December 2005

ADMINISTRATIVE LAW
Judicial Law

• Procedural Due Process. The commissioner of human services disqualified the appellant from working as a counselor to former inmates with drug and alcohol addictions in a state licensed program due to his criminal record. Appellant challenged the commissioner’s decision on the grounds that he was unconstitutionally denied procedural due process because he was not afforded the opportunity for an evidentiary hearing but was, rather, required by statute to contest the disqualification in writing. The court found that the appellant had a property interest in employment as a counselor in the public sector. However, because the fact of the appellant’s conviction was not contested, the court saw no value to an evidentiary hearing and concluded that a written submission to the commissioner was consistent with procedural due process. Sweet v. Commissioner, A04-2274, ___N.W.2d___ (Minn. App. 08/23/05). www.lawlibrary.state.mn.us/archive/ctappub/0508/opa042274-0823.htm

• Administrative Enforcement Exclusive Remedy. The Court of Appeals held that a class action challenge to an insurer’s rate determination could not prevail because there is no private cause of action for a violation of the Unfair Claims Practices Act. State Farm had based its rate determination for homeowners’ insurance on the age of the dwelling. The court held that the administrative enforcement scheme administered by the Department of Commerce was more appropriate to regulation of an insurer’s business practices. The court also held that the class action was prohibited by the filed rate doctrine since the rate in question had been approved by the Department of Commerce and could not therefore be attacked judicially. The doctrine preserves the regulatory agency’s authority to determine the reasonableness of rates and acknowledges that the courts are ill-suited to second guess the regulator’s decisions in this area. Schermer v. State Farm Fire and Casualty Co., A04-2054, A04-2088, ___N.W.2d___ (Minn. App. 09/06/05). www.lawlibrary.state.mn.us/archive/ctappub/0509/opa042054-0906.htm

• Corporate Practice of Medicine. The corporate practice of medicine doctrine is alive and well in Minnesota according to a recent ruling of the Supreme Court. The Court held that the lay ownership of corporations could not employ chiropractors. But it also held that the doctrine does not extend to physical therapists or massage therapists since they do not enjoy unfettered independent medical judgment. Three justices dissented and would have allowed the corporate ownership of a chiropractic practice since the Legislature has not specifically prohibited it and because changes in the health care industry justify the reexamination of the doctrine. Isles Wellness Inc. v. Progressive Northern Ins. Co., A04-485-489, ___N.W.2d___(Minn. 09/15/05). www.lawlibrary.state.mn.us/archive/supct/0509/opa040485-0915.htm

• Collateral Estoppel. Landowners were collaterally estopped from challenging a wetland replacement plan in an action under the Minnesota Environmental Rights Act because the plan had been previously approved by the Board of Water and Soil Resources (BSWR). The landowners had also challenged the plan before the BSWR and had unsuccessfully appealed the BSWR’s approval of the plan to the Court of Appeals. The court held that the landowners had a full opportunity to litigate the matter before the BSWR even though they were denied a hearing when the agency decided that the challenge was brought solely for the purpose of delay. The landowners were allowed to submit written argument and additional evidence to the agency. And they presented written and oral argument to the Court of Appeals. The court found that the landowners had a full and fair opportunity to be heard. Zander v. State of Minnesota, A04-2393, ___N.W.2d___ (Minn. App. 09/20/05). www.lawlibrary.state.mn.us/archive/ctappub/0509/opa042393-0920.htm

• Substantial Evidence. The commissioner of natural resources denied a permit to reopen a channel from a pond on a landowner’s property to Whitefish Lake. The Court of Appeals affirmed and found substantial evidence that the excavation would extend riparian rights to nonriparian land, namely to the subdivided plots of future owners of a development proposed for the land. The court also affirmed the agency’s determination that a county ordinance would be violated and that an existing dock on the property allowed adequate access and would affect the environment less than the proposed excavation. Finally, the court held that the agency adequately explained its deviation from the contrary recommendation of the administrative law judge and articulated a rational connection between its factual findings and legal conclusions so as to preclude a conclusion that it acted in an arbitrary and capricious manner. Bloomquist v. Commissioner, A05-147, ___N.W.2d___ (Minn. App. 09/27/05). www.lawlibrary.state.mn.us/archive/ctappub/0509/opa050147-0927.htm

• Authority to Amend Findings. In a decision issued on June 11, 2004, an unemployment law judge (ULJ) found that Mr. Rowe was ineligible for unemployment benefits effective May 4, 2004, due to the receipt of social security disability benefits. After Rowe received a bill for overpayment that appeared to be inconsistent with the decision, he protested and the ULJ then issued an amended decision, sua sponte, that found Rowe ineligible for benefits as of May 4, 2003. The amendment led to a bill for overpayment of $10,764. The Court of Appeals held that the ULJ lacked authority to amend the findings because the 30-day period for appeal of the ULJ decision to a senior unemployment review judge had expired. By statute the ULJ’s decision becomes a final decision of the department if no appeal is filed. Since the August 18, 2004 amendment was without legal effect, the court reinstated the June 11, 2004 decision. Rowe v. Department of Employment and Economic Development, A04-2200, ___N.W.2d___ (Minn. App. 10/04/05). www.lawlibrary.state.mn.us/archive/ctappub/0510/opa042200-1004.htm

• Unintentional Violation. The Department of Health disqualified a grocery store from participation in the Women, Infants and Children (WIC) nutrition program for a period of three years after the vendor accepted a WIC voucher in payment for a pack of cigarettes along with some approved items. A state rule and a federal regulation mandate disqualification for three years for a single sale of tobacco products in exchange for a WIC voucher. The boy friend of the WIC participant had purchased the cigarettes and the WIC participant had reported the violation. The vendor argued that the violation was inadvertent on the part of the cashier and the purchaser. Although it acknowledged that the result was harsh, the Supreme Court held that the federal regulation included both intentional and unintentional violations, that strict liability applied, and the court therefore upheld the disqualification. A dissent signed by two justices would have allowed the vendor to assert a defense of mutual mistake by the parties to the sale. The dissent felt that the WIC tobacco rule should be strictly construed due to the severity of the sanction. Hy-Vee Food Stores, Inc. v. Minnesota Department of Health, A04-548, ___N.W.2d___ (Minn. 10/27/05). www.lawlibrary.state.mn.us/archive/supct/0510/opa040548-1027.htm

— Hon. George Beck (ret.)
Office of Administrative Hearings
— Michael Ahern
Dorsey & Whitney

December 2005

ALTERNATIVE DISPUTE RESOLUTION
Judicial Law

• Choice of Law Provision; FAA Standards of Review. Puerto Rico Telephone Co. Inc. (PRTC) and U.S. Phone Manufacturing Corp. (USPHONE) arbitrated a breach of contract dispute and the arbitration panel awarded USPHONE over $2.5 million in damages. PRTC sought to vacate the award. The Federal Arbitration Act (FAA) permits vacatur only for corruption or fraud, partiality of the arbitrator, arbitrator misconduct, or an arbitrator exceeding his or her powers. 9 U.S.C. §10. PRTC contended that the parties chose to apply Puerto Rican law, which permits courts to review arbitral awards for errors of law. The 1st Circuit concluded that a general choice of law provision does not displace the limited federal grounds upon which awards can be vacated. The court noted, however, that parties may explicitly agree to replace the FAA standards as long as the new standards are stated with precision. The 1st Circuit thereby aligned itself with the 3rd, 5th, and 6th circuits in reasoning that the ultimate purpose of the FAA is to enforce the terms of arbitration agreements, including allowing enhanced review. The 7th, 8th, 9th, and 10th circuits have concluded otherwise, reasoning that federal jurisdiction cannot be created by contract. See, e.g., UHC Mgmt. Co. v. Computer Sciences Corp., 148 F.3d 992 (8th Cir. 1988) (in dicta). Puerto Rico Telephone Co. v. U.S. Phone Manufacturing Corp., 2005 WL 2596462 (1st Cir. 10/14/2005).

