April 2001

Amendments to General Rules of Practice. While most practitioners are probably familiar with or at least aware of the changes to the Minnesota Rules of Civil Procedure, few may be aware of the amendments to the General Rules of Practice for the District Courts. Significant changes were made to Rule 113, which governs assignments of a single judge to a case or to multiple cases. Rule 521, dealing with removal from conciliation court to district court, was also amended. What follows is a brief summary of those changes.

Rule 113.01: Assignment of Cases to a Single Judge (effective 03/01/01). In the courts of any county that does not assign a single judge to the case for the duration of the case, a party may move the court for such an assignment. The rule lists the possible grounds for such a request : (1) numerous pretrial motions raising difficult or novel legal issues that will be time-consuming to resolve; (2) management of a large number of witnesses or a substantial amount of documentary evidence; (3) management of a large number of separately represented parties; (4) the opportunity to coordinate with related actions pending in another court; and (5) substantial post-judgment judicial supervision. The request may be made by motion or in the requesting party's informational statement and is directed to the chief judge of the district.

Rule 113.02: Consolidation of Cases Within a Judicial District (effective 03/01/01). A party may also move for assignment of two or more cases in a single district to the judge. The motion is made to the chief judge (or designee) of the district.

Rule 113.03: Consolidation of Cases in More than One District (effective 03/01/01). This rule now establishes a formal procedure for asking the chief justice of the Minnesota Supreme Court to assign multiple cases in different districts to a single judge when the interests of justice dictate. The basis for such a motion would be that one or more common questions of fact exist or the cases are otherwise related and there is a special need for or desirability for central, coordinated judicial management. If the motion is granted, the chief justice has discretion to assign the case to a judge in one of the districts in which any of the cases is pending or in any other district. In selecting the judge to handle the consolidated matter, the chief justice may consider, among other things, the scope of the cases and their possible impact on judicial resources, the availability of adequate judicial resources in the affected districts, and the ability, interests, training, and experience of the available judges.

As an aside, Minn. R. Civ. P. 63.03 was also amended to make clear that when a judge is assigned pursuant to this procedure and rule, the judge cannot be removed peremptorily under Minn. R. Civ. P. 63.03 or Minn. Stat. ¤ 542.16.

Rule 521: Conciliation Court Rules -- Removal (Appeal to District Court) (effective 03/01/01). The change in this rule relates to corporations that may appear from time to time in conciliation court. The rule now states that if the party seeking to remove the case from conciliation court to district court is a corporation, the demand for removal must be signed by the attorney for the corporation in order to be effective.

--Cindy Jokela Moyer
Fredrikson & Byron

Ineffective Assistance of Counsel. At closing argument, for the first time, defense counsel made statements to the jury that the appellant was in "deep trouble" on count 1, aggravated robbery. Other counts included murder and attempted murder, both of which were felony murder charges. Therefore, concession of guilt to the aggravated robbery essentially conceded most of the elements necessary to convict the appellant of felony murder.

Held, the post-conviction court should have held an evidentiary hearing with respect to these assorted claims of ineffective assistance of counsel. When an attorney admits a defendant's guilt without the consent of the defendant, prejudice is presumed. Hence, the issue should have been explored at the post-conviction level. Although this claim was known but not raised on direct appeal, "ineffective assistance of counsel claims that require additional fact finding are properly raised in a post-conviction petition, even if they were known at the time of the defendant's direct appeal." Dukes v. State, 621 NW2d 246 (Minn. 02/01/01).

Judicial Communication with Jury; Presence of Defendant. After withdrawing for deliberations, the jury sent notes back concerning reasonable doubt and availability of a transcript. Appellant was not told, personally, of the jury's questions nor consulted regarding the proposed answers of the trial court and was not present in court when the communications occurred. Appellant did not waive his right to be present.

Held, it was error for the trial court to make any communications with the jury outside of open court and without the appellant's knowledge, consent, or presence. Further troubling is the lack of a contemporaneous record of the communications with the jury or counsel. Such communications are entirely improper. Even though one may characterize the communications as "innocuous," the public loses confidence in the integrity of the process if rules for a public trial and the 6th Amendment concerns are not observed. Under the circumstances, however, the error was harmless. State v. Sessions, 621 NW2d 751 (Minn. 02/08/01).

Offer for Stipulation; Lesser-included Offense. The district court was within its discretion in refusing to accept a stipulation by the appellant that he was a member of a criminal gang. Appellant was charged with aiding and abetting a drive-by shooting, as well as aiding and abetting a drive-by shooting committed for the benefit of a gang. Offers to stipulate are generally limited to prior conviction status. Here, the appellant's position as a gang member was necessary for the state to prove that the appellant had a knowing role in the crime committed for the benefit of a gang.

The defendant could not be adjudicated guilty of both offenses, because aiding and abetting a crime is a lesser-included offense of aiding and abetting a crime committed for the benefit of a gang. State v. Matelski, 622 NW2d 826 (Minn. App. 02/20/01).

Apprendi; Patterned Sex Offender. The patterned sex offender law contained in Minn. Stat. ¤ 609.108 is an unconstitutional violation of due process as applied in the instant case. Here, the appellant was convicted of first-degree criminal sexual conduct, involving rather egregious injuries to the victim. First-degree criminal sexual conduct, under Minn. Stat. ¤ 609.342, carries with it a maximum sentence of 30 years in prison. The patterned sex offender statute, Minn. Stat. ¤ 609.108, allows the statutory maximum sentence for criminal sexual conduct in the first degree to be increased to 40 years. Following a trial, the court found that the three "factual" determinations required to apply the patterned sex offender law did exist and sentenced the appellant to 40 years.

Held, Minn. Stat. ¤ 609.108, subd. 1, violates due process by increasing the statutory maximum for offenders sentenced under it based on the findings made by the sentencing court rather than the jury. Here, the jury, not the court, should have found the two critical factors used to apply the patterned sex offender law: that the offender was a danger to public safety, and that the appellant was a patterned sex offender. Although Apprendi involved the offender's mental state (a hate crime), its holding cannot be distinguished to exclude "sentencing factors," as opposed to traditional "elements" of the offense. State v. Grossman, 622 NW2d 394 (Minn. App. 02/06/01).

Search and Seizure; Probable Cause; Innocent Explanation. Police observed the appellant on a bicycle, whistling and waiving at approaching vehicles. During the 50-minute observation, the police officer observed several hand-to-hand transactions with other individuals, which were all concluded very briefly. The arresting officer testified that he had been involved in about 30­35 narcotics cases, about half of which involved hand-to-hand exchanges. He further testified that waiving and whistling at vehicles is a common method of peddling narcotics. It was the officer's opinion that for these acts to have been innocent exchanges, there would have been some type of normal conversation and not the pronounced brevity of these transactions.

The district court concluded that the officers lacked probable cause, because of the short period of time, and because the appellant's conduct "could have been perfectly benign."

Held, the judge applied the wrong standard for determining whether there was probable cause to arrest the appellant. The federal and state courts have consistently rejected the possibility of an innocent explanation as a test for validating probable cause. Here, the combination of factors observed by the arresting officer, taking into consideration the officer's training, support a finding of probable cause sufficient for a prudent person to believe reasonably that the respondent had engaged in a drug transaction. State v. Hawkins, 622 NW2d 576 (Minn. App. 02/07/01).

Obstruction of Justice; False Police Report. Respondent and friends had been out drinking, resulting in a serious personal injury accident caused by a vehicle driven by one of respondent's friends. Respondent was a Duluth police officer. At the scene of the accident, respondent told at least one involved party to leave the scene, he lied about not knowing the identity of the driver of the truck that hit the pedestrian, and he did not describe the vehicles correctly, all in an attempt to cover up for his friends.

Held, this is not a violation of the obstruction of justice statute, Minn. Stat.¤ 609.50. The statute is directed solely at particular kinds of physical acts that physically obstruct or interfere with a police officer. The only types of words to which it applies are "fighting words," which have the effect of physically obstructing or interfering with an officer. Although these lies may have stymied, interrupted, or misdirected the investigation of the police officers, they did not amount to a physical obstruction or interference of the police officer's investigation. Statements made to third parties, such as telling one of the involved persons to leave the scene, are not contemplated by the statute. State v. Tomlin, 622 NW2d 546 (Minn. 02/22/01).

