ALJ’s determination that the employee had not made herself “available” for suitable employment, as statutorily required under Minn. Stat. §268.085, subd. 1(4) to obtain benefits. In re Merrell, WL 2023 3943608 (Minn. Ct. App. 6/2/2023) (unpublished).
Marshall H. Tanick
Meyer, Njus & Tanick
mtanick@meyernjus.com
Environmental Law
JUDICIAL LAW
• Minnesota Supreme Court rejects PolyMet’s NPDES permit on procedural and groundwater issues. On 8/2/2023, the Minnesota Supreme Court affirmed in part, reversed in part, and remanded the National Pollutant Discharge Elimination System/State Disposal System (NPDES/SDS) permit issued by the Minnesota Pollution Control Agency (MPCA) for a new copper mining project in St Louis County, MN, proposed by New Range Copper Nickel (formerly PolyMet Mining).
In January 2019, several environmental groups and the Fond du Lac Band of Lake Superior Chippewa challenged the permit to the Minnesota Court of Appeals. Among other things, appellants alleged that MPCA had followed irregular and unlawful procedures by pursuing and entering into an agreement by which the U.S. Environmental Protection Agency (EPA) would not submit written comments on the permit during the public-comment period but would read the proposed comments to MPCA staff in a conference call. In May 2019, the court of appeals transferred the case to the district court to examine the alleged unlawful procedures. The district court determined that while MPCA had followed several procedural irregularities, the agency’s conduct, including MPCA’s efforts to persuade the EPA not to submit written comments during the public comment period, was not procedurally improper or otherwise unlawful.
In reviewing the district court’s decision, the court of appeals determined it did not need to determine whether the challenged procedures were unlawful because appellants had not demonstrated that the procedures prejudiced their substantial rights. For example, the court noted that MPCA’s actions did not prevent appellants from submitting comments on the permit, and even if EPA had submitted comments during the public comment period, they likely would have come toward the end of the comment period such that appellants could not have considered EPA’s comments in drafting their own comments. Plus, EPA did communicate its comments to MPCA. The court of appeals also evaluated appellants’ other arguments challenging the permit, including whether the permit should have included water-quality-based effluent limits (WQBELs) in addition to technology-based effluent limits, and whether the permit properly regulated seepage discharges to groundwater from the proposed project’s stockpile and tailings basin.
The Minnesota Supreme Court granted appellants’ petition for review to address three primary issues: (1) whether the permit must be reversed or remanded because of the procedural irregularities described above; (2) whether the permit should have included water quality-based effluent limitations (WQBELs); and (3) whether the permit complies with a Minnesota rule addressing wastewater discharges to groundwater, Minn. R. 7060.0600 (2021).
On the issue of procedural irregularities, the Court held that even if an irregular procedure of an agency does not rise to the level of an unlawful procedure under the Minnesota Administrative Procedure Act (MAPA, Minn. Stat. ch. 14), an irregularity in procedure nonetheless may constitute a “danger signal” that may be considered in determining whether an agency decision is “arbitrary or capricious.” Here, the Court found several “danger signals” in MPCA’s interaction with EPA during the permitting process, including: (1) arranging to delay EPA comments on the draft permit; (2) failing to document in the administrative record either its request or EPA’s concerns about the draft permit; (3) not explaining if or how the MPCA resolved EPA’s concerns; and (4) general deficiencies in the administrative record regarding communications between the MPCA and the EPA. These danger signals, the Court held, rendered the MPCA’s decision on the permit arbitrary and capricious.
In determining whether MPCA’s arbitrary and capricious permit decision required reversing or modifying the decision, the Court emphasized that the relevant inquiry is whether appellants’ substantial rights “may have been prejudiced.” Minn. Stat. §14.69 (emphasis added). Here, the Court held that appellants had met the standard. For example, the Court concluded that the lack of documentation in the administrative record regarding EPA’s concerns with the permit—particularly on issues of greatest concern to appellants, such as the need for WQBELs—“may” have limited appellants’ right to engage in meaningful review of the proposed permit. Accordingly, the Court remanded to MPCA for the limited purpose of giving EPA an opportunity to provide written comments on the final permit and for MPCA to respond to any comments submitted by EPA. The Court also directed MPCA to amend the permit, if warranted by EPA’s comments, to add WQBELs and ensure compliance with state and tribal water quality standards.
Regarding compliance with Minnesota groundwater requirements, at issue was an MPCA rule prohibiting, in relevant part, the discharge of industrial waste to the “unsaturated zone” in a manner that may “pollute the underground waters.” The rules define “unsaturated zone” as “the zone between the land surface and the water table.” Minn. R. 7060.0300, subp. 7. The Court evaluated the application of this prohibition to the proposed category 1 stockpile and tailings basin at New Range’s proposed mining operation. Both the stockpile and the tailings basin would allow pollutants from the mining waste materials to infiltrate to the underlying groundwater; however, in both cases, New Range proposed to construct cut-off walls from surface to the bedrock that would contain the polluted groundwater and minimize the groundwater escaping outside of the containment system. The polluted groundwater in the containment system would then be collected and sent to a wastewater treatment system. No party disputed that the groundwater in the containment systems underlying the stockpile and tailings basin would be polluted; rather, the core issue was whether the groundwater in the containment systems was part of “the underground waters” that may not be polluted under Rule 7060.0600, subpart 2.
The Supreme Court held that it was. Looking to the broad definition of “underground water,” Minn. R. 7060.0300, subp. 6, the Court held that the term’s unambiguous language contemplates no exclusions. The Court thus held that the prohibition on discharges to the unsaturated zone in a manner that may pollute the underground waters “applies with equal force to groundwater within the planned containment systems” at the proposed mining project, “as it does to groundwater outside the planned containment system.” And because the language was unambiguous, the Court determined it did not need to defer to MPCA’s contrary interpretation. The Court noted that its holding does not necessarily preclude MPCA from issuing a permit for the project, as the MPCA could consider granting a variance, which the rules allow in “exceptional circumstances.” Minn. R. 7060.0900. The Court reversed the court of appeals on the groundwater issue and remanded the permit to MPCA for consideration of whether a variance is appropriate for the project. The Court’s holding raises the possibility that other infiltration-based wastewater management facilities could likewise require a variance. In re Contested Case Hearing Requests & Issuance of Nat’l Pollutant Discharge Elimination Sys., ___ N.W.2d ___ (2023).
