In this month's "Notes & Trends:
State Suing Parens Patriae Not Bound By Arbitration Agreement. The state of Minnesota sued Cross Country Bank, an issuer of credit cards, alleging violations of state laws relating to debt collection and invasion of privacy. Under the doctrine of parens patriae, a state government may protect its citizens by maintaining a legal action where a quasi-sovereign interest is involved. Relying on E.E.O.C. v. Waffle House, 534 U.S. 79 (2002), the Minnesota Court of Appeals held that the state was not subject to the arbitration agreement between Cross Country Bank and its aggrieved consumers. The state was not a signatory to the arbitration agreement, nor did the state government "step into the shoes" of the consumers. Rather, the state acted as an independent party asserting state interests based on facts involving its citizens. Minnesota ex rel. Attorney General v. Cross Country Bank, Inc., 2005 wl 2208538 (Minn. App. 09/13/05).
• Arbitral Award Of Employee Bonus Upheld. Employer-appellant First Albany enticed an employee, McGrann, to switch companies by offering him a contract with stock grants, deferred compensation, and guaranteed bonuses. The contract offered to pay such bonuses on specified dates, provided that McGrann was still employed at such times. When McGrann refused to renegotiate his contract, however, he was terminated and never received his bonus. After an arbitrator awarded McGrann his guaranteed bonus, the U.S. District Court in Minnesota confirmed the award. On appeal, the 8th Circuit upheld the arbitration award. Reviewing the case under an "extraordinary level of deference to the underlying arbitration award," the court found that the award was not irrational, and thus, enforceable under the Federal Arbitration Act. The mere fact that First Albany disagreed with the arbitration panel’s interpretation of the contract did not indicate a "manifest disregard for the law." Finally, the employer’s retaliatory termination following the employee’s refusal to renegotiate the contract and relinquish the guaranteed bonus violated New York’s covenant of good faith and fair dealing implicit in the employment agreement. McGrann v. First Albany Corporation, 2005 wl 2218029 (8th Cir. 09/14/05).
• Nonsignatories Can Enforce Arbitration Agreements. In a contract dispute involving a franchise agreement, franchisee cd Partners brought tort suits against certain executive officers of franchisor C.D. Warehouse, Inc. (cdwi) for negligence, fraud, and misrepresentation. When the cdwi officers attempted to compel arbitration of the claims, cd Partners argued the officers were nonsignatories who could not compel arbitration under the franchise agreements. The 8th Circuit disagreed, however, finding that the arbitration clause was broad enough to cover the tort claims and that the officers could enforce the agreement as nonsignatories. The relationship between the signatory and nonsignatory defendants was "sufficiently close" because the tort allegations targeted conduct arising out of the individuals’ employment as officers at cdwi. Also, the claims of cd Partners relied upon, referred to, and presumed the existence of a written agreement between the two corporations. Given these circumstances, the 8th Circuit allowed the appellant officers to compel arbitration even though their signatures did not appear on the franchise agreements. CD Partners, LLC v. Grizzle, 2005 wl 2319132 (8th Cir. 09/23/05).
— Darin T. Allen
In this month's "Notes & Trends:
• Judicial Bias; Impartiality Compromised By Independent Investigation. In a controlled substance trial, the only contested issue was the appellant’s possession of a handgun. During the trial, a defense witness testified that the gun essentially arrived at the defendant’s home in a couch, which the appellant’s wife had purchased from her deceased boyfriend. The defense witness testified that the boyfriend had died sometime in 1999. During the bench trial, the judge announced to the parties that she felt that the boyfriend had died a couple of years later. During a recess, the judge’s law clerk confirmed this information, as did the prosecution’s independent investigation during the break. The judge had come to learn this information while apparently presiding in "drug court." Held, the information regarding the boyfriend’s death is not "personal information" requiring the judge to recuse herself. However, the appellant’s constitutional right to an impartial trial was violated by the trial court judge in the following ways: first, while sitting as finder of fact, she indicated by her comments, during the witness’ testimony, that the date of the boyfriend’s death was likely false. Second, the judge independently investigated a fact not introduced into evidence, violating her obligation as the finder of fact to refrain from seeking or obtaining evidence outside that presented by the parties during trial. Third, the judge announced her authorized investigation to counsel, effectively introducing into the proceedings a material fact that was favorable to the state. In conclusion, the Supreme Court states that when a judge possesses extra-record knowledge that is prejudicial to the defendant at criminal trial, she may not disclose that knowledge. Rather, the judge must either disqualify herself, or set aside that information and consider only the evidence adduced during trial. State of Minnesota v. Lorenzo Dorsey,C6-03-197 (Minn. 08/04/05). www.lawlibrary.state.mn.us/archive/supct/0508/opc030197-0804.htm
• Evidence; Threats To Witness Admissible To Assess Credibility. In a murder trial following a mistrial, defense counsel, on cross-examination, attempted to impeach a witness’ credibility by eliciting prior inconsistent statements, including a recantation. On redirect, the prosecutor was allowed to elicit evidence that, four days after his testimony at the first trial, the witness was assaulted by the appellant’s brother and two other individuals. Held, it was appropriate for the district court to allow testimony concerning the assault: it was restricted to redirect examination for purposes of repairing the credibility problem brought about by defense counsel; furthermore, the evidence was accompanied by a cautionary instruction. State of Minnesota v. Brian Alexander Clifton, A03-1964 (Minn.08/04/05). www.lawlibrary.state.mn.us/archive/supct/0508/opa031964-0804.htm
