August 2001

The 2001 Legislature enacted a number of measures of interest to administrative law practitioners, most of which were in response to the Rules Reform Task Force recommendations.

CHAPTER 179. Most notable provisions of this bill include:
Governor's Veto: Making permanent the governor's rulemaking veto authority.
Rule Variances: A new generic process is created allowing agencies to grant variances to their rules; costs of the variance may be billed to the petitioner and possibly credited to the agency.
Legislative Review: A new "rule-delay" authority is granted to the Legislature. Rule adoption may be delayed upon a majority vote of the appropriate committees of the House and Senate.
Illegal Rulemaking: A new process is established allowing petitions to the Office of Administration Hearing (OAH) seeking an order that an agency is engaging in improper rulemaking. The loser pays the OAH costs unless the petitioner is a pauper or "undue hardship" is established.
Obsolete Rule Repeals: A new process for repealing obsolete rules was also established.

CHAPTER 106 -- OAH Clean Up/Fix Up Bill. Several minor OAH housekeeping amendments to the APA are adopted in this bill.

CHAPTER 23, 46, 87 Rule Repeals. A lengthly list of obsolete rules were repealed for the following agencies:

CHAPTER 23: Department of Commerce, Board of Architecture, Public Employee Relations Board, and State Lottery.

CHAPTER 46: Board of Chiropractic Examiners, Department of Health (roller towels).

CHAPTER 87: Department of Transportation (motor carrier tariffs).

--Michael J. Ahern
Dorsey & Whitney LLP

Landlord's Duty. The Minnesota Court of Appeals affirmed a district court grant of summary judgment against plaintiff and in favor of a landlord who had no actual notice of any code violations. The court held that the landlord reasonably relied on an official inspection which did not include any citations for code violations. Even though there were code violations, the court affirmed the trial court's finding that the landlord did not know or have reason to know of those violations. Gradjelick v. Hance, C4-00-2161, 627 N.W.2d 708 (Minn. App. 6/4/01).

Unjust Enrichment. The Court of Appeals reversed a summary judgment on this issue and remanded for further proceedings, noting, preliminarily, that there is no "greater specificity" requirement to pleading a claim for unjust enrichment. Rather, the pleading is to be simple, concise, and direct.

The Court of Appeals found that appellant had submitted evidence sufficient to create a genuine issue of material fact: He made substantial improvements on respondent's land; Respondents knew of the improvements, and either encouraged them or did not discourage them; and Respondents benefited by the improvements. Schumacher v. Schumacher, C7-00-2039, 627 N.W.2d 725 (Minn. App. 6/11/01).

-- Steven J. Kirsch
-- Andrew T. Shern
Murnane Conlin White & Bradt PA

Procedure; Jury Unanimity; Single Charge, Multiple Acts. The appellant was charged with a single count of fifth degree controlled substance, alleging two acts on the two different dates. The appellant requested, but was denied, an instruction for the jury to evaluate the acts separately and unanimously agree about which act he committed. In closing argument, the state told the jury that some of them could believe that the appellant possessed the drugs on the first date and others could believe that he possessed the drugs on the second date, and there would still be the violation of a single count. Held, it was reversible error for the judge to deny the instruction, or to not require the prosecution to elect which specific act of possession it was relying on for conviction by the close of prosecution. Because some jurors could have believed that one event occurred, and others believed the later event occurred, it is possible that the jury¹s verdict was not unanimous. State v. Jack Leroy Stempf, 627 N.W.2d 352 (Minn. App. 5/29/01).

Firearms; Felon in Possession; Stay of Imposition. The defendant, originally convicted of felony possession of cocaine, which later, by operation of law (Minn. Stat. ¤ 609.13, subd. 1(2) became a misdemeanor, may still be prosecuted for the crime of being a felon in possession of a firearm in violation of Minn. Stat. ¤ 624.713, subd. 1(b), because the prior felony possession of cocaine conviction constitutes a "crime of violence" within the meaning of Minn. Stat. ¤ 624.712, subd. 5. It is the nature of the offense of conviction, rather than the subsequent treatment of the offender by the court, which is the correct basis for the firearms restriction. This was the legislative intent. State v. Larry Foster, 2001 WL 58989 (Minn. App. 5/29/01).

Sentence; Consecutive; Obstructing Legal Process; Crime Against a Person. The appellant had been charged with one count of obstructing legal process plus one count of DWI. At the time of sentencing, the judge ordered that the sentence for obstructing legal process be served consecutively to a federal bank robbery sentence. Minnesota Sentencing Guidelines II.F.1 allows consecutive sentencing when a prior felony sentence for a crime against a person has not expired or been discharged and one or more of the current felony convictions is for a crime against the person. The prior felony was for a crime against the person. While obstructing legal process is normally a property offense, sentencing courts may look for the manner in which a crime is committed. In this case, the obstructing legal process was with force involving struggling with a police officer for his gun in a moving squad car, causing the police officer to be in fear. The consecutive sentence was not an abuse of discretion. State v. Daniel Glen Myers, 627 N.W.2d 58 (Minn. 6/7/01).

Sentence; Credit; Residential Treatment; Equal Protection. The appellant received an EJJ disposition of a 150-month state sentence on a charge of first-degree assault. As a condition of probation, he was sent to complete a residential program out of state, which he completed successfully. Upon return to Minnesota, he violated his probation by testing positive for cocaine. The district court revoked his probation and imposed the 150-month adult sentence. Held, it was not a denial of equal protection for the district court judge to refuse to grant credit for time spent in the private residential program. Minnesota Sentencing Guidelines provide that credit for time spent in confinement as a condition of probation is limited to time spent in jails, workhouses, and regional correctional facilities, but that credit is not to be given for time spent in residential treatment facilities. Minnesota Sentencing Guideline III.C.04. The rule against granting jail credit for time spent in treatment programs comports with the legitimate state purpose of "rational and consistent sentencing." State v. Derrick Eugene Bradley, 2001 WL 605053 (Minn. App. 6/5/01).

