October 1999

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment and Labor Law
• Family Law
• Federal Practice
• Juvenile Law
• Tax Law
• Torts and Insurance

Underinsured Motorist Coverage. The Minnesota Supreme Court recently certified a question from the United States District Court in American National Property & Casualty Co v. Loren, C7-98-2332, 597 NW2d 291 ,1999 WL 549143 (Minn. 1999). The Court examined whether an insurance policy’s exclusion of underinsured motorist coverage for an insured injured while occupying a motorcycle owned by a resident relative violates Minn. Stat. §65B.49, subd. 3a.

On May 10, 1997, Norman Loren (Loren) used a motorcycle owned by his son, Bradley Loren. Bradley Loren was 27 years old and resided with his father. He had consented to his father’s use of his motorcycle. Bradley Loren had liability insurance in his name for the motorcycle but did not have underinsured motorist (UIM) coverage. During Norman Loren’s ride, he was struck by a vehicle driven by Manford Hage. Hage was primarily responsible for the accident. Loren sustained severe injuries that exceeded the $100,000 policy held by Hage, and although Hage paid a settlement personally as well, that and the collateral sources were still not enough to cover the damages sustained by Loren.

Loren owned three vehicles at the time of the accident and had UIM coverage on all of them through American National Property & Casualty Co. (ANPAC). The policy stated that "We will pay damages for bodily injury which an insured person is legally entitled to recover from the owner or operator of an uninsured motor vehicle or an underinsured motor vehicle."

The policy goes on to say that it will not cover bodily injury to anyone occupying a vehicle owned by a relative not specified by the policy. The parties agreed that Bradley Loren was a resident relative under the policy and that Bradley Loren’s motorcycle was not specified by the policy.

Loren made a claim for UIM benefits under his ANPAC policy, which were denied based upon the contractual language. ANPAC sought a declaratory judgment in the United States district court. Both ANPAC and Loren moved for summary judgment. The district court certified the question to the Minnesota Supreme Court.

The Supreme Court determined that the contract can not provide less coverage than that required by the Minnesota No-Fault Automobile Insurance Act (act). The act mandates UIM coverage for all motor vehicles but excludes motorcycles as motor vehicles. If a person is injured in a motor vehicle accident and the party at fault does not have coverage sufficient to compensate the injured party adequately, that person may look to the insurance covering the vehicle he was driving. If he or she is not listed as an insured under that policy, he or she may make a claim for excess insurance protection afforded by UIM coverage specified under a policy for which he or she is insured.

The act limits that excess insurance protection to the extent by which the liability limit of the insured’s policy exceeds the limit of liability coverage available from the occupied vehicle, and to the amount of covered damages sustained. There are only two situations in which UIM coverage is precluded: first, when an insured is injured while driving a vehicle owned by that insured and the vehicle is not enumerated by his insurance policy; and second, when an insured is injured while driving a motorcycle owned by that insured.

ANPAC argued that Loren could not recover as he was an occupant of a motorcycle owned by a resident relative, and that mandatory UIM coverage extends only to motor vehicles. Furthermore, the final sentence of subdivision 3a(5) states "[i]f at the time of the accident the injured person is not occupying a motor vehicle or motorcycle, the injured person is entitled to select any one limit of liability." ANPAC also argued that allowing Loren to recover would undermine the public policy encouraging adequate insuring of vehicles.

The Supreme Court rejected the arguments of ANPAC. The act, when read as a whole, clearly is contravened by a policy that would preclude coverage for an insured injured while occupying a motorcycle owned by a resident relative. Mandating UIM coverage for motor vehicles and not motorcycles is not dispositive. Loren made a claim based on the underinsurance of Hage’s vehicle, not that of the motorcycle. Since Hage’s vehicle was an underinsured vehicle, he is entitled to claim UIM benefits from ANPAC.

The act does not preclude anyone driving a motorcycle from receiving UIM benefits. Rather, implicit in the exclusionary language is the coverage of UIM benefits for someone driving a non-owned motorcycle. Had the Legislature intended to preclude benefits to all motorcycle occupants, they would have explicitly stated it.

The two subdivisions that preclude recovery for UIM benefits, 3a(7) and 3a(8), do not preclude Loren from recovering UIM benefits. Therefore, the statutory preclusion of the UIM benefits does not work to exclude Loren’s recovery. Since he did have UIM benefits under a policy for which he was an otherwise insured, he is entitled to UIM benefits under the act.

The legislative intent in allowing an injured person to recover for those injuries sustained in a motor vehicle accident and the intent to have all vehicles insured is fostered by this decision. Excluding coverage for an occupant of a motorcycle owned by another does not promote the purchase of insurance for owners of motor vehicles as was argued by ANPAC.

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment and Labor Law
• Family Law
• Federal Practice
• Juvenile Law
• Tax Law
• Torts and Insurance

Tribal Jurisdiction: Traffic; Driving after Revocation. Using the Cabazon test, the Supreme Court concludes that driving after revocation, under Minn. Stat. §171.24, subd. 2, is civil/regulatory and not subject to Public Law 280. One of the respondents in this case had her license revoked for failure to provide proof of insurance. She was an enrolled member of the Minnesota Chippewa Tribe, Leech Lake Band, and the driving conduct occurred entirely within the boundaries of the reservation. Hence, the state has no authority to enforce this charge upon a challenge for want of personal jurisdiction.

The list of traffic charges for which the state has no personal jurisdiction on Public Law 280 has now grown to eight:

1. Failure to provide motor vehicle insurance;

2. Driving with an expired registration;

3. Driving without a license;

4. Driving with an expired driver's license;

5. Speeding;

6. Driving with no seat belt;

7. Failure to have a child in a child restraint seat;

8. Driving after revocation (where revocation is for not having insurance).

State v. Adria Anne Johnson, et al, 1999 WL 605601 (Minn. 8/12/99).

Attorneys Fees and Costs: Trial Transcript; Private Attorney; Indigent Client. Under the facts of this case, the appellant is entitled to have his trial transcript provided at public expense, even though he is represented by private counsel retained by the appellant's parents on his behalf. In granting the appellant's motion for the costs of a trial transcript, the Supreme Court is announcing a procedure that is not specifically addressed in the existing Rules of Criminal Procedure and again exercising its supervisory powers.

In support of the motion for the transcript, the appellant's father submitted an affidavit that stated that he and the appellant's mother had enough money to pay for private counsel but not enough to also pay for the costs of the trial transcript. The appellant was thus compelled to apply to the public defender's office for a finding of indigency as well as for funding. However, the public defender stated that it could not expend its limited resources in a privately-retained-lawyer case.

The Supreme Court provides guidance for the Supreme Court Advisory Committee to incorporate such a procedure into the rules. Again, it will be the public defender that determines indigency, provides funding, and determines which parts of the trial transcript are necessary for effective appellate review. State v. Ryan Michael Pederson, C0-99-450, 1999 WL 649378 (Minn. 8/26/99).