• Prosecutorial Misconduct; "Were They Lying?" Questions Generally Improper. Asking a defendant whether other witness’ testimony was false, by posing a "were they lying?" question is a tactic which is inappropriate, as a general rule. Such questions are permitted only in circumstances where the defendant holds the issue of the credibility of the state’s witness in central focus. Here, the prosecution asked several gratuitous "were they lying?" questions in circumstances where the appellant did not state or insinuate that they were deliberately falsifying the testimony. Such questions provided no assistance to the jury in evaluating the defendant’s credibility, and were improper. However, subject to the plain error analysis, the Supreme Court reaches the decision that the jury would have reached the same verdict had the state not asked such questions. State of Minnesota v. Roger Allen Morton, A04-818 (Minn. 08/04/05). www.lawlibrary.state.mn.us/archive/supct/0508/opa040818-0804.htm
• DWI/Implied Consent; Sentence For Felony DWI; Mandatory Minimum. The trial court improperly calculated the defendant’s criminal history score at five points, rather than one, as required by the Sentencing Guidelines. Appellant was on probation for gross misdemeanor dwi, and was convicted of felony dwi. Minn. Stat. §169A.28, subd. 1(1)-(2) requires sentences for new dwi convictions to be consecutive to probation violations. Also, Minn. Stat. §169A.276, subd. 1 prescribes a mandatory minimum of 36 months, which is stayed by the guidelines unless the offender has a prior conviction for felony dwi. Finally, the Sentencing Guidelines provide that when consecutive sentences are presumptive, a criminal history score of one, or the mandatory minimum for the offense, whichever is greater, shall be used to determine the presumptive duration of the prison term. Hence, in this case, the trial court’s 66 months prison term is vacated, and remanded for resentencing consistent with the opinion. The Court of Appeals notes that any prison term would be a departure. State of Minnesota v. Frank E. Holmes, A04-1134 (Minn. App. 08/02/05). www.lawlibrary.state.mn.us/archive/ctappub/0508/opa041134-0802.htm
• DWI/Implied Consent; Out-Of-State Convictions; Enhancement; Right To Counsel; Exclusionary Rule. Appellant was charged with felony dwi, based upon 11 prior dwi convictions from South Dakota, and one conviction from Minnesota. In upholding the dismissal of the felony dwi charge, the Court of Appeals applies State v. Bergh, 679 N.W.2d 734 (Minn. App. 2004) disallowing the use of any South Dakota conviction or revocation because South Dakota does not afford drivers a right to counsel before deciding whether to submit to chemical testing. The Court of Appeals also rejects the state’s invitation to apply an exclusionary rule analysis in allowing use of the South Dakota prior convictions and revocations (e.g., exclusion would not deter police misconduct, admission does not compromise judicial integrity, and admission does not permit Minnesota courts to profit from wrongdoing). State v. Randy Leroy Schmidt, A05-218 (Minn. App. 08/09/05). www.lawlibrary.state.mn.us/archive/ctappub/0508/opa050218-0809.htm
• Crawford; 911 Call, Statements During Field Investigation Not Testimonial. Appellant was prosecuted for a domestic second-degree assault and felon in possession. The victim was unavailable to testify, because she was concerned for her safety, and refused to testify. There was no finding, however, that the appellant procured the unavailability of the victim. The trial court had admitted, over defense objection, the victim’s 911 call, and also a field investigation statement made to police approximately one half hour after the 911 call.
Held, both 911 calls and field investigation statements will be analyzed on a case-by-case basis to determine whether they are testimonial under Crawford. The 911 call is held to be nontestimonial, because of the circumstances under which it was made: the victim was begging for help; the operator focused only on obtaining information for intervention, rather than a future prosecution; given the demeanor of the victim, the temporal proximity and nature of the dialogue, the statements are admissible notwithstanding Crawford. The statements made to the police in the field investigation are also nontestimonial. The Supreme Court formulates an eight-point analysis, under which it concludes that the field investigation statements in this case are not testimonial. State v. David Eugene Wright, A03-1197 (Minn. 08/11/05). www.lawlibrary.state.mn.us/archive/supct/0508/opa031197-0811.htm
• Procedure; Lothenbach; Concession Of Guilt; Findings Unnecessary. Where a defendant agrees to a Lothenbach procedure in order to preserve pretrial issues for appeal, the defendant may not obtain appellate review of the sufficiency of the evidence. The Lothenbach procedure operates as, essentially, a concession of guilt. "Because a Lothenbach proceeding is not a court trial or a stipulated facts trial, the findings requirement of Rule 26.01 does not apply." State v. Mike Thomas Mahr, A04-1390 (Minn. App. 08/09/05). www.lawlibrary.state.mn.us/archive/ctappub/0508/opa041390-0809.htm
• Blakely; Prior Convictions; Lack Of Waiver For Jury Determination Harmless. During appellant’s trial for felony violation of an order for protection, the district court admitted a stipulation prepared by appellant’s attorney regarding appellant’s two prior domestic assault convictions. It is undisputed that appellant did not personally waive his right to a jury determination of the prior convictions. Although it may be error to not secure such a waiver, it is clearly harmless. Appellant does not contest the accuracy of the prior convictions. Blakely excludes the fact of a prior conviction from the rule it established for a jury determination of other facts. State v. Michael Walton Hinton, A04-1220 (Minn. App. 08/09/05). www.lawlibrary.state.mn.us/archive/ctappub/0508/opa041220-0809.htm
• Blakely; New Rule Not Retroactive. The Minnesota Supreme Court determines that Blakely is, indeed, a new rule, is not simply a restatement of Apprendi, and therefore Blakely is not retroactive to Apprendi for cases on direct review at that time. "Blakely altered our prior understanding of ‘statutory maximum’ in a much more fundamental way, applying the rule of Apprendi in the context of state sentencing guidelines, and is therefore also a new rule." State v. Gerald E. Houston, A04-324 (Minn. 08/18/05). www.lawlibrary.state.mn.us/archive/supct/0508/opa040324-0818.htm
• Blakely; Booker Rejected; Remedy For Guidelines Left To Legislature. The Minnesota Supreme Court finds that the district court’s imposition of an upward durational departure under Minnesota’s repeat sex offender statute was unconstitutional, because the 30-year sentence is only possible if the court finds an aggravating factor. Although the court found four aggravating factors, Blakely is implicated because the sentence exceeded the presumptive sentence under the Minnesota Sentencing Guidelines. Because Minnesota’s Sentencing Guidelines are, indeed, mandatory, imposition of the presumptive sentence is mandatory absent additional findings.