Sentence; Excessive Fines; Mandatory Minimum; Drug Offense. The appellant was convicted of a controlled substance charge in the third degree. The trial court judge fined the appellant $75,000, apparently believing that amount to constitute a mandatory minimum under Minn. Stat. ¤ 609.101, subd. 3 (2000). As noted in State v. Rewitzer, 617 N.W.2d 407, 412 (Minn. 2000), the term "mandatory minimum" is inaccurate, because the same statute permits a sentencing judge to reduce the fine considerably if the court finds "undue hardship." In this scenario, the imposition of the $75,000 fine violated the excessive fines clauses of the United States and Minnesota constitutions. State v. Mark Charles Oberg, 627 N.W.2d 721 (Minn. App. 6/5/01).

Conspiracy; Lack of Actual Agreement; Knowledge; Innocent Participant. Evidence educed at trial showed that an alleged coconspirator brought the appellant a red cooler and an altered propane tank containing ammonia. Both of these items are used in the manufacturing of methamphetamine. At the appellant¹s residence, which was owned by the alleged coconspirator, officers executing a search warrant found many more items used in the manufacture of methamphetamine. The appellant was charged with conspiracy to manufacture methamphetamine. Held, there is insufficient evidence in the record from which the jury could reasonably infer that the appellant had entered into an actual agreement with anyone for the purpose of manufacturing methamphetamine. The alleged coconspirator testified that he did not know the contents of the cooler or the altered propane tank.; no contrary evidence was presented by the state. No evidence was introduced that any alleged coconspirator had discussed manufacturing methamphetamine with the appellant or anyone. An innocent courier cannot be considered a coconspirator. Conviction reversed. State v. Michael Allen Hatfield, 627 N.W.2d 751 (Minn. App. 6/5/01).

Evidence; Voice Exemplar; Waiver of 5th Amendment. Although the appellant did not take the stand at trial, he offered to make a voice exemplar to show that he had a strong Cajun accent. The district court ruled that if he chose to provide such an exemplar, he would be subject to cross-examination. Because the appellant chose to not testify, the district court ruled that the offered voice exemplar would be inadmissible. The trial court did, however, allow the appellant to call five witnesses to testify regarding this accent. Held, in this case of first impression, a defendant does not open himself up to cross-examination if he attempts to introduce a voice exemplar. A voice exemplar is a physical characteristic, similar to those which courts routinely allow a state to compel a defendant to exhibit such as tattoos, scars, etc. It was plain error for the trial court to refuse to admit the voice exemplar evidence. Similarly, however, the court notes that "if the prosecution can compel a defendant to produce a voice exemplar without infringing on his privilege against self-incrimination, then the due process principle of reciprocity demands that a defendant should be allowed the same opportunity without waiving his 5th-Amendment privilege." State v. Robert Lee Valentine, 2001 WL 604961 (Minn. App. 6/5/01).

Evidence; Impeachment; Prior Juvenile Adjudication. A prior juvenile adjudication may not be used for impeachment in a juvenile adjudication proceeding. Minn. R. Juv. P. 13.04 states that "only such evidence as would be admissible in a criminal trial" shall be admitted in a juvenile adjudication hearing. Minn. R. Evid. 609(a) states that credibility may be attacked by impeachment with evidence that the witness has been convicted of a crime. Juvenile adjudications are not considered convictions: Minn. Stat. ¤ 260B.245, subd 1 (2000) states that juvenile adjudications shall not be "deemed to be a conviction of a crime." The rules of juvenile procedure have, hence, effectively overruled In re C.D.L., 306 N.W.2d 819 (Minn.1981), which held that prior juvenile adjudications may be used for impeachment in juvenile adjudication proceedings. Another reason for the non-vitality of C.D.L. is that juvenile hearings are now open to the public if the juvenile has committed a felony level offense and the juvenile is at least 16 years of age. In re S.S.E., 2001 WL 605016 (Minn. App. 6/5/01).

Search and Seizure; Automobile; Hanging Object. A citizen reported to a police officer that she saw several individuals in a motel parking lot, standing around a silver Saturn vehicle with open containers of alcohol. When the police officer arrived, he observed a Ford Escort leaving the lot. He pulled up behind it and noticed an object hanging from its rearview mirror and stopped the vehicle based on that object. Held, this was a permissible stop. Minn. Stat. ¤ 169.71, subd. 1 (1998) prohibits anyone, except law enforcement vehicles, from having any object suspended between the driver and the windshield, other than sun visors and rearview mirrors. Because the stop was based upon the object suspended from the rearview mirror, and because the statute prohibits this conduct, the officer¹s stop was justified. Gina Marie Gerding v. Commissioner of Public Safety, 628 N.W.2d 197 (Minn. App. 6/12/01).

No-Knock Warrant; Boilerplate Language; Actual Knock and Announce. A no-knock warrant was issued, based on the affiant's assertion that an unannounced entry would be necessary "to prevent the loss, destruction or removal of objects of the search [to protect the safety of the police officers . . .] because: drugs are easily disposable, and through previous experience, I have learned that [d]rug dealers are known to possess firearms to protect their interest." This language is not the required "strong showing" of particularized reasons for an unannounced entry. State v. Wasson, 615 N.W.2d 316, 320 (Minn. 2000). However, because officers knocked and announced their entry, this is a factual situation equivalent to one in which a search warrant is executed pursuant to a warrant without a no-knock provision. Hence, suppression should not be granted on a no-knock basis alone. The case is remanded for factual findings as to the probable cause component supporting the issuance of a warrant by the magistrate. State v. Janet Kay Anhalt, 2001 WL 683478 (Minn. App. 6/19/01)

-- Frederic Bruno
Frederic Bruno & Associates

HCFA Name Change. The Bush Administration has renamed the Health Care Financing Administration (HCFA). The new Centers for Medicare and Medicaid Services (CMS) will be split into three divisions, with Medicaid falling under the Center for Medicaid and State Operations (CMSO).