Evidence: Hearsay; Concealment. The trial court admitted C.F.'s statement to S.R. as a statement of appellant's coconspirator under Rule 801(b)(2)(E). In this case, it was essentially a narrative of what had happened. Appellant was present at the time the statements were made. The trial court, however, found that the statement was made as part of the conspiracy to conceal the crime, and that S.R. was, indeed, a person believed to be a reliable ally for the purpose of constructing an alibi. Hence, the statement was not hearsay. Other statements by C.F. to one "Cary" were admissible against the appellant as adoptive admissions pursuant to Minn. R. Evid. 801(d)(2)(B). Again, these were narrative-type statements describing the murder. Coconspirator C.F.'s statements were adoptive admissions because it was clear that the appellant agreed with C.F. while the statements were made. The defendant had helped describe his own involvement in the crime. State v. Erasmo Charles Flores, Jr. , C7-98-760, 595 NW2d 860 (Minn. 6/17/99).

Evidence: Reverse Spreigl; Third Party Suspect. In this murder case, the defense offered evidence that a third party, "Olhausen," was a drug dealer, that the victim owed Olhausen money, that Olhausen was in the victim's house with one "Nelson" on the same date, that Olshausen's business card was found in a bag of bloody clothes, and that Olhausen had threatened to kill another person who owed him money for drugs. The Supreme Court agrees with the trial court that these factors alone are insufficient to link Olhausen to the commission of the crime. The fact that Olhausen was in the home is, standing alone, insufficient to link Olhausen ". . . since it only places Olhausen in the vicinity of the crime." Further, the individual Nelson provided a strong alibi for Olhausen during the crucial period of time. State v. Flores, supra.

Evidence: Expert Witness; Community Crime Statistics. The trial court exercised its discretion by not allowing the defense to present expert testimony concerning community crime statistics and criminal activities in North Minneapolis. The appellant was convicted of murder. Prior to the murder, the appellant and the victim had had confrontations where the appellant had reason to believe that the victim presented a threat to the appellant. The victim had threatened to kill the appellant during a chase, and had stared at the appellant during another encounter in a store. Although appellant did not testify, appellant¹s friend testified that the appellant feared the victim because of those encounters.

While appellant was riding on his bike, he saw the victim, turned back, and decided to shoot him. His statement to police indicated that he was thinking, "I might as well just shoot him before he shoots me." Appellant at trial attempted to have a former Minneapolis police officer testify regarding crime statistics, and criminal activities in this particular community. The appellant argued that such testimony would help the jury understand that under such circumstances, a young person in this community might reasonably think that it was necessary to make a plan to strike and kill a person who would cause such fear.

Held, the trial court correctly precluded this testimony as irrelevant. There was no evidence that the appellant himself believed that crime in general was so rampant in Minneapolis that such a preemptive strike was necessary. The Court also rejects the appellant's contention such expert testimony is akin to evidence concerning Battered Women Syndrome, allowed by the Court in State v. Hennum, 441 NW2d 793 (Minn. 1989). Battered Women Syndrome is a scientifically recognized, accepted psychological syndrome, while the appellant was not offering evidence of any such syndrome. State v. Lyle Joseph Nystrom, C7-98-1259, 596 NW2d 256 (Minn. 6/24/99).

Evidence: Replay of Videotape to Jury. At trial on the charge of attempted criminal sexual conduct, the trial victim testified that the appellant touched her on the thigh. During a videotape made by a police officer, the victim appeared to indicate that the appellant touched her vagina rather than her thigh. It was not error for the trial judge to grant the jury's request to reexamine the videotape during deliberations. Under M. R. Cr. P. 26.03, subd. 19(2)(1) the court has discretion to allow the jury to review such evidence provided that undue prominence is not given. Although the trial court did not present to the jury other evidence, such as the child's trial testimony, none of the convictions required that the appellant actually touch the child's intimate part. Because the appellant was convicted of attempt, it was only necessary for the state to prove that the appellant had taken a substantial step toward the commission of second degree criminal sexual conduct. State v. James Joseph Meemken, CX-98-1577 597 NW2d 582 (Minn. App. 7/27/99).

Search and Seizure: Automobile; Jurisdiction. A police officer first observed the appellant driving within the city limits of Glenville. The officer first became suspicious when she earlier observed a similar vehicle stopping and starting. It is uncertain whether the first vehicle was the same as the appellant's vehicle. The officer also followed the vehicle for approximately three miles outside of the city limits, at which time she observed that the truck was swerving within its lane, crossing the fog line, and speeding.

Held, in light of Tilleskjor, 491 NW2d 893 (Minn. 1992), and Minn. Stat. §629.40, subd. 3 (1998), this was a valid stop. The police officer was in the course and scope of her employment. It is immaterial that she did not observe a violation until outside the city limits. It is also immaterial that she may have been mistaken about the identity of the vehicle. Even if the officer had first observed the appellant outside the city limits, the stop would still be valid, citing State v. Bunde, 556 NW2d 917 (Minn. App. 1996). Eric Thomas Lorenzen v. Commissioner of Public Safety, C4-98-2238, 594 NW2d 552 (Minn. App. 6/15/99).

Search and Seizure: Hotel Room; Consent. The appellant had been staying in the hotel for two days. At the time, he had an acquaintance with him, who apparently shared the room. Police arrested the appellant after interrupting an argument between the appellant and another man in the parking lot. The officer noticed the smell of marijuana, and received consent from the appellant to search the vehicle. In doing a pat search, officers found keys to two hotel rooms at the Days Inn, but appellant denied knowledge of why he had two separate rooms, including room 412.

When police responded to room 412 and knocked, the appellant's acquaintance, who was sharing the room, consented to the search. A narcotics dog, accompanying the officers, "hit" on the room safe. Police then used a key, which they had found on the appellant, opened the safe and found a gun, cash, and drugs.

Held, while the acquaintance did have "authority" to consent to the search of the hotel room, she did not have authority to consent to a search of the locked safe in the room. The safe contained items which belonged only to the appellant; he carried the key in his pocket, and all evidence indicated that he expected to keep these items within his personal control. Hence, the consent was invalid. State v. Nathan Thomas, C3-98-1260, 1999 WL 486401 (Minn. App. 7/13/99).

Felony Murder: Predicate Felony; Sale of Drugs. The respondent went to a private residence to sell cocaine, but detected that something was "funny." He later returned with a loaded weapon. During the drug transaction, the respondent stated that he saw one of the buyers pull a .22 caliber weapon from his pocket, at which time respondent shot and killed one of the buyers.

Five and one-half years after his conviction, on a motion to withdraw a guilty plea, the respondent contended successfully at the trial court level that a sale of illegal drugs is not a valid predicate felony for second degree felony murder. Respondent argued that the failure of the Legislature to expressly include drug offenses in a definition of felony murder demonstrates an intentional omission.

Held, the sale of cocaine that results in a shooting death is a valid predicate felony for second degree felony murder. Felony murder statutes have historically isolated for special treatment those felonies that present a danger to human life. Other jurisdictions support the use of a drug transaction as an adequate predicate felony. Furthermore, the way in which the respondent committed the drug sale constituted a special danger. Henry Lernell Smith v. State C8-98-1951, 596 NW2d 661 (Minn. App. 6/22/99).

Juvenile: Ordinance Violations; Enhancement. Under Minn. Stat. §260.015, juveniles who have been previously adjudicated delinquent forfeit their right to be treated as juvenile petty offenders in subsequent prosecution from misdemeanor level offenses. Normally, a juvenile is treated as a petty offender when the juvenile offense includes an offense that would be a misdemeanor committed by an adult.

In this case, D.D.B. had been adjudicated delinquent for felony possession. He was later charged with obstructing a public officer, in violation of a Duluth ordinance. This particular Duluth ordinance provides for a maximum fine of $700 with no possibility of imprisonment.