• Arbitration Agreement Enforced; Unenforceable Provisions Severed. After news anchor Peter Scovill’s employment was terminated, he sued his former employer WSYX under the Age Discrimination in Employment Act (ADEA). WSYX moved to compel arbitration. Scovill argued that an arbitration cost-shifting provision and a provision altering the evidentiary standard required to prove discrimination were unenforceable and dictated that the entire arbitration agreement be invalidated. The United States District Court for the Southern District of Ohio enforced the arbitration agreement, but severed the cost-shifting and evidentiary provisions. Upon review, the 6th Circuit Court of Appeals concluded that invalid arbitration terms could be severed and the remaining agreement enforced where, as here, a severability clause evinced the parties’ intent that the arbitration agreement should survive. The 6th Circuit affirmed severance of the cost-shifting term, holding that it could deter "a substantial percentage of similarly situated potential litigants" from filing a claim. However, it reserved the evidentiary issue for the arbitrator, reasoning that the term could be reasonably interpreted to apply only to arbitral review of internal disciplinary action rather than to alter ADEA burden-shifting procedures. Scovill v. WSYX/ABC, 425 F.3d 1012 (6th Cir. 10/06/2005).

— Darin T. Allen
National Arbitration Forum

December 2005

CIVIL LITIGATION
Judicial Law

• Statutory Construction; Statute of Repose; Contribution Actions. On June 2, 1989, a Certificate of Occupancy was issued for a townhome which plaintiff eventually purchased from defendant, Smith Companies Construction, Inc., the developer. On December 27, 2002, plaintiff sued defendant Smith Companies Construction, Inc. under Minn. Stat. §327A.02 (2002) for breach of statutory warranties. On February 3, 2003, Smith Companies Construction, Inc. commenced third-party actions for contribution and indemnity against respondents, various subcontractors. Respondents moved for summary judgment on the ground that the contribution claims were barred by the Statute of Repose in Minn. Stat. §541.051, subd. 1(a). Appellant opposed the motion, contending that the Statute of Repose was unconstitutional as respondents sought to have it applied. The district court granted the subcontractor’s motions for summary judgment and the general contractor appealed. The Court of Appeals reversed, holding that the Statute of Repose was unconstitutional under the facts of this case. The court also noted that 2004 amendments to Minn. Stat. §541.05 subd. 4 should prevent the scenario of this case from arising in the future. Brink v. Smith Co. Construction, Inc., 703 N.W.2d 871 (Minn. App. 2005).

— Steven J. Kirsch
— Andrew T. Shern
Murnane Brandt

December 2005

CRIMINAL LAW
Judicial Law

• Probation Violations: "Sufficient Evidence" Exception; Austin. Factors cannot be waived by a "sufficient evidence" exception: for a probation violation, the district court must engage in the three-step analysis prescribed by State v. Austin, 295 N.W.2d 246 (Minn. 1980). For the past 16 years, appellate courts have applied a "sufficient evidence exception" to the requirement that district courts make the specific findings: a district court’s failure to make express findings was historically not an abuse of discretion when the record contains sufficient evidence to warrant a revocation. However, the Minnesota Supreme Court recently determined that the "sufficient evidence" exception previously recognized cannot be reconciled with the language of Austin, and the Court of Appeals now considers the "sufficient evidence exception" to be effectively nullified and previous appellant interpretations upholding the exception were effectively overruled. State v. Modtland, 695 N.W.2d 602 (Minn. 2005), The rule in Modtland is deemed to be a new rule, but is not retroactive. Randy Erickson v. State of Minnesota, A04-2082 (Minn. App. 09/06/05). www.lawlibrary.state.mn.us/archive/ctappub/0509/opa042082-0906.htm

• DWI/Implied Consent: Due Process. The Minnesota Implied Consent Advisory does not violate a driver’s due process rights by not warning the driver that driving with an alcohol concentration of .20 or more is an aggravating factor that might increase the penalty for driving while impaired to a gross misdemeanor. Although the advisory does not mention the .20 aggravating factor, the failure of the advisory to warn of every possible consequence of either taking or refusing to take a chemical test does not violate fundamental fairness inherent in due process. Because the advisory is accurate, and does not permit the police to threaten charges that the state may not impose, there was no violation of the driver’s due process rights. Jeffrey William Magnuson v. Commissioner or Public Safety, A04-2212, (Minn. App. 09/13/05). www.lawlibrary.state.mn.us/archive/ctappub/0509/opa042212-0913.htm

• DWI/Implied Consent: Citizen Tip; Reliability. A citizen informant was sitting next to the respondent at a VFW, and noted that he and his brother were drinking and being very loud and boisterous. When the informant saw the respondent and his brother get into separate vehicles, she called 911, stated the location of the VFW in Mound, that there were two gentlemen getting into two different vehicles and they were definitely drunk. She gave the dispatcher her name and phone number, described the vehicles, and reported the license plate number of one of the vehicles.

Held, because the informant identified herself by name and provided her telephone number, there was sufficient information with which the police could locate the informant and hold her accountable, and therefore the tip had sufficient indicia of reliability. Next, the police may be justified in stopping the vehicle but only if the nature of the information provided is sufficient. Because the informant provided a fair amount of descriptive material, and stated that the respondent was "definitely drunk," the police had reason to believe that the tip was based on personal observation. The court notes that investigory stops upheld by this court have been based on less information provided from informants than the informant provided here. Magnuson v. Commissioner, supra.

• DWI/Implied Consent: Enhancement; License Revocation. Appellant had been stopped on three separate occasions in 2004, July 3rd, 5th, and 10th. Each time, the implied consent law was invoked, and each time the defendant refused testing. On July 16, 2004, appellant was again charged, refused, and was cited with 1st degree (felony) DWI as a result of the July 16th incident. In reversing the district court, the Court of Appeals concludes that the fact that notice of revocation includes a valid seven-day temporary license does not delay the immediate and ongoing revocation for purposes of enhancing charges to a higher level. In addition, the state may use a prior license revocation to enhance a subsequent charge even though the defendant has not exhausted his right to judicial review on the prior revocation. State v. Massoud Goharbawang, A05-747 (Minn. App. 10/25/05). www.lawlibrary.state.mn.us/archive/ctappub/0510/opa050747-1025.htm

• Sentence: Multiple Felony Convictions; Limits on Consecutive Sentencing. Appellant pleaded guilty, pursuant to a plea agreement, to five of ten counts of felony violation of a restraining order. The parties agreed on an aggregate sentence of 60 months and five days. The trial court honored the plea agreement, and imposed five sentences, consecutive, of one year and one day.

Held, the district court abused its discretion imposing consecutive sentences. Permissive consecutive sentencing is available only when the presumptive disposition for the offense is commitment to the commission of corrections. If permissive consecutive sentencing is not available, the use of consecutive sentences constitutes a departure and requires written reasons. Applying the rule of sentencing offenses in the order of which they occurred, the Court of Appeals determines that only the last two felony offenses call for executed sentences of 24 months and 27 months. The first three are stayed under the guidelines. The maximum sentence that the court can impose without departing from the guidelines is 36 months and one day: 24 months on count IV to run concurrently with sentences on counts I-III, and consecutively with one year and one day on count V. The court notes that when imposing a permissive consecutive sentence, duration of the second sentence is calculated based upon a criminal history score of zero, which in this case is one year and one day. The case is then remanded to district court for imposition of a guideline sentence.

The court notes that the rule in Blakely does not extend to consecutive sentences, and concludes that the district court may impose permissive consecutive sentences on the last two counts of violation of restraining order without violating the 6th Amendment rights articulated under Blakely.

Finally, the court notes that under State v. Lewis, 656 N.W.2d 535, 539, the district court, in addition to considering departure factors, may also consider on remand the effect that changes in the sentence have on the entire plea agreement. Lewis authorizes the district court to consider motions to vacate the conviction and plea agreement if it cannot find substantial compelling circumstances to support the departure from the guidelines. State v. Steven Leo Rannow, A05-282 (Minn. App. 09/13/05). www.lawlibrary.state.mn.us/archive/ctappub/0509/opa050282-0913.htm

• Sentence: Blakely; Shattuck Amended. The Supreme Court’s prior opinion in State v. Shattuck is amended to clarify that Minn. Stat. §609.109, subd. 4 is facially unconstitutional while Section II.D of the Sentencing Guidelines is unconstitutional as applied. In a footnote, the Supreme Court notes that the Guidelines allow for aggravated sentences based upon prior convictions, which is a scenario that passes the Blakely test. Also, the Supreme Court notes the recent legislative changes to cope with Blakely, including sentencing juries on bifurcated trials, about which the Supreme Court expresses "no opinion" yet states that these recent changes "do not foreclose the district court from considering any constitutionally applicable and/or available laws on remand." State v. Shattuck, Order C6-03-362 (Minn. 10/06/05). www.lawlibrary.state.mn.us/archive/supct/0510/or030362-1006.htm

• Sentence: Accessory after the Fact; Not Crime Against Person; Multiple Sentences Disallowed. The appellant pleaded guilty to being an accessory after the fact to three offenses: 1st Degree Murder, Attempted 2nd Degree Murder, and 1st Degree Assault for the Benefit of a Gang. Each charge related to a different victim. There was no agreement as to sentencing. The trial court imposed a total sentence of 148 months, employing consecutive sentences of 48, 52, and 48 months.