• U.S. Court of Appeals upholds EPA’s aircraft GHG emissions rules. In a recent ruling, the United States Court of Appeals for the D.C. Circuit upheld the 2021 EPA standards regulating greenhouse gas (GHG) emissions from domestic aircraft. The EPA’s standards aligned with those adopted by the International Civil Aviation Organization (ICAO). Petitioners—made up of 12 states, the District of Columbia, and three environmental groups—challenged the EPA’s regulations, claiming they should have been more stringent than those promulgated by ICAO in an effort to combat climate change.
Petitioners first asserted that the EPA failed to apply factors required by Section 231 of the Clean Air Act. The court rejected this argument, citing to the language of Section 231, which provides that “[t]he Administrator shall, from time to time, issue proposed emission standards applicable to the emission of any air pollutant from any class or classes of aircraft engines which in his judgment causes, or contributes to, air pollution which may reasonably be anticipated to endanger public health or welfare.” The court, examining the plain language of Section 231, explained that the statute is “relatively simple,” and does not mandate consideration of certain factors (such as a “latest-technology” approach), nor contemplation of substantive content of aircraft emissions standards. The EPA relied upon an earlier 2016 endangerment finding related to emissions of GHG from aircraft over a certain size. The EPA concluded that “elevated concentrations of these substances were reasonably anticipated to endanger the public health and welfare by contributing to climate change.” Having made the endangerment finding, the EPA was within its authority under Section 231 to “issue proposed emissions standards” related to GHG emissions from aircraft.
Petitioners next contended that the EPA acted arbitrarily and capriciously in passing the aircraft emissions standards. They asserted three prongs to this argument: (1) by aligning domestic aircraft standards with ICAO, the EPA did not account for harms of climate change; (2) the EPA failed to consider alternatives that would reduce GHG emissions; and (3) the EPA did not consider effects of the emissions standards on minority and low-income populations as required by executive orders. The court rejected all three prongs. First, the court found it beneficial to align domestic emissions standards with global ICAO standards, citing to a history of consistent harmonization between the EPA and ICAO. Next, the court held that the EPA reasonably concluded that implementing alternative standards like those proposed by petitioners would result in delay and undue hardship to American aircraft manufacturers, which the court recognized already “navigate lengthy timelines for the certification and sale of new aircraft.” Finally, the court rejected the third claim, explaining that petitioners’ claim was foreclosed by the executive orders, and not subject to judicial review.
The court concluded that the EPA has substantial discretion to regulate GHG emissions from aircraft under Section 231 and acted properly in aligning domestic standards with those of ICAO. California v. Environmental Protection Agency, 72 F.4th 308 (D.D.C. 2023).
ADMINISTRATIVE ACTION
• EPA rescinds Trump-era rule on evaluation of benefits and costs in Clean Air Act rulemaking. On 7/13/2023, the EPA published a final rule rescinding the agency’s 2020 Trump-era rule titled “Increasing Consistency in Considering Benefits and Costs in the Clean Air Act Rulemaking Process” (the benefit-cost rule).
In many instances, the EPA is required to prepare an economic impact assessment (EIA) prior to promulgating or revising a standard or regulation under the Clean Air Act (CAA) (42 U.S.C. §7401 et seq.). See 42 U.S.C. §7617(a) (requiring consideration of, e.g., the costs of compliance, the potential inflationary or recessionary effects of the standard or regulation, the effects on competition with respect to small businesses, and the effects on consumer costs and energy use). In addition, EPA is subject to various executive orders that require the estimation of costs and benefits any time an agency develops “economically significant” regulations. For example, in 1993, President Clinton issued Executive Order 12866, which mandates that agencies “assess both the costs and the benefits of the intended regulation and, recognizing that some costs and benefits are difficult to quantify, propose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs,” and “base its decisions on the best reasonably obtainable scientific, technical, economic, and other information concerning the need for, and consequences of, the intended regulation.”
Executive Order 12866 defines an “economically significant” regulation as any rule that may “have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities.” In addition the Office of Management and Budget’s (OMB’s) Circular A–4 provides guidance to federal agencies on the development of regulatory analysis as required under Executive Order 12866 and a variety of related authorities, and the EPA’s Guidelines for Preparing Economic Analyses complements Circular A-4 by providing guidance on analyzing the benefits, costs, and economic impacts of regulations and policies, including assessing the distribution of costs and benefits among various segments of the population.
On 12/23/2020, the EPA attempted to revise, update, and codify these practices in the final benefit-cost rule, which established procedural requirements governing the preparation, development, presentation, and consideration of BCAs, including risk assessments used in the BCA, for significant rulemakings conducted under the CAA. The rule defined BCA as “an evaluation of both the benefits and costs to society as a result of a policy and the difference between the two.” 85 Fed. Reg. 84130 (2020).
The benefit-cost rule consisted of four elements. First, it required EPA to prepare a BCA for all significant proposed and final regulations under the CAA. Second, the rule required EPA to develop the BCA using the best available scientific information and in accordance with best practices from the economic, engineering, physical, and biological sciences. The rule codified best practices for the preparation, development, presentation, and consideration of BCAs, and required that risk assessments used to support BCAs follow best methodological practices for risk characterization and risk assessment. Third, the rule imposed additional procedural requirements to increase transparency in the presentation and consideration of the BCA results. Specifically, the rule required the preamble of significant proposed and final CAA regulations to include a summary presentation of the overall BCA results for the rule, including total benefits, costs, and net benefits. Fourth, the rule required the EPA to consider the BCA in promulgating regulations, except where prohibited.
After publication, several parties filed petitions for review of the benefit-cost rule in the U.S. Court of Appeals for the District of Columbia. These consolidated cases are currently in abeyance.
