March 2000

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment & Labor Law
• Environmental Law
• Family Law
• Federal Practice
• Juvenile Law
• Real Property
• Tax Law
• Torts & Insurance

Underinsured Motorist Benefits; Release from Liability:.The Minnesota Court of Appeals recently limited the underinsured motorist benefits available to an injured passenger who settled his liability claims against the two at-fault drivers. E.M.C. Ins. Cos. v. Dvorak, 603 N.W.2d 350 (Minn. App. 1999).

Mr. Dvorak sustained severe injuries in a motor-vehicle accident in January, 1994 while riding as a passenger in a car driven by Skluzacek, who was insured by E.M.C. Skluzacek’s car collided with another car driven by Malinski, who had only $30,000 in liability coverage. The E.M.C. liability coverage for Skluzacek was $500,000, as was the UIM coverage. E.M.C. paid Dvorak $20,000 in no-fault medical benefits and $500,000 under the liability coverage. He also received the $30,000 liability limit available to Malinski. Although the release reserved the right to make claim for UIM benefits, it also released both tortfeasors, Skluzacek and Malinski, and their liability insurers from further liability. The pertinent portion of the release read as follows:

In consideration of the payments [received], Plaintiff hereby completely releases and forever discharges Anthony Lloyd Skluzacek, . . . and John Anthony Malinski from any and all present or future claims, demands, obligations, actions, causes of action, damages, costs, loss of services, expenses or compensation of any nature, based upon any theory which the Plaintiff may have against Defendants or which may hereafter accrue or otherwise be acquired, which are or could be the subject of the Complaint against the Defendants without limitation for any and all unknown claims for bodily injury and personal injuries to the Plaintiff which may have resulted or may result from the alleged acts or omissions of the Defendants.

This release and discharge shall also apply to Insurers’ liability coverage provided for the Defendants, it being understood that the Plaintiff by executing this release does not release any claims for Underinsured Motorist Coverage, but to the extent this Release applies to available liability coverages, it is intended to be a full, final and complete release of Defendants and their insurers, representatives, successors in interest and assigns . . . .

After concluding the liability settlements, Dvorak made a claim for E.M.C.’s underinsured motorist coverage, arguing that Malinski was underinsured. A panel of arbitrators determined both damages and fault, attributing 90 percent of the fault to Skluzacek and 10 percent to Malinski and awarding damages totaling $1,189,454.90. The parties disagreed as to the amount Dvorak was entitled to receive. Dvorak contended he was entitled to collect $475,781.98 in UIM benefits. E.M.C. contended it owed $86,945.49. The parties’ principal difference of opinion was Dvorak’s claim that he was entitled to collect four times Malinski’s percentage of fault pursuant to Minn. Stat. §604.02, subd. 1 (1998), the joint and several liability statute that limits the responsibility of a person whose fault is 15 percent or less to no greater than four times the percentage of his or her fault. The reallocation provisions are as follows:

[w]hen two or more persons are jointly liable, contributions to awards shall be in proportion to the percentage of fault attributable to each, except that each is jointly and severally liable for the whole award. . . . [A] person whose fault is 15 percent or less is liable for a percentage of the whole award no greater than four times the percentage of fault.

The district court, accepting the E.M.C. argument that it was not bound to reallocate damages under the joint and several liability statute, awarded damages of $86,945.49.

The Court of Appeals affirmed the district court’s award and held that the reallocation provision of the joint and several liability statute was not applicable because Dvorak’s settlement with the tortfeasors released them from liability, so there was no joint liability remaining to be reallocated. The release severed joint liability.

By Steven J. Kirsch and Andrew T. Shern
Murnane, Conlin, White & Brandt, PA

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment & Labor Law
• Environmental Law
• Family Law
• Federal Practice
• Juvenile Law
• Real Property
• Tax Law
• Torts & Insurance

Jury: Implied Bias. Nine of the impaneled jurors were past victims of similar crimes. The appellant was on trial for second-degree burglary. Of the 12 jurors selected, seven had been victims of home burglaries, two had been victims of theft, and two had experienced other crimes. The jury was picked without any challenges for cause or peremptory strikes by either side. Appellant contended that the federal doctrine of "implied bias" applied, which automatically presumes bias in certain situations, particularly where there is a relationship between a prospective juror and some aspect of litigation wherein an average person could generally not remain impartial. Sullivan v. Louisiana, 508 U.S. 273 (1993). This doctrine is opposed to that of a claim of bias under Minnesota law, where an appellant must show three things: 1) the juror alleged to be biased was subject to challenge for cause; 2) actual prejudice resulted from a failure to grant the motion to strike or to dismiss the panel; and 3) an appropriate objection was subsequently made.

Minnesota Rule of Criminal Procedure 26.02, subd. 5, does not have "crime victim status" as one of the proper causes for challenge. This list is deemed to be exclusive. The Court of Appeals, however, states that the doctrine of implied bias appears "philosophically sound"; nevertheless, it declines to extend the existing law. State v. Anderson, C3-99-121, 603 N.W.2d 354 (Minn. App. 12/21/99).

Sentence: Restitution; Victim's Parent. A trial court ordered a juvenile to pay restitution by reimbursing the mother of a 12-year-old. The parent incurred expenses of $124 for lost wages and mileage expenses as a result of taking the victim to St. Cloud to participate in a criminal investigation.

Held, the district court properly ordered the appellant to reimburse the victim’s mother for the cost of her parental assistance. This order is consistent with the spirit of the restitution statute. Parents can be included as "victims" under the restitution statute if they incur economic harm as a result of the appellant’s behavior. In re J.A.D., C2-99-868, 603 N.W.2d 844 (Minn. App. 12/21/99).

Sentence: Restitution; Accomplice after the Fact. In a plea bargain, the appellant pled guilty to being an accomplice after the fact in a murder case. Restitution was not discussed in the plea agreement, nor did the state request such restitution. The district court trial judge, however, ordered the appellant to pay over $12,000 in restitution to the victim’s parents.

Held, restitution is only proper where the victim’s losses are directly related to the conduct for which the defendant was convicted. Here, the appellant’s actions were to cover up the murder, and this is separate from the murder itself. There are no factual findings in the restitution order as to which restitution amounts were related to the murder and which were related to the family's multiple-day search for their son. Hence, the case was reversed and remanded to determine which losses were caused by the appellant in the cover-up of the murder. State v. Latimer, C3-99-1236, 604 N.W.2d 103 (Minn. App. 12/28/99).

Jail Credit: Consecutive Sentences; Double Credit. The appellant was convicted of three counts of criminal vehicular injury, with two 12-month sentences being concurrent and one 12-month sentence being consecutive to the other two sentences. The total incarceration period was 24 months. The district court then credited the appellant with 106 days of jail credit against the 24-month total.

Held, the appellant is not entitled to jail credit against each of the two consecutive sentences. To do so would constitute "double credit." State v. Cameron, C7-99-1529, 603 N.W.2d 847 (Minn. App. 12/28/99).

Probation: Geographical Exclusion. The appellant was put on probation for fourth-degree assault and obstructing legal process or arrest. These had both been charged out as felonies; however, the trial court judge treated them as gross misdemeanors and imposed a condition of probation that the appellant be excluded from the city of Minneapolis.

The record showed that the appellant had been involved in an altercation with a police officer and continually trespassed at a particular location known as "Bossen Terrace." During probation, the appellant violated the terms of the judge’s probationary conditions by reappearing in Minneapolis to attend church, by not checking in, and by failing a drug test. At a probation violation hearing, the appellant requested that the exclusion from Minneapolis be dropped.