Held, the crime of being an accomplice after the fact under Minn. Stat. §609.495, subd. 3 is a crime against the administration of justice, and is not a crime against a personal victim for sentencing purposes. Hence, it cannot be treated as a crime against the person for purposes of consecutive sentencing, or for purposes of the multiple victim exception to the single behavioral incident rule. The state concedes that it was a single behavioral incident, because it involved simply secreting the firearm evidence. The court holds that when one is an accessory after the fact, the harm has been done in the past, and there are no personal victims. The court further notes that the Supreme Court has held that accessory after the fact is not an accomplice of the principal, citing State v. Swyningan, 229 N.W.2d 29, 32 (1975).

The court notes that when there are multiple convictions arising out a single behavioral incident, the district court may properly impose only one sentence, although all three convictions may stand. While Minn. Stat. §609.035 does not specify which of the multiple convictions is to be sentenced, "sentencing policy" contemplates that the court will sentence the conviction that carries the highest penalty. However, the court notes that the statute was not intended to limit the trial court’s discretion in choosing the conviction on which to impose sentence, citing State v. Alt, 529 N.W.2d 727, 731 (Minn. App. 1995).

Finally, the crime of being an accessory after the fact is unranked in the Sentencing Guidelines. Here, the court assigned a severity level of VIII out of a possible XI to the crime of Being an Accessory after the Fact to 1st Degree Murder. The trial court did not abuse its discretion in doing so, because the court considered all the relevant factors. State v. Todd Skipintheday, A04-1293 (Minn. App. 09/27/05). www.lawlibrary.state.mn.us/archive/ctappub/0509/opa041293-0927.htm

• Fraud: Failure to Pay Subcontractor; Violation of Trust. Although the Minnesota Constitution prohibits imprisonment for debt, Minn. Stat. §514.02, subd. 1A is constitutional when it criminalizes the misapplication of funds paid to a contractor which are not paid to the subcontractors. The 2000 amendments to the statute state that payments made to a person to pay a subcontractor "shall be held in trust." The same statute, however, states that: "Nothing contained in the subdivision shall … create a fiduciary liability … ." The Court of Appeals finds that this language is not ambiguous, because the fiduciary language applies only to the limited civil cause of action, and does not eliminate the "held in trust" language. The statute punishes the contractor’s misapplication of payments received from the homeowner, as opposed to punishing the failure to pay a debt owed to the subcontractors. As such, the statute is constitutional, and the district court is reversed. State v. Bruce Peter Bren, A05-812 (Minn. App. 09/20/05). www.lawlibrary.state.mn.us/archive/ctappub/0509/opa050812-0920.htm

• Domestic Abuse: Spreigl; Analysis of Probative Value Required. At trial, the district court admitted two of the four prior acts of domestic abuse offered by the state under Minn. Stat. §634.20. It was error for the court to not explicitly determine whether the probative value of the evidence was substantially outweighed by the danger of unfair prejudice. Although such evidence is inherently probative, the district court must still undertake this analysis. The court finds, however, that there was not a reasonable possibility that the evidence significantly affected the verdict. State v. Ronald James Bell, A04-1595 (Minn. App. 09/20/05). www.lawlibrary.state.mn.us/archive/ctappub/0509/opa041595-0920.htm

• Spreigl: Purpose to Prove Identity Outweighs Prejudicial Effect. In a prosecution for murder which included breaking and entering in a protracted assault, the state gave notice that it intended to introduce four separate crimes of a spree nature from 12 years earlier. Both the offense of conviction and the Spreigl acts involved forcible entries into the homes of elderly victims. Citing State v. Billstrom, 149 N.W.2d 281, 284 (1967), "evidence of the crimes is admissible only to trial if the court finds that the direct or circumstantial evidence of the defendant’s identity is otherwise weak or inadequate, and that the evidence is necessary to support the state’s burden of proof." The trial court noted that the case was weak in terms of identity, involving only a fingerprint and some DNA. The Supreme Court states that Spreigl evidence is relevant material "when there is a sufficiently close relationship between the charged offense and the Spreigl offense in terms of time, place, or modus operandi." The closer the relationship, the closer the relevance. While it is true that there is a danger of the jury using the Spreigl evidence as propensity evidence, the probative value to the state’s case did outweigh the prejudicial effect on the appellant. The 11-year gap in time does not weigh against the admissibility, given the fact that the appellant was incarcerated for most of the intermediate time and the similarities between the charged offenses and the Spreigl offenses is great. State v. Charden Gomez, A03-1075 (Minn. 10/13/05). www.lawlibrary.state.mn.us/archive/supct/0510/opa031075-1013.htm

• Appeals: Waiver Void as Against Policy; Decision Limited. Appellant was convicted of two counts of Criminal Sexual Conduct, and received two executed 118-month sentences to be served consecutively. Each sentence was an upward durational departure from the presumptive sentence of 86 months. The appellant appealed his conviction but he agreed to dismiss his appeal and waive all of his appellate rights and post-conviction review rights when the state agreed to request that appellant be resentenced to the presumptive sentence of two 86-month consecutive sentences. The Court of Appeals dismissed his appeal, and the district court resentenced the appellant according to his agreement. Appellant subsequently filed a post-conviction petition challenging the sentences and the waiver of his right to appeal. In affirming, the court noted that the appellant did not dispute that his waiver was knowing and intelligent, but simply stated, without citing any controlling authority, that his waiver violated public policy.

The Supreme Court agrees: " … based on public policy and due process considerations … a defendant may not, after conviction at trial and sentencing, waive the right to appeal." The Court notes that there was no legitimate state interest in preserving an unjust conviction for the sake of conviction alone. Requiring a defendant to waive his right to appeal after conviction is "particularly coercive" because of the disparity of the bargaining power between the defendant and the state. "Requiring the defendant to give up the right to appeal in exchange for a reduced sentence forces the defendant to choose between a guaranteed reduced sentence and a fair trial." In a footnote, the Supreme Court cautions as follows: "We express no opinion on whether a defendant may waive his right to appeal as a result of a plea bargain before a trial or conviction." Charles Lee Spann v. State of Minnesota, A04-278 (Minn. 10/06/05). www.lawlibrary.state.mn.us/archive/supct/0510/opa040278-1006.htm

• Voir Dire: Peremptory Strike. It was error for the trial court to sua sponte initiate peremptory strikes: "therefore, based on the record before us, we conclude that the trial court erred when it invaded the province of the parties by initiating the strike of a person 21, eliciting defense counsel’s response, and then giving reasons justifying the strike before the state had the opportunity to examine the venireperson 21 and before the state actually struck the venireperson 21." The Supreme Court finds that this error affects the structural integrity of the criminal justice system and requires reversal and a new trial. State v. Gomez, supra.

— Frederic Bruno
Frederic Bruno & Associates

December 2005

EMPLOYMENT & LABOR LAW
Judicial Law

• Civil Rights. A wrongful termination lawsuit alleging race and age discrimination under federal and state law by an employee who was fired for allegedly making bomb threats was rejected by the 8th Circuit Court of Appeals. The African-American employee failed to make a prima facie case of race discrimination because he failed to establish the fourth prong of a prima facie case. Even if a prima facie case was established, he failed to show that the stated reason for his discharge was pretextual since the employer believed that he made the bomb threats, even if he did not do so. Johnson v. AT&T Corp., 422 F.3d 756, (8th Cir. 2005).