Gambling; Definition of Bet, "Beard". The evidence in this case was sufficient to convict the appellant of sport bookmaking, even accepting his argument that he never himself placed or received a bet. Appellant argued that he was merely a "beard," someone who places wagers for other individuals without revealing the person responsible for the wager. In this case, the respondent passed off a bet of $10,000 to a bookie in Ohio, claiming he was simply acting as a "beard." In other words, he had nothing to gain or lose by forwarding the bet. Minn. Stat. ¤ 609.75 defines a "bet" as a bargain by which the parties "agree to a gain or loss by one to the other of specified money . . . ." However, sport bookmaking is defined under Minn. Stat. ¤ 609.75, subd. 4, as: "The activity of intentionally receiving, recording or forwarding . . . bets, or offers to bet . . . ." Hence, the act of forwarding the bet is covered, even though the bet may not have been personal to the appellant. State v. Greenfield, 622 NW2d 403 (Minn. App. 02/20/01).

Conspiracy; Elements of Crime. Appellant was charged with several counts of sale of a controlled substance, as well as one count of conspiracy to sell a controlled substance. The jury instruction with regard to conspiracy did not contain the elements of the crime of sale of a controlled substance, while the sales counts did include the elements.

The appellant contended at trial that he would sometimes sell phony methamphetamine. With respect to the conspiracy count, he contended he was selling bogus methamphetamine. Although the drugs were tested, they were subsequently lost, depriving the appellant of his right to verify the accuracy of the testing. The jury found the appellant not guilty of the sale charges, but guilty of the conspiracy charge.

Held, it was abuse of discretion for the trial court to eliminate from the conspiracy instruction all the elements of the crime of controlled substance sale. In particular, the jury should have been told that the appellant "knew or believed that the substance he sold was methamphetamine," a required element of the sales counts. State v. Kuhnau, 622 NW2d 552 (Minn. 03/01/01).

Confrontation Clause; Accomplice Testimony. It was error for the trial court to admit against the appellant testimony of an accomplice that came in the form of a guilty plea. As part of the guilty plea, the accomplice was promised a sentence at the bottom of the guideline range and that he would be released pending sentencing. In the guilty plea, the accomplice directly implicated the appellant with respect to burglary charges.

The court noted, without deciding, that the effort expended by the state to secure the live testimony of the accomplice seemed to be "minimal." The ruling, however, turned upon whether the hearsay statement, in the form of the accomplice's guilty plea, bore adequate indicia of reliability. The court held that it was not reliable, noting a United States Supreme Court decision that concluded that a statement-against-interest exception to the hearsay rule was not a firmly rooted exception for purposes of the Confrontation Clause. Lilly v. Virginia, 119 S.Ct 1887, 527 U.S. 116 (1999). Furthermore, although a defendant is not automatically entitled to a new trial once his constitutional rights are violated, the error in this case was not harmless beyond a reasonable doubt because the state used the key criminal elements from the hearsay testimony to prove the intent of the appellant with respect to the burglary charge. State v. King, 622 NW2d 800 (Minn. 03/01/01).

Controlled Substance; Scientific Tests. Police searched the appellant's residence and seized methamphetamine on February 13, 1999. On February 15, 1999, police conducted field tests and weighed the substance as 25.4 grams of methamphetamine. The state filed its complaint on February 16, 1999. Appellant appeared in court with his attorney on February 19, 1999. The BCA weighed the substance in question on February 23, 1999, and completed the analysis on March 18, 1999. According to that analysis, the total weight of the substance was 25.7 grams.

Appellant then made a motion for independent weighing of the substance. The state explained, however, that the BCA destroys a portion of the substance in performing its analysis. The parties agreed that any further analysis of the remaining substance would not yield a valid issue on the subject of weight. Appellant did not pursue a further analysis.

Held, the state violated Minn. R. Crim. P. 9.01, subd. 1(4), by not giving the defendant notice and conducting a scientific test that would preclude further tests or experiments. It is important to note that the BCA analysis was not done during the charging phase, but after the appellant made an appearance with an attorney. The failure to give notice was unexplained. This deprived the appellant of the opportunity to have his own expert observe the tests and to perform a meaningful independent test, because the BCA could not determine how much of the sample was used in the analysis. It was an abuse of discretion to admit evidence of the weight of the substance.

The Court of Appeals then vacated the conviction of first-degree controlled substance and substituted a conviction for the lesser-included offense of second-degree controlled substance. State v. Hochstein, 2001 WL 185114 (Minn. App. 02/27/01).

Stay of Adjudication; Prosecutorial Discretion. Respondent, who had a .17 percent alcohol concentration, was charged with criminal vehicular operation for an accident causing massive injuries to the victim. The victim had been a passenger in the respondent's vehicle, and is now a quadriplegic.

Following the respondent's plea of guilty, neither the presentence investigator nor participants in victim-perpetrator mediation believed that the respondent should do any jail time or lose his license. The respondent subsequently assumed many obligations for caretaking of the victim, including taking him on hunting and fishing trips, assisting the victim's mother, caring for the victim, and becoming his only significant connection to the community outside of his home. The district court stayed adjudication, requiring 120 days in jail, among other conditions. The prosecutor appealed the sentence.

Held, a stay of adjudication is not, as a matter of law, an unconstitutional interference with the prosecutor's ability to charge a crime. Stays of adjudication are judicial decisions, and the prosecution does not enjoy veto power over such a sentence. The district court did not abuse its discretion in imposing a stay of adjudication under the circumstances of this case. State v. Lattimer, 2001 WL 185060 (Minn. App. 02/27/01).

Expungement; Stay of Adjudication; Disposition in Favor. In 1995, appellant was convicted of the gross misdemeanor charge of stalking. With the consent of both parties, the trial court stayed adjudication and placed the appellant on unsupervised probation for a period of two years, with several conditions, some of which were not completed, resulting in a probation violation. The court then revoked the stay of adjudication and stayed execution of the sentence. The probation violation was, however, reversed in an unpublished decision, because the trial court judge had not specified a deadline for the performance of a psychological evaluation.

In January 2000, the appellant petitioned the court for expungement under Minn. Stat. ¤ 609A.02, subd. 3, claiming that the prior stalking charge had been "resolved in his favor." The basis of the conviction in 1995 was a trial on stipulated facts.

Held, a stay of adjudication does not yield a resolution in favor of the defendant for purposes of Minn. Stat. ¤ 609A.02. Case law has determined that if a defendant either is found to have committed the offense or pleads guilty, the proceeding has not been resolved in favor of the defendant. On the other hand, if there is no valid finding of guilt, either by plea or verdict, proceedings have been resolved in favor of the defendant.

This case contains an excellent summary of the various types of dispositions that are, or are not, suitable under the statute for expungement. State v. Davisson, 2001 WL 214312 (Minn. App. 03/06/01).

--Frederic Bruno
Frederic Bruno & Associates

Conservatorship. In order to remove the Commissioner of Human Services and appoint a family member as conservator, the court must consider Minn. Stat. ¤ 525.61, subd. 3, "whether the existing guardian or conservator has performed the applicable duties and whether the continued appointment of the guardian or conservator is in the best interests of the ward or conservatee." The court held that this standard applied to public as well as private guardianships. Even though a public guardianship is more restrictive and should only be imposed when no acceptable alternative is available, once it is established, the reasons in the statute must be considered for removal. In re Geldert, No. C3-00-921, 621 NW2d 285 (01/23/01).

Conservatorship. Even though the conservatee is incapacitated for purposes of her estate, and even though she depends on her daughter as a caretaker, there was not sufficient evidence to support a conservatorship of the person. The record did not provide clear and convincing evidence that appellant "lacks sufficient understanding or capacity to make or communicate responsible decisions" or that she has an "inability to meet personal needs for medical care, nutrition, clothing, shelter, or safety." In re Zontelli, No. C7-00-1456, 2001 WL 96170 (02/06/01).

Guardianship. The Court of Appeals reversed the Probate Court order appointing a guardian of the person and estate because the court failed to provide specific, written findings of fact as required by statute. In re Bruhn, No. C3-00-1129, 2001 WL 96702 (02/06/01).

--Tonya Zdon Gabbard
Garvey & Boggio PA

Retaliation. A public sector employee was not subjected to wrongful retaliation under the 1st Amendment when she was fired after agitating to have her manager dismissed. In Gordon v. Kansas City, No. 00-1024, 2001 U.S. App. LEXIS 1936 (8th Cir. Feb.12, 2001), the 8th Circuit Court of Appeals rejected a claim that the discharge constituted illegal retaliation under the 1st Amendment. The court felt that the employee's conduct was "inherently disruptive" and thus not constitutionally protected.

An employee whose job was eliminated as part of a large restructuring program and who was offered another similarly paying job is not entitled to pursue a claim of retaliatory discharge. In LaCroix v. Sears Roebuck & Co., No. 00-2251, 2001 U.S. App. LEXIS 2131 (8th Cir. Feb. 14, 2001), the 8th Circuit upheld a ruling of the U.S. District Court in Minnesota dismissing a lawsuit by a human resources specialist who alleged she was discharged after she reported complaints of sexual harassment of employees by one of her supervisors. The evidence failed to show that the company retaliated against her when it eliminated her position a couple of months later as part of a nationwide reorganization.