Held, violation of the ordinance is not a misdemeanor-level offense and cannot be used to enhance a subsequent delinquent adjudication from a petty offense to a delinquency adjudication. Because no imprisonment is possible, violation of the ordinance is "simply an ordinance violation," and not a misdemeanor. In re the Matter of D.D.B., C9-98-2090, 596 NW2d 666 (Minn. App. 6/29/99).

Welfare Fraud: Civil Settlement; Equitable Estoppel. In 1997, the respondent signed an agreement with social services agreeing to pay back wrongfully obtained assistance in the amount of $1,733.64. Under this agreement, he would pay $20 per week. Approximately four months later, the government filed a criminal complaint charging the respondent with welfare fraud. At the time of the omnibus hearing, the respondent had made payments totaling approximately $540. At the omnibus hearing, the judge dismissed the charges, concluding that the appellant was "equitably estopped" from prosecuting respondent after first making an agreement for civil repayment.

Held, the doctrine of equitable estoppel may not be applied to prevent a welfare fraud prosecution because of a prior civil settlement. Specifically, the Legislature has provided that a county may "institute a criminal or civil action or both" when the assistance has been monthly obtained. Minn. Stat. §256.98, subd. 5 (Minn. 1996). Even if equitable estoppel were to be applied, it does not fit the facts in this case. There was no wrongful misconduct by the government. There were no allegations of improper inducement or promises that he would not be prosecuted. State v. Rodolfo Jiminez Ramirez, CX-99-181, 597 NW2d 575 (Minn. App. 6/29/99).

Prosecutorial Misconduct: Objection; Forfeiture. The appellant's attorney did not object to a prosecutor's statements at trial concerning law and order issues, personal opinion, and improper attacks on the appellant's character. The failure to object constitutes a forfeiture of the issue of prosecutorial misconduct. ". . . we strongly encourage defense attorneys to object to such statements at the time they are made. A timely objection enables the trial court to provide accurate instructions to the jury and ensures defendants a fair trial. Importantly, an objection might deter the prosecutor from continuing on an improper line of argument." State v. Milton K. Sanders, C2-98-1606, 1999 WL 554575 (Minn. 7/20/99).

Leg Restraints: Trial. In Shoen 1, 578 NW2d 708 (Minn. 1998), the Supreme Court held that the trial court erred by not making findings supporting the use of leg restraints for the defendant at trial. Shoen 1 found that such leg restraints are in court "inherently prejudicial" and remanded the matter for a Schwartz hearing to see if the conviction had been tainted by the jury's knowledge of the leg restraints.

At the Schwartz hearing, eight of the jurors said they had never noticed anything unusual. Two of the jurors testified that they did not believe that they had ever seen the appellant walked during trial. Only one juror had noted the leg restraints while the appellant was walking in the hallway outside of the courtroom, but stated that she thought it was for standard security purposes and thought nothing of it. A final juror had passed away.

The Supreme Court states that its "dicta" that such restraints are "inherently prejudicial" does not mean that the practice is, in every circumstance, constitutional error. Hence, the Supreme Court holds that the improper use of leg restraints, under the facts of this case, is amenable to the harmless error analysis. It might be a different standard of review had the restraints been highly obtrusive, highly visible restraints such as shackles, binds, and gags. In this case, the leg restraints were silent and largely invisible.

In such cases, it is the state that bears the burden of showing that the jurors' guilty verdict was unattributable to the restraints. In this case, the burden is met based upon testimony of the jurors of the Schwartz hearing. State v. Peter James Shoen, CX-98-1661, 1999 WL 550202 (Minn. 7/29/99).

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment and Labor Law
• Family Law
• Federal Practice
• Juvenile Law
• Tax Law
• Torts and Insurance

ADA Cases. A trio of recent rulings by the 8th Circuit Court of Appeals reversed trial court determinations in cases under the Americans with Disabilities Act (ADA) . In two of the cases, the employees prevailed at trial but lost on appeal; in the other, the employer prevailed in summary judgment but that ruling was overturned on appeal.

In Browning v. Liberty Mutual Insurance Co., 1999 WL 346140, 178 F.3d 1043, (8th Cir. 1999), the appellate court reversed a ruling for an employee who was unable to work while recuperating from surgery for a work-related injury. The employee’s inability to perform her normal functions on a reduced schedule and her ensuing absence from work led the court to conclude that the employee failed to perform an "essential function" of the job, regular attendance.

Similar reasoning underpinned reversal of a verdict for an employee in Buckles v. First Data Resources, Inc., 176 F.3d 109 (1999). The employer had made various accommodations for an employee with a sinusitis condition from sensitivity to chemicals in the workplace. The employee continued to miss work despite the accommodations, which led to his firing. The court upheld the employer's action on the ground that the employer was not required to create a "bubble" to isolate the employee from all irritants in the workplace.

But an employee prevailed in overturning summary judgment in Fjellestad v. Pizza Hut of America, Inc., 1999 WL 391911, 182 F3d 609 (8th Cir. 1999). The employee incurred a 30 percent injury to an arm as a result of a car accident and required a reduced workload. Although the employee did not request a specific accommodation, the employer failed to engage in "an interactive process to determine whether reasonable accommodations" were feasible, leading the court to reverse summary judgment for the employer and remand the case for trial.

Sexual Harassment. A lawsuit by a pair of students against a professor at the Duluth campus of the University of Minnesota was properly dismissed. The conduct, while inappropriate, was not sufficient to be actionable sexual harassment, and the University took prompt corrective action. In Yochum v. University of Minnesota Duluth, 1999 WL 391648 (Minn. App. 1999) (unpublished), the court held that suggestive comments and behavior by a professor directed to two students were not sufficiently grave to constitute sexual harassment. The University also was not liable because it warned him about the conduct when it was reported to the institution and subsequently took swift disciplinary action against him.

An employee is not entitled to reemployment compensation benefits for alleged constructive termination due to sexual harassment if the employee does not report the misconduct to her employer and give the employer an opportunity to correct the problem before quitting. In Arradondo v. St. Joseph Home For Children, 1999 WL 391854 (Minn. App. 1999) (unpublished), a counselor at an institution for homeless children did not get reemployment benefits after she quit, claiming that she had been sexually and verbally harassed. However, she did not inform the management of the alleged misconduct until 12 days after she quit, which disqualified her from having "good cause" to quit and be eligible for benefits.

Sexual harassment verdicts for a pair of employees of a country club were upheld by the 8th Circuit Court of Appeals in Kimbrough v. Loma Linda Development Inc., 1999 WL 493275, 183 F.3d 782 (8th Cir. 1999). The court held that harassment by a chef of two waitresses was ratified by management.

Non-compete Clauses. The Minnesota Court of Appeals recently ruled upon three new non-compete cases. In Correll v. Distinctive Dental Services, P.A., 594 NW2d 222 (Minn. App. 1999), the court held that an arbitration clause in an employment agreement containing a non-compete clause is binding and precludes an administrative judge from finding marital discrimination. The employer sought to enforce a non-compete agreement against a dentist who was fired after his wife, also a dentist, began employment with a competing dental clinic. The court held that the employee's claim of marital discrimination was subject to the arbitration clause in the employment agreement and could not be pursued before the Minnesota Department of Human Rights.