A race discrimination claim by an African-American bank teller, who was terminated for violating bank policy by processing a transaction on her own account failed in another 8th Circuit case. Although the claimant established a prima facie case of disparate treatment because a similarly situated white bank teller was not disciplined for violating the same policy, summary judgment was appropriate because the claimant failed to show that the bank’s legitimate, nondiscriminatory reason for termination was a pretext for discrimination. The frequency and seriousness of the claimant’s violations and the suspicious circumstances surrounding her violations differentiate her from the white employee who was not terminated for a similarly situated offense. Rodgers v. U.S. Bank, N.A., 417 F.3d 845 (8th Cir. 2005).

The Minnesota Court of Appeals also rejected a race discrimination claim by an African-American employee who was terminated for altering his mandatory driving log. The employee’s claim that white employees engaged in such conduct and were not terminated was based on conclusional allegations that his supervisor was racist, which failed to sustain a prima facie case of disparate treatment. Further, the employer had legitimate nondiscriminatory reasons for discharge, which was not pretextual. Bullard v. Penske Logistics, LLC, 2005 WL 2129924 (Minn. App. 2005) (unpublished).

A claim of sex harassment and retaliation brought by a woman because of sexual harassment by her foreman was dismissed by the 8th Circuit. The claim was not sustainable because the foreman who committed the alleged harassment was a coworker, not a superior, and had no authority to fire, promote or reassign her, and the claimant failed to produce any evidence that the employer failed to take proper remedial action. The retaliation claim was not actionable because the employee’s lay-off within a month after reporting sexual harassment was insufficient to establish a "causal connection" between any protected conduct and the employer’s adverse action because the employee missed a number of days of work and the company was undergoing a number of lay-offs and reduced work availability, which had started before the claimant was laid-off. Cheshewalla v. Rand & Son Const. Co., 415 F.3d 847 (8th Cir. 2005).

A claim by an ordained minister and religious teacher that he was wrongfully discharged in violation of the Minnesota Human Rights Act because of his sexual orientation was barred by the 1st Amendment of the U.S. Constitution in a case decided by the Minnesota Court of Appeals. The religious organization was exempt from claims of sexual-orientation discrimination under the Minnesota Human Rights Act because of the entanglement doctrine under the 1st Amendment of the U.S. Constitution in the parallel, but broader provision of Article I, Section 6 of the Minnesota Constitution, protecting freedom of conscience. Doe v. Lutheran High School of Greater Minneapolis, 702 N.W.2d 322 (Minn. App. 2005).

• Whistleblower Law. The complaint of a cook, who claimed that she was wrongfully terminated under the Minnesota Whistleblower Act, Minn. Stat. §181.932, was dismissed by the Minnesota Court of Appeals. The whistleblower claim was inapplicable because the statute applies only to "current employees" and the claim was asserted against a vendor that had contractual relations to provide food services to the claimant’s employer. Since the claim was not asserted against the current employer, but against a vendor, it was not actionable under the statute. Schmitt v. Lunchtime Solutions, Inc., 2005 WL 2009049 (Minn. App. 2005) (unpublished).

• WARN Law. The continuation of a plant as a "going concern" did not activate the 60-day warning requirement under the federal Worker Adjustment & Retraining Notification (warn) Act, 29 U.S.C. §2101, et seq. The 8th Circuit Court of Appeals upheld dismissal of a claim by employees when their facility was sold but continued in operation with 44 of the same 68 employees. The decision conforms to a ruling earlier this year by the U.S. District Court for the Western District of North Carolina, Local 2-1971 of Pace International Union v. Cooper, 364 F.Supp. 2d 546 (W.D.N.C., 2005). Smullin v. Mity Enterprise, Inc., 420 F.3d 836 (8th Cir. 2005),

• Unemployment Compensation. An employee who was terminated for testing positive for drugs was denied unemployment compensation benefits on grounds of "misconduct" in an unpublished decision of the Minnesota appellate court. The employee was properly fired after testing positive for a second time after entering a chemical dependency assessment program following a first positive test. The absence of any "threshold levels" in the company’s drug-testing policy did not bar the termination because the threshold levels were built into the test and a positive test result indicates that the threshold detection level was exceeded by the employee. Borland v. Bridon Cordage, LLC, 2005 WL 2008655 (Minn. App. 08/23/05) (unpublished).

An employee who was fired after receiving a disciplinary warning for bringing pornography into the workplace was fired for violating the company’s "zero tolerance" sex harassment policy. The employee talked about sexual matters at the workplace and told offensive jokes and stories, despite an oral warning not to do so, which sustained a finding of misconduct for sexual harassment and disqualified the employee from receiving unemployment benefits. Smith v. Itron, 2005 WL 20093038 (Minn. App. 2005) (unpublished).

In a separate action, an employee who quit her job because of alleged harassment was denied unemployment compensation benefits. Although there was a "personality conflict" between the employee and the supervisor, this does not constitute "good cause" for the employee to quit her job. Further, the employee did not raise complaints with the employer or file a grievance with the union, which prevented the employer from having an opportunity to correct the alleged problem before the claimant quit. Almen v. Independent School Dist. #659, 2005 WL 2008647 (Minn. App. 2005) (unpublished),

Another employee who quit because of physical harm from two coworkers was not entitled to unemployment compensation in an unpublished appellate decision. The employee was denied unemployment compensation benefits because she never complained to a supervisor or management about the harassment, which prevented the employer from having a "reasonable opportunity to correct" the working conditions. Klingsheim v. Happyland Tree Farms, Inc., 2005 WL 1950208 (Minn. App. 2005) (unpublished).

An employee who quit after she claimed to be sexually assaulted at work by a coworker was denied benefits because she untimely appealed a determination of disqualification. The employee quit after a coworker snapped her bra strap after the employee mentioned that she had a sunburn from tanning. A determination by an unemployment compensation judge that the "single incident" was inappropriate, "but would not cause an average employee to quit" was not timely appealed by the employee in the 30-day time period. Because she did not file an appeal until 54-days after the adverse determination, her claim was untimely and would not be heard. Olson v. TBI, 2005 WL 2077356 (Minn. App. 2005) (unpublished).

An employee who was absent from work due to incarceration was disqualified from unemployment compensation on grounds of misconduct. Although the employee was eligible for work release under the "Huber" law, the employer’s failure to verify her work status to jail authorities did not constitute grounds to set aside the "misconduct determination." The disqualification was based upon her being unavailable for work due to her incarceration, and the employer had no duty to inform the jail authorities that she was eligible for work release. Jenkins v. American Express Financial Corp., 702 N.W.2d 908 (Minn. App. 2005).

An employee who participated in a scheme to fraudulently obtain unemployment compensation benefits while in jail was required to reimburse the benefits he received. The employee had his wife and a former roommate furnish documentation to the Department of Employment and Economic Development, which resulted in unemployment benefits paid to him, which his wife cashed. Because the employee knew of and participated in the scheme, he was required to reimburse the department for the benefits he had received on grounds of fraud. Odegard v. Department of Employment and Economic Development, 2005 WL 2129106 (Minn. App. 2005) (unpublished).

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

December 2005

ENVIRONMENTAL LAW
Judicial Law

• Clean Water Act; Definition of Discharge. The United States Supreme Court recently granted certiorari to review a decision by the Maine Supreme Judicial Court holding that the mere passage of water through a dam constitutes a "discharge" under section 401(a)(1) of the Clean Water Act, 33 U.S.C.A. §1341(a)(1).

In 2004, the Supreme Court held that a "discharge" for purposes of National Pollutant Discharge Elimination System permits under section 402 of the Clean Water Act requires the addition of water from one "distinct" body of water to another where the water is merely conveyed by mechanical means from one location to another. South Florida Water Management District v. Miccosukee Tribe of Indians, 541 U.S. 95 (2004). In the instant case, the Court will address the definition of "discharge" in the context of section 401 of the Clean Water Act, which requires state water quality certification for federally licensed activities such as hydroelectric power generation. S.D. Warren Company v. Board of Environmental Protection, 868 A.2d 210 (Me. 2005), cert. granted 73 U.S.L.W. 3686 (U.S. 10/11/05) (No. 04-1527).

• Clean Water Act; Federal Jurisdiction Over Wetlands. The United States Supreme Court recently granted certiorari to review two consolidated decisions of the 6th Circuit Court of Appeals concerning the definition of "waters of the United States" within the meaning of the Clean Water Act, 33 U.S.C. §1321 et seq.