On 1/20/2021, President Biden signed Executive Order 13990, directing the EPA to review all regulations and policies undertaken by the previous administration and rescind or revise any that do not protect public health and the environment. The EPA conducted a comprehensive review of the benefit-cost rule and concluded that regulations promulgated in the rule were inadvisable, not needed, and untethered to the CAA. The EPA stated that, in some cases, the rule could have hindered the EPA’s compliance with the CAA and may not have even furthered the rule’s stated purposes of consistency and transparency.
On 5/13/2021, the EPA issued an interim final rule to rescind the benefit-cost rule as well as a press release stating that the rule “imposed procedural restrictions and requirements that would have limited EPA’s ability to use the best available science in developing Clean Air Act regulations, and would be inconsistent with economic best practices.”
In its final rule rescinding the benefit-cost rule, the EPA explained that it would rescind the rule for several reasons:
(1) First, it failed to articulate a rational basis justifying its promulgation. EPA explained the rule did not provide any recorded evidence that the guidance and administrative processes already in place presented problems that justified the mandate imposed by the rule, and there was no discussion of how the rule would have improved the agency’s ability to accomplish the CAA’s goals to protect and enhance air quality.
(2) Second, the rule’s expansion of BCA to all “significant” CAA rulemaking would require EPA to conduct resource-intensive BCAs without justifying why such expansion was necessary or appropriate.
(3) Third, best practices for conducting a high-quality BCA evolve over time and cannot be established using a set formula. The EPA explained that the codification of specific practices would have prevented situation-specific tailoring of the regulatory analysis to proposed policies. In addition, the rule contained a number of provisions that promoted particular types of data that could have conflicted with the use of best scientific practices or arbitrarily caused the agency to disregard important or high-quality data.
(4) Fourth, the rule required the EPA to present net-benefit calculations in regulatory preambles in a manner that would have been misleading and inconsistent with economic best practices. Specifically, the rule required a presentation of only the benefits “that pertain to the specific objective (or objectives, as the case may be) of the CAA provision or provisions under which the significant regulation is promulgated” (85 Fed. Reg. 84130 (2020)). The rule also required that if any benefits and costs accrue to non-U.S. populations, they must be reported separately to the extent possible. EPA also explained that the “purpose of a BCA is to assess the economic efficiency of policies, and in order to do so accurately, net benefits are calculated by subtracting total costs from total benefits, regardless of whether the benefits and costs arise from intended or unintended consequences and regardless of the particular recipients of the benefits or costs” (88 Fed. Reg. 44710 (2023)).
(5) Fifth, the rule did not reconcile its requirement that the agency consider the BCA in promulgating regulations with the substantive mandates of the CAA. The EPA explained that statute, not agency procedural rules, dictate what the agency may or may not consider in the context of exercising authority, and that the rule failed to align with the varied ways in which Congress either granted authority to or directed the EPA to consider benefits, costs, and other factors.
(6) Sixth, the rule failed to provide any support for its contention that the pre-existing process was deficient. The EPA explained that the agency’s pre-existing administrative process and procedures provide ample consistency and transparency, and that the rule’s new procedures were unwarranted.
In its final rule, the EPA asserted that the administrative processes already in place before the benefit-cost rule was promulgated provided ample consistency and transparency in the rulemaking process. “Increasing Consistency in Considering Benefits and Costs in the Clean Air Act Rulemaking Process,” 88 Fed. Reg. 44710 (2023). This final rule took effect on 8/14/2023.
Jeremy P. Greenhouse, Cody Bauer
Vanessa Johnson, and Molly Leisen
Fredrikson & Byron P.A.
Jake Beckstrom
Vermont Law School, 2015
Federal Practice
JUDICIAL LAW
• Final judgment rule; attempt to manufacture appellate jurisdiction rejected. An 8th Circuit panel appears to have retreated from previous decisions by the court that allowed litigants to manufacture appellate jurisdiction by dismissing certain claims without prejudice.
After Judge Ericksen dismissed all claims against one group of defendants, dismissed most (but not all) of the claims against another group of defendants, and denied a motion for the entry of a final judgment on the claims against the first group of defendants under Fed. R. Civ. P. 54(b), the remaining parties entered into an agreement for the conditional dismissal of the remaining claims, under which the plaintiffs’ claims against the second group would be “reinstated” if the 8th Circuit reversed the dismissal of the claims against the first group.
Noting that the 8th Circuit “repeatedly has expressed concerns about attempts to circumvent the final judgment rule,” the majority of the panel found that “the form of conditional dismissal presented here does not create a final decision.” Accordingly, the appeal was dismissed for lack of jurisdiction.
Judge Kelly dissented, asserting that previous 8th Circuit decisions allowed litigants to dismiss claims without prejudice in order to create appellate jurisdiction. In Re: Municipal Stormwater Pond Coor. Litig., ___ F.4th ___ (8th Cir. 2023).
• No personal jurisdiction; single sale of product. Affirming a district court’s dismissal of an action for lack of personal jurisdiction, the 8th Circuit held that a single sale of the subject product to the plaintiff was insufficient to establish personal jurisdiction over the corporate defendant, even where the defendant maintained a nationally available website. Kendall Hunt Publ’g Co. v. Learning Tree Publ’g Corp., ___ F.4th ___ (8th Cir. 2023).
n Waiver; failure to raise argument before district court or in previous appeal. Where the appellants cited a case only in passing in the district court and on appeal, the 8th Circuit found that the appellants had waived an argument that was not “meaningfully” raised, noting that citing a case “without developing an argument is not enough to preserve an issue for appeal.” Karsjens v. Harpstead, ___ F.4th ___ (8th Cir. 2024).
• Motion to disqualify judge and magistrate judge, and motion to reassign motion to disqualify denied. Judge Ericksen denied a motion to disqualify both her and Magistrate Judge Schultz, and also denied a motion to reassign the motion to disqualify in a long-running product liability MDL, finding that the motion was “meritless,” and also finding that the motion was untimely when it was not filed until “at least 16 months” after plaintiffs first indicated that they intended to move for recusal. In re: Bair Hugger Forced Air Warming Devices Prods. Liab. Litig., 15-md-2666 (JNE/DTS) (D. Minn. 7/10/2023).