• Next, the Supreme Court severs Section II.D from the Guidelines, which states that the sentencing judge "shall utilize the presumptive sentence." The Supreme Court leaves the rest of the Guidelines in place, and defers to the Legislature as to what remedies, if any, are required in order to obtain departures above the presumptive sentence, including sentencing juries and bifurcated trials. State v. Robert Allen Shattuck, C6-03-362 (Minn. 08/18/05). www.lawlibrary.state.mn.us/archive/supct/0508/op030362-0818.htm
• Experts; Battered Child Syndrome; Not Subject To Frye. In a case of first impression, the Minnesota Supreme Court decides that the admissibility of expert testimony on Battered Child Syndrome offered to prove an element of self-defense is not subject to the Frye-Mack test. Noting that such evidence is in the area of syndrome or social science, the Supreme Court holds that experts on such matters — including battered child syndrome — are only permitted to testify about the syndrome in a general manner, provided that the testimony is helpful to the jury. Following Michigan and Connecticut, the Court follows the helpfulness standard of Minnesota Rule of Evidence 702.
In the instant case, the Court follows the Hennum rule that such expert testimony is limited to a description of the general syndrome and the characteristics which are present in an individual suffering from the syndrome, but may not testify to the ultimate fact that the particular defendant suffers from battered child syndrome. In the instant case, while it was error for the court to exclude such evidence on a Frye-Mack basis, the error was harmless, because little of the demonstrable evidence supported the defendant’s proposition. The concurring opinion notes that Battered Child Syndrome requires physical or sexual abuse, both of which were missing in this case. State v. Jason Alexander MacLennan, A03-2048 (Minn. 08/18/05). www.lawlibrary.state.mn.us/archive/supct/0508/opa032048-0818.htm
• DNA: Multiple Sources; Random Match Probability Approved. In examining a murder victim’s bloodied shirt, a forensic scientist for the state presented her analysis of skin cells present. The scientist found that skin cells from various persons were represented, but she was able to recover a predominant profile in the mixture, which matched the appellant’s. She stated that the profile would not be expected to occur more than once in the world population among unrelated individuals.
Held, although the issue was essentially waived at trial, the Supreme Court cites with approval standards adopted by the dna Advisory Board approving the use of random match probability statistics generated by the product rule, and finds that such evidence falls within the dna exception to the general prohibition against the use of statistical probability evidence in a criminal case. State v. Kevin Terrance Hannon, A04-434 (Minn. 08/18/05). www.lawlibrary.state.mn.us/archive/supct/0508/opa040434-0818.htm
• Controlled Substance: Felony Sale Of Marijuana To Minor. Appellant was charged with 3rd Degree Controlled Substance, under Minn. Stat. §152.023, Subd. 1(3), which makes a felony the sale of a schedule I, II, or III controlled substance to a person under the age of 18. In the instant case, the substance was less than 42.5 grams of marijuana, possession or sale of a small amount of which is otherwise a petty misdemeanor under Minn. Stat. §152.027, subd. 4(A).
Held, the definition of criminal intent under Minn. Stat. §609.02, Subd. 9(6) does away with the mens rea requirement that the appellant should know the age of the children, and demonstrates that the Legislature intended that strict liability apply to the issue of age.
The Court of Appeals also rejects the appellant’s argument that his conduct was not criminal because the sale of a small amount of marijuana to another person is a petty misdemeanor, and not a crime. Under the statute, as written, appellant may be prosecuted for the felony offense, notwithstanding the petty amount of marijuana. State v. Jason Roy Skapyak , Ct. App. A05-765 (Minn. App. 08/23/05). www.lawlibrary.state.mn.us/archive/ctappub/0508/opa050765-0823.htm
• Juvenile; Probation Violation; Austin Factors. A court need not apply the Austin factors in a juvenile probation revocation proceeding, as opposed to proceedings implicating the rights of an adult offender or a juvenile under the ejj statute, The Court of Appeals finds that the primary purposes of the Austin rule are addressed in the Rules of Juvenile Procedure and that the final Austin factor, requiring the district court to find that the need for confinement outweighs the policies favoring probation, is not applicable to juvenile proceedings because confinement in a secure facility is not the presumptive consequence of violating probation in the juvenile setting. In Re R.V., A04-2007 (Minn. App. 08/23/05). www.lawlibrary.state.mn.us/archive/ctappub/0508/opa042007-0823.htm
— Frederic Bruno
In this month's "Notes & Trends:
& Labor Law
• Whistleblower. A municipal employee who was placed on involuntary leave after the city council questioned her for speedy compliance with the Government Data Practices Act was allowed to assert a whistleblower claim under Minn. Stat. §181.932 subd. 1(c). The Minnesota Court of Appeals reviewed dismissal of a lawsuit by the city’s data practices compliance officer on grounds that there was a disputed fact/issue whether the employee was subjected to adverse action due to her failure to respond to pressure or implied directions not to comply with the law, as prohibited by the statute, even without any "explicitly or blatantly" illegal directive by her employer, the city council. Erickson v. City of Orr, 2005 wl 227395 A05-481 (Minn. App. 2005)(unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0509/opa050481-0920.htm
• Taxation Of Damages. Settlement proceeds received by an executive in connection with termination of his employment were deemed taxable income by the 8th Circuit Court of Appeals. The Court held that the entire $2 million in settlement proceeds was not excludable from income under §104(a)(2) of the Internal Revenue Code (irc), which excludes damages received for "personal injuries or sickness" because there was no evidence of a "direct causal link" between the damages and any personal injuries or sickness. The taxpayer submitted only evidence of emotional distress, which is not covered by the exclusion. Lindsey v. Commissioner, 2005 wl 2105973 (8th Cir. 2005).