Held, the appellant’s exclusion from Minneapolis is invalid. An insufficient nexus exists between exclusion from Minneapolis and the appellant’s rehabilitation or the preservation of public safety. The record is scant in this regard, but it appears that the sentencing judge was most specifically concerned with activity at Bossen Terrace. Although the record indicates that the appellant had been previously arrested for terroristic threats against the officer-victim and that her gang associates had "put a hit out" on the officer, it is unclear whether and to what extent the sentencing judge considered these factors. Hence, the probationary exclusion from the city of Minneapolis is reversed. State v. Franklin, C1-99-635, 604 N.W.2d 79 (Minn. 1/6/00).

Double Jeopardy: Post-Verdict Mistrial Motion; Waiver; Receivable Verdict. This decision reverses the published decision of the Court of Appeals concerning double jeopardy.

At trial, and just before the reading of the verdict, the judge became aware that the jury had inadvertently received a copy of the amended complaint. Instead of divulging this information to counsel, the trial court proceeded with the reading of the verdict, which was guilty of disorderly conduct but not guilty of assault. The trial court then informed counsel of the amended complaint problem, at which time trial counsel made a motion for a mistrial. The motion was granted, and the case was reset for trial on both the disorderly conduct and assault charges.

The Court of Appeals had held that the receipt of the tainted evidence by the jury somehow made the verdict "non-receivable." The Supreme Court, however, held that mere trial error does not convert the verdict to a non-receivable one under Minn. Stat. §631.17. The trial court should have shared this information prior to the reading of the verdict and then decided what to do. However, because the verdict was received, it is final.

The motion for mistrial by the defense after the verdict did not constitute a waiver of double jeopardy. Because Rule 26.04 does not list mistrials as among the permissible post-verdict motions and the mistrial motion in this case was made after the verdict was entered, it was thus void.

Held, reversed. In the interest of justice, this case also is remanded for the appellant to file a motion for a new trial in accordance with Rule 26.04. State v. Leroy, C0-98-1247, 604 N.W.2d 75 (Minn. 12/30/99).

DWI/Implied Consent: Aggravated DWI; "B-Card". In 1994, the appellant, who had been involved in several alcohol-related incidents from 1989 to 1992, had his driver's license canceled as inimical to public safety. Appellant met the rehabilitation requirements in 1997 and was granted a "B-Card" -- any use of alcohol invalidates it. In 1998, the appellant was stopped and charged with aggravated DWI and violation of a restricted license. The court found him guilty of both.

Held, under the plain meaning of Minn. Stat. §169.129, the appellant cannot be convicted of aggravated DWI because his license had been reinstated, albeit with the no-use-of-alcohol restriction. The appellant’s license had not been canceled, suspended, revoked, disqualified, or denied under any of the sections listed in the aggravated DWI statute at the time of the incident.

The Court of Appeals rejected the reasoning by the state that a driver who violates the conditions of a "B-Card" by drinking is "immediately" under revocation. The court also rejected the argument that State v. Hood, 320 N.W.2d 415 (Minn. 1982) supports the appellant’s conviction. Under Hood, being on a limited license for work purposes during an actual period of revocation can support an aggravated DWI charge. The difference between Hood and this case is that the appellant had already been reinstated, whereas under a limited license situation, the reinstatement is not fully in effect. State v. Uber, C7-99-896, 1999 WL 1256577 (Minn. App. 12/28/99).

DWI: Enhanced Gross Misdemeanor; Revival; Waiver. On March 11, 1999, the Minnesota Supreme Court held that enhanced gross misdemeanor statutes are unconstitutional. On April 7, 1999, the respondent was charged with gross misdemeanor violations, based upon multiple convictions in a ten-year period. On May 25, 1999, new amendments to the law went into effect to "fix" the gross/enhanced misdemeanor problem.

The district court granted a motion to dismiss the charges, holding that between the filing of Baker (3/11/99) and the effective date of the new amendment (5/25/99), there was no statute under which to charge a third DWI within ten years as a gross misdemeanor, because that law had been superseded by the enhanced gross misdemeanor law that Baker held unconstitutional.

Held, the rule of revival applies in this case. When the court finds a statute unconstitutional, the statute is not only inoperative, but also deemed to never have been enacted. This rule generates a corollary that the statute that existed prior to the amendment automatically revives in full force of effect. Hence, the old gross misdemeanor law was automatically revived in this case and the respondent was lawfully charged. State v. Neely, C0-99-1498, 604 N.W.2d 120 (Minn. App. 1/11/00).

Evidence: Prior Inconsistent Statement; Substantive Evidence. During the appellant’s trial for first- and third-degree criminal sexual conduct, the victim took the stand. During his trial testimony on direct examination, the victim apparently did not discuss the appellant’s alleged use of a knife and terroristic threats to keep quiet. On cross-examination, defense counsel asked the victim about several inconsistent statements, including about the use of a knife. Over the defense objection, the trial court allowed the state to introduce a prior consistent statement in the form of a videotaped interview that discussed the knife and the terroristic threats.

Under Minnesota Rule of Evidence 801(d)(1)(B), a witness’s prior consistent statement may be admitted as nonhearsay evidence if certain conditions are met: (1) credibility has been attacked; (2) the prior consistent statement bolsters credibility; and (3) the statements are truly consistent with the trial testimony. In this case, the first two prongs were met. The problem was that the court did not analyze the individual statements of the interview to determine which were consistent and which were inconsistent. The discussions about the alleged knife and terroristic threats were criminally inconsistent and should not have been admitted as substantive evidence by the court. This was an error; however, because the jury acquitted the appellant of the first-degree counts, the jury apparently disregarded the evidence anyway. State v. Bakken, C5-99-587, 604 N.W.2d 106 (Minn. App. 1/4/00).

Bail: Cash Only; Constitutionality. Article I, Section 7, of the Minnesota Constitution states that: "All persons before conviction shall be bailable by sufficient sureties . . . ." The appellant in this case had been charged with escape from custody, a gross misdemeanor. The appellant had a history of flight, and a trial court judge set maximum gross misdemeanor bail at $6,000, "cash only."

Held, Article I, Section 7 prohibits a court from setting monetary bail that can be satisfied only by a cash deposit in the full amount of bail set by the court. By doing so, the trial court restricted the appellant’s right to post bail by providing alternative forms of sufficient surety, such as a bond.

Note: This opinion does not address the practice of setting a monetary bail amount that may be satisfied by allowing the accused to make a cash deposit with the court in an amount less than the full amount set by the court. State v. Brooks, C1-98-2388, 604 N.W.2d 345 (Minn. 1/13/00).

Search and Seizure: Investigative Stop; Motor Vehicle; Broken Window; Constitutionality. The appellant was driving at night in Minneapolis. Police noticed the appellant’s vehicle had a broken driver’s-side rear passenger window covered with a plastic bag. The officer suspected that the vehicle may have been stolen. While following the vehicle, the officer made a computer check to determine whether it was listed as stolen. Officers learned it was not stolen. Nevertheless, officers stopped the vehicle. After the vehicle was stopped, the appellant showed indicia of intoxication and was eventually charged with gross misdemeanor DWI.

At the trial suppression hearing, one officer alone testified. He stated that the computer check did not dispel his suspicion, because owners frequently do not know when vehicles are stolen until several hours or days later. This is particularly true on "dog watch."

Held, this stop was unconstitutional. There is insufficient evidence in the record to support the trial court conclusion that the stop was based on a reasonable and articulable suspicion of ongoing criminal activity. The police officers did not have an objectively reasonable articulable suspicion prior to the computer check. There was no testimony as to whether thieves or victims are more likely to have put plastic over broken car windows. A broken window alone does not give rise to an objectively reasonable suspicion that criminal activity is afoot. Further, there was no evidence in the record to indicate that the vehicle was currently occupied by a perpetrator, as opposed to a victim. There are also innocent reasons why a window could be broken, such as an owner who has locked his keys in the vehicle.