• Fed. R. Civ. P. 62(b); defendant ordered to post bond in excess of $1 billion. Where the defendant sought a stay of a judgment pending appeal and asked that the court “exercise its discretion” to waive the required bond, Judge Wright denied the stay request and approved the defendant’s alternative request that it be allowed to post a bond in the amount of $1,158,806,436.37. Kelley v. BMO Harris Bank N.A., 2023 WL 4740927 (D. Minn. 7/25/2023).
• Fed. R. Evid. 702; summary judgment granted; expert witness excluded. Granting the defendant’s motion for summary judgment in a Title IX/ADA action, Judge Tostrud excluded the testimony of one of the plaintiff’s experts in its entirety, finding, among other things, that her opinions regarding the defendant’s interviewers’ failure to use “best practices” were “not reasonably tethered” to relevant legal standards, and that her opinions regarding interviewers’ alleged bias were not “based on expertise.” Olson v. Macalester College, ___ F. Supp. 3d ___ (D. Minn. 2023).
• Motions to quash subpoenas; burden. Granting in part and denying in part a series of motions to quash subpoenas for personal cell phones in the In Re Cattle and Beef Antitrust Litig. brought by former employees of a Cargill affiliate, Magistrate Judge Docherty found that the subpoena recipients’ privacy interests would be “adequately protected by the existing protective order,” and that their “only real burden” would be that they would be without their cell phones for no more than two days. In Re Rule 45 Subpoena to Lucas, 2023 WL 4561320 (D. Minn. 7/17/2023).
• Fed. R. Civ. P. 26(a)(2)(B) and 37(b)(1); untimely disclosures; sanctions. Where plaintiff’s experts failed to make the timely disclosures required by Fed. R. Civ. P. 26(a)(2)(B) and defendants moved to exclude the experts, Judge Davis declined defendants’ request to exclude the experts, and instead held that both experts could be deposed by the defendants, with the plaintiffs required to pay the “reasonable costs and attorney’s fees” associated with both depositions, but denied the defendants’ request for the costs and fees associated with their motion to exclude the experts. Evans ex rel. Evans v. Krook, ___ F. Supp. 3d ___ (D. Minn. 2023), appeal filed (No. 23-2753, 8th Cir. 8/1/2023).
• Request for leave to amend denied; failure to comply with Local Rule 15.1(b). Granting the defendants’ motion to dismiss claims with prejudice in a securities fraud action, Chief Judge Schiltz denied plaintiffs’ request for leave to amend their complaint where they had “not identified any additional facts that they could allege,” and where they failed to submit the proposed amended complaint required under Local Rule 15.1(b). Steamfitters Local 449 Pension & Retirement Sec. Funds v. Sleep Number Corp., 2023 WL 4421688 (D. Minn. 7/10/2023).
• Forum selection clause; courts “in” or “of” a particular state. Dismissing an action on the basis of forum non conveniens, Judge Tostrud determined that a forum selection clause designating the “Courts of the State of New York” required litigation in the New York state courts, meaning that the action could not be transferred to a New York federal court. PersaudBramante Apts., L.L.C. v. Underwriters at Lloyd’s of London, 2023 WL 4473424 (D. Minn. 7/11/2023).
• Local Rule 5.6(d)(3); motion for further consideration of continued sealing; presumptive right of access. Judge Tunheim rejected a challenge to a decision by Magistrate Judge Docherty that had denied a motion for further consideration of continued sealing of a contract, where the magistrate judge found that most of the contract was not “sensitive,” that the confidentiality provision in the contract did not weigh in favor of sealing, and that the presumption of public access was strong. Cambria Co. v. Disney Worldwide Servs., Inc., 2003 WL 4545066 (D. Minn. 5/8/2003), aff’d, 2023 WL 4559436 (D. Minn. 7/17/2023).
• Doe pleadings; privacy interests. Magistrate Judge Foster granted the plaintiffs’ motion to proceed under pseudonyms on their claims arising out of the sex trafficking of a minor, finding that “all” of the relevant factors weighed in favor of allowing plaintiffs to proceed pseudonymously. Doe v. Lazzaro, 2023 WL 4545066 (D. Minn. 7/14/2023).
• Local rules amended. Amendments to Local Rules 83.5 and 83.7, relating to the requirement for local counsel and pro hac vice admissions, took effect on 8/1/2023. In a somewhat unusual move, Chief Judge Schiltz issued a letter the same day addressing and explaining the amendments.
Josh Jacobson
Law Office of Josh Jacobson
joshjacobsonlaw@gmail.com
Intellectual Property
JUDICIAL LAW
• Trade secret: Denial of preliminary injunction to enforce noncompete agreement. Judge Blackwell recently denied a motion for preliminary injunction that sought the enforcement of a noncompetition provision. Plaintiff Cookie Dough Bliss Franchising, LLC owns and licenses businesses that sell edible cookie dough products under the Cookie Dough Bliss trademark. In 2021, Cookie Dough entered into an agreement with defendants Feed Your Soul, granting them a non-exclusive license to operate a franchise using Cookie Dough’s products, recipe, resources, and trademark in Minnesota. The agreement also included a noncompetition provision that prohibited defendants from being involved in any competitive business within a 30-mile radius of the franchise location for two years after the franchise agreement terminated. Both parties allege that the opposing party materially breached the franchise agreement, leading to its termination.