But an employee terminated two weeks after she complained about more favorable pay and benefits given to a male peer was entitled to pursue a claim of reprisal under the state Human Rights Act in Dahnke v. Hub City N. Cent., No. CX-00-1015, 2001 Minn. App. LEXIS 170 (Minn. App. 2001) (unpublished). The short time span between the complaints and discharge justified an "inference" of retaliation and created a triable issue of fact on the reprisal claim, although sex and age discrimination charges were properly dismissed.

Independent Contractor Versus Employee. Individuals who perform janitorial services as subcontractors for a company that enters into cleaning arrangements with third parties may be employees rather than independent contractors, even though the arrangements designate them as independent contractors. In Vielbig v. U.S.A. Janitorial, Inc., No. C8-00-1255, 2001 Minn. App. LEXIS 74 (Minn. App. 2001) (unpublished), the Court of Appeals held that the service workers may pursue claims for unpaid wages under the Minnesota Wage Treatment Statute, Minn. Stat. ¤ 181.79, and for unjust enrichment for wrongfully deducting certain expenses. The decision turned on the degree of control exercised by the contracting company over the work of the individuals providing the janitorial services.

Front Pay Damages. The Supreme Court has agreed to decide whether front pay damages are subject to the $300,000 cap under Title VII of the Civil Rights Act. The Court will review a 6th Circuit decision, Pollard v. E.I. DuPont de Nemours Co., 213 F. 3d 933 (6th Cir. 2000), which held that front pay is a form of compensatory damages that are capped under the statute, 42 U.S.C. 1981 (a)(b)(3). The Court will consider the employee's argument that front pay is equitable relief because it is awarded in lieu of reinstatement and, therefore, is not subject to the $300,000 cap, a position taken by rulings of the 8th Circuit, the 10th Circuit, and the D.C. Circuit.

Health Plan Reimbursement. The right of health plans to seek reimbursement from an employee's tort recovery apparently will be decided after all by the U.S. Supreme Court during this term. The Court has granted certiorari in Great-West Life & Annuity Life Ins. Co. v. Knudson, which will review a ruling of the 9th Circuit Court of Appeals, 208 F. 3d 221 (9th Cir. 2000), which held that the health plan could not sue under the Employee Retirement Income Security Act (ERISA) to recover its payments. The Court had agreed to answer the issue in a case earlier, but the case apparently settled.

The instant case involves an employee who was seriously injured in a car accident, which resulted in the health plan paying more than $400,000 in medical expenses. The employee eventually settled her claim against the tortfeasor for $600,000, but only reimbursed the health plan for $13,800. The plan sued under ERISA, which allows suits for reimbursement under the federal statute that allows suits for "appropriate equitable relief." But the 9th Circuit stated that reimbursement constitutes damages, not "equitable relief," and was not legally cognizable under the statute.

--Marshall H. Tanick
Mansfield, Tanick & Cohen PA

Safe Drinking Water Act. Plaintiffs who challenge regulations promulgated under the Safe Drinking Water Act must file that challenge with the United States Court of Appeals for the D.C. Circuit within 45 days of issuance of the regulation, the 8th Circuit Court of Appeals held in Nebraska v. United States, 238 F.3d 946 (8th Cir. 2001) (2001 WL 83099). The state first filed suit in 1998, alleging that the 1992 regulations of the Environmental Protection Agency (EPA) regarding lead and copper were unconstitutional because they violated the Commerce Clause and the 10th Amendment. The Nebraska district court dismissed the claim, finding the D.C. Circuit had exclusive jurisdiction over challenges to the Safe Drinking Water Act under 42 U.S.C. ¤ 300j-7. Nebraska again filed suit, this time with one of its cities, Grand Island, in 1999. That lawsuit reasserted the previous allegations and added a new allegation that the rules also violated the nondelegation doctrine. The district court again dismissed the claim, finding the plaintiffs were required by ¤ 300j-7 to file within 45 days of the issuance of a regulation with the D.C. Circuit. This time, plaintiffs appealed.

The 8th Circuit upheld the district court dismissal. In doing so, it relied on the 4th Circuit decision in Virginia v. United States, 74 F.3d 517 (4th Cir. 1996), and its own decision in Missouri v. United States, 109 F.3d 440 (8th Cir. 1997), both of which involved challenges to the EPA Clean Air Act (CAA) regulations. Like the Safe Drinking Water Act, the CAA required challenges to EPA decisions under the CAA to be filed in the D.C. Circuit. The plaintiffs in Virginia and Missouri attempted to circumvent this requirement by claiming their challenges were to the constitutionality of the CAA, not just to the EPA regulations thereunder. In each case, the Court of Appeals found that the so-called "constitutional challenges" could not be completely separated from EPA actions. Therefore, the plaintiffs had to file their challenges directly with the D.C. Circuit. The 8th Circuit found the plaintiffs in Nebraska to be attempting the same inappropriate circumvention of the filing requirements of the Safe Drinking Water Act and affirmed the district court dismissal of the plaintiffs' suit.

Harmon Industries; Overfiling. The EPA Appeals Board ruled on January 18, 2001, that the EPA was not precluded from bringing an administrative enforcement action after a state agency had initially notified a company that it was in violation of federal hazardous waste law. In re Bil-Dry Corp., No. 98-4 (E.A.B. 01/18/01). In doing so, the Appeals Board specifically rejected the 8th Circuit ruling in Harmon Indus. Inc. v. Browner, 191 F.3d 894 (8th Cir. 1999). In that decision, the 8th Circuit held that the Resource Conservation and Recovery Act (RCRA) does not allow the EPA to file an enforcement action in a state with RCRA enforcement authority if state officials have already taken an enforcement action against the same party for the same offense.

The Appeals Board declined to follow the Harmon Industries approach in the Bil-Dry matter for several reasons. In Bil-Dry, Pennsylvania had only served the company with a Notice of Violation (NOV) for RCRA violations. The Board found this was not an "enforcement action" because the NOV was not the first step in an enforcement action, nor was it an appealable decision. Pennsylvania also agreed that the EPA would take the lead regarding enforcement against Bil-Dry and cooperated with EPA as it did so. Harmon Industries, a decision by the 8th Circuit, was not controlling precedent in Pennsylvania, which is located in the 3rd Circuit. Finally, EPA General Counsel Gary Guzy had announced in a May 22, 2000, letter that the EPA would not adopt the 8th Circuit RCRA interpretation nationwide. For these reasons and because of certain factual differences between Bil-Dry and Harmon Industries, the Appeals Board saw no reason to accept the 8th Circuit reasoning and upheld EPA enforcement rights in this case.

Large Livestock Operations; Public Health. The Iowa Department of Public Health, in a report issued at the end of January 2001, found large livestock facilities do not pose a public health threat. The report, titled Risks from Large-Scale Livestock Operations in Iowa, found no support for claims that airborne emissions from these operations cause a genuine health risk but did acknowledge that odor causes a "'perceived' health risk." Nonetheless, the report suggested more research regarding the impacts on public health from these facilities is needed.

The report also downplayed concerns over the threat these facilities pose to state ground and surface waters. While manure from these operations might have serious impacts on local waterways if released or on land if applied in sufficient quantities, the report found the threat of contamination in those cases to be greater for aquatic ecosystems than to human health. In fact, exposure to human sewage in state surface waters poses a more significant threat to human health, according to the report.

The department report followed a proposal by the EPA the previous month that land application of manure from concentrated animal feeding operations (CAFOs) be subject to permitting requirements.

--William Hefner
Greene Espel PLLP

Custody. The magistrate judge found that the stipulated joint physical custody arrangement of the parties was in fact a sole custody visitation arrangement. The court found that the father had physical custody of the children 33 percent of the year and the mother had custody 67 percent of the year. The guidelines recommended child support of $513 per month, but the court deviated downward to reflect the father's custody during the month of August, which resulted in a child support order of $449 per month. (The deviation results in an annual credit of $768, which is greater than the guidelines amount of $513 for one month.) The district court determined that, because the parties stipulated to joint physical custody, the father was entitled to a child-support offset under the Hortis/Valento formula for joint physical custody. The father was ordered to pay $208.79 child support per month. The mother's motion for reconsideration was denied.