The Supreme Court distinguishes this case from State v. Barber, 241 N.W.2d 476 (Minn. 1976), in which a stop was upheld based upon the use of bailing wire to attach a license plate, instead of screws. License plates are the primary means by which police may identify a vehicle and its owner, and evidence of tampering with these items is far more suggestive of criminal activity than a broken window. State v. Britton, C9-98-968, 604 N.W.2d 84 (Minn. 1/13/00).

By Frederic Bruno
Frederic Bruno & Associates

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment & Labor Law
• Environmental Law
• Family Law
• Federal Practice
• Juvenile Law
• Real Property
• Tax Law
• Torts & Insurance

Reemployment Compensation Cases. An employee who was excessively absent because he was unable to obtain child care was not entitled to reemployment compensation benefits. In Shibley v. Specialty House Electronic Repair, Inc., 1999 WL 1102411 (Minn. App. 1999)(unpublished), the Court of Appeals held that the employee’s "poor attendance," including missing nine days of work in one month, constituted misconduct, disqualifying him from benefits. Although an interpreter did not "smoothly translate" the proceedings, the translation was sufficiently satisfactory to uphold a denial of benefits in <H>Musse v. Dolphin Industrial Group, 1999 WL 1101425 (Minn. App. 1999)(unpublished). The appellate court in Shibleydeemed that the essence of the proceedings was "adequately and accurately" translated for the claimant.

A flight attendant who was on emergency leave due to a medical condition was not entitled to benefits because of her failure to seek "suitable" full-time work. In Lindemuth v. American Airlines, 1999 WL 1101998 (Minn. App. 1999)(unpublished), the appellate court upheld denial of benefits because the employee sought only temporary work while planning to resume her full-time flight position. This "prevented her" from the appropriate job-search efforts required by law.

An employer who reduced an employee’s hours from 32 to 20 per week was not required to pay reemployment benefits to an employee who quit for lack of work. In Rice v. Southeast Minnesota Private Industry Council, Inc., 1999 WL 1101390 (Minn. App. 1999)(unpublished), the appellate court held that allowing the employee to use leave time and giving overtime assignments to supplement her income precluded her claim of constructive discharge. The failure of an employee to accept suitable employment justified disqualification from receiving reemployment compensation benefits, according to a pair of recent rulings by the Minnesota Court of Appeals. In Emerick v. Choice Temporary Services, Inc., 1999 WL 1256579 (Minn. App. 1999)(unpublished), the court held that an employee was disqualified from receiving reemployment benefits because he refused to accept a job that paid about four percent less in wages than his previous job, a differential that was not sufficiently substantial to justify turning down the position.

In Ess v. Olsten Staffing Services, 1999 WL 1256587 (Minn. App. 1999)(unpublished), the court held that an employee could not refuse to accept a job for which he was qualified because he did not want to pay for parking or bus fare for the position, which was 18 miles from his home. The court stated that transportation to a job is the problem of the employee and cannot be used as justification for refusing a job that is otherwise suitable.

Indemnification. A county employee involved in work-related automobile accidents was not entitled to indemnification for claims covered by the employee's own private insurance. In Grinnell Mutual Reinsurance Co. v. City of Cokato, 1999 WL 1256378 (Minn. App. 1999), the court held that Minn. Stat. §466.07, which provides for governmental indemnification of employees, does not require governmental entities to indemnify employees for losses that are covered by private insurance carried by the employees.

Project Labor Agreements. A pair of recent rulings of the Minnesota Court of Appeals dealt with project labor agreements required by public entities. In Queen City Construction Inc. v. City of Rochester, 1999 WL 1256569 (Minn. App. 12/28/99), the court held that a public entity is entitled to require successful bidders in a public construction project to sign a Project Labor Agreement (PLA) requiring them to follow union work rules, contribute to union benefits, and use union hiring halls during the project as a condition of obtaining the contract.

In Minnesota Chapter of Associated Builders & Contractors, Inc. v. Minnetonka Independent School District No. 276, 1999 WL 1261743 (Minn. App.1999)(unpublished), the court also upheld a PLA, rejecting contentions that it violated the competitive bidding statutes and would be anticompetitive. In both cases, the court relied upon the desire of the contracting entity to insure that the project was timely completed, which justified the discretionary decision to require the PLAs as a means of assuring timely completion.

Age Discrimination. The Supreme Court recently held that the federal Age Discrimination in Employment Act (ADEA) does not apply to discrimination claims against states or state entities. In Kimel v. Florida Board, the Court held that Congress lacks the power to abrogate state sovereignty under the 11th Amendment. The decision is the first ruling of five cases pending before the Court this term concerning federal and state power.

Family Leave. The Department of Labor has proposed that states use their unemployment compensation funds to pay at least part of the salaries of parents who exercise their rights under the Family Medical Leave Act (FMLA) for up to 12 weeks of leave to care for a new birth or adopted child. The measure has drawn fire from business groups and others and is expected to face stiff opposition.

Federal Whistleblowers. The U.S. Supreme Court will soon decide whether individuals have standing to file whistleblower suits under the federal qui tam statute in Vermont Agency of Natural Resources v. United States, No. 98-1828. The issue is whether a state employee can sue a state under the measure if the government has not intervened.

By Marshall H. Tanick
Mansfield, Tanick & Cohen

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment & Labor Law
• Environmental Law
• Family Law
• Federal Practice
• Juvenile Law
• Real Property
• Tax Law
• Torts & Insurance

Citizen Suit For Clean Water Act Violations Not Mooted By Subsequent Compliance. A citizen suit seeking civil penalties for violations of a National Pollutant Discharge Elimination System (NPDES) permit is not mooted by the permit-holder's subsequent and voluntary compliance with its permit unless it is "absolutely clear" that the alleged violations could not reasonably be expected to recur. Friends of the Earth, Inc., v. Laidlaw Environmental Service, Inc., 2000 WL 16307 (Minn. 2000).

In 1986, Laidlaw Environmental Services (Laidlaw) acquired a wastewater treatment plant in South Carolina. After acquiring the facility, Laidlaw was granted an NPDES permit that limited the discharge of several pollutants into an adjacent river. Between 1987 and 1995, the discharges repeatedly exceeded the amounts allowed by the permit. Plaintiffs brought an action under the citizen suit provision of the Clean Water Act seeking, inter alia, civil penalties. During the course of the litigation, Laidlaw came into compliance with the NPDES permit and then shut down the plant altogether. The district court levied a civil penalty of $405,000 against Laidlaw. The 4th Circuit vacated the order, finding that the case had become moot when Laidlaw complied with the terms of its permit.

In reversing the 4th Circuit's decision, the Supreme Court held that a defendant who remedies operational violations after the commencement of litigation bears the "heavy burden" of convincing the court that the violations cannot reasonably be expected to recur. The Court held that the effect of Laidlaw’s compliance and the closure of the plant was a disputed factual matter and remanded the case for consideration of whether Laidlaw might again violate its NPDES permit.

EIS Not Necessary; Kondirator Permits Stand. A determination by an agency that an environmental impact statement (EIS) is not warranted and the subsequent issuance of operating permits will be affirmed where the agency actions are supported by substantial evidence in the administrative record and are not arbitrary or capricious. American Iron & Supply Co. v. Minnesota Pollution Control Agency, 2000 WL 31804 (Minn. App. 1/18/00).

In a decision that may hasten a conclusion to the legal controversy over the proposal by American Iron & Supply Company to install a metal-shredding facility (the Kondirator) on the banks of the Mississippi River, the Minnesota Court of Appeals affirmed a lower court ruling that upheld both a determination by the Minnesota Pollution Control Agency (MPCA) that an EIS is not required and the subsequent issuance of storm water and air permits.

