September 2001

Insufficiency of Service -- Waiver and Estoppel. In 1996, a mother and daughter commenced separate lawsuits for injuries suffered when they were rear-ended by defendant. After unsuccessful attempts to serve the defendant personally, both plaintiffs attempted service of process under Minn. Stat. ¤ 170.55 by filing a copy of their respective complaints with the commissioner of public safety. Defendant answered both complaints, alleging that service of process was "inadequate and incomplete." It is undisputed that service was insufficient. In the mother's case, defendant never again raised the insufficient service of process defense in the course of the lawsuit and the case went to trial. The jury returned a verdict for the mother. Meanwhile, the daughter did not pursue her case for over two years. Then in 1999, the daughter finally filed her case and defendant moved to dismiss for insufficiency of service of process.

In denying the defendant's motion to dismiss, the district court applied the principles of waiver and estoppel. The district court concluded that the defendant's conduct in the mother's case estopped defendant from raising the defense of insufficiency of service of process in the daughter's case and constituted a waiver of the defense. The Court of Appeals reversed. The appellate court acknowledged that insufficient service of process can be waived by the conduct of the defendant, but not conduct that occurs in a separate case. Uthe v. Baker, 629 N.W.2d 121, 2001 WL 710435 (Minn. App. 6/26/01). Opinion by Judge Stoneburner.

Claim and Issue Preclusion -- Diversity Jurisdiction -- Applicable Law. Plaintiff was injured when he fell from a collapsing dock. The dock was on Wisconsin property owned by two individuals and managed by a management company. Plaintiff sued the owners and the management company in Minnesota state court. The management company moved to dismiss for lack of personal jurisdiction. In response, and in order to preserve his claim against the management company if the motion to dismiss was successful, plaintiff commenced a second action against the management company in federal court in Wisconsin, based on diversity jurisdiction. In the federal case, the management company asserted a third party claim against the owners of the property, but the plaintiff did not add the owners of the property as defendants. Back in Minnesota, the Minnesota district court denied the management company's motion to dismiss for lack of personal jurisdiction, and that denial was affirmed on appeal. Meanwhile, the federal action in Wisconsin proceeded to trial. The jury returned a verdict attributing 15 percent causal negligence to the plaintiff, 40 percent to the management company, and 45 percent to the owners.

After the Wisconsin federal trial was over, the plaintiff continued his litigation against the owners in Minnesota state court. The owners moved to dismiss or for summary judgment, arguing that the federal action against the management company barred any action against them on the basis of claim preclusion. Plaintiff made a cross-motion for summary judgment, arguing collateral estoppel barred the owners from relitigating the issue of apportionment of negligence. The district court granted the owners' motion and denied the plaintiff's motion. Both the plaintiff and the owners assumed Minnesota law applied to the analysis.

The appellate court's analysis began by recognizing that the U.S. Supreme Court recently held that federal common law governs the claim-preclusive effect of federal judgments issued by federal courts sitting in diversity. The Supreme Court further held that federal law on claim preclusion incorporates the law of the state in which the federal court rendered the judgment. That means that in this dispute, Wisconsin law applies. The Minnesota Court of Appeals then held that under Wisconsin law claim preclusion did not bar plaintiff's claims against the owners because the parties in the second action were not the same as the parties in the first action, nor were they privies for the parties in the first action. The same analysis means that the plaintiff could not successfully assert issue preclusion (or collateral estoppel) against the owners on the issue of apportionment of negligence. Marshall v. The Inn on Madeline Island, ___ N.W.2d ___, 2001 WL 799692 (Minn. App. 7/17/01). Opinion by Judge Lansing.

-- Cynthia Jokela Moyer
Fredriksen & Byron , PA

Sentence: Conditional Release: Sex Offender: Separation of Powers. The delegation of conditional release to the commissioner of corrections does not violate the separation of powers provision of the Minnesota Constitution. Although the commissioner of corrections has adopted rule-setting standards and procedures for granting or revoking conditional release, such an exercise of power by the Executive Branch does not usurp the power of the Judiciary because it does not alter the original sentence of the court, but merely executes a condition set by the court for the offender¹s commitment to the commissioner. State v. Jason DeWayne Schwartz, 628 N.W.2d 134 (Minn. filed 6/28/01).

Plea Agreement: Givens. In accordance with a negotiated plea agreement, the appellant accepted upward durational departures on felonies ranging from manslaughter to fleeing a police officer. Alford pleas were employed. The appellant later moved to withdraw his plea of guilty, but the court denied that motion. When the court imposed the total sentence, the only reason given in support of the departures was the plea agreement.

Held State v. Givens, 544 N.W.2d 774 (Minn. 1996), may no longer be good law. Givens was believed to "hold" that a defendant may waive his right to sentencing under the guidelines, meaning that a departure may take place without the need for the district court to identify substantial and compelling reasons for a departure. The Court of Appeals states that the "holding" in Givens was "dictum," and is, under any circumstances, effectively overruled by the 1997 amendment to Minn. Stat. ¤ 244.09, which states that a defendant has no "right" to be sentenced pursuant to the guidelines. Minn. Stat. ¤ 244.09, subd. 5 (2).

Held, under current statutory law, a sentencing court must support any departure from the presumptive guideline sentence with "substantial and compelling reasons," and it is not sufficient that the defendant merely accede to the departure in a plea bargain. The dissent argues that Givens is the law and that the guidelines commission is prohibited from making a plea agreement an impermissible ground for departure. State v. Keith Edward Misquadace, 629 N.W.2d 487 (Minn. App. filed 7/10/01).

Burglary: Predicate Offenses: Order for Protection. The victim had an order for protection against the appellant, prohibiting him from having contact with her or entering her home. Upon returning home one evening, she found the appellant on her couch drinking beer and watching television. The appellant had entered through an unlocked window. The appellant was asked to leave and did so. The appellant was later arrested and charged with first-degree burglary. Appellant contends that the order for protection violation is equivalent to trespassing, which may not be a predicate offense for first-degree burglary (entry of a building without consent and committing a crime while in the building).

Held, a violation of an order for protection is an independent crime other than trespassing and a suitable element of first-degree burglary. Although burglary involves trespassing, not every burglary involves a violation of an order for protection. Therefore, there is no unity between trespassing and an order for protection violation that would make an OFP violation the equivalent of a trespassing violation. State v. Peter Allen Colvin, 629 N.W.2d 135 (Minn. App. filed 6/26/01).

1st Amendment: Indecent Conduct: Other Sexual Conduct. The city of Minneapolis charged the appellant, a dancer at a strip joint, with rubbing her bare breasts across a customer's face. The customer then grabbed the appellant¹s bare buttocks, and paid for a lap dance. Respondent disputes the allegation that she rubbed her breasts across the customer's face. The Minneapolis Code of Ordinances prohibits indecent conduct in a public place. Under the specific subdivision, the respondent was charged with "sexual intercourse or other sexual conduct." The district court certified the question as important and doubtful: "[I]s the state required, in order to prove [respondent's] conduct 'lewd and lascivious' . . . under the ordinance in question, to prove that her performance was legally obscene under Miller v. California?"

Held, the ordinance in question,¤ 385.160(b) is unconstitutionally overbroad because the phrase "other sexual conduct" is not defined and, therefore, it could proscribe constitutionally protected behavior. The statute is defective because it does not include a definition of "other sexual conduct." Hence, theatrical or dance performances involving sexual conduct arguably may be prohibited. Furthermore, the regulation of such conduct as was present in this case, whether by ordinance or by statute, must conform to the guidelines set forth in Miller v. California, 413 U.S. 15 (1973): the prurient interest test. Under the Minneapolis ordinance in question, a trier of fact has no determinable standard by which to gauge the "sexual conduct" which is prohibited. State v. Christina Joy Botsford, 630 N.W.2d 11 (Minn. App. filed 6/26/01).

Search and Seizure: School Interrogation: Student : Liaison Police Officer. The appellant juvenile, a high school student, was taken from his classroom by security guard escorts to a 10' x 10' office shared by security and the liaison police officer. The juvenile was searched at the office. Present also was a social worker. A total of four adults were in the room with the juvenile, three of whom were in uniform. The door to the office was closed. A tape recorder was employed. No Miranda warning was given. The juvenile was 15 years old at the time, and the parties do not dispute that the juvenile had never been questioned prior to this incident. The student was never told that he was free to leave or that he could decline to answer any questions. The juvenile testified he believed that he would be prevented from leaving if he chose to, although a police officer testified at the suppression hearing that he would have allowed the juvenile to leave the room had he asked. Furthermore, the juvenile was not informed that he could speak with a parent, or contact an attorney before answering any questions, nor were the juvenile's parents notified prior to the interrogation. The interrogation lasted approximately 13 minutes.