Once the agreement was terminated, defendants began operating their own newly named cookie dough treat business in the same location using the same Facebook website. Cookie Dough filed suit alleging trade secret theft and simultaneously filed a motion for a temporary restraining order and preliminary injunction seeking to enforce the noncompetition provision of the franchise agreement. The four-factor test weighed against the issuance of a preliminary injunction. The first factor, threat of irreparable harm, was not present, as most of the harm Cookie Dough cited was speculative. For non-speculative harm, Cookie Dough’s own actions created culpability by creating customer confusion, and Cookie Dough was not licensed to sell franchises in Minnesota. The court found against Cookie Dough on the next factor, finding that Minnesota law disfavors noncompete agreements, and Cookie Dough has not provided enough facts to prove the provision serves a legitimate purpose. In evaluating the balance of harms, the court found against Cookie Dough, citing that the injunction would put defendants out of business and would end their family’s primary income. The final factor, the public interest, did not benefit either party as the public interest supports upholding contracts and unrestrained competition. The court, in finding three of four factors weighing against Cookie Dough, denied the motion for preliminary injunction. Cookie Dough Bliss Franchising, LLC v. Feed Your Soul Minn., LLC, No. 23-1552 (JWB/TNL), 2023 U.S. Dist. LEXIS 132808 (D. Minn. 8/1/2023).
• Copyright: Lack of personal jurisdiction in view of single sale into district. The 8th Circuit recently affirmed a dismissal for lack of personal jurisdiction. Plaintiff Kendall Hunt Publishing is a textbook publisher located in Iowa. Hunt employed the defendants remotely from their homes in California, and the parties had regular contact by email and phone. From 2014-2016 the defendants successfully negotiated a publishing deal with a California teacher for an online ethics textbook—negotiating and editing solely in California. In 2019, the defendants incorporated their own business, Learning Tree Publishing Corporation, which sells online textbooks, including an ethics textbook by the aforementioned California teacher. Hunt filed suit against Learning Tree alleging claims of copyright infringement, tortious interference with contract, and unfair competition. Learning Tree countered by moving to dismiss the case due to lack of personal jurisdiction. The Iowa district court granted the motion for lack of personal jurisdiction and Hunt appealed. The 8th Circuit in response held that the district court lacked personal jurisdiction over Learning Tree. The court in its reasoning opined that Learning Tree did not have the requisite contacts with Iowa. Learning Tree did not advertise in Iowa and only had one online sale in Iowa, conducted by Hunt’s employee in anticipation of litigation. The court also rejected the argument that the defendants’ personal contacts with Iowa should be imputed to the corporation. The court reasoned the copyrighted material was not derived from prior contacts in Iowa and that the alleged wrongful conduct—working with the teacher and publishing and selling the book—took place in California. The 8th Circuit affirmed the district court’s dismissal for lack of personal jurisdiction. Kendall Hunt Publ’g Co. v. Learning Tree Publ’g Corp., No. 22-188, 2023 U.S. App. LEXIS 18688 (8th Circ. 7/24/2023).
Joe Dubis
Merchant & Gould
jdubis@merchantgould.com
Henry Adebisi
Merchant & Gould
hadebisi@merchantgould.com
Probate & Trust Law
JUDICIAL LAW
• No presumption of undue influence in Minnesota. The trustee of a trust agreed to lease a farm to her grandson and his business. The beneficiaries of the trust later filed an action to invalidate the lease. The district court, after a trial, concluded that the lease was invalid as it was the product of undue influence and as it was unconscionable. While the district court appeared to analyze the relevant factors to prove undue influence in relation to the sale of real property, it relied on a New Jersey case for the proposition that “courts presume undue influence in certain cases and shift the burden of proof onto the party opposing a determination of undue influence to rebut that presumption.” The court of appeals found that the New Jersey case was not binding authority, that it was not aware of any precedential case in Minnesota applying a presumption of undue influence, and that such a presumption of undue influence conflicts with at least one Minnesota Supreme Court case. For that reason, the court of appeals held that a confidential relationship does not create a presumption of undue influence or shift the burden of proof. Rather, the burden of proving undue influence remains on the party asserting undue influence. In re Ursula E. Nelson Tr. under Agreement dated 3/21/2014, as Amended, No. A22-1781, 2023 WL 4418643 (Minn. Ct. App. 7/10/2023).
• Common law supports striking unenforceable trust provisions. A grantor executed a trust containing a specific provision relating to amendments that did not include a requirement that amendments be witnessed or notarized. Fourteen years later, the grantor amended the trust. The grantor signed and delivered the amendment, but it was not notarized or witnessed. Two years later, the grantor similarly amended the trust. In the final amendment, the grantor included a penalty provision that provided that “percentages will only be paid out if [the beneficiaries] start acting [like] family again to my son…” After the grantor died, one of the beneficiaries petitioned to invalidate the two amendments on the basis that the amendments were not witnessed or notarized, among other reasons.
Initially, the district court found that the first amendment was validly executed but found that the second amendment was too ambiguous to enforce. The trustee moved the court for amended findings, arguing that the penalty provision should be struck and that the remainder of the second amendment should be enforced. The district court agreed and “reformed” the trust by striking the penalty provision. On appeal, the court of appeals agreed that the amendments were validly executed and concluded that the district court properly struck the penalty provision and reformed the trust under Minn. Stat. §501C.0415 because the grantor made a mistake of law in believing that the penalty provision was enforceable.
The Supreme Court also found that the trust amendments had been validly executed. However, Minn. Stat. §501C.0415 “was not the correct provision to use in construing the second trust amendment.” Specifically, “[e]quating an ambiguous trust provision to a mistake of law is not supported by pertinent precedent or statute.” However, the analysis did not end there. The Supreme Court went further and noted that “Minnesota common law supports the equitable remedy of striking a provision that is unenforceable but upholding otherwise clear language in an instrument…” Because the penalty provision was not so intertwined with the rest of the trust provisions that it could not be severed, the Supreme Court determined that the district court acted within its equitable powers in construing, interpreting, and enforcing the second amendment to the trust. Matter of Tr. of Robert W. Moreland, 993 N.W.2d 80 (Minn. 7/12/2023).