In 1994, the Minnesota Legislature enacted Minn. Stat. §116G.151, which required the MPCA to complete an environmental assessment worksheet (EAW) and to decide whether an EIS was necessary before permitting American Iron to install the Kondirator. After completing the EAW, the MPCA concluded that the proposal from American Iron would not have significant environmental impacts and that an EIS was not warranted. The city of Minneapolis and the Minneapolis Park & Recreation Board filed suit in Hennepin County District Court, claiming that the MPCA determination was erroneous. In 1998, the district court remanded the matter to MPCA for further consideration of several issues. The MPCA again concluded that an EIS was not necessary and issued storm water and air permits to American Iron. In a second challenge by the City and Park Board, the Hennepin County District Court affirmed the MPCA determination of no significant environmental impact and its issuance of the permits.

In the instant case, the Court of Appeals affirmed the lower court ruling on grounds that administrative decisions are entitled to deference under Minnesota law and should not be overturned unless they are arbitrary or capricious. According to the court, the MPCA conclusions were made after significant consideration of the facts and were supported by substantial evidence in the agency record; the mere existence of conflicting evidence did not in itself require a finding that an EIS was necessary.

On January 21, 2000, the Minneapolis City Council voted not to seek review of the decision by the Minnesota Supreme Court.

By Robert Devolve
Leonard, Street and Deinard

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment & Labor Law
• Environmental Law
• Family Law
• Federal Practice
• Juvenile Law
• Real Property
• Tax Law
• Torts & Insurance

Retroactive and Future Child Support from Obligor’s Estate. The parents executed a declaration of parentage and stipulated to child support, which deviated downward from the guidelines. Payments were made until the father was hospitalized. The child received Social Security benefits based on the father’s disability, which continued as survivor benefits after his death. The child’s mother requested retroactive and future child support from the father’s estate, which included a $242,000 brokerage account held jointly with his surviving wife. The district court denied all claims.

The Court of Appeals found that the father’s joint stock account was not a multiple-party account as defined by the Probate Code because the stock broker was not a financial institution, and the securities held by the broker did not constitute a deposit of funds in an account within the meaning of the Code. It concluded that the joint brokerage account could not be brought into the estate for payment of child support.

On the question of retroactive child support, the Court of Appeals found that the Parentage Act grants the district court discretion to limit the parent’s liability to what it deems just in the circumstances. It cited 1) the district court itself had never determined the amount of child support, 2) the father’s past contributions to child support, including payments toward the child’s vacations and payment of the child’s dental expense, 3) the support stipulation, and 4) the estate assets.

The court concluded that it could not find an abuse of discretion in the district court limitation of past support payments to those stipulated by the parties. As to the issue of future support, the Court of Appeals found that the Parentage Act allows support proceedings involving a decedent or his estate and requires a support order to be established under Chapter 518. It reversed in part and remanded, stating that the district court erred in concluding that the child was not entitled to future support because a support order was not in place at the time of the father’s death and in holding that the child’s survivor benefits eliminated the liability of the estate for future support. The court reversed in part and remanded to determine the liability of the estate for future support payments after crediting the estate for the Social Security death benefits paid to the child. Berg v. D.D.M., C4-99-005, 603 N.W.2d 361 (Minn. App. 12/21/99).

Adult Sister Denied Intervention in Custody Modification. The mother moved to Missouri, and the two boys went to live with their father in Minnesota with their mother’s consent. He petitioned for custody and so did the boys' adult sister, who alleged that custody in either parent was inappropriate. Her motion to intervene as of right under Rule 24.01 was denied. The Court of Appeals found that the rule does not permit intervention as of right to anyone with an interest relating to the subject of the action. Instead, the rule requires that a potential intervenor claim an interest relating to the property or transaction that is the subject of the action. It said that this important distinction precluded intervention as of right in a similar family law situation where former foster parents attempted to intervene. In that case, the Supreme Court held that the very personal interest derived from the attachment, knowledge, and concern for the child that had developed over a period of time did not give them the right to intervene because that language was inconsistent with the language of the rule. The rule more appropriately applies to the interests involved in traditional civil actions, such as in contracts and torts. The court concluded that the adult sister’s concern for her younger brothers’ welfare stems from very personal and family interests that do not constitute an interest sufficient to support intervention as of right under Rule 24.01. Affirmed. Van Meveren v. Van Meveren, C8-99-1499, 603 N.W.2d 671 (Minn. App. 12/28/99).

By the Hon. Eugene L. Kubes
Referee Judge, 2nd District, Ret.

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment & Labor Law
• Environmental Law
• Family Law
• Federal Practice
• Juvenile Law
• Real Property
• Tax Law
• Torts & Insurance

Injunction Appeal Consolidated with Decision on Merits. In Campaign for Family Farms v. Glickman, 2000 WL 10283 (8th Cir. 2000), plaintiffs brought a reverse Freedom of Information Act (FOIA) action against the United States Department of Agriculture (USDA) to prevent it from releasing certain information. The National Pork Producers Council (NPPC), which had initiated the FOIA request, intervened as a defendant. Judge Tunheim issued a preliminary injunction barring the USDA from releasing the information at issue, and the NPPC appealed.

During the argument on appeal, the 8th Circuit suggested the possibility of consolidating its decision on the appeal from the injunction with a decision on the merits. After argument, the NPPC filed a motion requesting consolidation. Plaintiffs opposed the motion; the USDA did not.

Noting that 28 U.S.C. §1292(a) places "no limits on the scope of our review" on an appeal from a preliminary injunction, the 8th Circuit held that there was "little question of our jurisdiction to consolidate the merits of the case with the appeal of an order granting a preliminary injunction," and that once "jurisdiction is established, we have a broad statutory grant of power to dispose of the case as we deem appropriate." While holding that consolidation should be limited to those cases where material facts are not in dispute, the 8th Circuit proceeded to reach the merits of the dispute and found for the plaintiffs, remanding the action to Judge Tunheim for entry of a permanent injunction.

The 8th Circuit endorsement of consolidation on appeal has created another option for parties on appeal from the grant or denial of a preliminary injunction.

Failure to Supplement Interrogatories and Untimely Disclosure of Expert Opinions Lead to Exclusion of Evidence. In Transclean Corp. v. Bridgewood Services, Inc., 1999 WL 1144823 (D. Minn. 1999), Transclean brought patent and trademark claims against Bridgewood, and Bridgewood counterclaimed, alleging that the patent at issue was invalid. Early in the litigation, Transclean served a series of interrogatories aimed at fleshing out the Bridgewood position on a number of issues. Bridgewood responded to those interrogatories but never supplemented its responses as the case progressed. The Bridgewood patent expert, Eugene Johnson, produced his expert report in August 1998 and was deposed in October 1998. During his deposition, Johnson declined to offer an opinion as to whether Bridgewood had infringed on certain elements of the Transclean patent. One month after his deposition and two days after the deadline for the completion of discovery, Johnson produced a supplemental expert report that disclosed theories and defenses that appeared neither in his previous report nor in the Bridgewood interrogatories. The parties brought cross-motions for summary judgment, and Transclean, as part of its motion, urged Magistrate Judge Erickson to disregard any of the Bridgewood legal theories not articulated in its interrogatory responses as well as Johnson’s late-found opinions.

Noting that the purpose of Fed. R. Civ. P. 26(e)(2), which requires parties to amend the interrogatory responses in a timely manner, is "to prevent Trial by ambush," Magistrate Judge Erickson quickly disposed of the Bridgewood argument that the boilerplate allegations in its answer and counterclaims could serve as a substitute for supplemental interrogatory responses or that the Bridgewood discovery requests could serve this purpose. The court held that because Bridgewood failed to provide Transclean with notice of certain of its defenses until after the close of discovery, effectively precluding Transclean from conducting discovery on those issues, Bridgewood was estopped from raising those defenses, and Transclean was entitled to summary judgment on each of those issues.