In Kunin v. Kunin, 1999 WL 486814 (Minn. App. 1999) (unpublished), the court upheld an 11-year non-compete agreement entered into by an employee of a chain of freestanding beauty shops when the employee subsequently began working for a company that operated beauty salons in department stores. The court held that the businesses were sufficiently similar to warrant imposition of the non-compete clause.

A non-compete agreement that barred former owners of a restaurant from operating a competitive "restaurant" was upheld in Lemon v. Gressman, 1999 WL 451165 (Minn. App. 1999) (unpublished). The former owners of a restaurant bought a doughnut shop next door to their former restaurant where they sold tacos, sandwiches, and other packaged goods, which the court deemed fell within the non-compete agreement drafted by the sellers of the restaurant.

Employment Manual Not Binding. Continuing its practice of holding that employment manuals are not binding upon employers, the Court of Appeals held that disclaimer language in an employment manual barred an employee from pursuing a breach of contract claim for the failure to follow a progressive disciplinary policy in the handbook. In Erickson v. Cannon Valley Cooperative, 1999 WL 262124 (Minn. App. 1999) (unpublished), the court rejected the employee's claims of equitable estoppel and promissory estoppel because the disclaimer language was sufficiently clear to preclude any "reasonable reliance" by the employee upon the terms of the manual.

Negligent Retention. The Minnesota Court of Appeals rejected a pair of negligent retention claims recently. In Johnson v. Motel 6 GP, Inc., 1999 WL 508355 (Minn. App. 1999) (unpublished), the court reversed a judgment notwithstanding the verdict (JNOV) after a jury found that the employer was negligent in its hiring and/or retention of an employee who raped a guest on the premises but that the employer was not the "direct cause" of the misconduct. The court held that the jury's two determinations could be reconciled and, therefore, did not warrant a determination of liability under the doctrine of negligent retention.

In Peterson v. Independent School District No. 704, 1999 WL 508624 (Minn. App. 1999) (unpublished), the court held that a school district has statutory immunity for alleged negligent hiring, training, and supervision of an adviser to the cheerleading squad after one of the cheerleaders suffered an injury while practicing a difficult routine. The hiring, training, and supervision of the adviser to the cheerleading squad constituted the type of "balancing of policy objectives" that gives rise to statutory immunity for a governmental entity.

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment and Labor Law
• Family Law
• Federal Practice
• Juvenile Law
• Tax Law
• Torts and Insurance

Paternity Judgment ; Personal Jurisdiction. Ramsey County commenced a paternity action by leaving the summons and complaint with the putative father's brother at their mother's home. There was no appearance and a default judgment was entered. A copy of the judgment and later child support and arrearage orders were mailed to the father at his mother's home. An Order to Show Cause was served for contempt and the father asked the court to vacate the adjudication and support orders and to order blood tests. The court granted tests but reserved all other issues. A 99 percent probability resulted in the father's concession of paternity but the action for lack of personal jurisdiction was reasserted. The trial court concluded that there was no actual, effective notice prior to the Order to Show Cause and all prior judgments were vacated.

On appeal, the county did not dispute lack of notice but alleged a general appearance. It argued that the motion for blood tests resulted in a waiver of the father's judgment challenge. The Court of Appeals looked to case law for authority and found that the father moved for blood tests and, at the same time, to vacate. The district court, not the father, decided to delay resolution of the issues. The appellate court concluded that the father preserved his right to challenge paternity by raising the blood test and vacate issues at the same time. Galbreath v. Coleman, C2-98-2156, 596 NW2d 689 (Minn. App. 1999).

Spousal Property; Uniform Fraudulent Transfer Act. The spouses set up three corporate restaurants with knowledge of the judgment creditor's $40,000 claim. The wife owned the stock but the husband played a vital role in that he operated the restaurants while she was employed full-time by the city. He never received a paycheck. The wife performed services in two of the restaurants and received an annual salary based on profitability. The Court of Appeals affirmed the directed verdict in favor of the couple. It found that donation of services is not fraudulent and concluded that a judgment creditor does not acquire a property interest in a wife's business under the Uniform Fraudulent Transfer Act merely because the debtor husband enhanced its value through gratuitous labor. Overrocker v. Solie, C8-98-1867, 597 NW2d 579 (Minn. App. 1999).

Motions to Vacate Docketed Arrearage Judgments Denied. The mother docketed two support arrearage judgments after giving the father the statutory opportunity to request hearings, which he failed to request. He filed a Rule 60.02(e) motion to vacate, arguing that he satisfied the judgments by taking care of the children, which was denied. The Court of Appeals found that his argument related to the merits of the judgments and that a satisfied judgment is not one that would not have existed on the merits but one that has been paid. In addition, he was not entitled to relief under the rule because he did not offer a good reason for his failure to request hearings. Hawkinson v. Hawkinson, C5-99-296 (Minn. App. 1999)(unpublished). This opinion may be cited only after the requirements of Minn. Stat. §480A.08, subd. 3 (1998) have been satisfied.

Child Support Recovery Act; Workers Compensation Payment. While under a court child support order, defendant received a lump sum workers compensation and Social Security payment of over $37,000 that was not subject to garnishment. No portion was used to pay child support. The district court did not err in disregarding defendant's application for modification of his future support obligation. His conviction for willful failure to pay under the Child Support Recovery Act also was affirmed. U.S. v. Harrison, CC-272-99, ___ F.3d ___ (8th Cir. 1999).

On August 6, 1999, the Supreme Court issued an Order promulgating amendments to Form 3 - Appendix A of the District Courts Title IV, Rules of Family Court, effective immediately. The amendments address visitation, unpaid support and maintenance judgments, and capital gains on sale of a principal residence. A copy of the revised form is available from any court administrator.

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment and Labor Law
• Family Law
• Federal Practice
• Juvenile Law
• Tax Law
• Torts and Insurance

Inadvertent Disclosure of Privileged Information. In Starway v. Independent School District No. 625, 1999 WL 597432, ___ F.R.D. ___ (D. Minn. 1999), the school district inadvertently produced a four-page privileged memorandum during discovery and then brought a motion to force plaintiff’s counsel to return the document shortly after learning that the memorandum had been produced. Plaintiff opposed the motion, arguing that the attorney-client privilege had been waived.

Acknowledging that federal courts have applied three different tests to determine whether inadvertent disclosure of privileged information effects a waiver of the privilege -- the "lenient" approach, the "strict" approach, and the "middle-of-the-road" approach -- Magistrate Judge Boylan adopted the middle-of-the-road test often referred to as the Hydraflow test, finding that this test imposes accountability on counsel without rigidly dictating a finding of waiver. Under the five-factor Hydraflow test, the court must examine: (1) the reasonableness of precautions taken to prevent inadvertent disclosure; (2) the number of inadvertent disclosures; (3) the extent of the disclosures; (4) the promptness of measures taken to remedy the problem; and (5) whether justice is served by relieving the party of its error.

Applying the Hydraflow test, Magistrate Judge Boylan determined that the school district had taken reasonable precautions to prevent the disclosure of the memorandum; the number and extent of the disclosures was minimal; the school district had acted promptly after learning of the disclosure; and the "interests of justice" favored the school district. Accordingly, Magistrate Judge Boylan ordered the memorandum returned to the school district and barred Starway from further use of the document.

This is the first published opinion in the district on the inadvertent disclosure issue. Thus this decision is likely to carry substantial weight the next time this issue arises in the district.