CADI and TBI Waivers. The Minnesota Department of Human Services (MDHS) has expanded Community Alternatives for Disabled Individuals (CADI) and Traumatic Brain Injury (TBI) waivers to include "Assisted Living Plus," allowing services to be provided in registered "Housing with Services" establishments. Before the amendment, assisted living services were available only to persons living in residential centers (i.e., apartment buildings). In affect, this extends the CADI waiver and the TBI waiver to include certain assisted living facilities that register as "Housing with Services" establishments. See MDHS Bulletin Nos. 01-56-09 (March 27, 2001) and 01-56-10 (March 28, 2001).\

-- Tonya Zdon Gabbard
Garvey & Boggio, PA

EPA Enforcement Authority; "Overfiling." In May, the U.S. District Court for the Western District of Wisconsin became the latest court to uphold the Environmental Protection Agency's (EPA's) ability to take enforcement action for violations of federal environmental laws, even in the wake of state enforcement action for the same matter (a process known as "overfiling"). In doing so, the court specifically rejected a contrary holding of the 8th Circuit Court of Appeals in Harmon Industries Inc. v. Browner, 191 F.3d 894 (8th Cir. 1999).

The defendant, Murphy Oil, urged the district court to adopt the 8th Circuit's finding in Harmon Industries that the plain language and the legislative history of RCRA precluded the EPA from taking its own enforcement action under that law once a state had done so. Murphy Oil even argued that the district court should extend the same finding to preclude EPA from overfiling under the Clean Air Act.

Thus far the 8th Circuit is the only federal appellate court to address the issue of overfiling under RCRA.

The district court denied Murphy Oil's motion on all counts. The court rejected the 8th Circuit's conclusion that states with EPA-approved RCRA enforcement authority were meant to displace the EPA in that arena, finding it to be "unsupportable" by either RCRA's plain language or its legislative history. (See also United States v. Power Engineering Co., 125 F.Supp.2d 1050 (D.Colo. 2000); In re Bil-Dry Corp., EAB, No. 98-4, 1/18/01.)

The district court also dismissed Murphy Oil's attempt to use Harmon Industries to claim the EPA could not overfile under the Clean Air Act. The court found the plain language of the Clean Air Act clearly anticipated the possibility of enforcement action by both the state and the EPA for the same actions. United States v. Murphy Oil USA Inc., 143 F.Supp.2d 1054 (W.D. Wis. 2001), 2001 WL 641744.

-- William Hefner
Greene Espel PLLP

Employment Rights. A former employee and minority shareholder in a closely held corporation can recover on a claim for unfair prejudice under the Minnesota Business Corporations Act ¤ 302A.752, subd. 2, based upon the contention that the termination of his employment frustrated his "reasonable expectation" of continued employment. In Gunderson v. Alliance of Computer Professionals, Inc., 628 N.W.2d 173 (Minn. App. 2001), the Court of Appeals upheld the rule that a terminated employee may be entitled to a compulsory buyout of his shares in the company because his termination dashed his "reasonable expectation" to have continued employment. The court cited a number of factors that must be considered in making this termination, including whether the shareholder's salary and benefits constitute de facto dividends, whether obtaining employment with the company was a significant reason for investing in the business, and whether the expectation of continued employment was known and accepted by the other shareholders.

A municipal employee who is hired on at "at will" basis has no due process right to challenge termination of her employment. In Reierson v. City of Hibbing, 628 N.W.2d 201 (Minn App. 2001), the appellate court held that a discharged municipal administrative employee who had a contract allowing for discharge "at any time, for any reason" was not entitled to assert any due process claims.

Whistleblower Claims. The 8th Circuit Court of Appeals upheld a federal district court jury verdict which favored an employee in a whistleblower case. In Chadwell v. Koch Refining, 251 F.3d 727 (8th Cir. 2001), an employee was fired after he had reported improper pollution activity to the Minnesota Pollution Control Agency. The jury, in a case in U.S. District Court in Minnesota, found in favor of the employer's contention that the employee was fired for legitimate business reasons, based upon aberrant work behavior and not in retaliation for the report to the government agency. The appellate court affirmed the ruling. It rejected the employee's contention that the trial court improperly refused to instruct the jury to sustain the whistleblower claim if it was "more likely than not" that the employee's termination was motivated by illegitimate reason. Under Minnesota law, the type of retaliation that can support a whistleblower claim must involve intentional action by an employer aimed at reprisal against an employee due to whistleblowing activities, which the jury concluded was not established in this case.

The Minnesota Supreme Court will soon decide whether a whistleblower has a right to a jury trial. In Abraham v. Hennepin County, 622 N.W.2d 121 (Minn. App. 2001), the Court of Appeals held that whistleblowers do not have rights to a jury trial because the statutory remedy was not recognized as common law at the time of the adoption of the Minnesota Constitution. The Supreme Court granted review and is expected to issue a decision soon. The outcome may be foreshadowed by the Court's ruling in Olson v. Synergistic Business Technologies Systems, Inc. 628 N.W. 2d 142 (Minn. 2001), which held that a "promissory estoppel" claimant seeking an ownership interest in a business is not entitled to a jury trial because the claim is equitable in nature and did not exist at the time the state constitution was adopted.

Discrimination Claims Rejected. A pair of employees lost their claims of job discrimination in two recent 8th Circuit appellate court rulings. In Smith v. Ashland, 250 F.3d 1167 (8th Cir. 2001), the court upheld a determination by the U.S. District Court of Minnesota that evidence of termination of other employees allegedly based on race or gender could not be used to support a discrimination charge by an employee under the Minnesota Human Rights Act, which formed the basis for the lawsuit. The earlier actions were outside the one-year statutory time period and, therefore, not admissible. The employee's termination was insufficient in itself to prove any type of pattern of discrimination, especially in the absence of evidence showing that other employees were systematically terminated due to race or gender or other employees were not promoted because of their race or gender. Because the termination constituted an isolated event, it does not constitute a continuing violation to support a human rights claim.