In addition, Magistrate Judge Erickson granted Transclean’s motion to strike Johnson’s supplemental expert report under Fed. R. Civ. P. 37(c)(1), finding that Transclean had been prejudiced by the delay in the production of the expert report and that Bridgewood was "unable to justify" its late production of the report.

This decision provides a striking example of the risk litigants take when they fail to supplement disclosures or otherwise comply with discovery deadlines.

Attempts to Manufacture Appellate Jurisdiction Meet with Mixed Success. 28 U.S.C. §§1291 and 1292 strictly limit the jurisdiction of the federal courts of appeal. Despite these limitations, litigants are continually inventing new and creative ways to manufacture appellate jurisdiction. These jurisdictional machinations are receiving a mixed reception in the 8th Circuit.

In Great Rivers Cooperative v. Farmland Industries, Inc., 198 F.3d 685 (8th Cir. 1999), plaintiffs filed a class action against Farmland and others. After certifying a plaintiff class, the district court granted partial summary judgment to the defendants. The district court directed entry of judgment under Fed. R. Civ. P 54(b) and also certified its orders pursuant to 28 U.S.C. §1292(b) to allow plaintiffs to appeal, but the 8th Circuit rejected both the Rule 54(b) determination and the certification and dismissed the appeals. On remand, plaintiffs moved for an order dismissing the remainder of their claims without prejudice pursuant to Fed. R. Civ. P. 41(a)(2), in an attempt to facilitate appellate review. The motion was granted and judgment was entered.

On appeal, Farmland argued that the 8th Circuit lacked jurisdiction because plaintiffs could not manufacture appellate jurisdiction by dismissing claims without prejudice. However, the 8th Circuit acknowledged that it had been presented with a seemingly "final" judgment, and, rather than addressing Farmland’s argument, addressed the question of whether the district court had abused its discretion in granting the Rule 41(a)(2) motion of plaintiffs. While noting that it "strongly disapprove[d] of this use of a dismissal without prejudice to create what is in substance an impermissible interlocutory appeal," the 8th Circuit exercised its "discretion" to reach the merits of the appeal.

Litigants were less successful in Orion Financial Corp. v. American Foods Group, Inc., 2000 WL 31712 (8th Cir. 2000). After the district court awarded partial summary judgment to Orion, the parties entered into a stipulation providing for the entry of a final judgment to permit an appeal to go forward, but American Foods reserved the right in the stipulation to raise new matters on remand in the event it prevailed on its appeal. Finding that this approach "plays fast and loose with the limited appellate resources that we have," the 8th Circuit held that the parties’ desire "to challenge issues on appeal that are still within the lawsuit and, if successful, challenge them again in further litigation," ran counter to "the very purpose of finality." Accordingly, the 8th Circuit dismissed the appeal for lack of a "final" judgment.

Local Rule Amendments in Effect. Minor amendments to the Local Rules for the District of Minnesota, dealing primarily with the filing of motion papers and ADR, took effect on January 3, 2000.

By Josh Jacobson
The Law Offices of Josh Jacobson PA

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment & Labor Law
• Environmental Law
• Family Law
• Federal Practice
• Juvenile Law
• Real Property
• Tax Law
• Torts & Insurance

Termination of Parental Rights. Appellant Jackson challenged the district court termination of her parental rights, alleging that the court abused its discretion by denying her the right to counsel. Jackson fired her public defender on the first day of a TPR trial. After brief questioning, the court allowed Jackson to represent herself. Minn. Stat. §260.155, subd. 2 grants a parent confronting a TPR proceeding the right to counsel. A parent can choose to waive this statutory right, if the waiver is voluntary, intelligent, and on the record. Minn. R. Juv. P. 50.01. Because the statutory right to counsel in TPR proceedings is analogous to a criminal defendant’s right to counsel, the Court of Appeals examined Minn. R. Crim. P. 5.02, subd. 1(4), which contains procedures a trial court must follow in accepting a criminal defendant’s waiver of counsel as voluntary and intelligent. Applying these requirements, the appellate court found that a parent involved in a TPR proceeding who wishes to waive his or her right to counsel is entitled to an on-the-record explanation of the nature of the statutory grounds for termination and the evidentiary burdens; the possible consequences and implications of a TPR proceeding; the advantages and disadvantages of self-representation; and all other facts essential to a broad understanding of the consequences of waiver of the right to counsel. Because the trial court failed to thoroughly and adequately advise Jackson on all these issues, the Court of Appeals held that the trial court erred in failing to establish that Jackson knowingly and voluntarily waived her right to counsel and reversed the termination of her parental rights. In the Matter of the Welfare of: G.L.H., G.E.H., Jr., C8-99-1345, 604 N.W.2d 10283 (Minn. App. 12/28/99).

Termination of Parental Rights; Jurisdiction; Judicial Notice of Previous Testimony. Appellant L.D. challenged the trial court termination of her parental rights, arguing that the court did not have jurisdiction over the termination petition because an appeal of the decision denying an earlier petition was pending, and that the court erred in taking judicial notice of testimony from the trial on the earlier petition. The Court of Appeals noted that the second petition was based on events that had arisen after the trial court’s order on the first petition had been issued. Because the trial court’s decision to terminate L.D.’s parental rights was based on newly arisen facts and on a new petition, the decision on the second petition was distinct from the decision on appeal, and the trial court had jurisdiction to terminate L.D.’s parental rights. Finally, although prior testimony is not a proper subject for judicial notice, a trial court may take judicial notice of court records and files. The appellate court held that the trial court’s order on the second petition did not reflect that it had actually relied on any testimony from the first trial, but instead expressly relied on the findings it had previously made, which was within its discretion. In re the Welfare of M.H., C6-99-1182, 1999 WL 1256407 (Minn. App. 12/28/99) (unpublished).

On December 29, 1999, the Supreme Court issued an order promulgating the new Juvenile Protection Rules, formerly to become effective January 1, 2000, and modifying the effective date of the same to March 1, 2000. The Juvenile Protection Rules can be found at the Supreme Court Web site located at www.courts.state.mn.us.

By Susan A. Daudelin
Walling & Berg PA

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment & Labor Law
• Environmental Law
• Family Law
• Federal Practice
• Juvenile Law
• Real Property
• Tax Law
• Torts & Insurance

Prescriptive Easement. Boldt claimed a prescriptive easement over Roth’s property dating back to 1986 for access to her property via a circular driveway. The case was tried on stipulated facts. Because Boldt and her husband, when they built the driveway, were the daughter-in-law and son of the owner of what is now the Roth property, the district court concluded that there was an inference, if not a presumption, that the use of the Boldt’s land was permissive. The district court denied Boldt’s claim of prescriptive easement and Boldt appealed. On appeal, the Court of Appeals affirmed the district court concluding that the use was permissive at its inception because the Roth property was owned at that time by a member of Boldt’s family and concluded that Boldt had failed to prove that the use of the property was hostile or adverse for the 15-year period necessary to acquire prescriptive rights. Boldt v. Roth, C4-98-87, 604 N.W.2d 117 (Minn. App. 1/11/00).

Offer and Acceptance. Gresser sued the Hotzlers for specific performance of a purchase agreement for commercial real estate and alternatively for breach of contract. On the Hotzlers’ motion for partial summary judgment on Gresser’s specific performance claim, the district court held that the purchase agreement was invalid and entered final judgment against Gresser dismissing both claims. Gresser appealed. Factually, Gresser submitted to the Hotzlers an unsigned proposed purchase agreement that required, inter alia, that the Hotzlers deliver a recertified survey on August 10, 1998, and provided for closing on September 1, 1998. The Hotzlers changed several terms, initialed the changes, signed the purchase agreement, and returned it to Gresser’s attorney. Subsequently, Gresser initialed the Hotzlers’ changes but made two additional changes and signed the purchase agreement. The Hotzlers assumed the parties had a deal but did not read the purchase agreement or initial the changes. Subsequently, the realtor received another offer for the property, which was forwarded to the Hotzlers, who decided to accept the new offer. On appeal, the Court of Appeals clarified the "mirror image rule" in analyzing acceptance of offers. Under that rule, an acceptance must be coextensive with the offer and may not introduce additional terms or conditions. The appellate court concluded that the focus should be on the legal operation of the contract and only minor changes that do not substantially alter the performance obligations of the parties may be immaterial. Under this principle, the date changes Gresser made were material. As a matter of law, the exception to the mirror image rule for immaterial variations did not apply to the changes made by Gresser to the purchase agreement. Gresser v. Hotzler, C0-99-1078, 604 N.W.2d 379 (Minn. App. 1/4/00).