The first case concerns John Rapanos, who was originally convicted in Michigan of knowingly discharging pollutants into the waters of the United States without a permit in violation of Section 404 of the Clean Water Act. After the Supreme Court held in Solid Waste Agency of Northern Cook County v. U.S. Army Corps of Engineers, 531 U.S. 159 (2001) ("SWANCC") that federal jurisdiction over wetlands does not extend to wholly intrastrate, isolated ponds and wetlands, uncertainty remained as to which wetlands were so remote from navigable waters as to fall outside the definition of "waters of the United States." Rapanos’ conviction was subsequently vacated and remanded by the Supreme Court for reconsideration in light of the Court’s holding in SWANCC. On remand, the district court set aside Rapanos’ conviction because the wetlands at issue were not "directly adjacent to navigable waters" under SWANCC. U.S. v. Rapanos, 190 F. Supp.2d 1011 (E.D. Mich. 2002). The conviction was subsequently reinstated by the 6th Circuit on appeal, which held that the wetlands at issue, while not located adjacent to any navigable waters, drain to a man-made ditch that, through non-navigable tributaries, eventually drains into navigable waters. In the view of the court, this eventual drainage into navigable waters distinguished the wetlands on the Rapanos’ property from those in SWANCC and provided a sufficient nexus for federal regulation under the Clean Water Act. U.S. v. Rapanos, 339 F.3d 447 (6th Cir. 2003).

In the companion case of Carabell, the property owners are appealing the Army Corps of Engineers’ denial of a request for a permit to fill wetlands. The wetlands at issue are similar to those in Rapanos in that they are adjacent to a man-made ditch which flows into tributaries of navigable waters.

In these consolidated appeals, the Supreme Court will now determine whether wetlands that are connected to navigable waters only through non-navigable tributaries and man-made ditches are within the jurisdictional reach of the Clean Water Act. Rapanos v. United States, 376 F.3d 629 (6th Cir. 2004), cert. granted, 73 U.S.L.W. 3466 (U.S. 10/11/05) (No. 04-1034); Carabell v. U.S. Army Corps of Engineers, 391 F.3d 704 (6th Cir. 2004), cert. granted, 73 U.S.L.W. 3632 (U.S. 10/11/05) (No. 04-1384).

— Robert Devolve
Leonard, Street and Deinard

FEDERAL PRACTICE
Judicial Law

• Denial of Motion to Amend; Standard of Review. Three relatively recent 8th Circuit decisions have established a far less deferential standard of review when plaintiffs appeal from the denial of a motion to amend a complaint under Fed. R. Civ. P. 15(a) and that denial is based on the alleged "futility" of the proposed amendment.

In the earliest of these cases, a qui tam plaintiff sought leave to amend its complaint to add as a defendant a government official in his individual capacity. The district court denied the motion as futile and the plaintiff appealed. The 8th Circuit affirmed the denial of the motion to amend, but only after first holding that "[t]he denial of a motion to amend based on futility means that the court found that the amended complaint failed to state a claim, and our review is therefore de novo."

The 8th Circuit applied the same standard one year later in an appeal from the denial of a motion to amend in a securities fraud action, finding that "review of the denial of leave to amend based upon futility is de novo where such denial is based upon the failure of the amended complaint to state a claim."

Earlier this year, the same standard was applied for a third time in another securities fraud case: "Where the district court’s denial of leave to amend based upon futility is in turn based upon a finding that a specific allegation, even if amended, would fail to state a claim as a matter of law, we review the denial de novo."

Logically, this same less deferential standard of review should apply to appeals from orders by magistrate judges denying Rule 15(a) motions for leave to amend on the merits as well, and de novo review of the denial of a motion to amend will inevitably benefit plaintiffs who seek to amend their pleadings. In Re Cerner Corp. Sec. Lit., 425 F.3d 1079 (8th Cir. 2005); In Re K-Tel Int’l, Inc. Sec. Lit., 300 F.3d 881 (8th Cir. 2002); U.S. ex rel. Gaudineer & Comito, L.L.P. v. Iowa, 269 F.3d 932 (8th Cir. 2001).

• Other Noteworthy Decisions. The 8th Circuit reversed Judge Tunheim’s certification of a medical monitoring class in prosthetic heart valve litigation as an abuse of discretion, and also reversed and remanded the certification of a nationwide consumer protection class under Minnesota law, finding that Judge Tunheim had failed to conduct a thorough individualized conflicts-of-law analysis prior to certifying the consumer protection class. In Re St. Jude Medical, Inc., Silzone Heart Valve Products Liability Lit., 425 F.3d 1116 (8th Cir. 2005).

Adopting the 4th Circuit’s six-factor test, the 8th Circuit found that the district court had abused its discretion in abstaining from exercising jurisdiction over a declaratory judgment action where none of the six factors weighed in favor of dismissal. Scottsdale Ins. Co. v. Detco Industries, Inc., ___ F.3d ___ (8th Cir. 2005).

Denying a motion to dismiss under Fed. R. Civ. P. 12(b)(1), Judge Kyle held that the amount in controversy in an insurer’s declaratory judgment action is the insurer’s total "pecuniary risk," which can be calculated as the policy limit plus defense costs. NCMIC Ins. Co. v. Sammon, 2005 WL 2648687 (D. Minn. 10/17/05).

On a motion seeking a default judgment and award of damages, Judge Magnuson applied the doctrine of issue preclusion sua sponte to limit the damages recoverable against the nonappearing defendants. Transclean Corp. v. Bill Clark Oil Co., 2005 WL 2406036 (D. Minn. 09/29/05).

— Josh Jacobson
Law Office of Josh Jacobson

December 2005

INTELLECTUAL PROPERTY
Judicial Law

• Patent Infringement; Attorneys’ Fees and Costs. Judge Montgomery rejected two arguments made by patent-infringement defendant Allflex to recover its attorneys’ fees and costs following the court’s final judgment in Allflex’s favor. The court found that a license agreement between the parties prevented Digital Angel’s claims of patent infringement. A fee-shifting clause in the license and the "exceptional case" provision of the Patent Act were the two arguments made by Allflex to recover its fees and costs. The license agreement included a fee-shifting clause that entitled a prevailing party to recover its fees and costs. However, the clause was explicitly limited to claims of breach of the license agreement. The court held that claims of patent infringement were not breach-of-contract claims and, therefore, did not fall within the fee-shifting clause of the agreement. The court also rejected Allflex’s argument that this case was "exceptional" under Section 285 of the Patent Act, which could also support an award of fees and costs to the prevailing party. Allflex argued that Digital Angel should have known that the license agreement prevented its claims and therefore the claims were baseless. However, the burden of proof for an "exceptional" case is clear and convincing evidence. The court held that Allflex had "not met their burden by clear and convincing evidence that [Digital Angel] knew or should have known its claims of patent infringement were baseless." Digital Angel Corp. v. Allflex USA, Inc., et al., 04-4545 (D. Minn. 10/06/05).

• Trademark Infringement; Preliminary Injunction. Judge Frank ruled that the court did not have authority to consider a request for a preliminary injunction because of an arbitration clause in a trademark license agreement. Clarus sued Myelotec for trademark infringement and sought a preliminary injunction. Clarus and Myelotec had been parties to a license agreement related to the trademarks and that contained an arbitration clause. One week after Clarus filed its motion for an injunction, Myelotec demanded arbitration under the terms of the license. However, the license also included the following language, on which Clarus relied: "each party shall be entitled to seek injunctive and other equitable relief in any court or forum of competent jurisdiction … ." The court, relying on Manion v Nagin, 255 F.3d 535 (8^th Cir. 2001), held that the language Clarus relied on was not sufficient "qualifying contractual language" to allow the court to consider the motion for an injunction and, at least temporarily, bypass the arbitration provision. The court explained that "qualifying contractual language" is "‘language which provides the court with clear grounds to grant relief without addressing the merits of the underlying arbitrable dispute.’" Clarus Medical, LLC v. Myelotec, Inc., No. 05-934 (D. Minn. 09/09/05).