Held, the interrogation of the juvenile was custodial, and a Miranda warning should have been given. Key to the court¹s reasoning in this case is the fact that the police officer failed to inform the juvenile that he was not under arrest, or that he was free to leave. The tape recording was also strongly suggestive of custodial interrogation. Under these facts, the juvenile had reason to believe that he was restrained to a degree equivalent to formal arrest, and under these circumstances, the district court should have suppressed the juvenile's incriminating statements. However, the victim's statements demonstrate beyond a reasonable doubt that the error was harmless. Other, unsuppressed evidence supports the adjudication. In re R.J.E., 630 N.W.2d 457 (Minn. App. filed 7/3/01).

Search and Seizure: Probable Cause for Warrant: Appellate Review. When reviewing a district court's probable cause determination made in connection with the issuance of a search warrant, an appellate court should afford great deference to the district court's determination. The only issue for the appellate court is to determine whether the issuing judge had a "substantial basis" for concluding that probable cause existed for the issuance of a search warrant. In this case, the Court of Appeals erroneously used the de novo review standard. This was incorrect: a de novo review of probable cause is to be used by reviewing courts only in determinations of probable cause made in connection with warrantless searches. To employ a "grudging or negative attitude" in reviewing a district court's decision concerning warrants would be inconsistent with the 4th Amendment's strong preference for searches conducted pursuant to warrants. State v. Rick Allen Rochefort, 2001 WL 872768 (Minn. filed 7/23/01).

Search and Seizure: Automobile: Detention Beyond Original Purpose. A police officer initially stopped the respondent's vehicle because of loud music emanating from the car. The officer verified that the respondent's license was valid and the car was not stolen. The police officer then asked to search the vehicle because he recognized two occupants of the car as drug dealers, and thought that the respondent had a reputation of being a possible narcotics dealer.

Held, the trial court judge correctly suppressed any evidence of the subsequent consent search because the police officer did not have a reasonable, articulable suspicion of criminal activity that justified continuing the traffic stop beyond its original purpose. Unpublished Decision: Minnesota v. Miranda (Winona County), 730 Slip Opinion C5-01-123.

Search and Seizure: Automobile Stop: Initial Detention: Further Investigation. The respondent was stopped when the police officer noticed a car without license plates. As the officer approached the vehicle, she noticed a white "drive-out" sticker in the rear window, indicating that the car was properly licensed and registered. Nonetheless, the police officer continued to talk to the driver, to explain why she made the stop. During this explanation, she noticed a faint odor of alcohol coming from the vehicle. The driver explained that the vehicle did not belong to him, and a passenger identified himself as the son of the owner. The officer then asked the juvenile to step out of the vehicle to see if there was anything illegal in the car. The juvenile stated that there was an alcoholic beverage that belonged to the respondent (another passenger in the vehicle). The police officer then asked if she could look in the car, and she was granted permission, at which time she found alcoholic beverages. The respondent, a passenger in the vehicle, stated that the alcohol belonged to her. The appellant was later charged with providing alcohol to a minor.

The trial court dismissed the charge based upon an illegal stop, holding that the continued detention was illegal after the police officer had initially determined that the drive-out sticker on the car's rear window was valid.

Held, the court erred by finding the continued detention unconstitutional. Although the original purpose of the detention ended at the moment that the police officer saw the drive-out sticker, she was certainly allowed to approach the driver merely to explain the error, and not to conduct an investigation. If, during the course of this explanation, a peace officer sees evidence of unlawful conduct, a further detention is justified, and there was probable cause for the officer to search the vehicle. "[T]he validity of the original stop continues at least long enough for the officer to approach the car and inform the driver he is free to go." State v. Janice Cruz Lopez, 2001 WL 800043 (Minn. App. filed 7/17/01).

Self-Defense: Dwelling: No Duty to Retreat. The Supreme Court clarifies some confusion on the duty to retreat within one's dwelling before the defense of self defense is available. (Cf. State v. Carothers, 594 N.W.2d 897 (Minn. 1999).)

Held, Minnesota will follow the majority of state jurisdictions in recognizing a rule that a person never has a duty to retreat from the home when defending oneself. Requiring retreat from the home before acting in self-defense would require one to leave one's safest place. The new rule is stated as follows: "there is no duty to retreat from one¹'s own home when acting in self-defense in the home, regardless of whether the aggressor is a coresident. But the lack of a duty to retreat does not abrogate the obligation to act reasonably when using force in self-defense. Therefore, in all situations in which a party claims self-defense, even absent a duty to retreat, the key inquiry will still be into the reasonableness of the use of force and the level of force under the specific circumstances of each case." State v. William Glowacki, 630 N.W.2d 392 (Minn. filed 7/12/01).

Homicide: Domestic Abuse: Pattern: Proof of Each Act. The appellant was convicted of first-degree domestic abuse homicide under Minn. Stat. ¤ 609.185 (6) (2000). Jurors were presented with evidence of four acts of domestic abuse by the defendant upon the victim. Appellant claims that the United States Supreme Court decision in Richardson v. United States, 526 U.S. 813 (1999), which was issued six weeks before his trial began, mandates a new trial based on erroneous jury instructions. In Richardson, the Court held that the federal Continuing Criminal Enterprise (CCE) statute requires jury unanimity with respect to each individual violation alleged to make up the series of violations. This holding is analogized by the appellant to Minnesota's domestic homicide law alleging a pattern of domestic abuse supported by specific incidents.

Held, the Supreme Court declines to apply Richardson, because there was not plain error. In State v. Cross, 577 N.W.2d 721 (Minn. 1998), the Minnesota Supreme Court held that the domestic abuse homicide statute does not require proof beyond a reasonable doubt of the individual acts that make up the past pattern of domestic abuse. The Court declines to apply the plain error rule in this case, because the law was unsettled. Secondly, the trial court did not err by not instructing the jurors that they must agree unanimously on which specific predicate acts comprise the past pattern of domestic abuse. Jurors are not required to unanimously agree on which acts comprise the past pattern of domestic abuse, and the prosecution may permissibly group past acts of domestic abuse as a preliminary factual element for domestic abuse homicide. State v. Burr Crowsbreast, III, 629 N.W.2d 433 (Minn. 7/12/01).

Extradition: Timeliness: Delivery of 180-Day Demand. In 1997, the appellant was detained in Wisconsin for a violation of his conditional release on a felony charge from Hennepin County, Minnesota. While the appellant was incarcerated in Wisconsin, on June 30, 1997, he sought an expedited final disposition of the Hennepin County felony pursuant to the Interstate Agreement on Detainers ("IAD") under Minn. Stat. ¤ 629.294 (2000). He signed the required paperwork, and gave it to the Wisconsin correctional authorities, who failed to file it and forward it to the Hennepin County Attorney until approximately three years later, April 6, 2000. Appellant contends that his right to a speedy disposition under the IAD was violated, and the prior felony charge from Hennepin County should have been dismissed.

Held, the phrase "shall have cause to be delivered" has not been construed by Minnesota courts. However, the United States Supreme Court has determined that this period does not commence until the court and the prosecutor of the jurisdiction that lodged the detainer actually receive the detainee's request. Minnesota follows suit in this case, and declines to dismiss the extant felony charge from Hennepin County. State v. Denarro Tyrone Burks, 2001 WL 799720 (Minn. App. filed 7/17/01).

-- Frederic Bruno
Frederic Bruno & Associates

Takings Claims. The United States Supreme Court removed some of the historic boundaries that have prevented landowners and developers from challenging governmental land use regulations in a fractured decision issued June 28, 2001.

In finding for the plaintiff, the Supreme Court limited certain ripeness and standing defenses that governmental entities have used in the past to defeat takings suits through pretrial motions. The Court first rejected the notion that a landowner or developer must attempt to develop other portions of his or her property before bringing a takings claim against the government. In the past, this was a necessary step in establishing the extent to which the value of the property had been reduced or destroyed by the regulations at issue.