Prescriptive Easement. This case involves a dispute over the status of a driveway located on parts of two adjoining residential lots in North Minneapolis. The Rogers asserted that they had demonstrated the continuous use of a driveway over part of the Moore’s property for the 15-year period required to establish a prescriptive easement. The Moores claimed that the Rogers had failed to prove the existence of the easement. The district court found that the Rogers established an easement, but the Minnesota Court of Appeals reversed on the grounds that the record did not support a finding of continuous use. On appeal, the Supreme Court, in a lengthy but well-reasoned opinion, reviewed the state of the law regarding the elements of proof required to establish a prescriptive easement, focusing primarily on the element of continuous use. The Court rejected Moore’s argument that a higher standard of proof of prescriptive easements based on a strict construction of the evidence should be applied. The Supreme Court reviewed and concluded that reasonable evidence exists to support the decision. Specifically, Rogers established continuous use sufficient to support a claim for prescriptive easement. Therefore, the Supreme Court reversed. Rogers v. Moore, C0-98-1345, 603 N.W.2d 650 (Minn. 12/30/99).

By Christopher Dietzen
Larkin, Hoffman, Daly & Lindgren Ltd.

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment & Labor Law
• Environmental Law
• Family Law
• Federal Practice
• Juvenile Law
• Real Property
• Tax Law
• Torts & Insurance

Bad Debt Deduction; Individual. The Tax Court determined that certain debts owed to the taxpayer, which were incurred to guarantee a corporate loan on which the corporation eventually defaulted, did not become "wholly worthless" by the end of the tax year and therefore were not deductible in 1993. Walker v. Commissioner, 7111, 1999 WL 495885 (Minn. T.C. 11/2/99).

Individual Domicile. The Tax Court ruled that, from 1993 to 1996, a taxpayer was a resident of Minnesota and that his military income was subject to Minnesota income tax. The court concluded that Wolf failed to prove he established a new domicile in Florida. It was not sufficient that he physically removed himself from Minnesota after 1988. The facts demonstrate that he "fully and completely integrated his life with the community of Minnesota (not Florida)." Lewis and Karen Wolf, 7068, 1999 WL 640030 (Minn. T.C. 8/17/99).

Allocation of Personal Dependent Income Tax Exemption. In an unpublished opinion, the court ruled that the trial court did not abuse its discretion by denying the motion of appellant, the noncustodial parent of the parties' minor child, to allow her to claim an income tax exemption for the child in alternating years, since the other parent, who had sole custody and provided more than half of the child's support, had not waived his right to claim the exemption. Martensen v. Babcock, C1-99-683, 1999 WL 1038005 (Minn. App. 11/16/99), See also Minnesota v. Tinker, 601 N.W.2d. 468 (Minn. App. 11/2/99) (district court does not abuse its discretion by refusing to award the tax dependency exemption to the noncustodial parent, absent any basis for doing so or an express waiver of the exemption by the custodial parent).

No Discount in Stock Value on Buy-Out. The Minnesota Court of Appeals held, where two 50 percent shareholders were involved in a buyout dispute, marketability discounts should not be applied in determining the "fair value" of a dissenting shareholder's shares when the sale results in the other shareholder becoming the sole owner of the corporation. Advanced Communication Design, Inc. v. Follett, 691 N.W.2d 707 (Minn. App. 1999).

S Corporation Stock in Divorce Action. In an unpublished opinion, the Minnesota Court of Appeals held that a husband's stock interest in an S corporation with its income distributions plus an ownership interest in a family partnership were not marital property in a marriage dissolution action since the husband's ownership interest was gifts from his parents which were used only to provide education funds for his children. In re Worms v. Worms, C8-99-650, 1999 WL 1037977 (Minn. App. 11/16/99).

Allocation of "Sales Price" for Sales Tax. The Tax Court held that the taxpayer sold two distinct products, gym memberships subject to taxation under Minn. Stat. §297A.01(3d) and weight training services, which are not a defined service under Minn. Stat. §297A.01(3k). The court found that the gymnasium marketed and sold the weight training services separate and apart from its membership and therefore said services were exempt. Although no allocation was done in the initial billings, the court found credible evidence for the allocation. Similarly, the Tax Court found that the sale of certain juices and food was exempt under Minn. Stat. §297A.25(2). Southern Exposure of Eagan, Inc. v. Commissioner , 7046, 1999 WL 968774 (Minn. T.C. 10/20/99).

Imputed Interest on Loans to Noncontrolling Shareholders. The Tax Court held that Section 7872 permits the IRS to determine imputed interest on below-market loans from a corporation to a shareholder even if the shareholder does not own a controlling or majority interest, and on loans to entities that are not owned solely by shareholders of the lending corporation. Rountree Cotton Co. v. Commissioner, 113 T.C. 28, 1999 WL 1203795 (12/16/99).

Loans to Taxpayer's Own Corporations Not Deductible as Worthless Business Debts. Taxpayer's outstanding loans to two corporations he owned were not deductible as partially worthless business debts because the loans did not relate to a trade or business of buying, rehabilitating, and reselling corporations. Bell v. Commissioner, 98-3241, 2000 WL 12021 (8th Cir. 1/5/00).

Tennessee Tax Violates Commerce Clause. A Tennessee law imposing franchise and excise taxes on a national bank with no physical presence in the state and contacts solely related to solicitation of credit card business and service of credit card accounts does not violate the Due Process Clause of the U.S. Constitution requiring "minimum contacts" with the taxing state, but does violate the Commerce Clause requiring "substantial nexus." J.C. Penney National Bank v. Johnson, M1998-00497-COA-R3-CV, 1999 WL 12021 (Tenn. App. 12/17/99).

Individual Not "At-Risk" for Loan; At-Risk Treatment Barred. An individual who borrowed funds is not considered to be at-risk under IRC §465(a) with respect to a loan. The code bars at-risk treatment with respect to amounts borrowed from a person with "prohibited interest" in such activity, and a lender's equity interest is such an interest. Van Wyk v. Commissioner, T.C., 113 T.C. 29, 1999 WL 1220098 (12/21/99).

Personal Representative Not Liable for Relying in "Good Faith" on Attorney's Advice. A personal representative of a decedent's estate who, relying in good faith on an attorney's erroneous advice that the estate had no tax liabilities, made distributions and closed the estate without paying income tax liabilities is not personally liable under IRC §3713(b) as a fiduciary who knowingly disregarded debts due to the United States. Little v. Commissioner, 113 T.C. 31, 1999 WL 1261491 (12/29/99).

Indian Tribe is 'Person' Subject to Penalty for Excessive Refund Claim. The 8th Circuit, reversing a summary judgment in favor of a Native American tribe, held that the tribe is a "person" for purposes of Section 6675 and, thus, may be subjected to penalties for claiming a refund for an excessive amount of fuel excise taxes. Fladreau Santee Sioux Tribe v. United States, 99-1670, 197 F.3d 949 (8th Cir. 12/1/99).