Two employees who claimed that they were passed over for promotion because of gender also failed in Gentry v. Georgia Pacific, 250 F.3d 646 (8th Cir. 2001). A pair of female employees claimed that they suffered gender-based discrimination, offering as evidence that they were not granted promotions due to inferior work evaluations. The 8th Circuit affirmed the trial court ruling that the employer had a legitimate reason for not promoting the two women, and the fact the company never promoted a female employee in the same department was not dispositive. An ambiguous statement made by one person involved in the promotion process to a successful male applicant that he would get the job if he applied for it also was not probative of gender discrimination. Consequently, the claim of employment discrimination under state law was properly dismissed.

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

Spousal Maintenance; Property Division. The Court of Appeals upheld denial of spousal maintenance to a man employed full time who presented evidence of illness that may, in future, interfere with his ability to support himself and that may worsen. Finding that the district court did not make findings explaining why it did not reserve maintenance, the appellate court remanded to allow the court to address reservations in light of case law addressing the issue in the context of an illness.

In the same case the Court of Appeals found that stock which the wife had brought to the marriage and which was not held or regarded as a retirement asset had been actively invested by the wife, even though her decision to continue reinvesting was a decision to refrain from acting. Of the shares which had increased due to this investment, the shares received from stock splits are nonmarital property and those from dividend reinvestment are marital property. Prahl v. Prahl, C0-00-1315, 627 N.W.2d 698 (Minn. App. 5/29/01).

Federal Pension. Where the decree provided that the wife receive one-half of the marital portion of the husband's [federal] pension benefit but was silent on his right to elect survivor's benefits in the event of his remarriage, and the husband elected survivor benefits for his second and third wives, the appellate court found that the first wife's share of the pension must be calculated after reduction for survivor benefits. The court found that federal regulations require recognition of the right to elect survivor benefits unless the court order states otherwise. Johnson v. Johnson, C0-00-1654, 627 N.W.2d 359 (Minn. App. filed 5/29/01).

Paternity. In an opinion filed on 5/9/00, the Court of Appeals ruled that a putative father, not a presumed biological father, had the right to genetic testing, over objection, where the mother's present husband is the presumed father (609 N.W.2d 618). The Supreme Court found that putative fathers, who are not necessarily presumed fathers, are specifically authorized to bring an action to establish paternity under the Parentage Act without being a presumed father. It concluded that a party alleging paternity has standing to bring an action under the act to compel blood or genetic testing even though, at the time, he does not possess blood or genetic test results. The Court explained that its conclusion does not open the door to unfettered challenges to the sanctity of marriage, family unity, and parent-child relationships because the courts are vested with the safeguard of a judicial determination of whether sufficient grounds to proceed exist. The chief justice dissented with the concurrence of two justices. Witso v. Overby, C6-99-1618, 627 N.W.2d 63 (Minn. filed 6/7/01).

Hague Convention. Where the appellant is presumptively the child's father, the couple separated in Canada and the mother and child resided together there before moving to Minnesota, where the child has lived over a year, the decision of the district court to grant custody to the mother without explaining what legal and factual determinations it made is remanded with no determination of the issues and direction to apply the Hague Convention. Salah v. Awes, C4-01-145, 2001 WL 641525 (Minn. App. filed 6/12/01.

Net Income. The Court of Appeals held that the guidelines statute does not allow deduction of the following items in calculating net income: 1) savings bonds and stock purchase plan payments not part of a retirement plan, 2) life and long term disability insurance, 3) charitable donations, and 4) company car expenses. In addition, the court declared that the $6,280 income limit for calculating guidelines support does not apply to allocation of child care cost on the basis of parents' net incomes. Fitzgerald v. Fitzgerald, C2-00-1557, 2001 WL 682721 (Minn. App. filed 6/19/01).

Child Support. On May 30, 2001, the Supreme Court promulgated its final rules of the "Expedited Child Support Process". (See "Orders in the Court," 58 Bench & Bar 6 (July 2001), p. 34. ED.) These rules represent the final step in removing child support for the district courts and transferring it into an administrative law process.

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

Certiorari Granted; 28 U.S.C. ¤ 1367(D); 11th Amendment. Plaintiffs commenced separate actions against the University of Minnesota in the District of Minnesota in August, 1996, alleging violations of the ADEA and the MHRA. The University raised 11th Amendment immunity as an affirmative defense in both actions and eventually moved to dismiss the complaints on 11th Amendment grounds pursuant to Fed. R. Civ. P. 12(b)(1). The district court granted the University's motion, and all claims were dismissed without prejudice on July 14, 1997. Plaintiffs then appealed the dismissal of the ADEA claims to the 8th Circuit, and simultaneously commenced a new action in the Minnesota state courts, reasserting their MHRA claims. The University then moved to dismiss plaintiffs' MHRA claims, arguing that they were time-barred. Not surprisingly, plaintiffs argued that the statute of limitations had been tolled on their MHRA claims during the pendency of the federal district court action under 28 U.S.C. ¤ 1367(d). The Minnesota district court granted the University's motion to dismiss; the Minnesota Court of Appeals then reversed the district court.

The Minnesota Supreme Court then reversed the Minnesota Court of Appeals, finding that 28 U.S.C. ¤ 1367(d) cannot trump the 11th Amendment, and concluded that "application of the tolling provision [of 28 U.S.C. ¤ 1367(d)] violates the 11th Amendment, because the 11th Amendment prohibits Congress from extending the state's liability to suit in state court via the state's uncontested presence in federal court. Specifically, the 11th Amendment does not permit Congress to affect the liability of the University as to a state law claim in state court when the University did not consent to federal jurisdiction."