• Patent Infringement; Standing. Please do not let the following befall you and your patent client: The Court of Appeals for the Federal Circuit upheld another dismissal with prejudice where the plaintiff did not have standing to assert claims for patent infringement. Sicom twice sued defendants for patent infringement. The first complaint was dismissed without prejudice because the trial court found that Sicom, a licensee of the patent, did not have standing to sue. Under the Patent Act, only the "patentee" can sue for patent infringement. The "patentee" is the person(s) to whom the patent issued or the subsequent owner(s) of the patent (e.g., assignee). With rare exception, a licensee, alone, cannot sue for infringement. Rather than join the patent owner as a coplaintiff in the second complaint, Sicom went it alone, again, after attempting to secure additional rights under the patent from the owner. Sicom paid a heavy price for its gamble. The trial court held, and the CAFC affirmed, that dismissal with prejudice was appropriate because Sicom still did not have standing to sue and "already had a chance to cure the defect and failed." Sicom Systems Ltd. v. Agilent Techs., Inc., et al., No. 05-1066 (Fed Cir. 10/18/05).

— Tony Zeuli
Merchant & Gould

Juvenile Law
Judicial Law

• Evidence; Child Witness; Hearsay. In an unpublished decision, the Minnesota Court of Appeals reviewed an appeal from an adjudication of delinquency where the delinquent was found to have committed first-degree sexual conduct. The 13-year-old delinquent was found to have sexually penetrated a five-year-old neighbor girl.

The issues before the appellate court concerned the competency to testify of the child witness, the adequacy of the child’s promise to tell the truth for testimonial purposes, and the admissibility of an out-of-court statement made by the minor child during a videotaped interview with a social worker.

With respect to the child’s competency, the Court of Appeals stated that to determine a child’s competency to testify, the district court must conclude that the child is capable of telling the truth and is able to recall facts. Here, the district court conducted a lengthy examination of the child, appropriately addressing her ability to recall facts and her capacity to tell the truth.

In the matter of the child’s veracity, the district court twice elicited from the minor child a promise to tell the truth in court. The Court of Appeals concluded that such a promise made by the minor child was an adequate affirmation as required for young children’s testimony.

Last, regarding the admissibility of the child’s out-of-court interview with the social worker, because the minor child was available, and did in fact testify at trial, the Court of Appeals did not find that the juvenile delinquent was denied his right of confrontation. Further, the Court of Appeals found that the statements made by the child during the interview with the social worker were sufficiently reliable to be admissible under Minn. Stat. §595.02, subd. 3.

Ultimately, the Court of Appeals concluded that even if admission of the hearsay statement was error, there was no reasonable possibility that it significantly affected the verdict. The adjudication of delinquency was therefore affirmed. In the Matter of the Welfare of K. R.O., Child, A04-2080 (Minn. App. 10/04/05). www.lawlibrary.state.mn.us/archive/ctapun/0510/opa042080-1004.htm

• Termination of Parental Rights. Parents appealed from an order terminating their parental rights as to their three adopted children. They argued that there was insufficient evidence to terminate their rights and that the court abused its discretion in the admission of certain evidence. The Court of Appeals, in this unpublished decision, affirmed the trial court’s findings that the parents had adopted three girls, who at the time of trial were ages 15, 12, and 7, there was evidence that the children were repeatedly physically abused by the parent or by another child living in the household, that the two older girls were sexually abused by the parent’s adult sons, and that the parents knew of the sexual abuse but took no action; many of the children’s descriptions of the abuse were corroborated by photos or medical reports; the parents consistently refused to participate in any services the county attempted to provide; and the children had been in continuous out-of-home placements since April of 2003.

When reviewing this evidence in total, the Court of Appeals concluded that the evidence was sufficient to support the termination of parental rights and that the parents had failed to demonstrate any prejudicial evidentiary error. In the Matter of the Welfare of the Children of: A.T., & F.T., A04-1614 (Minn. App. 10/11/05). www.lawlibrary.state.mn.us/archive/ctapun/0510/opa041614-1011.htm

In an unpublished decision, the Court of Appeals affirmed the district court’s termination of a father’s parental rights based on findings of abandonment and neglect of parental duties. The Court of Appeals observed that although the county’s efforts to locate the father and to correct the conditions that gave rise to the petition were not extensive, the district court’s determination that the efforts by the county were reasonable under the circumstances was correct.

This was a case where the mother and father had lived together for a few months during the child’s infancy. However, the father never established paternity. He also failed to consistently provide financial support for the child. He never sought to obtain custody. For a period of five years, he spent no more then four hours with the child and made no attempt to contact the child after learning that the child had been placed in foster care. After he received a notice of the termination of parental rights proceeding against him, the father sent a few letters to the child from prison.

The Court of Appeals found the circumstances supported the termination of parental rights. In the Matter of the Welfare of the Child of: J.D.B., Parent, A05-522 (Minn. App. 11/01/05). www.lawlibrary.state.mn.us/archive/ctapun/0511/opa050522-1101.htm

• Indian Child Welfare Act. In an unpublished Court of Appeals case, the court reviewed a situation where two children, ages five and six, were removed from their father’s custody. The two children suffered from fetal alcohol syndrome, heightened anger and anxiety levels, self-abuse, and speech, sleeping, and behavioral disorders. The father suffered from a serious brain injury and impaired memory, and had numerous violent relationships with women resulting in instability and chaos for the children. When the children were removed from the father’s custody and placed in the homes of relatives of the children’s mother, the father challenged this removal and placement on the grounds that the requirements of the Indian Child Welfare Act ("ICWA") were not met and there was inadequate evidence to support the petition.

The Court of Appeals affirmed the placement, noting that an expert qualified under ICWA to provide expert testimony supported removing the children from the father’s custody. Furthermore, it was noted that both of the parent’s respective Indian communities approved of the placement of the children with their maternal uncle and his wife. The Court of Appeals held that clear and convincing evidence supported that the determination that continued custody of the children by their father was likely to result in serious emotional damage to the children, and that the placement ordered by the district court was consistent with ICWA favoring placement with extended family members who are Indian. In the Matter of the Children of R.L.C and D.B.B., SR, Parents, A05-624 (Minn. App. 10/25/05). www.lawlibrary.state.mn.us/archive/ctapun/0510/opa050624-1025.htm

— Gary A. Debele
Walling, Berg & Debele

December 2005

REAL PROPERTY
Judicial Law

• Waiver or Modification of Statutory New-Home Warranties. In a decision with potentially far-reaching effects, the Minnesota Court of Appeals addressed the ability of a homeowner to waive or modify the new construction warranties set forth in Minn. Stat. Ch. 327A. In the case, the homeowners purchased a newly constructed home, but subsequently experienced problems with the property that led to repeated litigation. The owners eventually entered into a settlement agreement with the builder with a release that included a discharge of the builder from future claims connected to the construction. Following the execution of the settlement agreement and release, the owners discovered further problems that seemingly fell within the protection of the statutory warranties. The owners commenced an action against the builder and subcontractors claiming, in part, breach of the statutory warranty. The district court dismissed the warranty claim on summary judgment, ruling that the settlement agreement barred the claim. On appeal, with respect to the warranty claim, the Court of Appeals reversed. As the court observed, the ability of parties to waive or modify the statutory warranties is quite restricted. There are two express exceptions to the general prohibition on waiving the statutory warranties. The parties may waive the warranty as to a condition discovered prior to the sale of the home or they may agree to substitute express warranties that provide substantially the same protections as the statutory warranties. Because neither of these exceptions applied to the complete release of claims (that included no substitute protection) for defects discovered after the sale, the court held that the settlement agreement could not operate to subsequent claim for breach of warranty. In its decision, the Court of Appeals considered, but rejected, the builder’s argument that refusal to give full effect to a settlement agreement would discourage builders from agreeing to settle disputes. Affirmed in part, reversed in part, and remanded. Ittel v. Pietig, A05-222 (Minn. App. 11/01/05). www.lawlibrary.state.mn.us/archive/ctappub/0511/opa050222-1101.htm