The Court also held that landowners who purchase property after passage of restrictive regulations are not automatically precluded from bringing a takings claim. Otherwise, the Court reasoned, the government could avoid having to pay compensation for a taking simply because the owner at the time the regulation was passed decided later to sell his or her property. At trial, however, a court must still consider whether the regulation at issue interfered with the owner or developer's reasonable investment-backed expectations when buying the property. Although not a bar to bringing the suit, the timing of the purchase may nonetheless be relevant to the ultimate question of whether a taking occurred. Palazzolo v. Rhode Island, __ U.S. __, 121 S. Ct. 2448, 2001 WL 721005 (6/28/01). (For additional coverage of this case, see the Real Property coverage in the August 2001 "Notes & Trends," at page 45. ED.)

Mitigation Measures -- Environmental Impact Statement. A responsible governmental unit (RGU) may not rely on the existence of regulatory mitigation requirements in order to avoid ordering an environmental impact statement (EIS) if the efficacy of those requirements is in doubt. The Minnesota Pollution Control Agency (MPCA) had previously determined that a project-specific EIS was not necessary for a proposal by Boise Cascade Corporation to expand its timber operations near International Falls. In reaching this conclusion, the MPCA relied on a determination by the Department of Natural Resources (DNR) that the level of harvesting under Boise's proposal was consistent with that previously analyzed under a statewide generic environmental impact statement (GEIS) between 1989-1994. The MPCA incorporated this determination into its decision that no EIS was necessary because the mitigation efforts identified in the GEIS were sufficient to control any environmental impacts of Boise's specific proposal.

The Court of Appeals rejected the MPCA's reliance on the GEIS measures for a number of reasons. The Court found that many of the mitigation measures envisioned in the GEIS were only in the planning or research stages. In addition, the Court found that many of the measures in the GEIS were inchoate and subject only to future monitoring, the GEIS itself contained inaccuracies and omissions in need of further research and investigation, many of the GEIS's conclusions regarding mitigation were outdated and none of the measures were mandatory. Taken together, the Court found that the GEIS could not rely on such questionable measures as an assurance against potentially adverse environmental affects. The Court reversed the trial court's summary judgment in favor of the GEIS and remanded to the MPCA for preparation of a project-specific EIS. Minnesota Center for Environmental Advocacy v. Minnesota Pollution Control Agency¸ __ N.W.2d __, 2001 <H>wl<P> 827155 (Minn. App. 7/24/01).

-- William Hefner
Greene Espel PLLP

Reopen Decree. The parties' decree was based on a marital termination agreement (MTA) containing a full disclosure clause. When the pro se husband discovered that the wife had an investment account valued at $26,000 and her retirement account was valued at over $1 million, he moved to reopen and to amend child support within one year. Reopening was denied on August 18, but amendment of support was not granted until January 12, 2001. The Court of Appeals found that the husband timely appealed because the first order was a partial judgment and final judgment was not entered until entry of the support order. It also found that the district court had applied too strict a standard on the fraud issue by requiring the husband to show both fraud on the court and fraud on the opposing party. That finding was based on the Supreme Court's holding that, on a motion to reopen within one year, the legal standard is ordinary fraud which does not require an affirmative misrepresentation or an intentional course of concealment because, in dissolution, the parties have a duty to disclose completely and accurately. The court added that this duty was reinforced by the full disclosure clause in the MTA.

The Court of Appeals also concluded that the district court erred in denying the husband's request for an evidentiary hearing. It found that the denial of his motion for summary judgment was based on weighing the evidence whereas established case law requires that the husband's evidence be viewed in the light most favorable to him. The appellate court said that it is not necessary to show that the adverse party intentionally failed to disclose because disclosure is a duty; further, because it is an affirmative duty, there is no requirement to show that the information that was not disclosed was requested. The husband had not waived his right to receive full disclosure or his right to be represented by counsel. Reversed and remanded. Doering v. Doering, C0-01-224, ___ N.W.2d ___ (Minn. App. 6/26/01).

Engagement Ring; Entitlement. The paramour gave the paramee a $24,000 engagement ring in 1990. After a tumultuous relationship, including cohabitation, the paramee filed an employment discrimination suit and the paramour cross-filed a ring replevin action in 2000. The district court granted summary judgment in favor of the paramour in both actions. It found the ring was a conditional gift and ordered it returned based on a no-fault rule. In a case of first impression, the Court of Appeals found that other jurisdictions uniformly hold that marriage is an implied condition of the title of the ring and that the gift does not become absolute until the marriage occurs, which it adopted. Next, it found a split of authority on who is entitled to the ring. The majority approach determines ownership on the basis of fault. The minority applies a no-fault rule that returns the ring to the donor regardless of fault. Turning to Minnesota public policy, the court cited its application of the no-fault principle to marriage dissolution and the abolishment of civil actions for alienation of affections, breach of contract to marry, etc., and concluded that adopting the no-fault approach will be consistent with present public policy. Replevin affirmed. Benassi v. Miland, No. C9-01-75, ___ N.W.2d ___ (Minn. App 7/10/01.

Child Support. The decree awarded joint legal custody of the two children and primary physical custody to the mother. After the eldest child was emancipated, the father moved for reduction of child support. At the time, the parties shared physical custody of the remaining child equally and the district court applied the Hortis Valento principle. The Court of Appeals stated that there is no legal significance created by the use of the terms joint and primary physical custody. It cited the district court as having based its interpretation "on the reality of the situation as opposed to what a piece of paper says" and the reality of the situation is that the child is living equally in the homes of both parents. Affirmed. The district court also ordered the father to continue to maintain medical insurance for the child, but not at a greater cost than he pays to cover his second family. The appellate court found that the language could be construed to mean that he could provide less insurance for the child than he does for his second family. Remanded. Cary-Hill v. Cary, C4-01-33 (Minn. App. 7/10/01)(unpublished). SeeMinn. Stat. Sec 480A.08, subd. 3 (2000).

Expedited Child Support Process. The father alleges inability to attend an Expro hearing because he needed to "leave town". The magistrate issued an order based on imputed income, which the father requested be vacated, citing Minn. Stat. 518. 145. The magistrate denied the request. A motion for new trial followed, based on the failure to apply Rule 60.02, although it had not been pled. The Court of Appeals first found that the action was initiated as a paternity action and that Rule 60.02 is applicable if timely. It also found the Expro rules provide that other rules of court should be applied so as to further the purposes and goals of the process; therefore, the magistrate should have looked to Rule 60.02 for guidance. The court concluded that granting a new trial is an issue that is consistent with the purpose of Expro, i.e., fairness to the parties. It also noted that the Expro rules do not provide for rehearing or a procedure for vacating an earlier order and that Rule 60.02 is consistent with those rules. However, the court applied the Finden factors de novo to the father's claim of excusable neglect and found that he failed to meet his burden on the first three factors. As to the argument for correction of judicial error, it was denied because the remedy is not provided in Rule 60.02. The Court of Appeals concluded that any error by the magistrate in failing to apply Rule 60.02 was harmless because the father is not entitled to relief under the rule. Affirmed. Stearns County v. Strodtman, C9-00-1880, ___ N.W.2d ___ (Minn. App. 7/17/01).

-- Hon. Eugene L. Kubes
Referee Judge, Second District, Ret.

Removal; Multiple Defendants; Timeliness. Plaintiffs sued multiple defendants in the Missouri state courts. Two defendants were served on February 1, 2000, and two other defendants were served on February 3, 2000. On March 3, 2000, 29 days after the latter service, all five defendants (including a defendant who had not yet been served) jointly filed a Notice of Removal. Plaintiffs then moved to remand the action, arguing that the Notice of Removal had not been filed within 30 days of service on the first group of defendants. The district court denied the motion, find that each defendant was entitled to 30 days following service upon it to file a Notice of Removal.

Noting a split in the Circuits, the 8th Circuit focused on the 5th Circuit's so-called "first-served rule," which requires removal within 30 days of service on the first defendant, and the 6th Circuit's "minority" rule, which allows a later-served defendant 30 days for removal (with the consent of the remaining defendants) following service. Though it found "neither position particularly compelling," the 8th Circuit concluded that in the aftermath of its decision in Murphy Bros. v. Michetti Pipe Stringing, Inc., 526 U.S. 344 (1999), the Supreme Court would likely allow each defendant 30 days after service to file a notice of removal "regardless of when -- or if -- previously served defendants had filed such notices." Accordingly, the district court's denial of the remand motion was affirmed. Marano Enterprises v. Z-Teca Restaurants, L.P., 254 F.3d 753 (8th Cir. 2001).