Spectators can only guess at what prompted the Court to grant certiorari in this case. The Minnesota Supreme Court's decision arguably is in conflict with Stevens v. Arco Management of Washington, D.C., Inc., 751 A.2d 995 (D.C. App. 2000). However, it appears that the Minnesota Supreme Court is the first state supreme court to decide this exact issue. See Stevens, 751 A.2d at 999 (citing Minnesota Supreme Court's grant of review in Raygor, and noting absence of any decision on point by any other state supreme court). Perhaps it is because the Minnesota Supreme Court found a federal statute unconstitutional. But no matter what the reason for the grant of certiorari, Minnesota lawyers (and the Minnesota Supreme Court's decision) will be in the legal spotlight in the upcoming Supreme Court term. Regents of the University of Minnesota v. Raygor, 620 N.W.2d 680 (Minn.), cert. granted, 121 S.Ct. 2214 (2001).

RICO Elements; Enterprise. A boxing promoter sued Don King, alleging that King, as president and sole shareholder of a rival corporation, had conducted his corporation's affairs in violation of RICO. The district court dismissed the complaint, and the 2nd Circuit affirmed, on the basis that a viable claim under 18 U.S.C. ¤ 1962(c) required the existence of two separate legal entities, a "person" and a distinct "enterprise." In the 2nd Circuit's view, King, while acting as an employee of his corporation and within the scope of his authority, was not a "person" distinct from the "enterprise." Noting a wide split in the circuits on the person/enterprise distinction, the Court granted certiorari to resolve this conflict.

A unanimous Court agreed with the "basic principle" that 18 U.S.C. ¤ 1962(c) requires both a "person" and an "enterprise." However, unlike the 2nd Circuit, the Court found that a corporate owner or employee (like King) is distinct from the corporation itself, and further found that the application of RICO to King would be "consistent with the statute's basic purposes."

This decision changes the law in a number of circuits, but simply clarifies the law in the 8th Circuit, which had recently declined to decide this issue. See Fogie v.Thorn Americas, Inc., 190 F.3d 889, 898 (8th Cir. 1999) (declining to reach issue of whether officers or employees could conduct a RICO enterprise through their corporation). Cedric Kushner Promotions, Ltd. v. King, 121 S. Ct. 2087 (2001).

Other Noteworthy Decisions. The 8th Circuit continues its pattern of regularly affirming lower court decisions dismissing claims as a sanction for discovery abuses. In Martin v. DaimlerChrysler Corp., the 8th Circuit affirmed the dismissal of plaintiff's claims as a sanction of plaintiff's discovery abuses which resulted in the district court finding that that she "willfully withheld information directly relevant to Daimler Chrysler's interrogatory and deposition questions." Similarly, in Everyday Learning Corp. v. Larson, the 8th Circuit affirmed Judge Magnuson's entry of a default judgment for the plaintiff and the dismissal of Larson's counterclaims as a sanction for repeated discovery abuses. Martin v. DaimlerChrysler Corp., 251 F.3d 691 (8th Cir. 2001); Everyday Learning Corp. v. Larson, 242 F.3d 815 (8th Cir. 2001).
Judge Davis recently remanded two actions to the Minnesota courts. In Chase v. W.R. Grace & Co. Judge Davis remanded the putative class action (which had been removed on the basis of diversity jurisdiction), rejecting Grace's argument that plaintiffs' individual damage claims could be aggregated to meet the amount in controversy requirement. Similarly, in Crosby v. Aid Association for Lutherans, Judge Davis rejected the so-called "defendant's approach" to quantifying the value of injunctive relief sought by the plaintiff class, and remanded another class action removed on the basis of diversity jurisdiction, finding that each member of the putative class did not have claims in excess of the $75,000 jurisdictional threshold. Chase v. W.R. Grace & Co., 2001 WL 391783 (D. Minn. 3/20/01); Crosby v. Aid Association for Lutherans, 199 F.R.D. 636 (D. Minn. 2001).

In Moore v. Robertson Fire Protection Dist., the 8th Circuit found that two parties had waived their right to appeal where they were not listed on Notice of Appeal and the notice did not identify the order for summary judgment from which they purported to appeal. While acknowledging the "policy of liberally construing a notice of appeal," the 8th Circuit found that to allow these parties to pursue their appeal under these circumstances would "expand the policy of liberal construction beyond its scope and effectively eliminate the procedural requirements for an appeal." Moore v. Robertson Fire Protection Dist., 249 F.3d 786 (8th Cir. 2001).

-- Josh Jacobson
Law Office of Josh Jacobson PA

Color as a Trademark; Design Patents. In Minnesota Mining & Mfg. Co. v. Shurtape Technologies, Inc., et al., the defendants are singing the blues after Judge Davis held that a registration on the color blue as a trademark for tape is not invalid as a matter of law. 3M federally registered the Blue mark for its premium grade, UV-resistant tape. The tape is a light shade of blue and provides seven days UV-resistance. 3M sued Shurtape and Manco claiming infringement of the Blue mark by manufacturing and selling blue, UV-resistant tape. The court analyzed, inter alia>, whether the color blue was a functional feature of the 3M tape. A functional product feature, one that is essential to the use or purpose of the product or affects the cost or quality cannot be a trademark, stated the U.S. Supreme Court in Qualitex (the doctrine of functionality prevents trademark law from inhibiting legitimate competition by allowing a producer to control a useful product feature). Relying on Qualitex and other decisions upholding color as a trademark, the court considered defendants' arguments that the color blue in the 3M tape was functional as a matter of law because it identified the type of tape, made it conspicuous, and enhanced the UV-resistance but found the evidence insufficient. Although both sides submitted a significant amount of evidence on this issue, the court held that whether the color blue is a functional feature of the 3M tape will be for a fact-finder to decide. Minnesota Mining & Mfg. Co. v. Shurtape Technologies, Inc., et al., Civ. No. 98-2134, 2001 WL 530551 (D. Minn. 5/17/01)