• Landlord/Tenant; Liability of Successor Landlords. In an unpublished decision, the Minnesota Court of Appeals held that a successor landlord can be liable for the obligations of its predecessor with respect to a tenancy, even if that tenancy ended before the successor took over as landlord. At the beginning of his tenancy, Reed paid a $100 security deposit to landlord W.S. Property Management ("W.S."). W.S. failed to return the deposit at the end of the tenancy. Reed eventually obtained a judgment against W.S. in conciliation court, but was unable to collect on the judgment. According to the court, sometime after Reed’s tenancy terminated, The Miles Group became the landlord of the property. Reed then commenced a second action seeking recovery of the security deposit, naming W.S., The Miles Group, and the current owner of the property as defendants. The district court dismissed the claim against The Miles Group, ruling that The Miles Group could not be held liable for W.S.’s failure to return the deposit where it was not the landlord during Reed’s tenancy and where it had not received the deposit from W.S. The Court of Appeals reversed the dismissal of Reed’s claim against The Miles Group. Relying on Minn. Stat. §504B.178, the court concluded that The Miles Group could be held liable for its predecessor’s failure to return a security deposit even though the tenancy terminated prior to The Miles Group becoming landlord of the property. Reed v. Rooms Plus LLC, A05-141 (Minn. App. 10/04/05) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0510/opa050141-1004.htm

— C.J. Deike
Edina Realty Home Services

December 2005

TAX
Judicial Law

• Accounting Firm Malpractice. In an action against an accounting firm for malpractice, the court held that the defendant was not merely a tax preparer, but also had the role of evaluating risks and making recommendations. However, the firm could only be found liable for the transactions completed after it made recommendations. Carroll v. Lebouf, Lamb, Green, & Macrae LLP, 2005 U.S. Dist. LEXIS 21740 (09/29/05).

• Tax Court Jurisdiction. The Tax Court determined that it had jurisdiction over all years included in the notice of determination, regardless of the IRS’ concession that the taxpayer had treated the employee as a shareholder for several of those years. The IRS’ argument that the Tax Court lost jurisdiction under 7436(a) because there was no longer a controversy over employment status was rejected. In upholding the decision, the 9th Circuit noted the amendments to 7436 and the prevalent approach of determining subject matter jurisdiction at the time it is invoked. The court also noted the policy concerns of depriving the Tax Court of jurisdiction. Charlotte’s Office Boutique, Inc. v. Commissioner, No. 04-71325 (9th Cir. Oct. 7, 2005).

• 5th Amendment; Refusal to Produce Corporate Records. In a case involving false tax returns, the accountant for the taxpayer attempted to assert the 5th Amendment in refusing to produce the personal and corporate documents of the taxpayer. In rejecting this privilege, the court noted that "a custodian of corporate records may not avoid producing the documents of a collective entity that are in his custody." Braswell v. US, 487 U.S. 99 (1988). Since the accountant was found to be the custodian of the corporate records under §7602, he was not allowed 5th Amendment protection. United States v. Marra, 2005 U.S. Dist. lexis 23411 (D.N.J. 10/05/05).

• Commissioner Application of Overpayments. The taxpayer challenged the commissioner’s application of the taxpayer’s overpayment in 1999 to an outstanding tax liability from 1994. The taxpayer asserts that the 1994 liability was discharged in bankruptcy. Though the challenge was appropriate because the commissioner failed to provide proper notice, the Tax Court held that under §6402, the commissioner had the discretion to apply overpayments to any tax liability. Because the overpayment was applied before the taxpayer filed for bankruptcy, the application to that liability was proper. The commissioner’s failure to apply a taxpayer’s overpayment in the manner that the taxpayer wished was not improper. Richmond v. Comm’r., T.C. Memo 2005-238 (10/12/05).

• Investment, Energy Credits Denied; Partnership Lacked Substance. Taxpayer invested in a partnership that claimed to be engaged in plastics recycling. The commissioner found the leasing activities of the partnership lacked substance and refused to allow the taxpayer to apply the loss, investment credit, and energy credit. The court sided with the commissioner under §6653(a)(1) since the taxpayer did not act with due care in investigating the partnership. The taxpayer did not obtain an appraisal before investment and his financial advisor did not have sufficient knowledge of the recycling industry to be relied upon. Korchak v. Comm’r., T.C. Memo 2005-244 (Oct. 18, 2005).

• Burden of Proof; Payment; Penalties. A taxpayer met his burden of showing that a tax liability had been paid as agreed and IRS did not meet its burden of proof on the penalties imposed. Thus the Tax Court found the IRS abused its discretion in issuing a Notice of Determination which allowed a proposed levy to go forward. The taxpayer provided testimony regarding his installment agreement and payments for past taxes, which were confirmed by the records of the commissioner. There was also evidence the commissioner had extended the period over which the taxpayer could repay his taxes. The taxpayer had not paid $ .48 of tax and was assessed $440 in penalties and interest. The Tax Court placed the burden of proof on the penalties issue on the IRS. Since the commissioner failed to present evidence as to how the penalty was assessed the court determined the IRS had not met its burden of proof on the penalties. Norris v. Comm’r., T.C. Memo 2005-237 (10/11/05).

• Unsubstantiated Bad Debt Deduction. Taxpayer claimed a bad debt deduction under §166 related to two promissory notes taken by the taxpayer’s fuel business, though all documents related to the note had been destroyed by the taxpayer following a previous audit. The deduction was disallowed, since the taxpayer’s remaining records failed to substantiate, explain the amount, or justify why the deduction was taken in a particular tax year. An accuracy-related penalty under §6662 was also imposed. Egan v. Comm’r., T.C. Memo 2005-234 (10/05/05).

• Debt Transfer; Interest Rate Adjustment Disallowed. Two subsidiaries of the same corporation entered into an agreement, whereby one subsidiary agreed to assume the obligations of another. The commissioner challenged the treatment of this transaction by the subsidiary that transferred the debt. The court stated that although §482 grants the commissioner power to make adjustments to reflect an arm’s-length rate of interest in transactions between certain parties, that power was not appropriately applied here. The commissioner did not present sufficient evidence that the loan agreements were solely created to avoid taxes or that another party would be unable to engage in a similar transaction. In a separate issue, the court found the taxpayer’s assertion of a deduction pursuant to §165 due to the loss of their customer relationship was rejected, since the taxpayer could not substantiate the value or the continued existence of these relationships. Claymont Investment, Inc. v. Comm’r., T.C. Memo 2005-250 (10/31/05).

• Whistleblower Settlement Payment Includable in Gross Income. Taxpayer brought charges against the Texas Dept. of H.R. under the state whistleblower statute and was awarded damages. Commissioner determined that a significant portion of these damages had not been reported in the taxpayer’s gross income. Using the standard from Commissioner v. Schleir, 515 U.S. 323 (1995), the court held that both the additional damages from the final judgment and the punitive damages were includable in gross income. These payments failed to meet to meet the two requirements for exclusion that the payments arise from a tort-like right and relate to a personal injury. The accuracy-related penalties under §6662 were also upheld against the taxpayer. Green v. Comm’r, T.C. Memo 2005-250 (10/31/05).

• Improperly Classified Royalty Payment; Deduction Denied. Petitioner claimed he is entitled to deduct $902,476 as a royalty payment under petitioner’s license agreement, and not just the $ 441,210 that respondent concedes. The court found the royalty payment unreasonable, since the fee was almost twice the fee paid under a nearly-identical agreement with a third party. The taxpayer failed to show that the difference represented a salary for additional services given that the shareholder also received a separate salary payment. Chickie’s & Pete’s Inc. v. Comm’r., T.C. Memo 2005-243 (10/17/05).

• Deduction of Policy Loan Interest Expense. Xcel Energy predecessor Public Service Company of Colorado attempted to deduct loan interest expenses related to life insurance policies taken out on company employees. Xcel asserted it is entitled to deduct policy loan interest because its investment in the policies had a practical, non-tax effect. The court granted Xcel’s motion for summary judgment regarding its insurable interest in the lives of its employees, since the company benefited from continued employment and the employees had the opportunity to designate a beneficiary. In regard to whether Xcel is allowed the deduction, however, the case was remanded to consider whether or not the policies were bought as a sham to avoid tax liability. Xcel Energy Inc. v. United States, Civil No. 04-1449 (D. Minn. 10/12/05).

• Retrospective Income Tax Rate Increase; North Carolina. The taxpayer argued that the 2001 enactment of a tax on wages previously earned constituted a retroactive tax. The appellate court held that the plain language of the state constitution does not prohibit retrospective increase in the income tax rate. In making this holding, the court distinguished between an increase in the tax rate and the enactment of an entirely new tax. Because the increase in the income tax rate did not constitute a new tax, the statute was upheld. Coley v. State, COA04-1141 (N.C. Ct. App. 10/04/05).