Default; Excusable Neglect; Contrasting Cases. Defendant Progress was served with a Summons and Complaint, but failed to answer. After a default judgment was entered against it, Progress moved to vacate the default, explaining that it had failed to answer the Complaint because of a clerical error in its legal department. The district court denied the motion and Progress appealed.

Under Fed. R. Civ. P. 60(b)(1), a district court may grant relief from a default judgment in cases of "excusable neglect." The 8th Circuit noted that when a district court is asked to set aside a default judgment on the basis of excusable neglect, it "ought not focus narrowly on the negligent act that caused the default" but should instead "engage in a careful balancing of multiple considerations" including prejudice to the non-moving party, the length of the delay, and whether the movant acted in good faith, and that while "the reason for the party's delay is a key consideration," a district court is not free to disregard other considerations. After weighing the defendant's "minor mistake" against the other "equitable considerations," the 8th Circuit held that the district court had abused its discretion in refusing to vacate the default judgment. Union Pacific Railroad Co. v. Progress Rail Services Corp., 256 F.3d 781 (8th Cir. 2001).

The result was far different in another case. Plaintiffs sued securities brokers in the District of Minnesota in January 1998. Two defendants retained a California attorney to file an answer, but Magistrate Judge Mason declined to let the attorney participate in the October, 1999 pretrial conference because he was not admitted in the District and had not retained local counsel. By December 1999, these defendants had missed numerous deadlines to obtain counsel, and had failed to make mandatory disclosures or respond to discovery requests. After plaintiffs moved for sanctions, Magistrate Judge Mason issued an order to defendants to show cause why a default judgment should not be entered. At the hearing on the Order to Show Cause, defendants appeared with newly retained counsel, but offered no justification for their failure to respond to discovery or their failure to retain admitted counsel for more than two years. Following the hearing Magistrate Judge Mason recommended that a default judgment be entered, and Judge Kyle adopted that portion of the magistrate's report and recommendation following de novo review. The 8th Circuit found no abuse of discretion, finding that defendants' "complete failure to engage in discovery" and failure to retain licensed counsel for more than two years provided an "ample basis for a grant of default judgment."

These cases illustrate the contrasting treatment afforded "excusable neglect" by a party on the one hand, and willful violations of court orders on the other. Forsythe v. Hales, 255 F.3d 487 (8th Cir. 2001).

Other Noteworthy Decisions. Judge Frank affirmed an order by Magistrate Judge Nelson requiring one defendant to disclose trial witnesses more than 30 days before trial, and finding that the defendant's "generalized assertion of privilege and work product" were insufficient to support its privilege objections. Glover v. Standard Federal Bank, 2001 WL 629631 (D. Minn. June 5, 2001).

Judge Frank awarded plaintiffs more than $2 million in attorneys fees and $200,000 in costs in an employment discrimination class action. Fish v. St. Cloud State University, 2001 WL 667778 (D. Minn. June 12, 2001).

In June, 2001, motions for class certification were denied by Judge Frank in one case, and granted (in part) by Judge Magnuson in another case. Christian v. Sony Corp., 2001 WL 739147 (D. Minn. June 26, 2001); In Re Lutheran Brotherhood Variable Ins. Products Co. Sales Practices Lit., 201 F.R.D. 456 (D. Minn. 2001).

-- Josh Jacobson
Law Office of Josh Jacobson PA

Design Copyright; "Substantial Similarity". In Thimbleberries, Inc. v. C&F Enterprises, Inc., et al., Judge Doty preliminarily enjoined the defendants from using a design too similar to Thimbleberries' copyrighted "Countryside Wreath" because the designs were so strikingly similar that it precluded the possibility that the defendants arrived at the same result independently. The "Countryside Wreath" design includes a Christmas tree adorned with a bow flanked by four triangles and an exterior wreath shape constructed of triangles and squares. When the wreath design appeared on table linens in the defendants' catalog, Thimbleberries sued the defendants for copyright infringement and moved for preliminary injunction -- the latter being traditionally difficult to obtain in copyright cases.

Thimbleberries had to prove both substantial similarity between the two designs and access to the copyrighted design. The Countryside Wreath design, however, was never licensed for use in mass produced products. Although Thimbleberries failed to establish an inference of access through public dissemination of the design, the court found that the defendants must have had access to the copyrighted design because the infringing design was strikingly similar. The court based its conclusion on the identical scale and proportions of both designs and the nearly identical placement of the squares and triangles that created the exterior shape of the wreath and the center hole design.

The defendants contended that differences in color, fabric, stitching, and the absence of four triangles flanking the bow constituted an entirely different design. The court, however, found that differences in color, fabric, and stitching did not destroy the substantial similarity to the underlying copyrighted design. Moreover, the court viewed the absence of the triangles as a deliberate attempt to avoid a determination of copying. Thimbleberries, Inc. v. C&F Enterprises, Inc., et al., Civ. No. 01-185, 142 F.S.2d 1132 (D. Minn. June 7, 2001).

Copyright; Electronic Databases; Revision of a Collective Work. In New York Times Company, Inc. v. Tasini et al., the United States Supreme Court held that the publication of freelance articles in electronic databases infringed the freelance authors' copyrights. At issue was whether a publisher's limited right to publish "revisions" of a collective work as defined by the Copyright Act includes electronically republishing a freelance author's material disembodied from the collective work. This important case sheds light on the strain today's electronic information resources are placing on the Copyright Act, which predates the development of the Internet.

Under agreements with the publishers but without the consent of the freelance authors, two computer database companies placed copies of all the articles from the publishers' periodicals into three databases. The databases present a user with an electronic version of the individual articles, not the entire periodicals. Consequently, the user encounters each article disembodied from its original collective work, the periodical. Thus, the Court concluded that the electronic databases did not present a freelance author's contribution as part of a revision of a collective work under the Copyright Act.

The Court's holding is not limited to text-based systems. Image-based systems that show each article exactly as it appeared on a printed page are not within the publisher's limited revision right when only the pages containing the article are similarly disembodied from the original periodical. New York Times Company, Inc. v. Tasini et al., 121 S. Ct. 2381 (2001)

-- Anthony R. Zeuli
-- Eric DeMaster
Merchant & Gould

Adoption. In the first court ruling to fully examine the rights of children to sue under the Adoption and Safe Families Act of 1997 (ASFA) a Wisconsin federal judge ruled in a class action lawsuit that children in foster care have enforceable federal rights to a speedy adoption and can sue the state for failing to make children legally available for adoption so they can be placed in an adoptive home. This ruling will impact children nationwide as rights to a speedy adoption are within the competency of the federal courts to enforce. Jeanine B. v. Scott McCallum, No. 93-C-0547, 2001 WL 748062 (E.D. Wis., 2001). Opinion by the Honorable Rudolph T. Randa.

-- Nathalie S. Rabuse
Walling & Berg, PA

Trustees; Duty to Diversify Investments; Liability. James Williams' will created a trust that consisted almost exclusively of Creamette stock from his death in 1951 until the company's acquisition by Borden, Inc. in 1979. The trust owned and operated Creamette during that period. Beginning in 1980 the trustees began to diversify trust assets, and by December 31, 1989, Borden stock made up 39.3 percent of the value of the trust. The district court in a prior proceeding approved the trustees' accounts through that date.

In 1990 the corporate trustee recommended reducing the concentration of Borden stock to 25 percent of the trust's value by the end of 1992, but did not begin the reduction in the hope that the value of Borden stock would increase. In 1993 the trustees began selling Borden stock. By the time that the trustees had disposed of all of the stock in 1995, the trust had lost significant value because of the decrease in the value of Borden stock. The district court imposed a surcharge of more than $4 million on the corporate trustee, denied its fees for the period after 1989, and ordered it to pay the beneficiary's attorneys fees for the proceeding.

The Court of Appeals held that prior to the enactment of the Prudent Investor Act in 1997 Minnesota law did not impose a duty to diversify trust assets on trustees independent of their general duty to prudently invest assets in light of the settlor's intent and the beneficiaries' interests. Because the district court had applied the incorrect standard, the court remanded for determination of whether the corporate trustee had breached its duty to prudently manage the trust by failing to diversify.