In Decade Indus. v. Wood Techs., Judge Doty held that an insignificant modification to a patented design did not avoid infringement as a matter of law. Decade patented its design of a mini stereo system stand. Obtaining a design patent is similar to obtaining a utility patent in that the invention must be new and original. But unlike utility patents, design patents must be ornamental, rather than useful. The ornamental elements of Decade's design include left and right shelving units that extend outward at a lower height than the top shelf. Wood decided to produce and sell a similar mini stereo system stand with the only meaningful difference in the design being that the lower shelf consisted of one continuous piece, rather than having separate left and right side shelves.
Decade sued Wood for infringement and Wood moved for summary judgment. Analyzing whether Wood's stereo stand avoided infringing Decade's design patent, the court applied the traditional test: "if, in the eye of an ordinary observer, . . ., two designs are substantially the same, if the resemblance is such as to deceive such an observer, inducing him to purchase one supposing it to be the other, the first one patented is infringed by the other." While the court recognized the importance of the individual novel elements of the patented design as compared to the prior art, it also emphasized that the overall appearance of the design is not to be overlooked. In denying Wood's motion for summary judgment, the Court found that the appearance of the two products would be substantially similar to ordinary observers. Decade Indus. v. Wood Techs., Civ. 99-1652, 2001 WL 523396 (D. Minn. 5/15/01)

The U.S. Supreme Court granted certiorari in Festo Corp. v. Shoketsu Kinzoku Kogyo Kabuskiki Co. Ltd., discussed in April's "Notes & Trends."

-- Anthony R. Zeuli
-- Margaret Begalle
Merchant & Gould

Fiduciary Relationship; Undue Influence. Decedent's will left 50 percent of her estate to a long-time friend, Wells, and 25 percent shares to two other friends. Decedent also owned two accounts with CDs of approximately $100,000 each, naming herself as owner in trust for Wells. The district court found that Decedent and Wells had a fiduciary relationship, as she relied on Wells for financial and legal advice. However, there was no evidence of undue influence, as Wells informed Decedent that the CDs would not be included in her estate and that he would receive them. In Re: The Estate of Klossner, C7-00-1845 (June 19, 2001).

-- Tonya Zdon Gabbard
Garvey & Boggio, PA

Annexation. Where an administrative law judge ALJ, following an extensive consolidated hearing, issued an order denying incorporation of the town of Forest Lake into a separate municipal entity and granting annexation of the town to the city of Forest Lake, the appellate court found that the ALJ had the statutory authority to hear and grant the annexation petition and that the lack of presentation of a plan for annexation under Minn. Stat. ¤ 414.031. subd. 4(i) does not by itself prevent annexation. The court held further that the constitutional rights of the residents of the newly annexed area were not violated because they had a reasonable opportunity to elect a representative governing body. McNamara v. Office of Strategic and Long Range Planning, C0-00-1704, 628 N.W.2d 620 (Minn. App. 5/22/01).

Landlord/Tenant. A landowner who lacks actual notice of a code violation and reasonably relies on an official inspection cannot be held liable under a theory of either negligence per se or negligence. Since the landlords in this case had no actual notice of the code violations and relied upon an earlier inspection, they could not be liable. Since appellants failed to show that the landlords knew or should have known that any dangerous condition existed in the apartment building, their claims of dangerous conditions involving smoke detectors and failure to remove glass windows and transoms in common areas of the building failed as well. Gradjelick v. Hance, C4-00-2161, 627 N.W.2d 708 (Minn. App. 5/29/01).

Mechanic's Lien. A contractor must strictly comply with all statutory requirements for pre-lien notices. Because the contractor in this case did not provide pre-lien notice in the statutorily required type, the mechanic's lien did not attach to the subject property. Niewind v. Carlson, C0-00-1881, 628 N.W.2d 649 (Minn. App. 6/26/01).

Condemnation. Where the Richfield Housing and Redevelopment Authority asserted that the appeal was moot because title to the property had already transferred in accordance with Minn. Stat. ¤ 117.215. the appellate court determined that the evidence supported the finding that the taking was authorized by law and that the district court lawfully approved the taking. Next, the appellate court concluded that the taking was for a public purpose because it found conditions of blight in the project area within the definition of blight under Minn. Stat. ¤ 469.002. Therefore, it concluded that the district court did not clearly err in finding that 1) the taking was for a public purpose and 2) the condemnation was necessary and convenient in furtherance of a redevelopment project. Finally, the appellate court rejected the argument that the appeal was moot because property can be ordered returned in the absence of a proper showing of public purpose upon judicial review. The Housing and Redevelopment Authority in and for the City of Richfield v. Walser Auto Sales, Inc., C8-01-309, 2001 WL 741716 (Minn. App. 7/3/01).

Federal Condemnation Law. Palazzolo sued the Rhode Island Coastal Resources Management Council (council) in state court, asserting that the council's application of its wetland regulations took his property without compensation in violation of the Takings Clause of the 5th Amendment. The Rhode Island Supreme Court affirmed the denial of Palazzolo's takings claims. Palazzolo's petition for writ of certiorari was granted. The Supreme Court affirmed in part and reversed in part. It held in a divided opinion that the state court erred in finding that the claims were unripe because Palazzolo obtained a final decision from the Council determining the permitted for the land. The state court also erred in ruling that acquisition of title after the effective date of the regulations barred his claims. However, the state court did not err in finding that Palazzolo failed to establish a deprivation of all economic value because it was undisputed that the upland portion of the parcel retained significant worth for construction of a residence. However, the Supreme Court remanded the case so that the takings claims could be examined under the Penn Central analysis. This is an important case in takings jurisprudence because of its holdings on ripeness and whether post-enactment purchasers can challenge a regulation under the takings clause. Palazzolo v. Rhode Island, et al. ___ U.S. ___ (6/28/01).

Property Tax Reform. The Minnesota Legislature approved and the governor signed a bill heralded as significant property tax reform. The two principal components of the legislation are substantial reductions in property tax class rates and the elimination of the state-determined general education levy. However, the general education levy will be replaced by a state tax that will be levied against commercial/industrial and seasonal recreational properties. These reforms will result in a significant reduction in the tax increment generated by tax increment financing districts in years to come. To reduce the deficits created in such districts, the bill includes various "transition rules," including the establishment of a grant program to cover any shortfalls caused by the tax reforms. (Amendments to Minn. Stat. ¤ 273, et al., effective August, 2001)

-- Chris Dietzen
Larkin, Hoffman, Daly & Lindgren LTD

Child Tax Credit; Bankruptcy Estate. The additional child tax credit was includable in a bankruptcy estate because the legislative history of the credit did not contain a clear legislative purpose. Since this credit has high phase-out levels, the court found the credit assisted more than lower-income families and therefore was not public assistance. In re Steinmetz, 87 AFTR 2nd 1915 (U.S. Bnk. Ct. Idaho 3/7/01).