On appeal, the mother contends that the district court should not have rejected the determination of the magistrate judge without addressing the supporting findings as to who has custody during relevant times during the year. The Court of Appeals found that the rules require an independent review and provide that, if any findings are approved without change, the order must specifically state that those findings are affirmed but need not contain specific findings as to each question raised. It concluded that the word "independent" meant that the review was to be made without deference to the magistrate judge, and the district court was free to reach its own conclusion as to characterization of the custody arrangement. The appellate court also found that the district court affirmed the income findings and made independent findings as to the amounts of time spent by the children in the physical custody of each parent. It added that, because neither party chose to submit a transcript, the district court did nothing improper when it reached its decision without reviewing one. Finally, the court said that the fact that the children's time with the mother justifies designation of her home as the primary residence is not a sufficient basis to conclude that the custody arrangement is not joint physical custody. One judge dissented. Blonigen v. Blonigen, No. C7-00-1019, 621 NW2d 876 (Minn. App. 01/16/01) (unpublished).

Refusal to Reopen Decree. The parties stipulated to file income tax returns jointly after dividing their 50/50 interests in a subchapter S corporation. Their tax experience had consisted of small annual refunds. About one year after entry of the decree, they were subjected to an IRS audit that resulted in changing their accounting system from a cash to an accrual basis. This change also resulted in a $171,015 assessment for delinquent taxes and interest. The wife moved to reopen the decree, under chapter 518.145, subd. 2(5), because it "is no longer equitable that the judgment and decree or order should have prospective application". The trial court denied her motion to reopen. The Court of Appeals found that no Minnesota court had addressed this course of action under clause five of the statute. It stated: "After scrutinizing the nature of the issue in their case, it is evident that appellant has presented a change in circumstances that is not merely a new set of circumstances or an unforeseen change of a known circumstance. Appellant maintains that the value of the corporate business was different from what it was believed to be when the parties entered into the stipulation.

The considerations here concern not just the circumstances of the tax change after the judgement was entered, but rather a tax determination that seriously contradicts what the parties knew about the property when the judgment was made". The court concluded that the rule of clause five must be employed when an injustice in the prospective application of a divorce decree is due to the development of circumstances substantially altering the information on a topic that was accepted earlier, when the subject was addressed in a stipulation and ensuing judgment. The Court of Appeals reversed and remanded for reopening solely to determine a fair and equitable distribution of the corporate stock. Harding v. Harding, No. C3-00-921, 621 NW2d 285 (Minn. App. 01/23/01).

Attorney Fees Award; Custody; Adoption. In a parentage-custody action initiated by the putative father, the trial court awarded him attorney fees against the third-party custodians seeking to adopt the child. The award was based on a finding that the custodians knew that adoption would be impossible, because the father had acted properly in timely bringing the parentage action within 30 days of the child's birth. The Court of Appeals found that the father could not meet the best interests test required for an award of custody. The natural parents had agreed to their adoption but had rescinded, and court services recommended that the child be place in their custody. In addition, the child had bonded with the foster mother who was her primary caretaker, and expert testimony stated that separation would be harmful and disruptive. There were a number of questions as to the father's capacity to care for the child, and court services recommended that he complete a parenting class. The appellate court concluded that seeking custody after the adoption reversal was not unreasonable in light of the placement issue that remained to be determined. The fee award to the father was reversed. Mize v. Kendahl, No. C9-00-597, 621 NW2d 804 (Minn. App. 01/30/01).

Modified Property Award. The decree awarded the wife the homestead subject to the first mortgage, which was her sole responsibility, and made the husband responsible for the second mortgage. It also provided that, should the wife sell the home prior to payment in full of the second mortgage (which will result in satisfaction of the second mortgage from the proceeds of sale of the homestead), the husband shall indemnify and hold the wife harmless from said obligation by continuing to make the $400 per month payment directly to the wife until paid in full. When the balloon payment came due on the first mortgage, the wife was unable to make that payment, the mortgage was foreclosed, and the homestead was sold. The second mortgage was satisfied in full. In turn, the district court granted the wife a judgment in the amount of the satisfaction of the second mortgage. The husband appealed, and the Court of Appeals found that the judgment in favor of the wife accelerated collection contrary to the terms of the decree. It concluded that the acceleration of repayment constituted an unwarranted modification of the property division. The Court of Appeals reversed the entry of judgment and remanded for entry of an amended judgment that limits the husband's current obligation to $400 monthly payments to the wife. Knutson v. Knutson, No. C3-00-949, 2001 WL 69981 (Minn. App. 01/31/01) (unpublished).

Note: The above unpublished opinion may not be cited except as provided by Minn. Stat. ¤. 480A.08, subd. 3 (2000).

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

Claim Preclusion. In Lundquist v. Rice Memorial Hospital, 238 F.3d 975 (8th Cir. 2001), Lundquist filed ADA and MHRA claims against the hospital in the District of Minnesota in January 1997. The scheduling order established by the district court set a deadline of September 1, 1997, for amending pleadings.

After Lundquist was terminated in December 1997, Lundquist sought to amend her January 1997 complaint to add claims arising out of her termination. Lundquist's motion to amend was denied as untimely. Subsequently, the hospital was awarded summary judgment on Lundquist's original claims.

In February 1999, Lundquist filed a second federal action asserting claims arising out of her December 1997 termination. The hospital moved to dismiss the second action on the basis of claim preclusion, and the district court granted the motion. Lundquist appealed.
The 8th Circuit reversed, citing the "well settled" rule that "claim preclusion does not apply to claims that did not arise until after the first suit was filed." Describing the "core issue" as "whether the denial of Lundquist's Motion to Amend was a final judgment on the merits," the 8th Circuit found that because the merits of Lundquist's proposed amended claims were never addressed by the district court, Lundquist's second suit could not be barred by res judicata. Accordingly, the district court decision was reversed, and the matter was remanded.

Motions in Limine. Well-established 8th Circuit law holds that a motion in limine does not preserve error for appellate review, and that litigants must renew those objections at trial in order to preserve those issues for appeal.

Ross v. Douglas County, 234 F.3d 391 (8th Cir. 2000), the motion in limine of Douglas County was denied, and no objection was offered when the evidence at issue was introduced at trial. On appeal, Douglas County argued that the 8th Circuit decision in Sprynczynatyk v. General Motors Corp., 771 F.2d 1112 (8th Cir. 1985) (in which the 8th Circuit carved out a narrow exception to this rule) effectively had altered the rule. The court had little trouble rejecting this argument, finding that Douglas County did not fall within the narrow Sprynczynatyk exception, and that adoption of its argument "would undermine the general rule in the circuit that motions in liminedo not preserve appellate review."

Plainly, litigants within the 8th Circuit who fail to preserve evidentiary objections at trial continue to do so at their peril and cannot expect that their failure to renew their objections will be excused under the narrow Sprynczynatyk exception.

Other Decisions of Note. In United States v. Langmade, 125 F. Supp. 2d 373 (D. Minn. 2001), following a remand from the 8th Circuit, Judge Magnuson recused himself to avoid having to sentence a defendant to ten years in prison for conspiracy to manufacture methamphetamine in accordance with federal sentencing guidelines. Labeling the mandatory minimum sentence as "unconscionable and patently unjust" and criticizing the government's "merciless conduct," Judge Magnuson found that he "simply could not be impartial upon resentencing" and directed the clerk of court to reassign the case to another judge.

United State ex rel. Shaver v. Lucas W. Corp., 237 F.3d 932 (8th Cir. 2001), the 8th Circuit found no abuse of discretion in the district court decision to vacate a clerk-entered default pursuant to Fed. R. Civ. P. 55(c), after the district court found that the defendant had not intentionally delayed responding to the complaint, that it had a meritorious defense, and that the plaintiff would not be prejudiced.
In Arnold v. Wood, 238 F.3d 992 (8th Cir. 2001), the 8th Circuit held that the bulk of an appeal was untimely when the appeal was filed more than two months after judgment was entered, and the plaintiff's post-judgment motions (which would have tolled the 30 day appeal period if filed within ten days of entry of the judgment) were filed 11 days after judgment was entered. The 8th Circuit declined to resuscitate the appeal through application of the "unique circumstances" doctrine, finding it inapplicable in any event, but also commenting that four Supreme Court justices have noted their opposition to the doctrine.
In Hoffman v. Cargill, Inc., 236 F.3d 458 (8th Cir. 2001), the 8th Circuit reversed a district court decision vacating an arbitration award on the grounds of "fundamental unfairness." While declining to "categorically reject" the fundamental unfairness standard, the court found that even if the standard does exist, "it could not possibly sustain the district court's conclusion in this particular case."

--Josh Jacobson
The Law Office of Josh Jacobson PA

Festo: Major Change in Patent Law. The Court of Appeals for the Federal Circuit, which hears all appeals related to patent matters, recently decided an important case regarding the scope of patent rights. In Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co. 234 F.3d 558 (Fed. Cir. 2000), the Federal Circuit (en banc) established new limits to the doctrine of equivalents. The doctrine of equivalents permits the expansion of patent rights beyond the literal terms of a patent to cover products or processes that are considered equivalent to those claimed in a patent. However, the Federal Circuit held in Festo that "prosecution history estoppel acts as a complete bar to the application of the doctrine of equivalents when an amendment has narrowed the scope of a claim for a reason related to patentability."