Motion to Reconsider; Time to Appeal Judgment. In DuBose v. Kelly, 1999 WL 619063, ___ F.3d ___ (8th Cir. 1999), DuBose sued his former attorney and others under 42 U.S.C. §1983. The district court granted summary judgment to all the defendants on January 6, 1998. DuBose filed a request for leave to file a motion to reconsider pursuant to Local Rule 7.1(g) on January 15, 1998. The district court denied that request on March 4, 1998. DuBose then filed a notice of appeal on March 17, 1998, referencing both the January 6 and March 4 orders.

The 8th Circuit began its analysis by addressing -- apparently sua sponte-- its jurisdiction to hear the appeal. Noting its doubt that Local Rule 7.1(g) was intended to apply to post-judgment motions, the 8th Circuit found that compliance by DuBose with Local Rule 7.1(g) amounted to a de facto motion to alter or amend a judgment under Fed. R. Civ. P. 59(e), thereby extending his time to file a notice of appeal. Accordingly, the 8th Circuit held that it had jurisdiction over the appeal.

Raising of New Matters at Oral Argument; Motion to Dismiss. In Hamm v. Rhone-Poulenc Rorer Pharmaceuticals, Inc., 1999 WL 600440, ___ F.3d ___ (8th Cir. 1999), plaintiffs asserted RICO and other claims against Rhone-Poulenc Rorer Pharmaceuticals (RPR). RPR filed a Rule 12(b)(6) motion to dismiss. At oral argument on the motion before Magistrate Judge Mason, plaintiffs’ counsel made assertions of fact beyond those appearing in the complaint. Magistrate Judge Mason recommended that the RICO claims be dismissed with prejudice. After plaintiffs filed objections to the Report and Recommendation, Judge Doty adopted it but converted defendants’ 12(b)(6) motion into a motion for summary judgment because Magistrate Judge Mason had considered matters outside the pleadings -- specifically, counsel’s assertions of fact beyond those contained in the pleadings.

On appeal, plaintiffs argued that Judge Doty had erred in treating their 12(b)(6) motion as a motion for summary judgment. However, the 8th Circuit held that plaintiffs’ counsel’s assertions of fact beyond those contained in the pleadings constituted "matters outside the pleadings." Because the district court had considered those assertions, it had not abused its discretion in converting the RPR Rule 12(b)(6) motion into a motion for summary judgment. In addition, the 8th Circuit held that because it was plaintiffs’ counsel who raised the new matters, Judge Doty did not err when he failed to give formal notice of his intent to convert the RPR motion into a motion for summary judgment.

Untimely Motion to Amend Answer Denied. In Archer Daniels Midland Co. v. Aon Risk Services, Inc., 1999 WL 548730, ___ F.R.D. ___ (D. Minn. 1999), ADM sued Aon in September 1997, alleging that Aon had neglected to obtain sufficient excess insurance coverage. In April 1998, the court issued a Pretrial Order establishing a July 1, 1998 deadline for amending pleadings and a February 1, 1999 deadline for the completion of discovery. Aon filed a motion to dismiss in June 1999, which was denied in February 1999. Aon then filed an answer in March 1999. While the motion to dismiss was pending, the court agreed to an amended Pretrial Order, that did not alter the deadline for amending pleadings but did move the discovery cutoff to July 15, 1999. In the spring of 1999, Aon moved to amend further the Pretrial Order to allow it to amend its answer to assert new affirmative defenses and to extend the discovery cutoff six months to January 15, 2000.

Rejecting Aon’s argument that its motion was governed only by Fed. R. Civ. P. 15(a), Magistrate Judge Erickson applied the "good cause" standard applicable to motions to amend scheduling orders under Fed. R. Civ. P. 16(b). Finding that Aon could demonstrate "good cause" only by showing that "despite its exercise of due diligence, it could not have raised these proposed affirmative defenses in a timely manner," and noting that "carelessness is not compatible with a finding of diligence," Magistrate Judge Erickson found the failure of Aon to allege its new defenses previously to be "wholly beyond comprehension" and denied that portion of Aon’s motion as "without merit."

Aon fared only slightly better with regard to its request to extend the discovery cutoff. For despite the admissions of Aon’s counsel that it had only recently begun to review 70 boxes of discovery documents and that it had conducted no depositions in the 14 months since entry of the initial Pretrial Order, Magistrate Judge Erickson agreed to extend the discovery cutoff for 60 days based on his concern that "if not allowed a reasonable opportunity to discover, Aon will be undertaking its discovery in the Trial of this Action."

This decision is simply the latest in a line of recent decisions emphasizing the "good cause" requirement governing motions to amend pretrial orders under Fed. R. Civ. P. 16(b). In light of the emerging trend among magistrate judges to adhere strictly to the Rule 16(b) "good cause" requirement, counsel who seek to amend pretrial orders without offering the required good cause do so at their own risk.

Other Decision of Note. In Weber v. Strippit, Inc., ___ F.3d ___ (8th Cir. 1999), the 8th Circuit joined the 4th and 6th Circuits and refused to extend Batson v. Kentucky, 476 U.S. 79, 106 S. Ct. 1712 (1986) to prevent the use of peremptory challenges to remove older jurors.

In Dhyne v. Meiners Thriftway, Inc., 1999 WL 512169, ___ F.3d ___ (8th Cir. 1999), the 8th Circuit reiterated that the denial of a pretrial motion for summary judgment is an interlocutory order that may not be appealed post-trial.

In In Re Medtronic, Inc., ___ F.3d ___ (8th Cir. 1999), the 8th Circuit granted Medtronic’s request for a writ of mandamus for relief from discovery orders, finding that compliance with the district court’s discovery orders would have required Medtronic to violate federal regulations governing certain medical devices. In doing so, the 8th Circuit reiterated that requests for writs of mandamus are governed by the five guidelines set forth in In Re Bieter Co., 16 F.3d 929 (8th Cir. 1994).

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment and Labor Law
• Family Law
• Federal Practice
• Juvenile Law
• Tax Law
• Torts and Insurance

Stepparent Adoption; Notice and Consent. M.E.F.'s adjudicated father shared joint custody with the child's mother under an October 1997 order. Because the child's stepfather wanted to adopt her, a hearing was held in December 1997 regarding termination of the father's parental rights because of abandonment, but no such determination was ever made. On June 3, 1998, a follow-up hearing was held, at which the father was not present, and the adoption was granted. The father later argued that he had no notice of the June 3 hearing as he had been unexpectedly transferred to another prison. Another hearing was held June 26, at which the father was present by telephone. The father contested the adoption and requested an attorney. The district court stated it would continue the matter but never vacated the adoption. The Court of Appeals reversed and remanded the grant of the adoption petition, finding that the father's consent to the adoption was required unless his parental rights had been terminated, and that he had not been given the 14-day notice of the hearing required under Minn. Stat. §259.49, subd. 1(b)(5) (1998). While the facts that the father did not have contact with the child for approximately one year before his imprisonment, that his only involvement in her upbringing was disruptive, and that he had failed to pay child support pursuant to the October 1997 order could support a finding of good cause for termination of his parental rights, the district court did not make findings that the father had abandoned the child and did not terminate his parental rights before granting the adoption. Petition of Justin Lee Fossen and Amy Jo Fossen to Adopt M.E.F., C3-98-1906, 1999 WL 562669 (Minn. App. 1999) (unpublished).