• Unemployment Compensation. The Court of Appeals upheld unemployment compensation benefits for two commissioned sales personnel, ruling that the provision of the unemployment compensation statute that bars benefits for an employee who was paid "solely" on commissions does not apply if the employee receives fringe benefits in addition to commissions. Minn. Stat. §268.035, subd. 20(26). The employee’s compensation was based solely on commission, but he also received a number of fringe benefits valued at approximately $8,400. Because of the fringe benefits, he was not compensated "solely" on commission and, therefore, was not disqualified from receiving unemployment benefits after his employment terminated. Samuelson v. Prudential Real Estate, 696 N.W. 2d 830 (Minn. App. 2005). www.lawlibrary.state.mn.us/archive/ctappub/0505/opa041416-0531.htm
The modification of a sales person’s compensation from straight salary to commission constituted a "good reason" for the employee to quit and receive unemployment compensation benefits in a recent unpublished case. Although the employee may have received more compensation under the commission arrangement, depending upon the volume of sales, a revision of the pay package created a "transfer of risk," which justified the employee’s resignation while entitling him to receive unemployment benefits. D & D Associates, Inc. v. Skjod, 2005 wl 1331227 (Minn. App. 2005) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0506/opa041544-0607.htm
A technician at a veterinary clinic also was entitled to unemployment compensation benefits after she was fired in retaliation for refusing to sign a waiver of a deferred compensation agreement. The technician, who was a 50 percent investor in the facility, was compensated through a deferred compensation agreement since she was not entitled to be an owner of the business because she was not licensed. However, when the business was put up for sale, she refused to sign a waiver of the deferred compensation agreement, which led to her discharge. Reversing the decision of the commissioner of the Department of Economic Development, the appellate court held that she was retaliated against for refusing to sign the waiver, rather than for substandard performance as claimed by the employer, and thus was entitled to unemployment compensation benefits. Walters v. Midway Animal Hospital¸ 2005 wl 1389390 (Minn. App. 2005) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0506/opa041600-0614.htm
A commercial truck driver, who quit after being assigned to work excessive hours in violation of federal law, was held eligible for unemployment benefits by the appellate court. The employer’s requirements that the driver work a shift without ten hours off-duty, as required by federal transportation safety laws, justified his resignation and allowed him to be eligible for benefits. Krenz v. Cloverleaf Cold Storage, 2005 wl (Minn. App. 2005) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0509/opa042405-0920.htm
But an employee who did not return to work after an authorized leave expired was deemed ineligible by the appellate court for unemployment benefits. The employee’s failure to timely submit another request for leave, request a finite extension, or otherwise indicate when she would return quit without good cause attributable to her employer. Hodges v. Heartland Employment Services, Inc., 2005 wl 2277324 (Minn. App. 2005) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0509/opa050175-0920.htm
A quartet of federal workplace regulations recently went into effect:
— Marshall H.
• Mera: Preclusive Effects Of Approved Wetlands-Replacement Plan. Dan and John Zander owned property in Waseca County, a portion of which would lie within a proposed expansion area of Trunk Highway 14. The Zanders challenged the proposed construction under the Minnesota Environmental Rights Act ("mera") on two grounds: 1) the construction would destroy a threatened, stated-listed plant on the Zanders’ property and 2) the wetland-replacement plan that was developed by the Minnesota Department of Transportation ("mndot") and approved by the Minnesota Board of Water & Soil Resources ("bwsr") was inadequate. The Minnesota Court of Appeals upheld the district court’s dismissal of both challenges via summary judgment. The Court of Appeals found that the record clearly indicated that the threatened plants fell outside the proposed construction area, and that mndot had furthermore agreed to construct fencing and a berm to ensure that the off-site plants were not damaged. As such, no material issue of fact existed on that topic to preclude summary judgment. It then found that the Zanders were collaterally estopped from challenging the validity of the wetland-replacement plan because the Court of Appeals, in a separate matter brought by the Zanders, had upheld bwsr’s decision to reject their request for a hearing on the plan. Finally, as for their mera claim itself, the court found that the Zanders had failed to make an adequate showing that the proposed construction would result in a "material adverse effect" on the environment under the five factors set forth in Schaller v. County of Blue Earth, 563 N.W.2d 260, 267 (Minn. 1997). Dan Zander, et al., v. State of Minnesota, A04-2393 (Minn. App. 09/20/05), 2005 wl 2277283 . www.lawlibrary.state.mn.us/archive/ctappub/0509/opa042393-0920.htm
• Public Water Resource Rules: Denial Of Permit Application. Lakefront property owner Warren Bloomquist applied for a permit from the Minnesota Department of Natural Resources ("dnr") to remove sediment and vegetation from a channel that connected Whitefish Lake in Crow Wing County to a pond on his property so as to once again allow boat traffic in the channel. An administrative law judge recommended approval of Mr. Bloomquist’s permit application following a contested-case hearing on the dnr’s original denial of his application. The dnr commissioner adopted most of the alj’s factual findings and legal conclusions, but denied the permit on three grounds: 1) the excavation would violate a dnr rule that prohibits excavation whose purpose is to extend riparian rights to nonriparian lands or to promote the subdivision and development of nonriparian lands; 2) the project would violate applicable resource management plans and shoreland ordinances and 3) Mr. Bloomquist already possessed access to Whitefish Lake that had less of an environmental impact than the one proposed. The Court of Appeals found the dnr’s permit denial to be legally sufficient and supported by the facts in the record. Mr. Bloomquist’s development-centered purpose for excavating the channel violated the dnr’s prohibition against such excavation. The proposed project would have entailed sediment removal, in violation of a county ordinance. Finally, the fact that Mr. Bloomquist had another existing access to the lake from his property further justified the denial of his excavation permit application. Warren Bloomquist v. Commissioner of Natural Resources, A05-147 (Minn. App. 09/27/05), 2005 wl 2356086. www.lawlibrary.state.mn.us/archive/ctappub/0509/opa050147-0927.htm
• Post-Aviall: 2nd Circuit Allows §107(A) Action In Voluntary Cleanup. Consolidated Edison Company of New York, Inc. ("ConEd") entered into a "Voluntary Cleanup Agreement" with the state of New York in 2002 to clean up a number of sites in that state, including seven previously operated by ugi Utilities, Inc. ("ugi"). Prior to doing so, ConEd sued ugi under cercla and New York state navigation and nuisance laws to recover costs it had incurred and would incur in cleaning up the sites ugi had previously operated. ConEd’s appeal of the dismissal of its claims by the district court was pending at the time the United States Supreme Court issued its decision in Cooper Industries, Inc. v. Aviall Services, Inc., 125 S.Ct. 577 (2004). The 2nd Circuit requested additional briefing by the parties as to whether the determination in Aviall that a cercla §113(f)(1) claim could only be brought during or following a civil action specified in that section deprived the 2nd Circuit of subject matter jurisdiction to consider ConEd’s appeal.