• Presumption of revocation appropriately overcome. The decedent executed a will that left his assets to his descendants or to charity (if his descendants did not survive him). The decedent’s descendants predeceased him. It was undisputed that the decedent’s individual will was in his possession prior to his death, but it was not located after his death. The nominated personal representative, therefore, filed a petition for formal adjudication of intestacy. A copy of the decedent’s will was thereafter provided to the district court by the decedent’s attorney. Learning that it was a beneficiary, the charity objected to the nominated personal representative’s petition. At trial, the nominated personal representative claimed that the decedent told her that he was going to change his will on one occasion and that the decedent told her he had destroyed his will on another. The decedent’s attorney, however, testified that he had spoken with the decedent periodically about his estate plan and the decedent never indicated that he wanted to change it—despite changing other parts of his estate plan. The charitable beneficiary further introduced two letters that indicated that the decedent was comfortable with his will. Ultimately, the district court admitted the will to probate. The court of appeals affirmed, finding that the record contained extensive circumstantial evidence that the decedent did not revoke his will and that the charitable beneficiary made a prima facie showing of non-revocation. In re Estate of Andersen, No. A23-0042, 2023 WL 4553437 (Minn. Ct. App. 7/17/2023).
• Decision to appoint manager to govern land owned by a trust and individual affirmed. Married tenants in common who owned farmland executed identical wills. The wills contained a provision that prohibited the surviving spouse from revoking his or her will after the other died. The wills also contained a provision bestowing their interest in the land to a trust and granting one of their children the option to lease the land at a specified rate. After the husband died, the wife attempted to lease the land to her son at a rate lower than that designated in the husband’s will. The trustee of the trust petitioned the district court to appoint a manager to make all decisions concerning the land. The district court granted the petition and the wife appealed. The wife argued that the district court lacked subject matter jurisdiction to issue an order relating to the farmland, as the scope of the court’s authority was limited to the portion of the land that the trust owned.
The court of appeals disagreed and indicated that the district court was authorized to order the trustee to act consistently with the trust. However, the court of appeals noted that the district court’s order could be read to exceed the trustee’s authority and was potentially too expansive, as the district court only had authority to appoint a person to manage the land on the trust’s behalf (not the wife’s behalf). Therefore, the court of appeals modified the district court’s order to specify that the manager’s authority could extend no further than the trustee’s power under the terms of the trust. The wife also argued, among other things, that her agreement with her husband that prohibited her from changing her will after his death did not result in the terms of her will becoming effective during her lifetime. The court of appeals agreed but also found that the terms of the husband’s will fixed the trust’s position as to any land lease terms with the couple’s son. The court of appeals found that the couple’s arrangement displayed an intention that the husband’s will would govern the lease option and the lease terms that the trust was required to extend to their son on the husband’s death. Matter of Will of Hemish, No. A22-1569, 2023 WL 4554653 (Minn. Ct. App. 7/17/2023).
• Attorneys’ fees awarded to personal representative, not to beneficiary. A decedent’s son filed a petition for formal probate of will and appointment of personal representative. The son served notice to all interested parties. After a hearing, the son was appointed as personal representative. Months later, the personal representative filed an ex parte petition to release funds from a nonprobate account. The petition noted that four of the account’s beneficiaries were prepared to submit documentation required to release the funds, but the appellant could not be reached. Because there was not unanimity, Merrill Lynch had refused to release the funds. Shortly thereafter, the appellant filed an objection to the probate petition and the petition for the release of funds.
Ultimately, the district court dismissed the appellant’s objections on summary judgment. In doing so, the district court directed the parties to file motions relating to any request for reimbursement of attorneys’ fees. After motions were filed by both the personal representative and the appellant, the district court found that the personal representative’s actions benefitted the estate and that his attorneys’ fees were fair and reasonable, and awarded the personal representative almost $25,000 in attorneys’ fees. The court denied the appellant’s request for attorneys’ fees, finding that she did not benefit the estate and that her litigious behavior caused substantial delays. The court of appeals found that the district court did not abuse its discretion in awarding the personal representative attorneys’ fees, that the district court did not err in finding that the attorneys’ fees were fair and reasonable, and that the record supported the district court’s finding that the appellant’s actions did not benefit the estate. Estate of Donald J. Kellett, a/k/a Donald Jean Kellett, Decedent, No. A23-0289, 2023 WL 5013537 (Minn. Ct. App. 8/7/2023).
• Agreement to proceed with a civil action amounts to waiver of in personam jurisdiction defense. The testators executed trusts in which their assets were to be distributed equally to their three children. One testator died in 2012 and the other died in 2017. At the time of the last testator’s death, the value of the trust’s assets was approximately $3 million. But because of actions taken between 2012 and 2016, one of the children (the trustee of the trust) received almost $1.7 million in assets, while the others received only about $350,000. The two beneficiaries who received less sought court intervention. The district court found that the trustee influenced his parents to take out personal loans on his behalf that were collateralized by assets in the trust. However, instead of later repaying the loans personally, the trustee used the trust’s assets to repay the loans.
The district court determined that the trustee had breached his fiduciary duties, appointed an independent accountant to determine damages, and awarded prejudgment interest. After the forensic accountant’s review, prejudgment interest was awarded from the date of each identified transaction. On appeal, the trustee argued, among other things, that the beneficiaries could not pursue claims that were personal to the testators because they had not been appointed as personal representatives of their estates. The court of appeals disagreed, finding that because the district court concluded that the breach of fiduciary duty only occurred when the trustee failed to repay the loans (in 2017), the beneficiaries had standing to pursue claims against the trustee. The trustee also argued that the district court lacked in personam jurisdiction over him, pursuant to Swanson v. Wolf. The court of appeals similarly rejected this argument, finding that the trustee waived any jurisdictional challenge he may have had when he affirmatively invoked the district court’s jurisdiction (by agreeing to allow the case to proceed as a civil action versus a trust action, asking the court to order mediation, and filing a motion for a new trial). Additionally, the trustee argued that the district court miscalculated its award of prejudgment interest. The court of appeals agreed and found the district court’s calculation to be erroneous, as it calculated interest from the date of the transaction rather than from the commencement of the action. Jorgensen v. Jorgensen, No. A22-1652, 2023 WL 5012216 (Minn. Ct. App. 8/7/2023).