Untimely Refund Claims: Statements from IRS Officers Do Not Insulate Taxpayers. The statements from IRS appeals officers on a refund claim do not insulate taxpayers from provisions of the code or applicable provisions of statutes of limitations, and the claim was untimely. Chaney v. United States, 98-182T, 45 Fed Cl. 309 (Fed. Ct. 11/30/99).

Early Retirement Payments Not Subject to FICA. Payments made by a state university to tenured faculty members who participated in an early retirement program were in exchange for their tenure rights, not wages subject to FICA tax. Payments made to administrators who participated in the program were wages subject to FICA. North Dakota State University v. United States, A3-98-50, 85 AFTR2d 2000-409 (D.N.D. 11/19/99).

Taxpayers May Discount Partnership Interests Transferred to Trusts for Lack of Liquidity. Restrictions on liquidation set out in taxpayers' partnership agreements do not constitute "applicable restrictions" within the meaning of IRC §2704(b), and thus taxpayers are not barred from applying a discount for lack of liquidity in valuing the partnership interests that they transferred to grantor-retained annuity trusts. Kerr v. Commissioner, 113 T.C. 30, 1999 WL 1247551 (12/23/99).

Payments to Entities Controlled by Taxpayers Attributed to Taxpayers. Payments made by certain individuals to entities controlled by taxpayers in connection with efforts by taxpayers to obtain business for the payers through the use of the taxpayers' influence constituted taxable income to the taxpayers. Investment Research Associates v. Commissioner, T.C. 43966-85, T.C. Memo 1999-407 (12/15/99).

Expert Opinion on Hypothetical Property Excluded in Estate Refund Suit. The district court did not err in excluding expert testimony as to what a hypothetical reasonable fiduciary would do under identical circumstances in a penalty refund suit alleging that an estate's late payment of estate taxes was due to "reasonable cause." Such testimony would constitute inadmissible legal opinion on the very issue the jury must decide. Estate of Sowell v. United States, 98-11066, 198 F.3d 169 (5th Cir. 12/13/99).

U.S. Supreme Court: IRS Lien Superior to Minnesota Tax Lien. The Supreme Court let stand the 8th Circuit decision that a Minnesota tax lien is choate as of the date upon which a taxpayer files a return and not summarily enforceable for priority purposes. Minnesota Department of Revenue v. United States, 184 F.3d 725 (8th Cir. 1999), cert. denied, 99-597 (U.S. 1/11/00).

Shareholders May Increase Basis Pro-Rata to Reflect Share of Debt Cancellation Income. Shareholders of S corporations are entitled to increase their basis in their stock by their pro-rata share of cancellation of indebtedness income resulting from an involuntary bankruptcy petition filed against the corporation, and thus may take advantage of net operating loss carryovers from prior years. Hogue v. United States, 99-302-KI, 2000 WL 2651 (D. Ore. 1/3/00). Cf. Witzel v. Commissioner, 99-2482, 2000 WL 30084 (7th Cir. 1/18/00) (debt income does not increase stock basis).

Interest Rate on Minnesota Taxes. The commissioner announced that the interest rate on tax refunds and delinquent state taxes other than property taxes will remain at eight percent for 2000. Sales Tax Newsletter (12/99).

Minnesota Claim for Refund. The commissioner released its claim-for-refund form, Form M4-X, which was required by the 1999 Legislature to be used for making refund claims by corporate taxpayers. Form M4-X should be used after January 1, 2000. The form may be reproduced from the year 2000 Package XM or from the commissioner's Web site at www.taxes.state.mn.us. Minnesota Department of Revenue Notice 99-17 (12/27/99).

New IRS Reporting Plan for Successor Businesses after Mergers. The IRS unveiled procedures providing a new combined information reporting method for successor business entities in certain situations following a merger or acquisition. Rev. Proc. 99-50, I.R.B. 1999-52 (12/27/99).

IRS Starts Test of Binding Arbitration Appeals Procedure. Pursuant to a mandate in the IRS Restructuring and Reform Act, the IRS has announced that it is finally ready to kick off a two-year test of a binding arbitration procedure for matters in IRS Appeals that deal exclusively with factual issues. Under the procedure, the taxpayer and IRS Appeals must first attempt to negotiate a settlement. If those negotiations fail, the parties may jointly request binding arbitration to resolve factual disputes. The two-year test period begins for arbitration requests made on or after January 18, 2000. IRS Announcement 2000-4.

IRS Guidance Issued for Meals, Lodging Expenses. The IRS issued revised per diem rates that businesses can use to reimburse employee expenses for business travel. The rates also can be used by employees and self-employed individuals to substantiate such expenses to claim business-travel-expense deductions. Revenue Procedure 2000-9 replaces Revenue Procedure 98-64 and applies to expenses paid or incurred for travel away from home on or after January 1.

Web Sites for Gift Planners. The IRS released guidelines for its agents to use when auditing the tax-sheltered annuities of nonprofit organizations -- known as Section 403(b) retirement plans after the section of the Code that governs them. The guidelines may be found on the IRS Web site at www.irs.gov/prod/bus_info/tax_pro/irm-part/section; click on 27872a. For more information on the plans, and for help in resolving problems with existing plans, go to www.irs.gov/prod/bus_info/ep/partnership.html.

IRS Unveils Fixed Monthly Payment Option for Taxpayers with Offers-In-Compromise. The IRS announced a new, simplified method of settling taxpayer debts under its offer-in-compromise program. The change involves a fixed monthly payment option to settle a taxpayer's IRS debt through an offer-in-compromise. The change is being made in conjunction with other changes, such as revising Form 656, Offer-In-Compromise, to include Form 656-A, Additional Basis For Compromise. IR-1999-105.

Solely-Owned LLCs Can Purchase Section 1033 Replacement Property. The IRS held that the purchase of replacement properties by a taxpayer's two solely owned limited liability companies did not preclude the taxpayer's election under Section 1033 with respect to condemned real estate. The two LLCs, which are not classified as corporations for federal tax purposes, were formed for the purpose of acquiring, owning, and leasing a parcel of real estate. P.L.R. 199945038.

IRS Guidelines on Equitable Relief for Innocent Spouses. The IRS provides guidelines for divorced and separated spouses to obtain "equitable relief" if they do not know about any tax problems or if payment of tax would cause undue hardship. The procedure modifies and supersedes Notice 98-61, which provided interim guidance. Rev. Proc. 2000-15, I.R.B. 2000-5 (1/31/00).

Two Types of Mergers Will Not Qualify as Tax-Free Reorganizations. The IRS rules that two types of transactions involving state-law "mergers" of the target corporation into an acquiring company would not qualify as tax-free corporate reorganizations under Section 368(a)(1)(A). Rev. Rul. 2000-5, I.R.B. 2000-5 (1/31/00).

IRS Regulation on Intangible Assets. The IRS issued final regulations providing comprehensive guidance on the tax treatment of the acquisition of intangible assets. REG.-T.D. 8865, Fed. Reg. (1/25/00). The IRS also proposed rules on the amortization of intangible property for partnerships involving Sections 732(b) and 734(b). REG-100163-00, Fed. Reg. (1/25/00).

Proposed Legislation to Fix Repeal of Installment Sale. The recently enacted Ticket to Work and Work Incentives and Improvement Act (H.R.1180; PL. 106-170) prohibits taxpayers that use the accrual method of accounting from using the installment method to account for gains when they sell assets. Effective December 17, 1999, many small-business owners who provide financing to buyers of their business will be taxed up front on their gains rather than being taxed in installments. Small business groups are pushing Congress to roll back the change because of its adverse impact. Unless the law is changed, seller-owners will either have to pay the taxes or restructure the deal by, for example, getting a bigger down payment or requiring the buyer to purchase stock instead of assets.