The Court of Appeals also addressed three issues related to the appropriate remedies in the event that the district court determines on remand that the trustee breached its duty. 1) It held that the district court did not abuse its discretion in calculating the surcharge from the first day after the period covered by the accounts previously approved by the court. 2) It held that when the district court makes a finding of fraud, bad faith or inexcusable neglect, it has the discretion to deny all fees, to allow reduced compensation, or to allow full compensation. 3) It held that if an exception to the "American rule" that each party to litigation pay its own legal expenses is to be adopted in Minnesota, a clear expression of the change must be made by the Supreme Court or by the Legislature. The Court of Appeals is not a legislative or doctrinal court. In Re Matter of the Trusteeship of the Trust Created Under the Last Will and Testament and Codicil thereto of James T. Williams, C4-00-2239 ___ N.W.2d ___ (Minn. App. 7/9/01).

-- Curtis L. Stine
William Mitchell College of Law

Deed Reformation. Deming conveyed a parcel of land to Harms with a deed containing a defective legal description. The Schermas purchased the Harms parcel and later learned of the discrepancy in the legal description giving Schermas 13.2 more acres of land. Deming commenced a quiet title action to reform the deed. The Court of Appeals found that a written instrument may be reformed if it is shown there is a valid agreement that failed to express the true intent of the parties as a result of a mutual mistake or unilateral mistake accompanied with fraud. However, reformation will not be granted if it may prejudice a bona fide purchaser or innocent third party. Because the legal description did not reflect the intent of all parties, mutual mistake exists. Furthermore, the reformation did not harm Schermas since they had implied notice of the defect, thus the deed was reformed. Finally, the court held that Deming did not unreasonably delay the lawsuit causing prejudice to Schermas, so the doctrine of laches did not apply. Deming v. Scherma et al. C1-00-1906, 2001 WL 741427 (Minn. App. 7/3/01)(unpublished).

Mortgage Foreclosure. Wagner executed quit claim deeds to McClelland in exchange for a loan to bring Wagner current under several mortgages. McClelland made mortgage payments, satisfied liens and paid property taxes. Later, McClelland would not allow Wagner to refinance the loan and regain title to the property. First, the Court of Appeals found that McClelland held an equitable mortgage and remanded the decision to permit foreclosure by action. The district court, in turn, issued an order determining amounts due under the equitable mortgage and allowing the foreclosure to proceed. Then, the appellate court upheld the district court decision to not enter a judgment of foreclosure without first defining the amounts due and providing Wagner an opportunity to cure the default. Redmond v. McClelland, CX-01-134, 2001 WL 766779 (Minn. App. 7/10/01)(unpublished).

Landlord/Tenant. The landlord and tenant agreed that "base operating costs" would be part of the rent paid by tenant. The lease stated that base operating costs included heat, air conditioning, electricity, elevator and janitorial services. Later landlord determined that property taxes were a base operating cost payable by tenant as a part of rent. The Court of Appeals agreed with the district court decision that a landlord could not require that real estate taxes be a part of the tenant's rent if the lease terms did not clearly and unambiguously provide for their inclusion as base operating costs. Operating costs result from the use of the property. Because real estate taxes are levied against the land they are the obligation of the landlord as the landowner, unless the lease clearly provides otherwise. Bureau of Collection Recovery, Inc. v. Eden West Partners, LLC et al., C6-00-2033, 2001 WL 799871 (Minn. App. 7/17/01)(unpublished).

Eminent Domain. The city of Cokato petitioned for condemnation of Anderson's land for storm water management. The city amended its petition to include the purpose of economical development, this purpose was later removed. The city built a water tower on the land. Attorney fees and costs may be granted in eminent domain action if authorized by statute. Under Minn. Stat. ¤117.195, subd. 2, if condemnor discontinues the proceeding the owner may recover costs and expenses. The Court of Appeals found that Anderson was not entitled to receive attorney fees and costs from the condemnation of his property. By using the property for a purpose different from that stated in the petition the city had not discontinued the condemnation proceeding and thus allowing Anderson to receive his costs. Anderson v. City of Cokato, C3-01-265, ___ N.W.2d ___ (Minn. App. 7/17/01).

Practical Location of Boundaries. Tungseths own land directly north of the Ronning property. A fence is located between the two properties. A survey showed the actual boundary line is nine feet south of the fence. The Court of Appeals held that the fence determined the boundary by practical location and adverse possession. For a practical boundary location to be established by acquiescence the location of the boundary line must have been reasonably assented to by the property owners for 15 years. The recognition of a fence line as a boundary is significant evidence of assent. Furthermore, the court found sufficient evidence that Ronnings use of the nine-foot area was actual, continuous, open and hostile possession for at least 15 years; therefore, they also owned the property by reason of adverse possession. <BI>Ronning et al. v. Nikolai, Tungseth, Abblett et al., C8-01-116, 2001 WL 799681 (Minn. App. 7/17/01)(unpublished).

-- Melissa Baer
Moss & Barnett PA

Personal Income Tax: Division of Retirement Assets; Marital Property Award. The Supreme Court upheld a trial court's discretion to consider the income tax consequences of a marital property award of proceeds from retirement plans in a divorce action. The Court rejected the argument that the consideration of income tax consequences constituted impermissible speculation unless the liquidation was required or was mandated within a short period of time after the divorce. In Re the Marriage of Mauer v. Mauer, 623 N.W.2d 604 (Minn. 2001).

Minnesota Property Valuation; Luxury Home. The Supreme Court determined that the Tax Court had sufficient evidence to reduce the property taxes on a luxury home for 1996 and 1997 and was correct in using a market value rather than a cost approach for determining the value of the property since the property was "unique". Lewis v. County of Hennepin, 623 N.W.2d 258 (Minn. 2001).

Valuation; Agricultural Homestead; Agricultural Property. The Minnesota Tax Court held that, for real property tax purposes, agricultural property and agricultural homestead property are to be classified and valued separately as are the land and dwelling of an agricultural homestead. A property's use and classification may be considered in the valuation of property. Michael A. Weed v. County of Fillmore, No. C6-01-48, 2001 WL 840345 (Minn. 7/26/01).

Minnesota Property; Assessment Agreement. The Minnesota Supreme Court held that the county's refusal to agree to a decrease in the minimum market value of a paper mill property pursuant to the adjustment clause in the tax assessment agreement between the parties was neither unreasonable nor a breach of any implied covenant of good faith and fair dealing. Minn. Stat. Section 469, Subd. 8 requires that an assessment agreement be executed prior to completion of the improvements. Lake Superior Paper Industries v. State, 624 N.W.2d 254 (Minn. 2001).

Sales Tax; Capital Equipment; Service Business. Qwest was ineligible for the capital equipment exemption since it was not engaged in the "manufacturing, fabricating, or refining" of "tangible personal property." Qwest's statutory construction argument, which was rejected, rested on language, first adopted by the 1987 Legislature, to the effect that "telephone services" constitute "taxable services" and that all taxable services are included within the term "tangible personal property" unless specifically provided otherwise. The case is on appeal to the Minnesota Supreme Court. Qwest Corp., f.k.a. U.S. West v. Commissioner of Revenue, No. 7214-R, 2001 WL 355861 (Minn. Tax Ct. 4/2/01).

Property Tax Refund; Statute of Limitations. Taxpayer's claim for their 1996 property tax refund dismissed as being untimely filed and therefore barred by the statute of limitations. Statutorily created causes of action are jurisdictional and require dismissal for failure to timely file refund claim within prescribed period. The Tax Court is without equity power to extend the statutory period for filing of claims. Deloris Mays and Sammy Mays v. Commissioner of Revenue, No. 7279, 2001 WL 561335 (Minn. T. Ct. 5/15/01). See also Peoples State Bank of Truman v. Triplett, No. CX-00-2147, 2001 WL 826898 (Minn. App 7/24/01) (claim dismissed for failure to timely file a claim for refund for the carryback year on a net operating loss even though the taxpayer filed a timely claim for the loss year).

Deed Taxes; Basis; Net Consideration. A broker is liable for a deed tax on a transfer of property by warranty deed to an investor, but the deed tax is imposed on only the net consideration. The amount of the deed tax due is normally $1.65 since most of the deed and sale transactions by the broker to the investors are subject to existing liens evidencing the debt of the underlying purchaser of the property to the seller. The issue related to whether Midwest was to pay a deed tax on a transfer by warranty deed along with an assignment of a contract for deed to an investor after the broker purchased from the initial seller. Midwest Brokers, Inc. v. Commissioner of Revenue, No. 7237, 2001 WL 561330 (Minn. Tax Ct. 5/9/01).

Limitations Period; Assessments; Indefinite Extension; Termination. Deficiency notice for partnership-related losses issued within extended limitations period was timely as an open-ended Form 872-A did not automatically terminate by operation of law. Also, taxpayer's claim that IRS unreasonably delayed deficiency's enforcement was rejected since he was free to terminate extension at any time and trigger an assessment and stop interest accrual. Muir v. Commissioner, 87 AFTR 2d ¦2001-2513, 2001 WL 669265 (8th Cir. 6/15/01).