Possession of Weapon at School; Level of Mental Culpability. C.R.M., 15 years old, was charged with possession of a dangerous weapon on school property after a 4-inch, folding-blade knife was found in his coat pocket during a routine search. C.R.M. admitted the knife was his and that he had put it in his coat pocket but claimed he had used the knife the prior weekend for whittling and had forgotten to take it out of his coat. The trial court judge noted that he believed the child brought the knife to school "accidentally," but found him guilty of the charged offense, reasoning that Minn. Stat. §609.66, subd. 1d(a), does not require that he knew he had the knife when he walked into school. The Court of Appeals determined that C.R.M.'s possession of the knife was not "unwitting," a case in which a defendant bears no responsibility for the fact of possession, as it would have been had a classmate put the knife in his coat without his knowledge. The court analogized the case to those decided against passengers who board airplanes while accidentally possessing weapons, in which the appropriate minimum level of culpability was whether the passenger either knew or should have known that the concealed weapon was on or about his or her person or property while aboard or attempting to board the aircraft. The evidence established that C.R.M. knew he had a duty to determine whether the knife was in his coat but failed to do so, and the evidence was sufficient to support a finding that he should have known the knife was in his coat. In the Matter of the Welfare of C.R.M., C6-98-2385, 1999 WL 595371 (Minn. App. 1999) (unpublished).

Delinquency Disposition; Findings; Restitution; Delegation to Probation Officer. T.R.P., 16 years old, was adjudicated delinquent on charges of assault in the third degree and simple robbery. At the disposition hearing, the juvenile court ordered that T.R.P. be placed at Chamberlain Academy for five to eight months and that T.R.P. pay restitution in an amount to be determined by the probation officer. The court failed to make written findings describing (1) why public safety was served by the disposition; (2) why the best interests of the child were served by the disposition; (3) what alternative dispositions were proposed to the court and why these alternatives were not ordered; (4) why the child's present custody was unacceptable; and (5) how the correctional placement met the child's needs. Noting that the failure to make written findings is reversible error--see In re Welfare of C.A.W., 579 NW2d 494, 497-98 (Minn. App. 1998)--the Court of Appeals reversed and remanded for written dispositional findings of facts. The court upheld the order requiring the probation officer to determine restitution, stating that when the amount was calculated, T.R.P. had the right to challenge the reasonableness of the award by motion. In Re the Matter of the Welfare of T.R.P., C3-98-2361, 1999 WL 561966 (Minn. App. 1999) (unpublished).

Jurisdiction to Order Disposition Terminates after Child Turns 19. On January 2, 1997, B.A.L. and four friends stole four snowmobiles. The Brown County attorney filed a petition on April 13, 1998, alleging B.A.L. delinquent for aiding and abetting felony theft of a snowmobile. Trial was set for August 7, 1998, but B.A.L. failed to appear. A warrant was issued, B.A.L. appeared on August 10, 1998, and trial was rescheduled for October 30, 1998. After the trial, B.A.L. was adjudicated delinquent. The court ordered an updated probation report and scheduled a disposition hearing for November 23, 1998. B.A.L. turned 19 on November 9, 1998, while awaiting disposition, and ordinarily, juvenile court jurisdiction terminates when a person becomes 19 years old. Minn. Stat. §260.181, subd. 4(a)(1998). The county argued that the juvenile court retained jurisdiction over the disposition under an exception to the rule that provides continuing jurisdiction "over a person who has been adjudicated delinquent until the person's 21st birthday if the person fails to appear at any juvenile court hearing or fails to appear at or absconds from any placement under a juvenile court order. . . ." Minn. Stat. §260.181, subd. 4(e) (1998) (emphasis added). The Court of Appeals determined that under the plain language of the statute, B.A.L.'s failure to appear for trial on August 7, 1998, was not sufficient to extend jurisdiction because at the time he failed to appear, B.A.L. had not yet been adjudicated delinquent, and the statute does not provide for a general extension of juvenile court jurisdiction for any child who misses a court hearing at any stage in the proceeding. In the Matter of the Welfare of B.A.L., C5-99-10, 1999 WL 538108 (Minn. App. 1999) (unpublished).

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment and Labor Law
• Family Law
• Federal Practice
• Juvenile Law
• Tax Law
• Torts and Insurance

No Penalty for Reckless Return Preparation without Jury Trial. The IRS denied summary judgment against an accounting firm for return preparer penalties for the firm's alleged reckless and intentional discharge of rules and regulations in filing a client's tax returns. The Court decided that the issue of whether such a penalty was justifiable was best suited for a jury, which would have to sort out the facts. Schneider & Co. v. United States, No. IP98-C-0015-D/F, 1999 U.S. Dist. Lexis 10379 (Ind. 6/24/99).

Limit to Tax on "Bundled" Software Upheld. The 1974 rule of the California Board of Equalization construing the state computer tax to apply only to operating software "bundled" with the equipment is a valid interpretation of the 1972 and 1973 California statutes, despite dramatic changes in the computer industry since then. Hahn v. State Board. of Equalization, No. B121612, 87 Cal.Rptr2d 282, 1999 WL 557624 (Cal. App. 7/28/99).

High Court Review Sought. A petition for certiorari has been sought in Luther v. Commissioner of Revenue, 588 NW2d 502 (Minn. 1999). Luther held that the application of the Minnesota nondomiciliary resident tax statute to an out-of-state domiciliary who maintained an abode in Minnesota and spent more than half of the tax year there did not violate the Due Process or the Interstate Commerce Clause. 67 U.S.L.W. 3773 (U.S. 6/14/99) (No. 98-1999).

Employment Taxes: Reliance on Industry Practice. Summary judgment for the IRS on the employee status of booth performers for an adult entertainment operator is reversed to permit the operator to show reliance on industry practice and entitlement to the safe harbor defense under the 1978 Revenue Act. 303 W. 42nd St. Enters., Inc. v. IRS, No. 97-6066, 181 F.3d 272, 1999 WL 401482 (2d Cir. 6/18/99).

Exemptions Disallowed without TIN or Social Security Number. A taxpayer who failed to provide a taxpayer identification number or Social Security number for a minor dependent son may not claim the child as an exemption on his tax return despite the allegation that Treas. Reg. §301.6109-1(c) allows an affidavit explaining the absence of the number. I.R.C. §151(e) mandates that a TIN or Social Security number be on returns claiming the exemptions. Furlow v. United States, No. CCB-98-2394, 1999 WL 478304 (D. Md. 7/6/99).

Tax on Service Contracts. Payments made by customers to purchase warranty service contracts are includable in income when received. Warranty payments are typically nonrefundable deposits that are not includable in gross income. The court required accrual- basis car dealerships to include in income the full amount received on the sale of vehicle service contracts (VSCs) in the year the vehicle is sold, but reversed the Tax Court by allowing a deduction for the portion paid by the dealerships to the third-party-VSC administrator. Johnson v. Commissioner, No. 98-1324, 184 F.3d 786, 1999 WL 51272 (8th Cir. 7/21/99).

Rehabilitation Credit Denied; Fee Liability Not Fixed. The 8th Circuit, affirming summary judgment in favor of the IRS, held that a partnership is not entitled to a tax credit for a developer fee relating to the rehabilitation of historic buildings because its liability for the fee was not fixed and absolute. John L. Brassard v. United States, No. 98-3941, 1999 WL 549139 (8th Cir. 7/29/99).