Jessica L. Kometz
Bassford Remele
jkometz@bassford.com
Tax Law
JUDICIAL LAW
• Tax court ordered to explain narrow aspect of hotel valuation. In an extensive opinion concerning the valuation of a hotel property, the Minnesota Supreme Court vacated and remanded to the tax court a single issue: “the tax court is directed to revisit and explain its adoption of the percentage reduction to the sales price of one of the comparator hotels that it used in its sales comparison analysis to account for non-taxable assets included in the sales price.” The Court otherwise affirmed the tax court’s opinion. Bloomington Hotel Invs., LLC, v. Cnty. of Hennepin, No. A22-1201, 2023 WL 5065419 (Minn. 8/9/2023).
• Following “Erie shuffle,” tax court deems Minnesota’s frivolous return penalty not unconstitutional. The Minnesota Tax Court has “sole, exclusive, and final authority for the hearing and determination of all questions of law and fact arising under tax laws of [Minnesota],” but the court does not have original jurisdiction to decide constitutional issues. For nearly 40 years, however, the tax court has been able to acquire such authority through what has become known as the Erie shuffle, so named after Erie Mining Company v. Commissioner of Revenue, 343 N.W.2d 261, 264 (Minn. 1984).
In a case involving taxation of Minnesota apportionable income for a nonresident taxpaying couple, the tax court engaged in an Erie shuffle to address the taxpayer’s constitutional challenge to Minnesota’s frivolous return penalty. The court construed the self-represented taxpayer’s constitutional challenge as raising three arguments concerning (1) due process; (2) excessive fines; and (3) equal protection. None was successful.
First, the court rejected the taxpayers’ argument that the frivolous penalty clause violated due process for lack of notice. Well-established law put the taxpayers on notice that calling wages another name for the purpose of not including them on a return has “no basis in fact or law” and is frivolous. E.g., Brintnall v. Comm’r of Revenue, No. 7495-R, WL 1877239 (Minn. Tax 4/8/2003). Since the court in a prior opinion found that the taxpayers attempted to avoid taxation by calling wages another name, they were on notice and their due process claim failed.
The court then turned to the excessive fines argument. Both the United States and the Minnesota Constitution protect individuals against excessive fines, and that protection extends to civil as well as criminal proceedings. Justice Gorsuch, concurring in the recent Supreme Court case involving Hennepin County’s forfeiture system, reminded litigants that “[e]conomic penalties imposed to deter willful noncompliance with the law... cannot be excessive.” Tyler v. Hennepin Cnty., 143 S. Ct. 1369, 1382 (2023) (Gorsuch, J., concurring). The Minnesota Tax Court applied the established three-part test set out in Minnesota case law (State v. Rewitzer, 617 N.W.2d 407 (Minn. 2000)) to conclude that the challenged penalty met the constitutional requirements. The three-part test includes inquiries into (1) the gravity of the offense and the harshness of the penalty, (2) a comparison of the contested fine with fines imposed for the commission of other crimes in the same jurisdiction, and (3) a comparison of the contested fine with fines imposed for commission of the same crime in other jurisdictions.
Finally, the court summarily rejected the taxpayers’ equal protection claim as “nonsensical.” The court concluded that the frivolous return penalty is not unconstitutional, and that summary judgment was appropriate to the commissioner. Wendell v. Comm’r of Revenue, No. 9488-R, 2023 WL 4441638 (Minn. Tax 7/10/2023).
• Request for attorneys’ fees denied. Warning that “a taxpayer’s subjective belief that its gross receipts are nontaxable does not alter the consequences of its refusal to provide records in response to an audit,” the Minnesota Tax Court denied a taxpayer’s request for over $20,000 in attorney’s fees. The court articulated the “gist” of the taxpayer’s claim to fees as follows: The disputed sales tax assessment order was not “substantially justified,” the taxpayer asserted, because the court granted summary judgment in the taxpayer’s favor on an unopposed basis. The unopposed nature of the summary judgment, the taxpayer continued, proved that “[t]here never was the slightest factual basis” for the tax order. The court explained that “the question is not whether [the taxpayer] ultimately provided adequate… support for its sales tax reporting,” but whether the commissioner’s position had a reasonable basis in fact or law. Since the commissioner’s position had a reasonable basis, the requested attorney fee award was not appropriate. The court did, however, award several hundred dollars in requested costs. Bugg Prod. LLC v. Comm’r, No. 9516-R, 2023 WL 4983130 (Minn. Tax 8/2/2023).
• Summary judgment not appropriate to resolve tax-exempt nature of medical clinics. Minnesota exempts public hospitals from property taxation. “Public” hospital includes hospitals owned by the public (like county hospitals) but also any hospital that is not “operated for the benefit of a private individual, corporation, or group of individuals.” State v. Browning, 255 N.W. 254, 256 (Minn. 1934). In addition to excluding public hospitals themselves, the property tax exemption extends to certain auxiliary properties. Auxiliary properties are exempt if they are “owned by a public hospital and [are] used for the accomplishment of the purposes for which the hospital was organized.” Abbott-Northwestern Hosp., Inc. v. Cnty. of Hennepin, 389 N.W.2d 916, 919 (Minn. 1986).
At issue in these cross motions for summary judgment was whether two clinics in Pine County (one in Pine City and one in Hinckley) are exempt as “auxiliary property” of a public hospital. The taxpayer argued that the two clinics qualified as exempt because both clinics were “essentially a hospital” and both were reasonably necessary to the hospital. The county countered that the clinics do not rise to the level of “functional interdependence” required for exemption. See Chisago Health Servs. v. Comm’r of Revenue, 462 N.W.2d 386, 390 (Minn. 1990) (discussing functional interdependence and explaining that “Auxiliary facilities to qualify for tax exemption must, first, be devoted to what it is that a public hospital does and, secondly, be reasonably necessary to accomplish that purpose. The test, in a sense, measures the degree to which the auxiliary facilities and the public hospital are functionally interdependent.”)
The court determined that the factual record was not sufficiently developed to establish either that the Pine County clinics operate as auxiliary properties to a public hospital or that they do not. The parties’ cross motions for summary judgment were denied. Welia Health v. Cnty. of Pine, No. 58-CV-22-196, 2023 WL 4917278 (Minn. Tax 8/1/2023).