Refund Actions; Limitations Period; Equitable Tolling. Refund action for erroneous Social Security tax payments was time-barred under Section 6511 where taxpayer filed refund claim more than three years after returns were filed and taxes were paid. Taxpayer's ignorance of employer's responsibility to pay and her rightful claim to the refund were irrelevant factors as equitable tolling did not apply to Section 6511 limitations period. IRS letter advising taxpayer of right to file refund suit did not waive limitations period defenses. Knis v. U.S., 87 AFTR 2d ¦2001-2391, 2001 WL 615290 (C.A. Fed. Cir. 6/5/01).

Absence of Petition Date; Notice of Deficiency. Commissioner's failure to provide in the notice of deficiency the date that is the last day for filing a petition with the U.S. Tax Court does not render the notice invalid under Section 3463(a) of the Internal Revenue Service Restructuring and Reform Act of 1998. <BI>Rochelle v. Commissioner<P>, 116 T.C. No. 26, 2001 WL 548942 (5/24/01).

Airline Employees; Per Diem Allowances; Deduction. Airline may deduct, as employee compensation under Section 162(a)(2), unsubstantiated per diem allowances paid to its pilots and flight attendances on both overnight and day trips even though taxpayer did not report the allowances as wages or compensation on the employee's W-2. UAL Corp. v. Commissioner, 117 T.C. No. 2 (7/13/01). See also Worldwide Labor Support of Mississippi, Inc. v. U.S., 87 AFTR 2d ¦ 2001-2401, 2001 WL 710604 (S.D. Miss. 5/15/01) (company that provides temporary skilled labor to businesses under an agreement that includes per diem payments to non-local employees that vary with hours worked or length of service is liable for employment taxes with respect to per diem payment).

MACRS Reclassification; Change in Accounting Method; Prior Approval. A taxpayer that reclassified property for MACRS depreciation purposes did not make an accounting method change requiring prior IRS consent under Section 446. Brookshire Brothers Holding, Inc., TC Memo 2001-150, 2001 WL 705962 ( 6/22/01).

Airplane Expense Deduction; SIFL Fringe Benefit Rate. Corporation is entitled to deduct the full amount of expenses incurred in providing flights on corporate jet, even though the corporate officers, who used the aircraft for a variety of noncorporate purposes including vacation travel, calculated their fringe benefit income on the basis of the Standard Industry Fare Level cents-per-mile rate. The corporate deduction was not limited to the amount taxed to the employees as compensation due for the flights. Sutherland Lumber-Southwest Inc. v. Commissioner, 88 AFTR 2d ¦2001-8011, 255 F.3d 495 (8th Cir. 7/3/01).

"Duplicated Loss Factor"; Consolidated Return; Authority of Treasury. Treas. Regulation ¤1.1502-20, which disallows a shareholder's investment loss to the extent of a subsidiary's "duplicated loss factor" in a consolidated return (calculated as the excess of the subsidiary's adjusted basis in its assets over the value of its assets after the sale), is invalid. The IRS rulemaking authority under IRC Section 1502 does not authorize imposition of a tax on income that would not otherwise be taxed. Rite Aid Corp. v. United States, 88 AFTR 2d ¦2001-5058, 255 F.3d 1357 (C.A. Fed. Cir. 7/6/01).

Advances to Sister Corporations of Open Accounts; Capital Contributions. Tax Court abused its discretion in deciding that amounts transfered by taxpayer to its sister corporations through an "open account receivable" were capital contributions rather than loans, without taking into account fact that taxpayer over the years had received payments from the sister corporations, part of which was booked by taxpayer as interest income. Cerand & Co. v. Commissioner, 88 AFTR 2d ¦2001-5026, 254 F.3d 258 (D.C. Cir. 7/6/01).

IRS Liability; Litigation Costs; "Whipsaw" Situations. The IRS's position in denying a taxpayer's claim for earned income credit in the face of a conflicting claim by her exspouse for a credit with respect to the same qualifying children was justified until the commissioner conceded the issue following the exspouse's default in Tax Court. Thus the Tax Court properly denied the taxpayer's motion for an award of litigation costs. The court's ruling involves situations in which the IRS is confronted with conflicting claims, typically from divorced spouses, and the IRS then issues "whipsaw" notices of deficiency to both parties to ensure that at least one party is held liable for a deficiency to protect the fisc. Sherbo v. Commissioner, 88 AFTR 2d ¦2001-5009, 254 F.3d 650 (8th Cir. 6/29/01).

Burden of Proof; Credible Evidence; IRC ¤7491. A couple failed to produce credible evidence supporting claimed deductions, and thus, the burden of proof will not shift to the IRS under Section 7491. The taxpayer's testimony was based on implausible factual assertions, frivolous claims, and tax protestor arguments. This decision demonstrates that the shift in the burden of proof under IRC ¤7491 does not occur automatically -- certain requirements must be met. Higbee v. Commissioner, 116 T.C. No. 28, 2001 WL 617230 (June 6, 2001).

Reciprocal Trust Doctrine; Gifts. The 8th Circuit affirmed the U.S. Tax Court conclusion that the "reciprocal trust" doctrine applied to gifts made by three couples and therefore the gifts were made to their children. The wives were not subject to accuracy-related penalties because of reasonable reliance on their CPA. Larry Sather, et. ux. v. Commissioner, 87 AFTR 2d ¦2001-2423, 2001 WL 710616 (8th Cir. 6/7/01).

Sham Transactions; Business Purpose and Economic Substance Doctrines. Countering the IRS's recent assault on tax shelters and other tax motivated transactions based on "common law" tax doctrines, the courts have applied limitations in three recent cases:

• The U.S. Tax Court properly denied accrual method corporation deductions for policy loan interest and administrative fees on a leveraged corporate-owned life insurance sham called a "COLI plan." The COLI plan's interest deduction-generating design precluded the possibility of generating any pretax profit and showed the plan wasn't used to indemnify taxpayer for loss of key employees, was not an employee benefit, and was not established for any other business purpose. Winn-Dixie Stores Inc. v. Commissioner, 87 AFTR 2d ¦2001-2626, 254 F.3d 1313 (11th Cir. 6/28/01).
• Transactions involving American Depository Receipts, whereby taxpayer purchased ADRs with dividend rights attached and then resold them shortly thereafter ex-dividend, and thereafter claimed capital losses that it carried back and tax credit for the foreign taxes withheld, were not sham deals since a business purpose was established for the transactions. IES Industries Inc. v. United States, No. 00-1221 87 AFTR 2d ¦2001-2492, 253 F.3d 350 (8th Cir. 6/14/01).
• UPS arrangement with an affiliated Bermuda insurance company had real economic effect and a business purpose, and therefore was respected for tax purposes. The Tax Court labeled the arrangement a sham transaction. United Parcel Service of America, Inc. v. Commissioner, 87 AFTR 2d ¦2001-1051, 254 F.3d 1014 (11th Cir. 6/20/01).

New Withholding Calculator. A New IRS Withholding Calculator reflects the changes in the income tax rates on individuals that began on July 1, 2001. It can help compute your federal income tax withholding so your employer can withhold the correct amount. To use the calculator, visit the IRS web site at: http:/www.irs.gov/prod/ind_info/wh/. Also available are the new withholding tables for 2001 in IRS Publication 15-T at: http://ftp.fedworld.gov/pub/irs-pdf/p15t.pdf.

Automatic Filing Extension; Estate Tax Returns. IRS issued final regulations that provide an automatic extension to file the estate tax return, effective for returns due after July 25, 2001. The regulations adopt with some modifications the proposed regulations that were issued last Fall. T.D. 8957; Reg. ¤ 20.6075-1; Reg. ¤ 20.6081-1.

S Corporation esops; Company Stock "Rollover". S corporation status will not terminate merely because the ESOP makes distributions of the sponsor corporation's stock and one or more ESOP participants elect to make a direct rollover of the stock to an IRA, provided that the S corporation immediately repurchases the stock. Letter Ruling 200122034.

Tax Fraud; Criminal Investigation Website. The IRS announced the establishment of a website to alert taxpayers and tax practitioners to tax scams and fraud schemes. Case summaries of individuals recently convicted of committing crimes will be included on these pages. The website pulls together information on a variety of fraudulent schemes into one central location. The site is located at: www.treas.gov/irs/ci.