State Capital Gains Tax. A debtor is not subject to Mississippi tax on capital gains realized from the sale of land he personally owned and land he owned through an S corporation, as well as on interest on notes, in a transaction structured as an installment sale combined with the dissolution of the corporation. Lambert v. Mississippi State Tax Commission, 179 F.3d 281 (5th Cir. 1999).

Mailing Lists; Unrelated Business Income Tax. Rental payments from mailers to an exempt organization for the use of its mailing list are not subject to unrelated business income tax under I.R.C. §512. Except for the portion of the payments that compensate the list broker, the payments constitute royalties that are excluded from unrelated business taxable income. While the list brokerage activities are not royalty-related, those activities and the compensation for them are not attributable to the organization. Common Cause v. Commissioner, T.C. No. 13921-97, 112 T.C. No. 23, 1999 WL 416764 (6/22/99); See also Sierra Club, Inc. v. Commissioner, T.C. M. (RIA) 99, 086 (3/23/99).

Exemption to Capital Stock Tax Violates Commerce Clause. A manufacturing exemption to the Pennsylvania capital stock tax, which is limited to manufacturing plants actually located in Pennsylvania, determinates against interstate commerce and violates the Commerce Clause. PPG Industries v. Pennsylvania, No. 87 M.D. 1996, 1999 WL 396902 (Pa. 6/17/99).

Litigation Costs Attributable to Punitive Damages Deductible as Business Expense. In a case of first impression, the U.S. Tax Court held that litigation costs attributable to the recovery of punitive damages by an independent contractor were deductible on Schedule C as a business expense and not on Schedule A as a nonbusiness itemized deduction. The court looked not to the nature of the damages but to the nature of the underlying claim. Since the punitive damages arose from a business-related claim, the costs attributable to the damages were a business expense. Guill v. Commissioner, No. 16796-97, 1999 WL 407465 (T.C. 6/18/99).

Tax Practice. The court dismissed without prejudice an action by the Indiana State Bar Association to enjoin the State Board of Tax Commissioners from promulgating a rule or otherwise allowing nonattorneys to represent taxpayers in appeals before the tax assessment Board of Appeals, the Division of Appeals, or before the Board. The court held that the proposed rules were reasonably designed to address the Bar Association interest, but that it may commence a new action if the rules as actually adopted substantially deviate. State ex rel. Indiana State Bar Association. v. Board of Tax Commissioners, No. 49S00-9810-OR-543, 1999 WL 446016, 714 NE2d 128 (Ind. 6/21/99).

IRS Lien; Cancellation of Contract for Deed. A vendor's failure to notify the IRS of the cancellation of a contract for deed on property subject to an IRS lien does not void the cancellation of the defaulting taxpayer's (vendee's) interest in the property. Bartels v. Blattner, 595 NW2d 527 (Minn. App. 1999) (unpublished).

Privilege Inapplicable to Accountant Collaborating with Tax Preparer. The attorney-client privilege and work-product privilege are inapplicable to taxpayers' conversations with, and documents they turned over to, an accountant referred to them by an attorney who was acting solely as their tax return preparer and not as a legal adviser. United States v. Randall, M.B.D. No. 98-10388-NG, 1999 U.S. Dist. Lexis 8862 (D. Mass. 5/21/99).

Records Given to Attorney-In-Fact Keep 5th Amendment Shield. Documents delivered by taxpayers to their attorney-in-fact under an IRS Form 2848 power of attorney solely in connection with the audit contemplated by such power of attorney are deemed not to have left the taxpayers' hands at all and continue to be protected by the Fifth Amendment privilege against self-incrimination. Streett v. United States, No. 5:96-MC-00006, 1999 U.S. Dist. Lexis 8775 (W.D.Va. 5/27/99).

Sales and Use Tax: Purchase of Video Games Exempt. The taxpayers' initial purchase of token and coin-operated video games machines, pinball machines, pool tables, jukeboxes and similar items is exempt from Minnesota sales tax under the purchase for resale provision. Amendments to the statute by the 1997 Legislature did not overrule preexisting case law. A&H Vending Co. v. Commissioner, No. 7051, 1999 WL 549636 (Minn. T. Ct. 7/23/99).

Employment Taxes: Penalty Notices. The IRS sent out 55,000 penalty notices to employers for various violations involving Forms W-2 and 1099, from missing or incorrect information on the forms to late filing. The notices, to be dated for early September 1999, were being sent out early to give taxpayers extra notification. Violations that triggered the notices include faulty or missing information on the wage reports, filing the forms on paper--if they were required to be submitted via magnetic media-- or late reporting to either IRS or employees. Daily Tax Report, No. 152, G-10 (BNA) (8/9/99).

Department of Revenue Notice: Corporate Franchise Tax; Application of IRC §382. In 1997, the Legislature amended Minn. Stat. §290.095, Subd. 3(d), to require that the federal limitation on amounts of net operating loss that can be carried over after certain corporate acquisitions must be applied to net income before apportionment. Previously, the statute merely stated that the federal provisions applied. The amendment was effective for tax years beginning after December 31,1996. This Revenue Notice further explains how to apply the federal limitation for Minnesota purposes. Revenue Notice #99-07.

Department of Revenue Notice: Tax Refund or Return Preparer Penalty. This Revenue Notice explains the application of special penalties on a "tax refund or return" preparer. Revenue Notice #99-08.

Proposed Regulations on Purchase Price Allocations in Asset Acquisitions. The IRS released proposed regulations that try to update and clarify the treatment of, and provide consistent rules for, both deemed and actual asset acquisitions under IRC §§338 and 1060. NPRM REG-107069-97 Fed. Reg. (8/10/99).

Automobile Donation Program; Audits. The IRS recently warned practitioners that charity auto donation programs will likely come under IRS scrutiny. The IRS National Office reportedly also sent a memorandum to field personnel in May 1999, alerting revenue agents to scrutinize charity automobile donation programs. In addition, the IRS 2000 Continuing Professional Education (CPE) textbook will contain a discussion that warns of abuse in this area. Standard Federal Tax Reports, p. 6 (CCH) (6/24/99).

Treasury White Paper on Corporate Tax Shelters. The Treasury recently released a white paper --"The Problem of Corporate Tax Shelters: Discussion, Analysis, and Legislative Proposals" -- on corporate tax shelters. The paper elaborates on the four core, interrelated elements of the President's corporate tax shelter proposals: strengthening disclosure of corporate tax shelter activities; increasing and modifying penalties or sanctions related to the substantial understatement of income tax; changing the substantive law rule to disallow the use of tax benefits generated by corporate tax shelters; and providing consequences to other parties who facilitate or accommodate the transaction, including promoters and tax indifferent accommodating parties. Daily Tax Report, No. 127, GG-1 (BNA) (7/2/99).

IRS Guidance on Early Referral of Audit Issues to Appeals. The IRS issued Revenue Procedure 98-28 providing guidance and describing the method by which taxpayers may request early referral of unresolved issues from the Examination or Collections Division to the Office of Appeals. Rev. Proc. 99-28, 1999-29 I.R.B. (7/19/99).

JCT Interest and Penalty Study. The Joint Committee on Taxation issued its much-anticipated interest and penalty study. JCS-3-99. An executive summary of the report is found in Daily Tax Report, No. 141, L-1 (BNA) (7/23/99).