Prosecution history estoppel precludes a patentee from obtaining under the doctrine of equivalents coverage of subject matter that was relinquished during the prosecution of its patent application. Before the Festo decision, it was unclear whether prosecution history estoppel applied to amendments other than those to overcome non-novelty and obviousness rejections. In Festo, the Federal Circuit held prosecution history estoppel is not limited to amendments made to overcome non-novelty and obviousness rejections, but also applies to "an amendment that narrows the scope of a claim for any reason related to the statutory requirements for a patent." Thus, a narrowing amendment that is made to point out more particularly and define the invention more distinctly will be a complete bar to the doctrine of equivalents. The court also held that the estoppel rules apply to voluntary amendments as well as amendments made in response to a rejection from a patent examiner.

The holding also rejected the "flexible bar" approach to prosecution history estoppel. Under the flexible bar approach used in some of its prior cases, some range of equivalents was permitted even as to claim limitations amended to procure allowance of the patent. Under the complete bar, "when a claim amendment creates prosecution history estoppel, no range of equivalents is available for the amended claim element." In support of its decision to adopt the complete bar, the Federal Circuit explained that the flexible bar was in conflict with the public-notice functions of the statutory claiming requirement. The court emphasized that in recent years "the notice function of patent claims has become paramount, and the need for certainty as to the scope of patent protection has been emphasized." The court explained that the "problem with the flexible bar approach is that it is virtually impossible to predict before the decision on appeal where the line of surrender is drawn."
In contrast, "a complete bar to the doctrine of equivalents provides the public and the patentee with definite notice as to the scope of the claimed invention." While "[a]llowing some range of equivalents gives the patentee some benefit of the doubt as to what was disclaimed," the "benefit comes at the public's expense," and the complete bar "eliminates the public's need to speculate as to the subject matter surrendered by an amendment that narrows a claim for a reason related to patentability."

If the decision stands, Festo will affect both inventors seeking maximum patent protection and competitors seeking to avoid patent infringment. For inventors, Festo places a higher premium on unamended claims. Careful claims drafting may minimize the likelihood of needing claim amendments that bar protection under the doctrine of equivalents. For competitors seeking to avoid infringement of a patent, <I>Festo<P> may provide a new tool to support a conclusion that infringement is lacking. However, it is unlikely that the dust has finally settled as to the doctrine of equivalents for amended claim limitations.

--Anthony R. Zeuli
--Jeffrey P Cook
Merchant & Gould

Malpractice Statute of Limitations; Improperly Drafted Trust Documents. In 1990, an attorney drafted documents to create irrevocable inter vivos trusts for the plaintiff and her husband. These trusts were intended to avoid the federal estate tax, but included language that retained the right to the income for life in the grantors. Around 1994, the attorney prepared a quitclaim deed that transferred the homestead of the plaintiff and her husband to certain relatives, but retained a life estate in the property in the grantors.

In 1996, more than six years after the signing of the irrevocable trusts, a new attorney advised plaintiff that both her trust and the homestead would be subject to the estate tax at her death because of her retained interests. Plaintiff sued her first attorney for malpractice, alleging negligence in the preparation of both documents. The district court granted the attorney summary judgment, holding that the claim based on the improper drafting of the trust documents was barred by the statute of limitations and that the claim based on the quitclaim deed could not be sustained because any damages were too remote and speculative to allow recovery.

The Court of Appeals affirmed as to both claims. The claim based on the trust documents was barred because the actual damage to the plaintiff occurred when the attorney erred, not when the tax liability caused by the error became payable. The statute of limitations began to run at the time of the error "even though the ultimate damage [was] unknown or unpredictable" at that time. The claim based on the quitclaim deed was timely but was barred because the determination of damages would require speculation as to when plaintiff will die, what the value of her estate will be and what the tax law will be at her death.
The decision presents difficulties for the plaintiff who claims malpractice in estate planning. The attorney's error may be discovered long after it occurs when the action is barred, but if it is discovered within the limitations period the action is not sustainable because of the speculative nature of the damages. Harmeyer v. Gustafson, No. C8-00-1191, 2001 WL 122141 (Minn. App. 02/05/01) (unpublished).

Intentional Interference with Inheritance. After executing his will that left his estate to his two sons equally, decedent sold a farm to one son by contract for deed for one third of its market value. After decedent's death, his other son sought to rescind the contract and also asserted a claim for tortious interference with receipt of his inheritance.

The Court of Appeals affirmed the summary judgment against the plaintiff on both claims. The plaintiff lacked standing to seek rescission of the contract because he was neither a party to the contract nor a third party beneficiary. His claim based on tortious interference with inheritance must fail because the Supreme Court has not recognized this tort, and the Court of Appeals does not have the power to recognize new torts. The court noted that even if it had the power to do so, it would not recognize the tort in this case because the plaintiff had adequate remedies in probate court to protect his interest in his father's estate. Botcher v. Bothcher, No. CX-00-1287, 2001 WL 96147 (Minn. App. 02/06/01) (unpublished).

Refusal to Vacate Order Admitting Will. Decedent's will was admitted to probate in a formal proceeding in September of 1999. In May of 2000, after their negotiations to buy the decedent's funeral home business from the estate broke down, his two sons by a prior marriage moved to vacate the order admitting the will.

The probate court has the power to vacate an order on grounds of "excusable neglect" within two years of the filing date (Minn. Stat. 525.02), but to prevail on the motion to vacate, the movant must demonstrate: 1) a reasonable chance to prevail on the merits, 2) a reasonable excuse for the failure to act, 3) due diligence after notice of the order, and 4) that no substantial prejudice will result to the opposing party if the motion is granted. In this case, the probate court did not abuse its discretion in denying the motion to vacate. In re Estate of Brezinsky, No. CX-00-1211, 2001 WL 50879 (Minn. App. 01/23/01) (unpublished).

--Curtis L. Stine
William Mitchell College of Law

Municipal Law. Oak Grove operates a bingo hall under licenses issued by the Gambling Control Board and City of St. Paul. Midway, LLC applied for and received a license to operate a bingo hall less than two miles from the Oak Grove bingo hall. The Court of Appeals upheld the city council decision to grant the license. The court found that while the location of the Midway bingo hall violated Code of Ordinances ¤ 403.05 requiring a minimum distance of two miles between bingo halls, there was substantial evidence that the Midway site would provide economic benefits to the community without significant negative impacts on residential or commercial use. Oak Grove Prop,. Inc. v. City of St. Paul, No. CX-00-1838, 2001 WL 169971 (Minn. App. 02/20/01).

Tenancy in Common. Respondent Mrzlaks and Morimoto executed a contract for deed to purchase a parcel of property as tenants in common. Morimoto and her husband gave a mortgage on the property to WMC Mortgage Corporation. At the closing, a forged quitclaim deed conveying Mrzlak's interest in the property to Morimoto was produced. The Morimotos defaulted on the loan and WMC foreclosed against the property. The district court held WMC and Mrzlak were tenants in common and awarded each a 50 percent interest in the property. The Court of Appeals remanded the case for a determination of Mrzlak and WMC's comparative interests in the property. By holding property as tenants in common, each co-tenant's interest in the burdens and benefits of the property is proportionate to each tenant's share. Mralak v. WMC Mortgage Corp No. C6-00-1545, 2001 WL 139015 (Minn. App. 02/20/01).

Mechanic's Liens. General contractor Stiglich entered into a standard AIA construction contract with respondent Larson in which Stiglich agreed to build a warehouse addition and do remodeling work. Larson defaulted under the contract and Stiglich filed a mechanic's lien. The parties arbitrated their claims, and an arbitrator ruled in favor of Stiglich. Stiglich moved to confirm the award and claimed attorney fees. The Court of Appeals reversed the district court decision that Stiglich waived its right to attorney fees by not requesting them during the arbitration. The court stated that the prevailing lienor is entitled to reasonable costs and disbursements, including attorney fees, in a mechanic's lien foreclosure action under ¤ 514.14. Furthermore, the contract does not require that the parties arbitrate the award of attorney fees. Stiglich Constr., Inc. v. Larson, III, No. C6-00-1190, 621 NW2d 801 (Minn. App. 01/30/01).

Zoning. Arliss Anderson owns and lives in a house located within an area zoned for single-family residential use with the permitted use to operate a group care facility. Anderson leased space to My Brother's Keeper to conduct administrative services. The Court of Appeals upheld the district court decision prohibiting My Brother's Keeper from performing administrative work in the house. According to the court, the use of the house by My Brother's Keeper did not fit within the plain and ordinary meaning of the zoning regulation that permitted 24-hour group care operations that provided rehabilitation, food, lodging and education. Finally, the underlying policy of the ordinance allowing group care facilities was to promote access by handicapped persons to residential neighborhoods and not to permit the administrative work being done in Anderson's house. My Brother's Keeper v. Scott County, No. C6-00-1173, 621 NW2d 479 (Minn. App. 01/30/01).