Frivolous Claims; Penalties. Recent court decisions have imposed stiff penalties on taxpayers seeking their "day in court," but whose positions were meritless or frivolous or whose intent was to delay or who did not pursue other remedies. Among these was a taxpayer who had not filed his taxes because he believed he was not a taxpayer as defined by the tax code. The court imposed an addition to his taxes for failure to file, failure to pay the tax on time, failure to pay estimated tax, and a penalty under section 6673. I.R. 2001-59 and Scheckel v. Commissioner, TC summary opinion 2001-84 (6/13/01).

Corporate Financial Problems; Penalty Abatement. The 9th circuit joined the 2nd and 3rd circuits in ruling that a corporation's financial problems may be considered as reasonable cause among other factors to determine whether penalties should be abated. The court rejected the 6th Circuit's reasoning that since the withholdings are held in trust for the government, financial difficulties could never be a reasonable cause to excuse the penalties. The court interpreted the Treasury regulations considering "all the facts and circumstances" to mean that the financial ruin of a corporation should also be considered. Holding otherwise, the court noted, would make the reasonable cause exception "virtually meaningless." Van Camp & Bennion v. United States, 2001 U.S. App. LEXIS 11745 (9th Cir. 6/6/01).

Exclusion of Social Security Numbers; Taxpayer's Religious Beliefs. The exclusion by a married couple of their children's social security numbers prevented them getting the dependency exemptions. The court stated that religious beliefs were not sufficient to allow them to exclude the children's social security numbers. The court emphasized that the social security numbers have a "legitimate government purpose" and are the "least restrictive means" of implementing the federal tax system. Cansino v. Commissioner, TC Memo 2001-134, 2001 WL 640914 (6/8/01).

Advances and Guaranty Payments; Business Deductions; Joint Venture. Taxpayers made advance payments and guaranty payments to a business, which the court concluded was not a joint venture. Also, since the taxpayers were not in the business of guaranteeing loans, they could not claim these as business bad debts. However, the advance that was made in the form of a note was allowed as a nonbusiness bad debt when the business went bankrupt. Levy v. Commissioner, TC Memo 2001-136, 2001 WL 640961 (6/8/01).

Amendment for Foreign Tax Credits; Expired Period for Assessment. The amended tax returns sought to elect foreign tax credits under section 901 in lieu of the deductions. These amendments resulted in net operating losses for the amended years and therefore no liability existed for the credits to be applied against. The company sought to carry forward these credits to future years. The IRS did not allow this, stating that the ten-year assessment period started in the year the credits arose, and this period had already expired. The Tax Court rejected the interpretation that the election for this credit could be made within the assessment period of the year in which the credit was taken and not the year when the credit arose. The election to take the credit for foreign taxes was therefore untimely. Chrysler Corp. v. Commissioner, 116 T.C. No. 30, 2001 WL 739231 (6/29/01).

Expenditures Attributable to Multiyear Installment Contracts; Capitalization. Tax Court held that expenditures incurred by a company to acquire multiyear contracts must be capitalized if the contracts are the sole purpose of the company's business. Since the multiyear contracts will exist for more than one year, any expenditures directly involved in obtaining these, including salaries and benefits and offering expenditures, must be capitalized. Items allowed as expenses under section 162 were overhead costs and expenditures related to rejected contracts, once the determination to reject these was made. Lychuk v. Commissioner, 116 T.C. No. 27, 2001 WL 589096 (5/31/01).

Bona Fide Intent Test; Gain on Exchange. The Tax Court did not look into the like-kind exchange requirements of a transaction exchanging timber-cutting rights on land in one year with interests in fee simple in three parcels of real estate in a subsequent year. The Tax Court relied on other evidence to show that the petitioners had a bona fide intent to enter into a like-kind exchange of property. The petitioners felt that they were exchanging real property for real property, and all of the agreements between petitioners and the transferee indicated this belief. Also due to this belief, the court did not impose an accuracy-related penalty under section 6664. Smalley v. Commissioner, 116 T.C. No. 29, 2001 WL 667858 (6/14/01).

Early Retirement Payments; Tenured Faculty; FICA. The court considered that a tenured position is different than an at-will position. While the government argued that the payments were partly based on a professor's past performance, a position taken with at-will employees by the 8th Circuit, the court rejected the position because of the different relationship between a tenured position and the university. The tenured position was seen as a property interest, and the payments made deemed to be in exchange for this property right and not compensation. N.D. State Univ. v. United States, ___ F.3d ___ (8th Cir. 2001); 2001 U.S. App. LEXIS 13391 (6/18/01).

Self-Employed Individual; Health Coverage Deductibility; Spouse. The IRS issued an Industry Specialization Program Settlement Guideline stating its position on health coverage for spouses of self-employed individuals. The spouse must be a bona fide employee of the business in order for the self-employed individual to receive the deduction and the spouse to receive the non-taxable benefit. The determination will be made on a case-by-case basis. IRPO ¦180,068.

Asset Threshhold for Small Business/Self-Employed Division. The IRS will increase the number of taxpayers in its Small Business/Self-Employed (SB/SE) Division by increasing the asset threshold. This increase will enable more taxpayers to benefit from the SB/SE's services, which are focused more on taxpayers who do not have the financial ability to have tax professionals on board. The expected date of this shift is October 1, 2001, but a formal announcement has not been made. Taxday, Item #I.2 (6/27/01).