On regard to the subject matter jurisdiction issue, the 2nd Circuit first rejected ConEd’s argument that was entitled to bring a contribution claim against ugi because its Voluntary Cleanup Agreement with New York constituted a cercla §113(f)(3)(B) administrative settlement. The 2nd Circuit found the Agreement only settled state law claims, not potential cercla claims. As such, §113(f)(3)(B) was not available to ConEd for use in a contribution claim against ugi. The 2nd Circuit found sua sponte, however, that ConEd could bring a claim against ugi under §107(a). The Court of Appeals found that §107(a) permits a party that has not been sued or made to participate in an administrative proceeding, but that, if sued, would be held liable under §107(a), to recover necessary response costs, so long as the costs were incurred voluntarily and not pursuant to a court or administrative order or judgment. To find otherwise, in light of Aviall, would be "impermissibly discouraging" to those willing to do voluntary cleanups. Prior to this decision, the 2nd Circuit held in Bedford Affiliates v. Sills, 156 F.3d 416 (2nd Cir. 1998) that a potentially responsible party that could pursue a contribution claim under §113(f)(1) could not also bring a §107(a) claim. The difference between that case and the one here, the Court of Appeals explained, was that the plaintiff in Bedford Affiliates had incurred its expenditures pursuant to a consent order with a government agency and had been found partially liable by the court under §113(f)(1). By comparison, ConEd’s liability had not been adjudicated, nor was there an administratively or judicially approved settlement requiring it to incur costs, meaning that it remained a "person" able to seek recovery of voluntarily incurred costs under §107(a).
Through this finding, the 2nd Circuit became the first of the federal appellate courts following the Aviall decision to find that a potentially responsible party in this situation may use §107(a) to sue for recovery costs. Consolidated Edison Company of New York v. UGI Utilities, Inc., __ F.3d __, 2005 wl 2173585.
— Bill Hefner
• Diversity And Federal Question Jurisdiction; Probate Exception. The scope of the so-called "probate exception" to federal court jurisdiction is at issue in an appeal brought by Anna Nicole Smith.
Smith (a/k/a Vicki Lynn Marshall) has been involved in long-running litigation relating to her late husband’s estate which was probated in the Texas courts. Smith filed for Chapter 11 bankruptcy in the Central District of California, and prevailed in an adversary proceeding brought against her stepson that alleged tortious interference with her anticipated inheritance. On appeal to the 9th Circuit, the stepson argued that the probate exception to federal jurisdiction barred the federal courts from considering Smith’s claims. Smith, citing a 1988 decision from the 11th Circuit, argued that the probate exception applied only to cases invoking the federal courts’ diversity jurisdiction, and not to her bankruptcy court claims which fell under federal question jurisdiction. Surveying the "few precedents" addressing the probate exception, the 9th Circuit rejected Smith’s attempt to limit the probate exception to diversity cases and held that Smith’s claims were encompassed by the probate exception.
Certiorari was granted on four separate questions. In addition to several broad questions regarding congressional intent and the overall scope of the probate exception, certiorari also was granted on the question of whether the probate exception applies in federal question cases.
Marshall v. Marshall, 392 F.3d 1118 (9th Cir. 2004), cert. granted, ___ S. Ct. ___ (2005).
• Other Noteworthy Decisions: The 8th Circuit held that it had jurisdiction over an appeal from an order by Judge Doty remanding state law claims despite Judge Doty’s statement that the claims were being remanded for lack of subject matter jurisdiction. Ali v. Ramsdell, ___ F.3d ___ (8th Cir. 2005).
The 8th Circuit held that the trial court had abused its discretion in barring an experienced attorney from offering expert testimony based on his personal experiences. First Union National Bank v. Benham, ___ F.3d ___ (8th Cir. 2005).
Judge Montgomery rejected an appeal from Magistrate Judge Boylan’s scheduling order that struck as "premature" a motion for summary judgment filed prior to the start of discovery, finding that the scheduling order was neither "clearly erroneous" nor "contrary to the law." Schwarz Pharma, Inc. v. Paddock Labs, Inc., 2005 wl 2122597 (D. Minn. 09/01/05).
Judge Ericksen rejected an attempt to introduce hearsay evidence under the "catch-all" hearsay exception found in Fed. R. Evid. 807. Elnashar v. Speedway SuperAmerica, llc, 2005 wl 2333832 (D. Minn. 09/22/05).
Judge Montgomery awarded plaintiffs’ counsel just under $400,000 for their representation of the prevailing plaintiffs in sex and parenting discrimination claims. Vosdingh v. Qwest Dex, Inc., 2005 wl 2290255 (D. Minn. 09/19/05).
Judge Kyle adopted a Report and Recommendation of Magistrate Judge Boylan that imposed an adverse inference at trial against certain parties for their failure to preserve evidence, as well assessing $5,000 in costs against each of those parties. E*Trade Securities llc v. Deutsche Bank ag, ___ F.R.D. ___ (D. Minn. 2005).
— Josh Jacobson
• Patents; Inequitable Conduct; Disclosure Of Litigation. Judge Donovan Frank faced an increasingly common patent-litigation argument of inequitable conduct — failure by the patent owner to disclose litigation during prosecution of the asserted patent. Cardiac Science claimed that Philips failed to disclose patent litigation to the Patent Office during prosecution of Philips’ patents and that the litigation was "material" to patentability. Cardiac Science’s argument was that previous patent litigation involved Philips’ invention and, during litigation, there were allegations regarding incorrect inventorship and positions taken that were contrary to positions made to the Patent Office during prosecution of the patents. Judge Frank ruled that there was no showing of inequitable conduct because the subject matter of the prior patent litigation did not go to the question of inventorship and was not "material." Further, Cardiac Science failed to make "specific allegations" of misconduct with respect to the alleged inconsistent positions taken during litigation. Cardiac Science, Inc. v. Koninklijke Philips Elecs. N.V., et al., Civ. No. 03-1064, 2005 U.S. Dist. lexis 15835 (D. Minn. 08/01/05).
• Patents; Prosecution Laches. The Federal Circuit revisited the doctrine of prosecution laches and affirmed a holding that 14 patents owned by Lemelson Medical were unenforceable. Fourteen Lemelson patents relating to machine vision and automatic identification bar code technology, resulting from numerous continuation applications, were asserted to be entitled to 1954 and 1956 filing dates. The Federal Circuit ruled that the Nevada district court did not abuse its discretion by finding the asserted patents unenforceable under the doctrine of prosecution laches due to egregious delays in prosecution. However, the court cautioned that the doctrine "should be applied only in egregious cases of misuse of the statutory system." For example, the court said that the doctrine should not apply to: (1) refiling to respond to uspto restriction requirements, even if deferred until just before issuance of a parent application; (2) refiling to present evidence of unexpected advantages that may not have existed earlier; and (3) refiling to add subject matter to support broader claims as development of an invention progresses. Further, refiling is appropriate even in the absence of these reasons if not unduly successive or repetitive. However, refiling an application containing only previously allowed claims for the business purpose of delaying their issuance can be considered an abuse of the patent system. Symbol Techs., Inc. v. Lemelson Med., Educ. & Research Found., LLP, No. 04-1451, 2005 U.S. App. lexis 19439 (Fed. Cir. 09/09/05).