Michigan Repeals Single Business Tax. Since 1975, Michigan has been the only state that has enacted a Single Business Tax or value-added tax to replace the corporate income tax more typically used by the states. In June, the Single Business Tax was phased out over a 23-year period starting in 1999. The Single Business Tax has long been criticized for being burdensome, complex, and difficult to apply. A business activities tax is being discussed in Minnesota and a report on this tax is due to our Legislature in 2000.

Federal Tax Bills in November. Both the House and the Senate in July passed tax bills that are substantially different in approaches, other than providing tax relief of over $800 billion over a 10-year period. Highlights in the bills are rate reductions, marriage penalty relief, phase-out of the estate and gift tax, capital gains reduction, elimination of the alternative minimum tax for individuals, retirement plan modifications, and overhaul in the international tax area. The Conference Committee reached agreement in August and passage by Congress is expected after Labor Day. The President has stated he will veto the tax proposals because they do not cut the deficit enough. However, it is anticipated that the President will negotiate on the size of the tax cut and that an acceptable bill will be passed and signed into law in November 1999.

Property Taxes; Citizens Jury. The Ventura Administration has undertaken an 18-month effort to reform the property tax system in Minnesota. In July, the Department of Revenue retained the nonpartisan Jefferson Center to assemble a "Citizens Jury," commissioned to identify the values, principles and tradeoffs involved in overhauling the real property system.

In August, the 18-member jury issued its recommendations.

* Reduce property taxes for all local jurisdictions and increased local fees and state aids.

* Continue to limit local sales tax authority.

* Continue to prohibit local income tax authority,

* Increase state aid to pay for increased state mandates.

* Limit annual valuation increases for all properties to the lesser of CPI or 5%.

* Decrease the number of property classes and sub-classes.

* Consider letting counties establish their own classifications and rates.

* Eliminate penalties on home improvement projects.

* Provide more rent tax relief.

* Create property tax incentives to promote new apartment construction.

Over the next few months, the Revenue Department will hold public forums on the recommendations and eventually the technicians will lay out some options for consideration by the Governor in the 2001 legislative session.

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment and Labor Law
• Family Law
• Federal Practice
• Juvenile Law
• Tax Law
• Torts and Insurance

Underinsured Motorist Coverage. On May 10, 1997, Norman Loren drove a motorcycle and was struck by Hage, who was at fault. Loren settled with State Farm for the policy limits, but his injuries far exceeded available insurance. Loren's son, a resident relative, owned the motorcycle but the son had no underinsurance (UIM) coverage. Norman Loren had a policy with American National Property & Casualty Co. (ANPAC) that did not cover injury for persons injured on a motorcycle, and UIM coverage is not required under the No-Fault Act.

In a certified question from the United States District Court, the Minnesota Supreme Court ruled unanimously that the ANPAC policy excluding UIM coverage for an insured injured while occupying a motorcycle owned by a resident relative violates Minn. Stat. §65B.49, subd. 3a. It found that, in reading the No-Fault Act as a whole, a provision in a policy precluding coverage for an insured injured while operating a motorcycle owned by a resident relative contravenes the act. It also ruled that the legislative interest in requiring vehicle owners to have insurance is not served by excluding nonowner resident relatives from UIM coverage and noted that the act is concerned that victims of auto accidents receive adequate compensation. American National Property & Casualty Co. v. Loren, C7-98-2332, 1999 WL 549143, 597 NW2d 291 (Minn. 1999).

Insurance; Strict Compliance with Policy Required. Nathe Brothers, Inc. purchased a commercial insurance policy from American National Fire Insurance (American National) for a restaurant. American National inspected damage from a rainstorm and told Nathe that coverage would be limited because of policy restrictions. On January 30, 1997, American National informed Nathe that it must submit a sworn statement in proof of loss within 60 days if it disagreed with American National's assessment. On February 14, 1997, Nathe submitted as proof of loss an unsigned letter with no supporting information but did list a specific amount of claimed property damage and loss of business income.

The district court granted American National's motion for summary judgment because the policy demanded that there be full compliance and Minn. Stat. §65A.01, subd. 3(c) demands a sworn statement of loss. Nathe argued that it substantially complied with the requirements. The Minnesota Court of Appeals disagreed and affirmed the trial court. It found that Nathe was represented by counsel, was a commercial entity, that American National did nothing to lull Nathe into inaction, and that substantial compliance could apply in other cases. Nathe Brothers, Inc. v. American National Fire Insurance Company, et al, C5-98-2328, 597 NW2d 587 (Minn. App. 1999).

Liability of Accountants to Nonclient. Witzman sued accountants Lehrman, Lehrman & Flom (LLF) who had worked for Wolfson, trustee of a trust under which Witzman was a beneficiary. Witzman alleged that LLF was jointly and severally liable for Wolfson's breach of trust under RICO, 18 USC Sections 1961-1968 (1994) and that it was aiding and abetting Wolfson's torts. The district court granted summary judgment for LLF because there was "no confidential or fiduciary relationship between LLF and Witzman and Witzman was not an intended beneficiary such that Witzman could prevail on her claims."

The Minnesota Court of Appeals affirmed on the negligence and misrepresentation counts but remanded for trial on the other counts. LLF argued to the Minnesota Supreme Court that Minnesota law did not recognize joint tortious conduct/aiding and abetting claims as to professionals and that no facts supported the RICO claim. The Court reviewed the motion as a motion to dismiss under Minn. R. Civ. P. 12.02(e). Witzman based her claim on the Restatement (Second) of Torts §876 (b) (1977). The Court indicated that it would narrowly construe the elements of aiding and abetting liability against professionals and would require plaintiffs to plead facts with particularity.

The Supreme Court reversed the Court of Appeals and dismissed the case. The Court found that even if the allegations of the complaint were true, Witzman must have known the actions of the primary tort-feasor were wrong. The actions of LLF did not rise to the level of "substantial assistance" and its routine accounting activities were insufficient for Witzman to prosecute a RICO violation. Finally, the fraud claim was dismissed as LLF had no actual knowledge that Wolfson's actions were tortious, and the accountants had no duty of disclosure to a nonclient in this instance. Witzman v. Lehrman, Lehrman & Flom, C6-98-555, 1999 WL 605602 (Minn. 8/12/99).

Sufficiency of Expert Affidavit; Medical Battery. Haile underwent surgery on September 26, 1995, at the University of Minnesota. On September 5, 1997, she served a complaint that included claims of medical negligence and battery. She filed an affidavit on October 1, 1997, indicating that her "expert is now deceased." Five months later, Haile filed a second affidavit that included a letter from Haile's expert, concluding that Haile "has a valid complaint of malpractice, and should have compensation, relying solely on medical records". On March 30, 1998, Haile was notified that her second affidavit did not meet the requirements of Minn. Stat. §145.682 but Haile did not respond. On September 2, 1998, respondents moved for summary judgment. On October 5, 1998, Haile filed responsive papers with two additional expert letters.

The trial court found that the expert submissions were deficient and that Haile failed to present a prima facie case for battery. The Minnesota Court of Appeals affirmed and found that the second affidavit was filed more than 180 days after the lawsuit was commenced, did not include the signature or credentials of the expert, or explain the chain of causation between the standard of care and Haile's damages. The court noted that the later affidavits were filed over one year after the lawsuit was commenced, and Haile never requested an extension of time. The battery claim should have been established through expert testimony, thus the trial court properly dismissed the claim as a matter of law. Haile v. Sutherland, University of Minnesota, et al, C9-99-415, 1999 WL 619012 (Minn. App. 8/17/99).