Land Use. The Buffalo Red-River Watershed District (BRRWD) contracted to have a ditch repaired. Upon completion of the ditch, appellant Wear expressed concerns to BRRWD that the new spoil bank was too low to manage excess water overflow effectively. BRRWD did not raise the spoil bank and during a heavy rainfall water ran over the bank of the ditch causing damage to appellants' properties. The Court of Appeals affirmed the district court decision stating that Wear did not prove that BRRWD negligently repaired the ditch. Appellants failed to establish that the design and construction of the ditch was inappropriate based on the needs of the district. Additionally, appellants did not demonstrate that BRRWD breached its duty to improve the ditch by not raising the spoil bank after Wear complained about its height. Wear v. Buffalo-Red River Watershed District, No. C0-00-908, 621 NW2d 811 (Minn. App. 02/13/01).

--Melissa Baer
Stephenson & Sanford

Individual Income Tax Domicile; Penalties. The Minnesota Supreme Court affirmed the Minnesota Tax Court and held that the Stelzners were nondomiciliary residents of Minnesota despite their contention of a Nevada business presence and residence. The record contained sufficient evidence to support the refusal by the court to abate late filing penalties. Stelzner v. Comm'r, 621 N.W.2d. 736 (Minn. 2001).

Closing Agreement: Nexus; Public Law 86-272; Unitary Treatment. The Minnesota Tax Court found factual issues and denied cross-motions for summary judgment made by the commissioner and taxpayers over the impact of statutory closing agreements signed in 1993 and covering audit years 1973 through 1988. The commissioner sought summary judgment on the basis that the taxpayers waived their claims of lack of nexus or not being members of a single unitary business group and similarly were foreclosed from contending that imposition of corporate tax violated Public Law 86-272 by signing the closing agreements. Johnson & Johnson Consumer Prod., Inc. v. Comm'r, Nos. 7057-67, 2000 WL 1886617 (Minn. T.C. 12/26/00).

Property Tax; Public Charity Exemption. The Minnesota Supreme Court reversed the tax court and held that a newly formed organization was not precluded from qualifying as a purely public charity for purposes of the property tax exemption. Although the taxpayer had not provided charitable services, it still could qualify as a purely public institution by clearly demonstrating that its organizational structure and planned operations were compatible with the test in Northstar Research Inst. v. County of Hennepin, 236 N.W.2d. 754, 757 (Minn. 1975). Skyline Pres. Found. v. County of Polk, 621 N.W.2d. 727 (Minn. 2001).

Basis Calculation; Passive Activity Losses and Material Participation; Attorneys' Fees. The Minnesota Tax Court, in an income tax case, held that the taxpayer had sufficient basis in subchapter S corporations and was materially participating in the trades or businesses and was therefore allowed to take the losses sustained in the years at issue. The court also awarded attorneys' fees under the Minnesota Equal Access to Justice Act, Minn. Stat. ¤ 15.472, since the commissioner's position was not "substantially justified." Helgeson v. Comm'r, No. 7217, 2001 WL197269 (Minn. T.C. 02/26/01).

Filing of Appeals. The Minnesota Tax Court dismissed an appeal for lack of jurisdiction because the taxpayers failed to serve properly the petition by mail or by personal service upon any of the required county officials as required in Minn. Stat. ¤ 278.01(1). Aanensen v. County of Murray, No. CX-00-93-R, 2000 WL 1725055 (Minn. T.C. 11/17/00).

No Interest on Unemployment Compensation Refund. The Minnesota Court of Appeals held that when an employer pays an unemployment compensation tax under protest and the Court of Appeals later holds that the basis for the tax was improper, the employer is not entitled to interest on the erroneous payment. The interest is not allowed under Minn. Stat. ¤ 268.057, Subd. 7(a). Central Specialties, Inc. v. Comm'r of Econ. Sec., No. C4-00-989, 2001 WL 185106 (Minn. App. 02/27/01).

Timely Mailing as Timely Filing. The IRS denied dismissal of a petition that the taxpayer originally deposited with a private delivery service within the required 90-day period, but which was ultimately delivered late. The "timely mailing as timely filing" rules of Code Sec. 7502 applied where the original mailing envelope was timely mailed and properly addressed. The fact that the taxpayer incorrectly checked the "hold Saturday" box on the mailing label was not controlling, since the box was not part of the delivery address and other actions showed that the taxpayer intended the envelope to be delivered by standard overnight service. Estate of Cranor, T.C. M. 2001-27, 2001 WL 103449 (02/08/01).

Attorney-Client Privilege. The clients' disclosure and reliance on opinion advice in the merger proxy statement forfeited their attorney-client privilege with respect to all documents that formed the basis for the tax advice, all documents considered by counsel in rendering advice, and "all reasonably contemporaneous documents reflecting discussions by counsel or others concerning that advice." In re Pioneer Hi-Bred Int'l Inc., Misc. No. 661, 238 F3d 1370 (Fed. Cir. 02/05/01).

Fraud; Statute of Limitations. The tax court held that a taxpayer did not commit fraud when he failed to pay employment taxes on workers he wrongfully treated as independent contractors. As a result, the IRS was barred from assessing the taxes because the normal three-year limitation period under Section 6501(a) had run. Neely, 116 T.C. No. 8, 2001 WL 121104 (02/13/01).

Joint Returns; Signatures. The tax court improperly denied a taxpayer joint filing status based on an unsigned joint return he filed with his ex-wife. The unrefuted evidence showed that the taxpayer intended to file a joint return. By refusing to allow him to sign an otherwise valid and processed return after he was notified of his inadvertent omission, the IRS waived its claim that a valid return was not filed due to lack of a signature. Olpin v. Comm'r, 87 A.F.T.R.2d (IRA) ¦ 2001-656 (10th Cir. 2001).

COD Income. Some farmers had cancellation of debt ("COD") income in the year that the Farmers Home Administration wrote off a portion of their mortgage loans pursuant to net recovery value buyout/recapture agreements. The taxpayers' argument that discharge was contingent on the termination of the recapture agreement was rejected where such agreement was completely within their control and too indefinite to be a mere substitute for the original, fixed mortgage debt. Jelle v. Comm'r, 116 T.C. No. 6, 2001 WL 80181 (01/31/01).

Attorney-Client Privilege. Documents prepared by the taxpayer's accountants at the direction of the taxpayer's divorce attorney to assist the attorney in the divorce litigation were privileged and not subject to IRS summons. There was no evidence that the documents prepared by the accountants were used in the filing of any tax returns. Pomerantz v. United States, No. 00-6777 (S.D. Fla. 01/19/01). See also Segerstrom v. United States, No. C-00-0833 S.I. (N.D. Cal. 02/0701) (documents sought by IRS summons fell within representation of taxpayers by a law firm for purposes of rendering legal advice and assistance in estate planning, and enforcement of summons is therefore denied.). Cf. Calvin Klein Trademark Trust v. Wachner, No. 00 Civ. 4052, 124 F.Supp2d 207 (J.S.R.) (S.D.N.Y. 12/15/00) (communications between law firm and public relations firm that it hired concerning public relations aspects of litigation are not protected by attorney-client privilege).

COD Income. The tax court has held that assets that are exempt from the claims of creditors under state law must be taken into account in determining whether a taxpayer is insolvent and thus able to exclude cancellation of debt ("COD") income from gross income. Carlson, 116 T.C. No. 9, 2001 WL 180173 (02/23/00).

Post-Divorce Transfers and Agreements. The tax court properly found that the ex-husband's post-divorce property transfer to his ex-wife in exchange for release of her divorce-related property settlement claims against him was "incident to" divorce under Code. Sec. 1041. The transfer clearly contemplated marital property division where the release explicitly stated that transfer fully settled all marital claims. The fact that the transfer occurred separately more than three years after the divorce did not negate the intent of the parties. Young v. Comm'r, 87 A.F.T.R.2d, 240 F3d 369 (RIA) 2001-889 (4th Cir. 02/16/01).

Sales and Use Tax. Independent contractors known as "consultants" on the sales force of an out-of-state company were "representatives" within the meaning of the sales and use tax statute, making the company liable for the tax on sales generated by them, even though these consultants had no authority to bind the company. Comm'r v. Jafra Cosmetics Inc., No. SJC-08265, 742 NE2d 54 (Mass. S.J.C. 01/25/01).