— Tony Zeuli
• Chips; I.C.W.A. In an unpublished decision by the Minnesota Court of Appeals, a mother challenged the adjudication of her children as being in need of protection of services and their continued out-of-home placement. Where this mother failed to demonstrate her sobriety and refused to undergo urine analyses, she failed to provide adequate food, clothing, and supervision for the children, all of whom have special needs, and where she failed to comply with her case plan, the Court of Appeals held that the district court did not err in adjudicating the children as being chips children. Furthermore, the Court of Appeals found that the district court’s order was generally consistent with the recommendations of the tribal court representative of the Red Lake Band of Chippewa Indians. Hence, the Court of Appeals found there was also no violation of the Indian Child Welfare Act. In the Matter of the Welfare of the Children of: S.S., L.B., D.D., and T.W., A05-407 (Minn. App. 09/13/05) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0509/opa050407-0913.htm
• CHIPS; Evidence; Documents In Social Worker’s File. In an unpublished decision by the Minnesota Court of Appeals, a mother challenged a district court’s order adjudicating her six minor children as chips children. In this case, the mother testified to her physical discipline of the children, including beating with a belt, and stated that she does not intend to stop beating the children. She further acknowledged her history of poor parenting and blamed her children for the current problems. The mother contended that her right to procedural due process was violated because the district court adopted the proposed findings submitted by the county nearly verbatim. She did acknowledge on appeal, however, that the district court did make some changes to the proposed findings and included independent findings that were not part of the proposed findings. The Court of Appeals found that the district court’s order showed that the court independently considered all of the issues, and even issued additional findings in the order denying the mother’s motion for a new trial.
The mother also alleged that the district court deprived her of a fair trial and violated her right to due process by making erroneous evidentiary rulings and relying on inadmissible evidence introduced through the testimony of two social workers. However, because of the mother’s own admissions regarding her physical discipline of the children, the Court of Appeals observed that even if the district court had improperly admitted certain evidence, the mother failed to demonstrate prejudicial harm. Further, the Court of Appeals stated that it could not as a matter of law state that the district court abused its broad discretion in its evidentiary rulings. The Court of Appeals noted that the Supreme Court has held that the business rules exception to the rule against hearsay applies to documents in a social worker’s file, such as reports from a psychologist, doctor, social worker, counselor, teacher, psychiatrist, and a speech pathologist. The Court of Appeals concluded that the challenged documents in this case constituted such business records, and the district court property admitted the evidence. Further, the Court of Appeals observed that much of the challenged evidence related to disposition and not to adjudication, and in this appeal, the mother was challenging the chips adjudication rather than the services ordered as a result of that adjudication.
Ultimately, the Court of Appeals concluded that the district court’s findings were supported by clear and convincing evidence, therefore affirming the chips adjudication. In the Matter of the Welfare of the Children of C.J., Parent, A05-276 (Minn. App. 09/06/05) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0509/opa050276-0906.htm
• Termination Of Parental Rights; Evidence. In another unpublished decision, the Minnesota Court of Appeals considered an appeal by a mother of a termination of her parental rights. In this case, the mother was 13 years old when she gave birth to her child. Six months later, she admitted that the child was in need of protection of services and both the mother and the child were placed together in a foster home. The mother was found to have failed to give the child recommended medical treatment, failed to remain law-abiding, which resulted in placement in law enforcement/treatment settings where she failed to control her violent behavior. She also failed to comply with the requirements of her case plan to cooperate with her placement, participate in therapy and a mentoring program, and meet requirements for attending school. The Court of Appeals held that clear and convincing evidence supported the district court’s determination that her parental rights should be terminated because the county’s reasonable efforts failed to correct the conditions leading to the child’s placement and the mother failed to comply with her parental duties.
The mother also alleged that
the juvenile court abused its discretion by admitting into evidence certain
documents without proper foundation. However, the mother did not address
what foundation was laid, why it was improper, or what prejudice resulted
from the admission of the evidence. Further, the mother relied on all
but two of the contested documents in the statement of her facts in her
appellate brief and referred to some of the documents in her oral argument.
The Court of Appeals held that even if appropriate foundation was not
laid, the mother failed to show that she was prejudiced by the admission
of the documents at issue. In the Matter of the Welfare of the Child
of S. M., A05-182 (Minn. App. 09/09/05) (unpublished).
• Summit On Foster Care. Minnesota Supreme Court Chief Justice Kathleen Blatz in September hosted a three-day national conference dealing with child protection issues. The conference, entitled "Changing Lives by Changing Systems: National Judicial Leadership Summit for the Protection of Children," included chief justices and human services leaders from 49 states and several U.S. territories. By the end of this conference, each team had formed the beginning of an action plan for its state or territory. The individual action plans developed at the summit are to be compiled into a national action plan to be published by the National Center for State Courts before the end of the year. A progress report will follow by the end of next year.
The summit occurred at nearly the same time federal bipartisan legislation was introduced that incorporates recommendations of the Pew Commission on Children in Foster Care to strengthen and improve state courts that oversee foster care cases. Among the recommendations are the adoption of court performance measures by every child protection court, incentives and requirements for effective collaboration between courts and child welfare agencies, a strong voice for children and parents in court, effective representation by better trained attorneys and volunteered advocates, and leadership from chief justices and state court leaders in organizing court systems to better serve children, train judges, and promote effective standards for all court personnel.