IRS Coordinated Issues. Over the years, the IRS has issued coordinated issues papers for various industries. Individual papers discuss the law as it applies to a particular issue for a specific industry. The IRS's position is important for you to know so you may argue against it in an audit or in Tax Court. A complete listing of all of what the IRS has available is on the website and can be found at: http://ftp.fedworld.gov/pub/irs-isp/oo-index.txt. A complete listing of MSSPs can be found at: http://ftp.fedworld.gov/pub/irs-mssp/oo-index.txt. See also, IRS Audit Techniques Guides, which are the IRS examination techniques for common and unique industry issues, at: http://www.irs.gov/bus_info/mssp/index.html.

Disclosure of Return Information; Verbal Request or Consent. Temporary regulations for IRC Section 6103(c) authorize IRS employees to accept a taxpayer's verbal request or consent to disclose return information to parties assisting the taxpayer in resolving a federal tax matter. The regulation also clarifies that the taxpayer can verbally approve disclosures to someone accompanying him or her at an in-person meeting with the IRS, or participating in a telephone conversation between the taxpayer and the IRS. REG-103320-00; 66 F.R. 2373-2374 (1/11/01).

Tax Provisions Scheduled to Expire. The Joint Committee on Taxation published a list of ten federal tax provisions scheduled to expire between 2001 and 2010 unless extended by Congress . BNA Daily Tax Report, G-5 (No. 122, 6/26/01) or at the JCT website: www.house./gov/jtc.

Small Business Resource Guide. The IRS Small Business Resource Guide CD-ROM 2001 is intended to be a one-stop source of easy access to federal tax and other regulatory information as well as other information important to small business entrepreneurs. The CD contains business tax forms, instructions, and publications needed by small business owners and provides an abundance of other helpful information such as how to prepare a business plan, finding financing for a business, and much more. A single, free copy of the Small Business Resource Guide CD-ROM 2001 can now be ordered on line from the IRS website at: http://www.irs.gov/bus_info/sm_bus/smbus-cd.html. A single free copy can also be ordered from the IRS by calling (800) 829-3676 asking for IRS Publication 3207.

Nexus; Online Bookseller; California. California's State Board of Equalization is reportedly readying an opinion that asserts Borders.com has California nexus on account of the activities of Borders Books stores in that state. The opinion states that Borders Books stores acted as agents for the online company, thereby causing it to have sales tax nexus. The opinion emphasizes merchandise returns as the reason for an agency finding. See: http://economercetax.com/doc/072201.htm.

Privacy Notices to Individual Clients. On or before July 1, 2001, an initial privacy notice was to be sent to all nonbusiness individual clients to whom financial products and services are provided by the firm. If that deadline was missed, compliance within a reasonable time is advisable. The notice requirements apply to lawyers and the FTC's taking that position pursuant to the Gramm-Leach-Bliley Act of 1999. The penalties for failure to comply are as much as $11,000 per failure. The notice is to be sent by everyone who is "significantly involved" in tax planning, tax advice, tax preparation, financial advice, debt collection, real estate closing, and other financial activities and provides services for personal, financial, and household purposes. "Significantly involved" means holding yourself out to provide services. There is no requirement to provide this notice for business entities. Annual notices must be sent and there appear to be no exceptions unless the person ceases to be a current client. For more information see: http://ftp.aicpa.org/public/download/news/ftc.doc, or http://www.abanet.org/cle/programs/tftcmo.html. (See also the cover article in this issue of Bench & Bar. ED)

Omnibus Tax Bill. After much wrangling, the Legislature and the governor agreed on a tax bill for 2001. Special Session Chapter 5 (H.F. 1 and S.F. 13). Major items in the law are:
Property Tax.

• Eliminates state-mandated general education levy of $900 million for K-12 funding.
• Replaces $415 per pupil of operating referendum property taxes with funding from the state's general fund.
• Imposes a new statewide business tax of $592 million on commercial, industrial, and seasonal recreational properties. Future growth in that tax is dedicated to education funding.
• Simplifies the state's property class rate system in which different types of properties were valued at different values because of different class rates. Now, residential homesteaded property under $500,000 will be taxed at 1 percent with the value over that amount taxed at 1.25 percent. The regular apartment rate is reduced from 2.4 percent to 1.8 percent. The new law reduces rates on commercial/industrial properties from the current 2.4 percent on property valued up to $150,000 to 1.5 percent and for property greater than $150,000, the rate is reduced from 3.4 percent to 2 percent.
• The Metropolitan Council's authority to levy property taxes to pay for the operating costs of transit systems was eliminated. To replace the levy, which expires after fiscal year 2002, 20.75 percent of the revenues from the sales tax on motor vehicles is deducted in 2003 and 22.75 percent in the following years.
• Provides for the state its takeover of the costs of district court administration.

Income Tax.

• Provides for federal update and conformity through June 2001, except for the 2001 federal changes made to the estate tax.
• Fully conforms with federal treatment of banks that have elected Subchapter S status under IRC Code.
• Provides an exemption of military pay for active duty military personnel stationed outside Minnesota.
• Conforms state corporate tax to the federal charitable contributions deduction for corporations.

Sales Tax.

• Eliminates the June accelerated sales tax payment, beginning with the June 2002 payments.
• Passed the Streamlined Sales Tax Project by adopting provision that allows the state to enter into the agreement with other states and enacts other provisions on uniform base definitions and standards developed by the project, effective January 1, 2001.
• Authorizes a sales tax rebate of $852 million for individuals. (Checks were mailed in August, 2001).
• Makes technical changes to Sales Tax Recodification, initially enacted in 2001, effective June 30, 2001.

Health Care Tax.

• The 1.5 percent health care provider tax is extended for two additional years. (The provider tax was scheduled to increase to 2 percent on January 1, 2002).

New Federal Tax Breaks: Charitable Giving. The faith-based bill titled Community Solutions Act (H.F. 7) contains several tax incentives for charitable giving. The bill would enable religious organizations to be eligible for federal grants for assisting the poor and homeless. The most controversial portion of the bill is an exemption for religious organizations from state and federal laws against discrimination. The nine tax-related charitable provisions included in H.F. 7 are:

• Provides charitable contribution deductions for non-itemizers,
• Provides tax-free withdrawals from <H>ira<P>s for charitable contributions,
• Phases-in increases in the percentage limitation on deductions for corporate charitable contributions,
• Enhances deductions for donations of food inventory,
• Reforms the excise tax on investment income of private foundations,
• Modifies the tax on unrelated business taxable income of charitable remainder trusts,
• Liberalizes the requirements for deductions of research property and for computer technology and equipment,
• Makes basis adjustments to stock of S corporation contributing appreciated property, and
• Extends and expands IRAs.

S Corporations. Congressional efforts to make the S corporation as flexible as LLCs and to eliminate other restrictions on its use continue. Some of the bills to watch are:

• Allows existing S corporations to make a special tax-free "election" to opt for partnership tax treatment provided continued existence is maintained thereafter. (H.F. 2337).
• Expands the range of eligible S corporation shareholders (including banks and small businesses) as well as liberalizing qualification and eligibility requirements on second class of stock, debt, excess passive income, suspended losses on divorce, mitigate invalid QSUB elections, and a host of like technical provisions (S.F. 1201).

-- Jerry Geis
Briggs & Morgan

Medical Malpractice - Statute of Limitations. The new four-year statute of limitations that applies to medical negligence claims commenced on or after August 1, 1999, does not apply retroactively to revive a claim that was time-barred prior to the effective date of the new statute. Morton v. Dyste, No. C4-00-2046, 627 N.W.2d 734 (Minn. App. 6/12/01).

Insurance Coverage -- Interpretation of Policy. An automobile dealer sought to recover from its insurer under false-pretense provisions in a garage general liability policy and supplemental insurance policy after learning that its customer had forged a loan agreement. The policies provided that false-pretense losses would be covered, but an exclusion applied when, as here, at least one payment had been made. The supplemental policy contained a "catch all" provision that provided coverage for "any other criminal scheme, criminal trick or criminal devise ... ."

In affirming summary judgment for the insurer, the Court of Appeals held that the exclusion applied. The court reasoned that it must construe the language in the false-pretense provision according to its plain meaning, and held that the automobile dealer's claim was excluded because the buyer made the first payment. The court also held that the catch-all provision did not apply because the fraud at issue would have been covered under the false-pretense provision in the garage general liability policy, but for the exclusion. Brookdale Pontiac-GMC v. Federated Ins., No. C8-01-18, 630 N.W.2d 5 (Minn. App. 6/12/01).