Small Case Summary Opinions. In a reversal of prior policy, the U.S. Tax Court decided to make public small case summary opinions, which have no precedential value. Taxpayers with a deficiency of $50,000 or less may elect to have their cases handled under small case procedure; however, the decision cannot be appealed. Summary opinions beginning in 2001 are available on its Web site, http://www.ustaxcourt.gov.

Limited Liability Company; Deduction of Ordinary Losses. A taxpayer properly treated his ratable share of flow-through loss from a medical service LLC as normal, not passive activity loss. Gregg v. United States, No. 99-845-AA (D. Or. 11/29/00).

Interest Deductions; Corporate-Owned Life Insurance. A utility was denied COLI policy loan interest deductions for all years at issue. Although interest during the early years arose in real transactions, the broad-based, highly leveraged COLI plan as a whole was a sham and lacked economic substance. Am. Elec. Power, Inc. v. United States, 87 A.F.T.R.2d (RIA) ¦ 2001-917 (D.C. Oh. 02/20/01).

Alternative Cost Method; Allocation of Costs. A developer using the alternative cost method may, in calculating gain on the sale of residential lots, allocate to bases in the lots sold the estimated construction costs relating to common improvements, excluding estimated future-period interest expense. Hutchinson v. Comm'r, 116 T.C. No. 14, 2001 WL 253262 (03/14/01).

Tax on Internet Services. Tennessee does not have the right to impose taxes on America Online's Internet services because the company does not have a physical presence in the state. Am. Online, Inc. v. Johnson, No. 97-3786-III (Tenn. Ch. C. 03/13/01).

Collection Due Process. The IRS Appeals Office administrative decision following a collection due process hearing failed to comply with the statutory mandate that a balancing analysis be made of the need for efficient tax collection with the taxpayer's legitimate concern on excessively intrusive collection action. The decision was remanded for hearing by an impartial appeals officer. Mesa Oil Inc. v. United States, No. 00-B-851, 2000 WL 1745280 (D.Col. 12/15/00).

Residence Exclusion; Revocable Trusts. A new IRS private ruling reveals a potential pitfall where a married couple transfers their residence to a revocable trust that becomes irrevocable after the first spouse dies. The $250,000 home-sale exclusion may be completely lost or available only to a limited extent, even though the surviving spouse has the continued right to occupy the residence. In the ruling, the exclusion was available only to the extent the survivor was considered to own trust property because of his "five or five" power. Priv. Ltr. Rul. 200104005.

Standards of Tax Practice. The Committee on Standards of Tax Practice of the ABA Section of Taxation issued Standard 2000-1 for the guidance of tax practitioners. The standard addresses differences when the income tax return accuracy standards for taxpayers and the lawyers who advise them result in conflicts of interest between clients and their lawyers. Specifically, it explores whether the benefits of adequately disclosing return positions, which may affect taxpayers and advisers differently, generate conflicts of interest. The statement is available on the committee home page at www.abanet.org/tax/groups/stp/stmt00-1.html.

Joint and Several Liability on Joint Return; Innocent Spouse Relief. If a taxpayer has been a domestic violence victim and fears that claiming innocent spouse relief might result in retaliation from the other spouse, he or she should write "Potential Domestic Abuse Case" at the top of Form 8857, Request for Innocent Spouse Relief, and attach an explanation to the form. IRS workers will receive training on how to handle abuse cases properly. I.R. 2001-23.

New IRS Website. "Tax Talk Today" is a new IRS Web site dedicated to providing continuing education and information for tax practitioners. It is a series of monthly 60-minute programs designed specifically for the tax professional community. It allows the attorney to participate in live and archived Webcasts and satellite broadcasts. Access to the program is at www.TaxTalkToday.tv.

New IRS Regulations. The IRS issued regulations in a number of important areas set forth below:

• Form of Partnership Mergers and Divisions. The IRS issued final regulations that generally respect the form chosen by the parties involved in partnership mergers and divisions. T.D. 8925.
• Recovery of Litigation Costs after a Qualified Offer. The IRS issued temporary and proposed regulations on recovery of litigation costs after a qualified offer. The regulations apply for qualified offers made in administrative or court proceedings after January 3, 2001, and before January 3, 2004. T.D. 8922.
• Replacement Anti-Morris Trust Proposed Regulations. The IRS has withdrawn earlier proposed regulations and issued a new set that defines a "plan (or series of related transactions)" for purposes of the Code Sec. 355(e) anti-Morris Trust provision. Reg. 116733-98 and Reg. 107566-00.
• Third-Party Contacts by IRS. The IRS issued proposed regulations on the statutory rule that generally requires IRS officers and employees to give a taxpayer advance notice before they contact third parties about the taxpayer's tax liability. Reg. 104906-99.
• Death Technique Barred in Deductions for Charitable Lead Trusts. Final regulations prevent individuals from inflating transfer tax deductions for charitable leads trusts by fixing the term of the charity term to last for the life of an unrelated person who is seriously ill and can be expected to die prematurely. T.D. 8923.
• New Standards for Tax Shelter Opinions. In the latest assault on tax shelters, the IRS proposed tough new tax shelter opinion standards for lawyers, accountants, enrolled agents, and others authorized to practice before it. The proposed rules are part of a revamping of Circular 230, which governs practice before the IRS. Reg. 111835-99.
• Switches from Association to Partnership or Disregarded Entity. The IRS issued proposed regulations that would provide guidance about the tax treatment of changes in entity classification from an association taxable as a corporation to a partnership or to a disregarded entity. The proposed regulation would permit the 80 percent-or-greater parent of an association taxed as a corporation to convert it to a partnership or disregarded entity for federal tax purposes in a tax-free transaction, without adhering to the formality of adopting a formal plan of a subsidiary liquidation. Reg. 110659-00.
• Innocent Spouse Relief. The IRS published its long-awaited proposed regulations providing "innocent spouses" relief in certain circumstances from joint and several tax liability under Section 6015. Reg. 106446-98.
• "Like-kind" Exchanges. The IRS issued proposed regulations to narrow the definition of the term "disqualified person" for ¤ 1031 like-kind exchanges. The regulations would affect the eligibility of certain persons to serve as escrow holders of qualified escrow accounts, as trustees of qualified trusts, or as qualified intermediaries. They are in response to recent changes in the federal banking law, especially the repeal of ¤ 20 of the Glass-Steagall Act of 1933. Reg. 107175-00.
• Minimum Required Distributions for Qualified Plans. The IRS proposed regulations that would simplify the minimum distribution rules for qualified pension plans and individual retirement accounts. The effect of the simplified rules would be to reduce the required minimum distribution for the vast majority of workers. Reg. 1030477-00.

Timely Refunds, Credit Claims, Late Returns. The IRS issued final rules providing that, under certain circumstances, claims for refunds or credits may be treated as timely filed under the "mailbox rule" of Internal Revenue Code Section 7502 even if the return itself is late. T.D. 8932.

Health Coverage for Domestic Partners; Veba. A new private ruling explains numerous tax consequences of health coverage provided for employees' domestic partners through a multiemployer voluntary employees' beneficiary association (VEBA) including tax consequences to employees, the VEBA itself, and participating employers. Priv. Ltr. Rul. 200108010.

Statutory Stock Options; Payroll Tax Withholding. A new IRS notice provides both bad news and good news for employees holding statutory options and companies offering them. The bad news is that the IRS has concluded that Rev. Rul. 71-52, 1971 1CB 278, which held that the prior law that qualified stock options were not subject to FICA, FUTA, or income tax withholding is obsolete and does not apply to statutory options. The good news, however, is that statutory options won't trigger FICA, FUTA, or income tax withholding before 2003. Notice 2001-14, 2001-6 I.R.B.

New Paid Preparer Authorization. Beginning with 2000 tax returns, individual taxpayers will now be able to designate their tax preparer as an authorized representative in matters with the Internal Revenue Service. Taxpayers can make this authorization by checking the box on the Form 1040 of the tax return near their signature.

Lawsuits and Awards Guide. The Lawsuits and Awards Market Segment Specialization Program (MSSP) Audit Technique Guide has been posted to a government Web site. The government Internet address for the document is http://ftp.fedworld.gov/pub/irs-mssp/a9lawsuit.pdf. This thorough guide is intended to provide an overview of lawsuit settlement examinations and applies to recoveries by individuals only.

Subpart F Study. The Treasury released its long-awaited "Subpart F" study focusing on the deferral of income earned through U.S.-controlled foreign corporations (CFCs). Two years in the making, it reexamines the system for taxing U.S. <H>cfc<P>s and considers some of the options for tax reform. Treasury Department Policy Study on Deferral of Income Earned through U.S.-Controlled Foreign Corporations, 2001 W.T.D. 1-45.

Contractors' Use of Cash Method. The IRS announced a change in its litigating position requiring small construction contractors to use inventory accounts and the accrual method of accounting. It will not change their use of the cash method while it studies the issue further. C.C.M. 2001-110 (02/02/01).