— Gary A. Debele
• Statute Of Repose. Owner purchased a townhouse from Builder after the city issued a certificate of occupancy on June 2, 1989. On December 27, 2002, Owner sued Builder for failing to construct the townhouse in a workmanlike manner and for violating the statutory warranties under Minn. Stat. §327A.02 because of water intrusion. On February 3, 2003, Builder filed third-party actions against certain subcontractors that worked on the townhouse. The subcontractors moved for summary judgment, arguing that Builder’s claims were barred by the statute of repose under Minn. Stat. §541.051, subd. 1(a). The Court of Appeals reversed the district court’s grant of summary judgment to the subcontractors, holding that the statute of repose is unconstitutional as it applies to Builder’s third-party contribution and indemnity claims against the subcontractors. At the time of the lawsuit, Minn. Stat. §541.051, subd. 4 exempted Owner’s action brought under Minn. Stat. §327A.02 from the 10- and 12-year statute of repose, however Builder’s third-party claims for contribution and indemnity were subject to the statute of repose, thereby effectively barring Builder’s claims against subcontractors before an action accrued. The court found that this statute violated Builder’s due process rights and right to a remedy under the Minnesota Constitution. Subsequent to the commencement of this action, the statute of repose was amended in 2004; therefore, actions for breach of warranties under Minn. Stat. §327A.02 are now subject to the statute of repose. Brink vs. Smith Cos. Constr., Inc., A05-5 (Minn. App. 09/27/05). www.lawlibrary.state.mn.us/archive/ctappub/0509/opa050005-0927.htm
• Joint Tenancy. Debtor owned non-homestead real estate in Pine County with three other owners as joint tenants. On May 13, 2003, Creditor obtained a judgment against Debtor in the amount of $90,948.84. The judgment was filed in Pine County on July 9, 2003. The real estate was sold on July 11, 2003, for $109,000, which was deposited with the court. The three owners sued for judgment declaring that Creditor was entitled only to Debtor’s one-fourth interest in the real estate and consequently Creditor was entitled only to Debtor’s one-fourth interest in the proceeds of the sale of the real estate and that the escrow agent should release the remainder of the funds to the three owners. Upholding the district court decision, the Court of Appeals ruled that a judgment creditor may recover from only the fractional share of the proceeds of the real estate attributable to the joint tenant who is the judgment debtor. Gibson, et al. vs. Trustees of the Minn. State Basic Building Trades Fringe Benefits Funds, A05-39 (Minn. App. 09/27/05). www.lawlibrary.state.mn.us/archive/ctappub/0509/opa050039-0927.htm
— Melissa A.
• Procedure: Order Denying Motion To Compel In Discovery. The Minnesota Tax Court denied a motion of a taxpayer to obtain in discovery income, expense, or rental information of another taxpayer which had been submitted to the county. The motion to compel was made under Rule 37, Minnesota Rules Civil Procedure, and Minnesota Rule 8610.007 and the issue related to the balancing test set out in Montgomery Ward v The County of Hennepin, 450 N.W. 2d 299 (Minn. 1990) and Chapter 13 of the Minnesota Government Data Practices Act. The balancing test is made up of two components: (1) whether the information is discoverable under the rules of evidence and (2) whether the benefit to the party seeking access to the data outweighs any harm to the confidentiality interests of the agency maintaining the data or of any person who has produced the data or is subject to the data. The court held that the first part of the balancing test was met and that the materials were discoverable under the rules of evidence. However, the second part of the test was failed since the burden would outweigh the benefit here since release of the information would cause taxpayers to be less cooperative, which puts an undue pressure on the county’s property tax collection system. K-Mart Corporation v County of Lyon, C0-01-252, et al., 2005 wl 2016845 (Minn. T. Ct. 08/02/05).
• Real Property: Failure To Comply With 60-Day Rule. The Minnesota Tax Court dismissed the petitioner’s property tax petition for failure to provide income and expense information within 60 days after filing the petition according to Minn. Stat. §278.05(6)(a). Although the information on income and expense had been provided to the county a year before the petition was filed in connection with an earlier proceeding, the 60-Day Rule clearly requires a taxpayer to provide any of the required information within its possession on the day of the deadline. The fatal defect was that there was no supplemental information submitted 60 days after the filing to freshen-up the material. Gannett Printed Media Prudential Insurance v County of Hennepin, No. 31529, 2005 wl 1882757 (Minn. T. Ct. 08/03/05),
• Real Property: Valuation. The Minnesota Tax Court found that an automatic full-service car wash located in Cottage Grove should be valued at $930,000 for assessment years 2002 and 2003. The car wash was assessed in 2002 and 2003 at $809,900. At trial, the assessor’s value was $1,025,000. The taxpayer’s experts valued the property at $640,000. The highest and best use of the property was as a car wash. The court initially engaged in a traditional three-factor analysis and evaluation but dismissed the income approach as not a valid indicator of value in this case since the property was owner-occupied and other reliable car wash rental data was not obtained. Equal weight was given to the factors of sales and cost of reproduction. SJC Inc. v County of Washington, C7-04-2434 & C7-03-2617, 2005 wl 2016837 (Minn. T. Ct. 08/02/05).
• Procedure: Costs And Disbursements. The Minnesota Tax Court awarded the taxpayer $6,220 in costs and disbursements for a real property dispute. This included the court reporter fee, witness fees for time spent at trial, statutory costs, and filing fees less the satisfaction of judgment fee. Peter R. Houser v. County of Hennepin, No. 29232 (Minn. T. Ct. 04/29/05).
• Property Tax: Property Valuation And Unequal Assessment. The Minnesota Tax Court ruled on property valuation and unequal assessment issues for the years 2002 and 2003 for an abandoned K-mart single-tenant retail premises in Hutchinson. The subject property had been specially built for K-mart in 1981 and between assessment dates, K-mart filed bankruptcy and formally rejected the K-mart lease in its bankruptcy. Approximately nine months later, the property was re-leased to a furniture retail operation. The court found the highest and best use for the property on the assessment dates as unimproved, commercial development, and as improved, single-tenant retail. The assessor’s value for 2002 was $2,926,000 and for 2003 was $2,709,000, while the county’s expert valued the subject property at $3 million for 2002 and 2003. The taxpayer’s appraisal valued the property at $850,000 for both years. The court concluded that the appropriate fair market value was $2,100,000 for both 2002 and 2003. The court dismissed the cost approach and placed its emphasis on the income and sales approach. Further, for the assessment year 2003, the court used the Assessment Sales Ratio for McLeod County commercial and industrial properties, which was 79.9 percent for ten sales, and therefore, further reduced the value for 2003 to reflect the unequal assessment by 15.1 percent or a final value at $1,782,900. Developers Diversified, Ltd. v. County of McLeod, C3-04-608, C4-03-624, 2005 Minn. Tax lexis 39 (Minn. T. Ct. 08/15/05).