• Expert exclusion too extreme for counsel’s calendaring error. A calendaring error by counsel resulted in untimely disclosure of an expert. In some circumstances, untimely disclosure can result in exclusion of the expert’s testimony. However, “the most compelling circumstances” are necessary to warrant the exclusion of expert testimony. In this instance, the untimely disclosure was not the result of an inexcusable dereliction or tactical maneuvering. Because the county suffered no prejudice (trial was months away and the county had additional discovery opportunities), the county’s motion to exclude was denied. MinnStar Bank, N.A. v. Cnty. of Blue Earth, No. 07-CV-22-1402, 2023 WL 4751797 (Minn. Tax 7/25/2023).
• Continued crackdown on tax protester “gibberish.” The federal tax courts continue to warn taxpayers to refrain from making frivolous arguments. Petitioners who continue to embrace arguments deemed frivolous are subject to penalties per Section 6673(a)(1), which authorizes those penalties “[w]henever it appears to the Tax Court that—(A) proceedings before it have been instituted or maintained… primarily for delay, [or] (B) the taxpayers positions in such proceedings is frivolous or groundless.” Saccato v. Comm’r of Internal Revenue, T.C.M. (RIA) 2023-096 (T.C. 2023).
Before the court for a second time, the petitioner in the first case this month “excluded all wages paid… on their joint 2018 federal income tax return and contend that wages of U.S. citizens do not constitute taxable income.” Hatfield v. Comm’r of Internal Revenue, T.C.M. (RIA) 2023-093 (T.C. 2023). Within an IRS notice and before the court many times already, the “Petitioners’ assertion that wages are not taxable income has been identified as a ‘frivolous position.’ Frivolous Positions, 2010-17 I.R.B. 609 (2010), see, e.g., Walker v. Comm’r of Internal Revenue, 123 T.C.M (CCH) 1336 (T.C. 2022); Briggs v. Comm’r of Internal Revenue, 111 T.C.M (CCH) 1389 (T.C. 2016); Lovely v. Comm’r of Internal Revenue, 110 T.C.M. (CCH) 98 (T.C. 2015), aff’d sub nom. Lovely v. Comm’r of Internal Revenue, 642 F. App’x 268 (4th Cir. 2016).
The tax court concluded by taking the “opportunity to warn petitioners again that assertions of such frivolous arguments in any future appearance before this Court may result in an additional penalty.” Hatfield, T.C.M. (RIA) 2023-093, *3 (T.C. 2023).
In the second case, the court rejected petitioner’s entreaty that he was not a tax protester. Saccato, T.C.M. (RIA) 2023-096 at *11. From the outset, the petitioner asserted what can only be described as tax protester arguments, starting with a claimed exemption from federal income tax. His reasoning: “[H]e is ‘a citizen of the State of Oregon’ and ‘not a federal citizen.’” Id. at *10. Further, the court cited additional “gibberish commonly embraced by tax protesters—e.g., that he ‘never knowingly elected to be treated as a ‘taxpayer’,’ that he ‘was protected through the doctrine of estoppel,’ and that ‘the notice of deficiency lacked the required jurat signed under the penalties of perjury.’” Id.
Since “[f]rivolous arguments and groundless claims divert the Court’s time, energy, and resources away from more serious claims and increases the needless cost imposed on other litigants,” the purpose of imposed penalties is quite clear. Kernan v. Comm’r of Internal Revenue, 108 T.C.M. (CCH) 503 (T.C. 2014), aff’d sub nom. Kernan v. Comm’r of Internal Revenue, 670 F.App’x 944 (9th Cir. 2016). Penalties “compel taxpayers to conform their conduct to settled tax principles and to deter the waste of judicial and IRS resources.” Coleman v. Comm’r of Internal Revenue, 791 F.2d 68, 71–72 (7th Cir. 1986); Salzer v. Comm’r of Internal Revenue T.C. Memo. 2014-228, 108 T.C.M. 503, 512 (T.C. 2014), aff’d sub nom. Kernan v. Comm’r of Internal Revenue, 670 F.App’x 944 (9th Cir. 2016).
In Saccato, the court’s warning to future petitioner’s was quite clear as the court chastised the “[petitioner’s] persistent filing of frivolous papers” which “has wasted the Government’s time and ours.” The court imposed a $10,000 penalty. Id. at *11.
• Unclean hands not tenable as an affirmative defense. In this case, the petitioner claimed that the government’s action in response to the COVID pandemic caused him direct harm and further that such government-induced harm should estop collection efforts under the unclean hands doctrine.
Upon review of the petitioner’s federal income tax for 2013 and 2017, the IRS determined deficiencies were attributable to the petitioner’s capital gains in cryptocurrency transactions during those years. In 2020, during the early days of the pandemic, however, the petitioner suffered large losses after having to liquidate assets at a substantial loss. The petitioner claims these losses were exacerbated—if not caused—by the government’s response to the covid pandemic.
The petitioner’s defense of unclean hands, however, had no legal basis. Fundamental to a defense of unclean hands is that “‘the alleged misconduct by the [party] relate directly to the transaction concerning which the complaint is made.’” (Dollar Sys., Inc. v. Avcar Leasing Sys., Inc., 890 F.2d 165, 173 (9th Cir. 1989) (internal quotation omitted)). Further, “unclean hands does not constitute ‘misconduct in the abstract, unrelated to the claim to which it is asserted as a defense.’” Jarrow Formulas, Inc. v. Nutrition Now, Inc., 304 F.3d 829 (9th Cir. 2002) citing Republic Molding Corp. v. B.W. Photo Utils., 319 F.2d 347, 349 (9th Cir. 1963). The petitioner’s defense thus had no basis, as petition failed to substantiate any relationship between the government’s 2020 alleged misconduct and a determination of federal income tax deficiencies in 2013 and 2017. Kim v. Comm’r of Internal Revenue, T.C.M. (RIA) 2023-091 (T.C. 2023).
Morgan Holcomb
Adam Trebesch
Mitchell Hamline School of Law