Insurance Coverage -- Long-Term Disability Benefits. Plaintiff resigned from her job with the county due to incapacitating mental illness. The long-term disability policy of her former employer provided reduced benefits for beneficiaries suffering from mental disabilities while guaranteeing full benefits for physically disabled recipients. Plaintiff filed suit, alleging the county's insurance policy discriminated against her because of her disability, in violation of the Minnesota Human Rights Act ("MHRA"). The county, the insurance agent who issued the policy, and the insurance company brought motions to dismiss or for summary judgment. The district court granted summary judgment and plaintiff appealed.

In reversing summary judgment on plaintiff's MHRA claim, the Court of Appeals held that a long-term disability insurance plan that provided less coverage for the mentally disabled than the physically disabled violated the MHRA. The court acknowledged but declined to follow the prevailing federal rule allowing disability-based distinctions in employer-provided long-term disability insurance plans. Kolton v. County of Anoka, No. C1-00-2179, 628 N.W.2d 643 (Minn. App. 6/26/01).

Insurance Coverage -- Limitations of Miller-Shugart Settlement Agreement. Plaintiff, a provider of professional home health care services, arranged for a nurse to provide home health care to one of its clients. The Department of Human Services ("DHS") was to pay for the care. The nurse failed to obtain a physician's certificate authorizing and requiring home health care services, which DHS required providers to obtain prior to providing care.

DHS paid for the services but notified plaintiff that because the nurse failed to obtain the requisite certificate, DHS was not liable for payment and would offset the amount from future payments owed the plaintiff. Plaintiff sued the nurse, who tendered the defense to her insurer. Due to a policy exclusion of coverage for government payments imposed directly upon the insured, the insurer refused to defend her. Plaintiff and the nurse settled with a Miller-Shugart agreement (judgment was entered against the nurse in the amount of government fees owed and plaintiff agreed to attempt recovery only from the insurer).

The Court of Appeals rejected plaintiff's argument that the policy in question provided coverage for government payments imposed on entities other than the insured, noting that plaintiff's syllogistic reasoning would have led to the inconsistent result of giving a Miller-Shugart plaintiff/assignee rights greater than those of the insured/assignor, i.e., denying coverage for the insured but providing coverage for an entity who is not the insured. Health Personnel v. Peterson, No. C3-01-24, 629 N.W.2d 132 (Minn. App. 6/26/01).

Insurance Coverage -- Intentional Acts Exclusion. A high school boy was injured when two acquaintances pulled his ankles while he was hanging on the rim of a basketball hoop at the school gymnasium. The insurer who had issued a homeowner's policy to one of the acquaintances sought a declaratory judgment that the carrier had no duty to defend or indemnify the insured. The carrier claimed the event was not an "occurrence" because it constituted an intentional act.

The Court of Appeals found no coverage. The Supreme Court reversed, holding that since there was no intention to injure the claimant it was not excluded by the intentional act exclusion. The Court distinguished intent to injure from an intent to engage in the conduct. Thus, when there is no intent to injure, the event is an accident, even if the conduct itself was intentional. The Court held that to infer an intent to injure would require evidence that the insured acted with deliberate and calculated indifference to the risk of injury. The Court found no such evidence based on the record and held that the insurer had a duty to defend and indemnify the insured in the claim. American Family Ins. Co. v. Walser, No. C1-00-349, 628 N.W.2d 605 (Minn. 7/5/01).

Insurance Coverage -- Underinsured Motorist Coverage. Plaintiff's decedent was struck and killed by a motorist. At the time of the accident, decedent resided at his parents' home and was insured as a resident family member under his father's automobile insurance policy with Illinois Farmers Insurance Company ("Farmers"). In addition, decedent owned his own car and was a named insured on a policy issued by Viking Insurance Company ("Viking"). The Farmers policy had underinsured motorist ("UIM") limits of $100,000, and the Viking policy had UIM limits of $30,000. After the trustee for the estate settled with the driver's insurance company, she sought excess <H>uim<P> coverage under the Farmers policy. Farmers moved for summary judgment, arguing that the "closeness to the risk" analysis required the estate to seek excess UIM coverage under the Viking policy alone. The district court agreed and granted summary judgment for Farmers.

In reversing summary judgment for Farmers, the Court of Appeals held that pursuant to Minn. Stat. ¤ 65B.49, subd. 3(a)(5), a priority of coverage is specified when the injured person is an occupant of a vehicle; when the injured person is not an occupant of a vehicle, the injured party may select any limit afforded by a policy under which they are insured. The court noted that the statute reflects a clear legislative policy that injured pedestrians are entitled to greater latitude in selection of excess UIM coverage than injured occupants of motor vehicles. The court further held that because the statute plainly allows the injured party to select a policy for excess UIM coverage, the closeness to the risk analysis does not apply. Holmstrom v. Illinois Farmers Ins. Co., No. C4-01-78, 2001 WL 766925 (7/10/01).

Insurance Coverage -- No-Fault. The parties disputed State Farm's no-fault insurance obligation for the first of two motor vehicle accidents in which plaintiff was injured. State Farm paid medical expense benefits for the first accident. A different insurer, Titan, covered plaintiff at the time of his second accident. Titan ultimately requested that plaintiff attend an independent medical examination. Plaintiff refused and Titan suspended benefits. Soon thereafter plaintiff and Titan reached a settlement in which Titan paid plaintiff an amount less than the policy limits in exchange for his waiver of any future claims of no-fault benefits. Plaintiff continued to incur medical expenses bringing his total claims after the second accident in excess of the Titan policy limits. Plaintiff then sought reimbursement from State Farm for these expenses and filed a petition for mandatory no-fault arbitration, claiming that State Farm should be responsible for the remaining unpaid medical expenses.

The Court of Appeals affirmed the trial court's decision holding that an insured's medical expense recovery from the first insurer for amounts in excess of the second accident coverage limits that are attributable to the first accident are not barred. The court concluded that there is no exhaustion requirement and that the amount of the insured's recovery from these accidents must be reduced by the amount of medical expenses that could have been but were not covered by the insurer for the second accident. Khawaja v. State Farm Ins. Cos., No. C9-00-1698, 2001 WL 799978 (Minn. App. 7/10/01).

No-Fault -- Workers' Compensation Interplay. Plaintiff was injured in a work-related auto accident. The plaintiff and the workers' compensation carrier settled the claim for all past, present and future chiropractic expenses even though the plaintiff had not yet received any chiropractic treatment. Three years later, the plaintiff began to receive chiropractic treatment. Plaintiff then sought to recover medical expenses, including chiropractic visits, from his own no-fault insurer.

The Court of Appeals affirmed the trial court's denial of recovery for the chiropractic treatments. Under Minn. Stat. ¤ 65B.61, a workers' compensation insurer is primarily responsible for paying medical expenses arising out of his employment while the no-fault insurer is secondary. Because the settlement released the claim against the workers' compensation carrier for chiropractic expenses and eliminated the no-fault insurer's right to reimbursement from the workers' compensation carrier for chiropractic expenses, plaintiff was precluded from recovering expenses covered by the settlement from his no-fault insurer. American Family Ins. Group v. Udermann, No. CX-00-2214, 2001 WL 799978 (Minn. App. 7/10/01).

No-Fault -- Preexisting Conditions. The plaintiff brought a no-fault arbitration claim to recover her medical expenses from an automobile accident. In addition to the injuries from the accident, she also had prior injuries from a horse-riding accident. The arbitrator awarded all of her medical expenses, finding that Minnesota law precluded him from apportioning the expenses to various claims.

The Supreme Court held that the arbitrator could determine whether the injuries developed from the automobile accident or the prior non-automobile injury. An injured person is entitled to no-fault benefits only for damages "arising out of the maintenance or use" of a motor vehicle. Accordingly, a causal connection must be established between an automobile accident and the injury. Because the no-fault insurer is liable for the expenses related to injuries caused or aggravated by an automobile accident, but not medical expenses for injuries caused by a non-automobile accident, the arbitrator must allow recovery only to the extent the medical expense was caused by the maintenance or use of the motor vehicle. Pususta v. State Farm Ins. Co., No. C8-99-1068, 2001 WL 872758 (Minn. 7/19/01).

-- Michael Klutho
Bassford Lockhart Truesdell & Briggs PA