• Standing to Challenge Tax Act; School Board. A school board challenged a state homeowners act which transferred education funding from property taxes to income and earnings taxes. The court held that taxpayer compliance with the act did not threaten any substantial or immediate interest of the board. Therefore, the board lacked standing in its attempt to enforce an injunction against the state. Pa. Sch. Bds. Ass’n v. Barnes, No. 180 M.D. 2005 (Comm. Ct. of Pa. 10/19/05).

Administrative Action

• Deductions for Travel Expenses. Revenue Procedure 2005-67 updates the rules under which the amount of ordinary and necessary business expenses of an employee for lodging, meal, and incidental expenses, or for meal and incidental expenses, incurred while traveling away from home are deemed substantiated under §1.274–5. In addition, an alternative method has been provided for employees who are not reimbursed for their deductible costs while traveling.

• Proposed Regs: Domestic Production Deduction. The proposed regulations attempt to clarify the newly enacted deductions for domestic production under IRC §199 allows for companies to deduct 3 percent of income from domestic production. The most significant guidance provided by the proposed regulations relates to the identification of the items that fall within this deduction.

• Guidance for Katrina Victims. The IRS continues to issue tax guidance for the victims of Hurricane Katrina. Notice 2005-66 extended the deadlines for taxpayers because of the hurricane’s status as a presidentially declared disaster. The hardest hit areas will receive automatic extensions, whereas others must identify themselves as hurricane victims. Related announcements for hurricane relief were given in Notice 2005-68, 69, and 70, as well as Announcement 2005-67, 68, and 69.

• Proposed Regs: Treatment of Nonqualified Deferred Compensation Under 409A. Enacted in 2004, 409A was intended to supplement existing requirements for deferred compensation and call for increased tax if those requirements were met. Similar to Notice 2005-1, the proposed regs would define a deferred compensation plan as "a plan that provides for the deferral of compensation only if, under the terms of the plan and the relevant facts and circumstances, the service provider has a legally binding right during a tax year to compensation that hasn’t been actually or constructively received and included in gross income, and that … is payable to or on behalf of the service provider later in the year."

• Final Regs: Agency and Employee Performance. In response to confusion as to what measurements may be included in performance goals, the irs has amended the regs, originally issued in 1999, for performance measurement systems and the use of quantity measures for organizational and employee results. The regs will remove the quantity limitations related to company performance and to suggest goals to employees, though they may not be used to evaluate employee performance. T.D. 9227.

• Agreement on Filing Software. The irs announced an agreement with the Free File Alliance (FFA), a consortium of software companies, to extend free tax services, electronic filing, and consumer protections to eligible taxpayers. The agreement calls for the FFA to offer free online tax preparation for individuals with less than $50,000 in adjusted gross income. The agreement follows an announcement in the Treasury Funding Bill that the irs would not be allowed to develop its own software, an issue which had created problems with FFA negotiations. The program served more than 5 million taxpayers in 2005, though it is estimated that over 93 million individuals will be eligible in 2006. IR-2005-126.

• Additional IRS Guidance

Announcement 2005-75. The following organizations no longer qualify for deductions under §170: Alpha Kappa Psi Scholarship Fund, of Minneapolis, MN; Alphabets Childcare Center, Inc., of Clarksville, TN; Inner City Development Foundation, of Los Angeles, ca; and Rocky Road Incorporated, of Snowmass Village, co.

Announcement 2005-80. The agency has implemented a settlement initiative whereby eligible taxpayers may resolve the tax treatment of any of 21 eligible abusive transactions. Those persons currently engaged in litigation, under criminal investigation, or whose cases involve fraud are not eligible for settlement.

Notice 2005-67. This notice updates the weighted average interest rates for corporate bond indices and 30-year Treasury securities.

Notice 2005-70. Provides guidance on making elections under §362(e)(2)(C).

Notice 2005-74. Announces that the Treasury and the irs will amend the regulations under §367(a), concerning the treatment of property transfers with foreign corporation. Amongst other adjustments, the amendments will clarify the treatment of gain recognition resulting from certain common asset reorganizations.

reg-104143-05. Proposed regulations under §3121 amend existing regulations as to the dollar threshold amounts and time periods used to determine whether payments for 1) domestic service in a private home of the employer, 2) agricultural labor, 3) service not in the course of the employer’s trade or business, and 4) services provided by home workers described in §3121(d)(3)(C) are wages subject to FICA taxes.

reg-111257-05. Proposed regulations clarify the substantive requirements for tax exemption under §501(c)(3) and the imposition of §4958 excise taxes.

reg-144615-02. Proposed regulations provide guidance with respect to the sharing of costs and risks of cost-sharing arrangements under §482. They replace current regulations §1.482-7 to clarify the scope and valuation of the external inputs for which arm’s length consideration must be provided as an entry condition into cost sharing.

reg-150088-02. Proposed regulations under §6320 relate to a taxpayer’s right to a hearing after the filing of a notice of federal tax lien (NFTL). The regulations clarify the manner in which collection due process hearings are conducted and specify the period in which a taxpayer may request an equivalent hearing.

reg-150091-02. Proposed regulations under §6330 relate to a taxpayer’s right to a hearing before or after levy. The regulations clarify the manner in which collection due process hearings are conducted and specify the period during which a taxpayer may request an equivalent hearing.

Rev. Proc. 2005–68. Provides guidance for requesting expedited processing of letter ruling requests for certain reorganizations and for distributions under §355, and clarifies the requirement that a "significant issue" be present before the Service will rule on certain transactions.

Rev. Rul. 2005–65. Provides guidance as to whether an acquisition and a distribution are part of a plan under §355(e) and §1.355-7(b).

Rev. Rul. 2005–66. Updates the adjusted federal rate, adjusted federal long-term rate, and the long-term exempt rate for purposes of §§382, 642, 1274, 1288.

Rev. Rul. 2005–67. Provides the monthly bond factor amounts to be used by taxpayers who dispose of qualified low-income buildings or interests therein during the period January through December 2005.

Rev. Rul. 2005–68. Illustrates the interaction between the Real Estate Mortgage Investment Conduit (REMIC) excess inclusion rules and the net operating loss rules under §860E(a) of the Code.

Rev. Rul. 2005–69. The August 2005 price indexes from the Bureau of Labor Statistics are acceptable for use by department stores applying the retail inventory and LIFO methods for valuing inventories.

T.D. 9222. Final regulations under §951 prescribe rules under which a United States shareholder of a controlled foreign corporation determines its pro rata share of the subpart F income, previously excluded subpart F income withdrawn from investment in less developed countries, and previously excluded subpart F income withdrawn from foreign base company shipping operations.

T.D. 9224. Final regulations under §6654 provide guidance for individuals failing to pay their income taxes. The regulations incorporate changes made by the Tax Reform Act of 1984, though they do not impose any new requirements for taxpayers.

Legislation

• Minnesota Legislature Finalizes 2006 Budget. In a year that included a ten-day partial government shutdown and a special session to finalize the FY2006 budget, the Minnesota Legislature wrapped up plans for an approximately $300M increase in state revenue. The most significant source of this increase will come from increases to tobacco and property taxes. In regard to income tax, the largest initiative relates to tax shelter compliance. Following efforts made in California and Illinois, the state will allow taxpayers to amend their returns and avoid penalties related to legally questionable tax shelters, as identified by the irs.

Looking Ahead

• Tax Reform Panel Unlikely to Recommend Sweeping Changes. The advisory panel for federal tax reform ruled out wholesale changes to the system and will instead make adjustments to the current framework. Major moves considered by the panel include limitations on exclusions for housing and a capping of the currently unlimited exclusion for employer-provided healthcare benefits. Though discussed, the implementation of a national retail sales tax is unlikely. The panel was to present its final recommendations on November 1.

• Tax Relief Sought for Airline Industry. Several U.S. airlines are requesting tax relief for jet fuel in the wake of Hurricane Katrina, record fuel costs, and fees imposed after 9/11. While Congress has been reluctant to provide additional support in the past few years, the industry’s continuing woes have led some to suggest the time is right.

• Informational Clearinghouse for Federal Agencies. The irs is considering implementation of an information clearinghouse that would allow other federal agencies to access certain taxpayer information. Though still very early in the developme