ABA Commission on Multidisciplinary Practice Responds to Criticism, Asks for Comment. The ABA Commission on Multidisciplinary Practice updated the report it issued last June in which it recommended that the Model Rules of Professional Conduct be amended to permit lawyers to form partnerships and to share legal fees with nonlawyers. The ABA Commission issued the update to outline related developments since the August ABA vote, respond to criticisms and comments directed at the original report, and encourage further dialogue. The revised report agrees to focus any future recommendations on competency as a core value of the legal profession that would have to be preserved in any MDP setting. The Commission sought comment on a number of matters, including segregation of fees and client funds. The Commission resisted calls for concrete empirical evidence of the need for MDPs. The updated background and informational report of the ABA Commission on Multidisciplinary Practice is available at http://www.abanet.org/cpr/febmdp.html on the ABA web site.

By Jerry Geis
Briggs and Morgan

In this month's "Notes & Trends":

• Civil Litigation
• Criminal Law
• Employment & Labor Law
• Environmental Law
• Family Law
• Federal Practice
• Juvenile Law
• Real Property
• Tax Law
• Torts & Insurance

Liquor Liability Exclusion; One-Day Town Festival. Since 1982, Wilson Township and its volunteer fire department have had an annual one-day fundraising event. Its 1996 festival had gross receipts of $6,972 for beer sales, which was 26.6 percent of the net festival proceeds. The fire department had a temporary "on-sale" liquor license from Winona County. It purchased a liquor liability policy from the Minnesota Joint Underwriting Association (MJUA). Wilson Township held a commercial package issued by Mutual Service Casualty Insurance (MSI) that contained a liquor liability exclusion. The exclusion applied only if the organization was "in the business of manufacturing, distributing, selling or serving or furnishing alcoholic beverages."

At the 1996 festival, Lance Henderson was sold, served, or furnished beer while obviously intoxicated and got into an automobile accident, colliding with Casey Peterson. Peterson and her passenger were injured. They sued under the Civil Damages Act, Minn. Stat. §340A.801 (1996). MSI rejected settlement of the claims while Wilson Township settled both claims. The Minnesota Court of Appeals affirmed the district court, finding that "in the business of" only applies to an insured's commercial enterprise or activity and that this language is not ambiguous. It followed that the exclusion would not apply because the insured was not in the business of selling, serving or furnishing alcohol for purposes of the liquor liability exclusion. Mutual Service Casualty Ins. v. Wilson Township, CO-99-898, 603 N.W.2d 151 (Minn. App. 12/21/99).

Joint and Several Liability Severed; UIM Coverage. Dvorak was injured in a January 1994 automobile accident while a passenger in Skluzacek's vehicle. Skluzacek collided with Malinski. Skluzacek had $500,000 in liability coverage and $500,000 in underinsured (UIM) coverage with EMC Insurance Companies (EMC). Malinksi carried $30,000 in coverage. EMC paid Dvorak $500,000 in a liability settlement and $20,000 in no-fault benefits while Malinksi paid $30,000 to Dvorak. The settlement agreement with Skluzacek and Malinski released them from future liability except that Dvorak retained the right to pursue UIM benefits.

Dvorak filed for UIM benefits under Skluzacek's policy, based on Malinski's underinsurance. (The parties agreed that Dvorak could not bring a UIM claim based solely on Skluzacek's underinsurance.) The matter went before a panel of arbitrators who attributed 90 percent fault to Skluzacek and 10 percent to Malinski, finding total damages of $1,189,454.90. Dvorak claimed that his award should be four times Malinski's percentage of fault pursuant to Minn. Stat.§604.02, subd. 1 (1998). The district court agreed with EMC. The Minnesota Court of Appeals affirmed. It noted that because Dvorak had settled with the tortfeasors, no joint liability remained. His reservation of right to collect UIM benefits allowed him only to collect UIM benefits, not reallocate fault a second time. EMC Ins. Cos. v. Dvorak, 603 N.W.2d 350 (Minn. App. 1999).

Right to Arbitration; Waiver. In January 1992, Hughes was injured in Rykel's vehicle, which was rear-ended by Houle's uninsured automobile driven by Lund. Rykel was insured by Auto-Owners Insurance Company. That policy had an arbitration clause with no independent restriction on when arbitration can be demanded. On December 18, 1997, Drontle, a legal assistant for Hughes' attorney, telephoned Norwig, a claims representative, to discuss an uninsurance claim. The parties dispute what was said, but Drontle sent to Norwig a copy of the summons and complaint and drafted a letter memorializing that there would be an indefinite amount of time in which to file an answer. Norwig denied that she agreed to accept service of process and stated that she did not possess authority to do so.

Hughes filed the summons and complaint in Washington County on December 22, 1997. Auto-Owners answered, alleging lack of jurisdiction, the complaint failed to state a cause of action, the complaint failed because of the statute of limitations, and Hughes was not entitled to uninsured benefits. On August 20, 1998, after participating in discovery, Auto-Owners moved for summary judgment, claiming that the claim was barred by the six-year statute of limitations in Minn. Stat. §541.05, subd. 1(1)(1998). The trial court held the claim accrued on the date of the incident and that the service was deficient because Auto-Owners never returned the acknowledgement of service as required by the Minnesota Rules of Civil Procedure, and granted summary judgment to Auto-Owners.

On appeal, Auto-Owners claimed that Hughes waived his right to arbitrate by waiting more than six years to arbitrate. Judge Randall, writing for the Minnesota Court of Appeals, ruled that resolution of the issue turns on whether Hughes properly commenced his district court action. He found that the six- year statute of limitations did not begin to run until there was a demand and a refusal to arbitrate, citing Spira v. American Standard Ins. Co., 361 N.W.2d 454, 457 (Minn. App. 1987). Thus, when Hughes failed to commence the lawsuit properly, Hughes did not waive his right to arbitrate. Insurance carriers would be advised to review policy language concerning arbitration clauses under this decision. Hughes v. Lund, C7-99-431, 603 N.W.2d 674 (Minn. App. 12/28/99).

Case of First Impression: "Loss Claims". On March 27, 1994, Hayes was involved in a one-car automobile accident that killed his passenger, Judith McCarthy. National Family Insurance Corporation (NFIC) agreed to settle the case for the policy limit of $30,000. McCarthy had an underinsured policy with Farmers Alliance, which substituted its $30,000 check for NFIC payment. Farmers Alliance sued Hayes in subrogation, settling the claim for $30,000. NFIC tendered Farmers Alliance a check on February 26, 1996, and presented it for payment on December 19, 1996. However, on November 18, 1996, NFIC had been placed in liquidation and its bank account was closed. The liquidators classified the claim under Minn. Stat.§60B.44 subd. 6, while Farmers Alliance argued that the claim should be classified under subdivision 4 of the statute. In a separate claim, Grinnell Mutual Reinsurance Company (Grinnell) filed a claim, which the liquidators classified under subdivision 6 of the statute, while Grinnell claimed it should have been classified under subdivision 4. The district court classified the claims under subdivision 6, a lower degree of preference than subdivision 4.

Minn. Stat. §60B.44 subd. 4 (1988) defines "loss claims" and provides the priority in which claims against a liquidated insurer must be paid.

Farmers Alliance and Grinnell asserted their claims in subrogation. The parties conceded that no other carrier would cover the claims. In each case, the person causing the loss was insured by NFIC. Judge Schumacher, reversing the trial court, found that because the subrogation claims were not covered by the Minnesota insurance guaranty association statutes, they were "loss claims." The appellate tribunal refused to interpret the statute such that subrogation claims by insurance companies are prohibited from being classified as "loss claims." Thus, it held that the claims qualify as "loss claims" under subdivision 4 as they are not covered by the guaranty association. In re Liquidation of National Family Ins. Corp., C3-99-1303, 603 N.W.2d 668 (Minn. App. 12/28/99).

By Thomas C. Baudler and Lee Bjorndal
Baudler Baudler Maus & Blahnik