Report on IRS Restructuring. The Treasury Inspector General for Tax Administration (TIGTA) released the semiannual report focused on the organizational restructuring and technology modernization of the IRS. The report pointed out some security concerns that have arisen as the IRS seeks to connect all of their systems. The report also addressed some concerns regarding misuse of information by IRS employees. The report can be accessed online at www.treas.gov/tigta/. Taxday, Item #T.1 (6/13/01).

Measuring Tax Compliance. The General Accounting Office (GAO) released a report on the status of the IRS's voluntary compliance program. Some of the benefits of this new program will be to reduce the number of taxpayers that will be audited and make the audit experience easier on taxpayers by auditing fewer lines on the tax returns and reducing the number of requests for information from taxpayers by having more comprehensive files. Taxday, Item #M.1 (6/20/01).

Grandfathered Generation-Skipping Trust; Exempt Status; Effect Of Court Order. The directions by the court, including the break-up of the trust into three separate trusts, did not affect the beneficial interests of the trusts nor extend the vesting of the interest. The ruling also pointed out that the trust was irrevocable prior to the effective date of the generation-skipping transfer tax and no additions were made to the trust after its creation. Letter Ruling 200124012.

Interest Rates. The IRS stated that the interest rate would drop to 7 percent for overpayments (6% for corporations) and 7 percent for underpayments (9% for large corporate underpayments). I.R. 2001-58.

Tax Rebates. The House Ways and Means Committee released the effects of the tax rebates. Since the new ten percent tax bracket is five percent lower than the existing 15 percent lowest tax bracket, taxpayers will receive a refund (of 5%) for the portion of their income that is taxed at the lowest rate. The refund will be calculated based on the 2000 taxable income. Refund checks are expected to begin going out on July 20. The checks will be mailed out in batches according to the last two digits of the taxpayer's social security number. Taxday, Item #C.2 (6/7/01).

Corporate Tax Breaks; Disclosure. Other states are joining Minnesota and Maine in requiring disclosures of corporate tax incentives. Texas, Connecticut, and Washington are considering similar requirements. 20 State Tax Notes 1871 (5/28/01).

Land Use Conservation and Preservation; Incentives. The Joint Committee on Taxation presented the Senate Finance Committee with proposals for new tax incentives when land is purchased for conservation purposes, when voluntary action is taken to protect endangered species, and when bond proceeds are used primarily for a "qualified environmental infrastructure project." The proposals allow for a 50 percent gain exclusion when land is purchased by an "eligible" entity whose primary purpose is conservation. The proposals also provide for additional tax incentives for voluntarily contributing to the conservation of endangered species. An additional credit is also contemplated for "Community Open Space" bonds where 95 percent of these proceeds would go for works such as wetlands, public parks, nature centers, etc. Joint Committee on Taxation (JCX-53-01).

Energy Efficiency; Incentives. The House Ways and Means Subcommittee on Select Revenue Measures has several suggestions for promoting the use of new energy supplies and more efficient products. The proposals include providing tax credits for use of fuel cells and landfill gas, tax incentives for customers to purchase alternative fuel automobiles, and tax credits to manufacturers creating high-efficiency household appliances. The text of a bill providing a tax credit for certain "energy efficiency improvements" installed in a taxpayer's home and for the construction of more efficient homes also was released. H.R. 2147. Other bills proposed would give a credit for expenditures made towards the purchase of "renewable energy property" and the use of wind-generated equipment and cool roof property. H.R. 2179 and 2184. A credit has also been proposed for taxpayers using certain energy efficient property in both their homes and businesses. H.R. 2206.

Disaster Relief Legislation; Homeowners. The text of a proposed bill was released providing a tax credit for homes destroyed by a "Presidentially declared disaster." This bill is to assist taxpayers who were unable to obtain insurance because of unreasonable rates, although the credit is reduced if the taxpayer received a government grant. This bill would include disasters occurring on or after January 1, 2000. H.R. 2176.

Families with Developmentally Disabled Children; Tax Relief. The Families of Developmentally Disabled Children Tax Fairness Act of 2001 would provide a credit for each child to offset expenses incurred by the family for the child. The expenses covered would include behavioral, speech, occupational and physical therapies and other services. While the bill does have a phase-out provision, the credit will still be a significant advantage to moderate-income taxpayers whose insurance does not cover much of these costs. Taxday, Item #C.2 (6/28/01).

-- Kathryn Sedo
-- Yolanda Guzman
University of Minnesota Tax Clinic

Motorcycle Passenger; UIM Benefits; Separate Insurance Policy. Lauriel L. Johnson's husband owned a motorcycle and insured it with Guidant Specialty Mutual Insurance Company (Guidant), with liability limits of $30,000. She and her husband jointly owned another vehicle and both were named insureds under policy from St. Paul Guardian Insurance Company (Guardian). In 1995, she was injured in an accident on her husband's motorcycle and sued both her husband and the owner and operator of the other vehicle involved. She settled with her husband in the amount of $27,500 on the Guidant policy on the motorcycle, and went to trial against the owner of the other vehicle. The jury found her husband 80 percent at fault and the driver of the other vehicle 20 percent at fault. The owner and operator of the other vehicle satisfied its portion of the judgment, leaving appellant with uncompensated damages.

She then filed a claim for UIM benefits from the policy issued by Guardian. The district court granted summary judgment in favor of the insurer.

The Minnesota Court of Appeals affirmed. It reasoned that the injured wife sought to recover UIM benefits from a separate policy covering both her and her tortfeasor husband on another vehicle. It found that to ignore the family automobile exclusion in this case would convert the UIM coverage to third-party coverage. It held the purpose of UIM benefits is to protect the insured from those who carried inadequate liability coverage. Lauriel Johnson vs. St. Paul Guardian Insurance Company, C5-00-2086, 627 N.W.2d 731 (Minn. App. filed 6/12/01).

Negligence; Code Violations. Gradjelick v. Hance, C4-00-2161, 627 N.W.2d 708 (Minn. App. 5/29/01). (See supra "Real Property Law," "Civil Litigation." ED.)

-- Thomas C. Baudler
-- Lee A. Bjorndal
Baudler Baudler Maus & Blahnik PA