Split-Dollar Life Insurance Plans. The IRS revised and clarified taxation of split-dollar arrangements for purchases of life insurance contracts. Revisions were considered necessary to address recent forms of equity split-dollar arrangements and enactment of Code Sec. 83 and Code Sec. 7872 since the last guidance was issued. As part of the interim guidance until further notice, payment made by employers under split-dollar arrangement must be accounted for as either a loan, an investment in a contract for the employer's own account, or payment of compensation, and the new premium rate table (Table 2001) may be substituted to determine the value of current life insurance protection. Notice 2001-10.

New Small Businesses Web Site. The IRS launched a new small business community Web site designed to assist small businesses and self-employed taxpayers through user-friendly information and assistance. The new site includes answers to basic tax questions and a calendar of important deadlines; on-line access to IRS forms; news and events specific to new businesses and specific industry information for the construction and restaurant industries; links to key federal and court opinions on tax issues as well as links to rulings and regulations affecting specific industries; links to state tax information; links to non-IRS sites for general tax information; and links to small business resources. The new site can be accessed through the IRS Web site at www.irs.gov and then clicking on the link that says "Small Business and Self-Employed Community."

Bush Tax Proposal. President Bush's $1.6 trillion, ten-year tax plan includes these tax provisions:

• replacing the current tax rates of 15, 28, 31, 36, and 39.6 percent with a simplified rate structure of 10, 15, 25, and 33 percent;
• doubling the child tax credit to $1,000 per child and applying the credit to the Alternative Minimum Tax (AMT);
• reducing the marriage penalty by reinstating the ten percent deduction for two-earner couples;
• eliminating the estate tax;
• expanding the charitable deduction to non-itemizers, and
• making the research and experimentation (R&D) tax credit permanent.

Streamlined Sales Tax Effort. With much fanfare, Governor Ventura announced the introduction of companion bills in the Legislature (S.F. 1325 and H.F. 1416), marking the formal start of Minnesota joining the National Streamlined Sales Tax effort. Minnesota is one of 30 states initiating legislation to make the nationwide sales and use taxes purportedly more fair, simple, and uniform. A fly in the ointment is that the National Conference of State Legislatures introduced its own version of the model act, which strips out all language on definitions, bad debt treatment, the uniform rounding rule, and other limitations such as sales tax holidays. It is unclear what the prospect is for passage in 2001.

Internet Moratorium Bills. The federal Internet moratorium runs out in October 2001. Numerous bills have been introduced in Congress to extend the moratorium. States are scrambling to get the Streamlined Sales Tax Project passed to ward off federal legislation. It appears that the Internet tax moratorium war will continue well into 2001 before resolution. The Dorgan bill is S. 512 and the Wyden-Leahy bill is S. 288.

Repeal of Federal Estate Tax in Minnesota. At the present time, Minnesota, along with 38 other states, has a state death tax that is a "pick-up" or "sponge" tax. Under the "pick-up" or "sponge" tax, the state death tax is an amount equal to the state death tax credit allowed for the federal estate tax. Repeal of the federal estate tax will have the effect of repealing the Minnesota state death tax since Minnesota does not have a separate death tax as such. The revenue loss is estimated to be $58 million per year in Minnesota.

--Jerry Geis
Briggs & Morgan PA

Home Insurance; Business Pursuits Exclusion. An insured operated a farm and grain company, and the insured's family lived on a portion of the farm. The insured carried both a comprehensive general liability (CGL) policy for his farming business and a homeowner's policy for his home and personal effects.

Plaintiff was injured when his motorcycle collided with a tractor operated by the insured's 12-year-old son. The insured had instructed his son to drive the tractor from a field back to the farmhouse, where the tractor's oil could be changed. Plaintiff received benefits under the CGL policy and then sought benefits under the homeowner's policy. The insurer denied coverage under the homeowner's policy, reasoning that the policy excluded coverage for business pursuits.

The Court of Appeals affirmed, holding that when analyzing the business pursuits exclusion in a homeowner's insurance policy, the focus is on the liability-causing conduct, rather than on the status of the individual engaging in the conduct. The court rejected the plaintiff's argument that the homeowner's policy should also provide coverage because the 12-year-old was helping in his father's business and was not engaged in his own business pursuit. Erickson v. Christie, No. C1-00-1548, 622 NW2d 138 (Minn. App. 02/06/01).

Medical Malpractice; Managed Care; Comparative Negligence. Plaintiff's husband had a two-year history of chest pain and abdominal problems. Medical tests indicated normal cardiac functioning. The husband's primary-care physicians referred him to a gastroenterologist, who found nothing wrong. The physicians diagnosed the husband's problem as anxiety-related. The husband died from a sudden cardiac event while on his way to a doctor's appointment. Plaintiff commenced a medical malpractice action against two primary-care physicians. The jury attributed all fault to the deceased, and plaintiff recovered nothing.

In affirming the jury verdict, the Court of Appeals first held that evidence about the managed care plan was not relevant because plaintiff had failed to establish that financial incentives caused the doctors to deviate from the applicable standard of care. Furthermore, even if the relevancy requirement had been met, the evidence was properly excluded because it was likely to confuse a jury.

Second, the court held it was proper to instruct the jury on comparative negligence. Instructions on comparative negligence generally are allowed in medical malpractice cases, and there was evidence that the deceased did not follow doctors' advice to: (1) quit smoking, (2) take his medication, or (3) go to an emergency room when he began having chest pains. Shea v. Esensten, No. C1-00-366, 622 NW2d 130 (Minn. App. 02/06/01).

Negligence; Paramedics; Aggravation. While at home, plaintiff experienced trouble breathing. Her family called 911. The responding paramedics got lost and were delayed in reaching the plaintiff by one to four minutes. Plaintiff sued, claiming the paramedics' negligent response to the 911 call caused oxygen deprivation and the resulting severe brain injury. Defendant, the paramedic provider, appealed the jury verdict for plaintiff.

Affirming the verdict, the Court of Appeals ruled that the applicable standard of care is that of the reasonable person. When paramedics perform functions not requiring professional training or judgment, such as using an address to locate a home, a professional standard of care is not required. Accordingly, the court rejected defendant's argument that the plaintiff had to present expert testimony to establish the paramedics' standard of care.

Defendant also argued that the trial court, using the controversial new aggravation jury instruction, impermissibly shifted the burden of proving damages to the defendant. The instruction, patterned after JIG91.40, read: "If you cannot separate damages caused by the pre-existing medical condition from those caused by [defendant's] negligence, if any, then [defendant] is to be held liable for all of the damages."

The court agreed that this newly formulated JIG did indeed conflict with Minnesota law, because the JIG improperly extended a defendant's burden of proof to apportionment between an at-fault defendant and a preexisting condition. However, under the unique facts of this case, the court nonetheless affirmed the verdict, holding that modifications to 91.40 made by the trial court did not destroy the substantial correctness of the charge or create substantial prejudice on a vital issue. The court also held that the unique facts and evidence did not result in a shifting of the burden of proof. Blatz v. Allina Health System, No. C9-00-826, 622 NW2d 376 (Minn. App. 02/06/01).

Auto Insurance; Underinsured Motorist Benefits. A passenger in an accident involving two underinsured at-fault automobiles is not entitled to underinsured motorist (UIM) benefits from her own insurer where her UIM limits do not exceed the UIM limits of the host driver's policy. Schons v. State Farm Mut. Auto. Ins. Co., No. C6-99-1246, 621 NW2d 743 (Minn. 02/08/01).

Insurance; Business Risk Exclusion. An insured that had been hired to clear trees from land brought a declaratory judgment action against its insurer after the insurer refused to defend or indemnify the company for damages it caused to trees owned by a third party adjacent to property where the land was being cleared. The insurance policy excluded coverage for "property damage" to real property on which the contractor was working "directly or indirectly." The policy also excluded coverage for "property damage" that must be restored, repaired or replaced because the work was not performed correctly. The lower court granted summary judgment to the insurance company, holding that the policy exclusions unambiguously denied coverage.

The Court of Appeals reversed, holding that the relevant exclusions were business risk exclusions. The business risk doctrine arises from the public policy that a risk that an insured's product will not meet contractual standards is a risk that is not covered under a general liability insurance policy. The court held that because the insured's employees accidentally damaged property of a third party in the course of completing their contract, the business risk doctrine precluded the exclusion from denying coverage. In doing so, the court differentiated damage to property owned by a third party and the property that was the subject of the contract. Thommes v. Milwaukee Mut. Ins. Co., No. C9-00-1393, 622 NW2d 155 (Minn. App. 02/13/01).

--Michael A. Klutho
Bassford, Lockhart Truesdell & Briggs