• Property Tax: Valuation. The Minnesota Tax Court reduced the property valuation of the taxpayer’s property. The property was a Class B, multitenant, four-story office building, built in 1990 as a single-tenant owner-occupied facility and converted to multitenant occupancy in 2000-2001. The property tax dispute related to the valuation of January 2, 2002, payable in 2003, which the assessor valued at $6,363,000. At trial, the county’s appraiser valued the property at $7,371,000. The taxpayer’s appraisal came in at $4,750,000. The court found that the highest and best use of the property as vacant was for commercial development, as demand warrants, and as improved property, for multitenant office use with an emphasis on single tenancy per floor. Although the Golden Valley property was sold in late April 2002 for $8.6 million, the court determined that the sale was not reflective of fair market value, but represented a leased fee sale. The court gave little emphasis to the cost approach but gave primary impact to the income approach. After reconciliation and examining the various appraisals on the sales and income approach, the court determined the value of the property was $6 million. IRET Properties v. County of Hennepin, No. 30776, 2005 wl 2076409 (Minn. T. Ct. 08/25/05).
• Real Property: Failure To Comply With 60-Day Rule. The Minnesota Tax Court dismissed the petitioner’s property tax petition for failure to provide income and expense information within 60-days after filing the petition according to Minn. Stat. §278.05(6)(a) for the tax year January 2, 2003 assessment. Notwithstanding that the petitioner had forwarded almost a year prior to filing the petition the year-end income statements for 2001 and 2002, the 2003 budget, and a current rent-roll was not then over. The petition was dismissed for failure to submit the actuals for assessment 2003 income and expense figures and the anticipated income and expenses for 2004. Moreover, the County requested said information after the filing of the subject petition and petitioner failed to respond within 30 days thereafter. Schmidt Osborne, LLC v. County of Anoka, C1-04-3708, 2005 Minn. Tax lexis 44 (Minn. T. Ct. 08/31/05).
• Procedure: Order To Compel Discovery. The Minnesota Tax Court dismissed the taxpayer’s motion to compel discovery for a failure to comply with Minn. Rule of Civil Procedure 37.01(b). The court held that in order to compel discovery, a taxpayer or moving party must show there is still a dispute after "conferring" and thereby attest to the court that they actually met in "good faith" on the discovery issues. However, if the moving party has in good faith attempted to confer with the other party but has been unsuccessful then it may bypass the actual conversation requirement by certifying that it did attempt in "good faith" to confer with the other party and was unable to do so. In this case, the taxpayer’s letter did not constitute either conferring or attempting to confer since the letter did not attempt to schedule a further meeting or hold a conference with opposing counsel. It merely requested opposing counsel to contact to discuss the discovery issues. GPI Properties 1997 LLC v. County Dakota, C5-03-7862, C2-04-7151, 2005 wl 2143728 (Minn. T. Ct. 08/30/05).
• Procedure: Order Denying Motion To Compel Discovery. The Minnesota Tax Court dismissed the taxpayer’s motion to compel discovery for a failure to meet the "good faith" requirement of Minnesota Rules of Civil Procedure 37.01(b). Repeatedly extending the deadline for returning discovery responses does not satisfy the good faith requirements of the Rule because the parties did not confer or attempt to confer about the discovery. Sears, Roebuck & Co. v. County of Dakota, C4-04-7619, C8-05-7374, and CX-03-7761, 2005 wl 2143734 (Minn. T. Ct. 08/30/05).
• Real Property: Failure To Comply With 60-Day Rule. The Minnesota Tax Court dismissed the petitioner’s property tax petition for failure to provide anticipated income and expense information for 2005 within 60 days after filing the petition pursuant to Minn. Stat. §278.05(6)(a) for the tax year January 2, 2004. It was uncontested in the case that the property was income-producing on the assessment date, that the taxpayer had submitted some expense data to the county, but that no anticipated income and expense information was furnished by the taxpayer to the county assessor within 60 days after the filing deadline. There was no claim that the taxpayer was not aware or informed of the requirement to provide the information. Austin Leased Housing Associates LP v. County of Mower, C5-05-559, 2005 wl 2182231 (Minn. T. Ct. 09/07/05).
• Property Tax: Property Valuation And Unequal Assessment. The Minnesota Tax Court held that the property for the assessment year 2003 should be $9 million. The assessor valued the single-user medical office facility at $10,275,500. At trial, the taxpayer produced an appraisal at $6,350,000 and the County’s expert valued the property at $13,000,000. The Court used the traditional three factor formula for valuing the facility, even though the experts differed dramatically, but gave the most weight to the income approach. The taxpayer’s contention of unequal assessment was rejected because the nine-month city study did not have six or more sales to be of a minimal and adequate sample size. After dismissing the city sales ratio study, the Court went to the nine-month county commercial sales ratio study; and found the median ratio at 94.9 percent. This was an insufficient basis upon which to grant relief for unequal assessment. Affiliated Community Medical Centers, P.A. v. County of Kandiyohi, C9-03-1969, 2005 wl 2182192 (Minn. T. Ct. 09/09/05).
• Leasing Activities From Different Years; "At-Risk" Rules. The Tax Court held that losses from a series of equipment leases placed in service over several years could not be aggregated into a single activity for purposes of the at-risk rules. Hubert Enterprises, Inc., 125 TC No. 6 (2005).
• Consolidated Filing After Restructuring by Downstream Merger. Restructuring of an affiliated group of corporations to enable them to elect Subchapter S status as corporations owned directly by individuals, through a downstream merger that resulted in the temporary existence of an affiliated group with a former subsidiary as the common parent, followed by direct ownership of the remaining corporations by individual shareholders at the end of the same day, did not deprive the group of "affiliated group" status eligible to claim losses incurred after the merger. Falconwood Corp. v. United States, 96 aftr 2d ¶2005-5977 (Fed. Ct. 2005).
• No Recovery Of Costs Where Irs Did Not "Take Position.". The U.S. Tax Court held that a winning tax argument with the irs does not guarantee an award of irs costs. An award of costs under irc Code §7430 requires fulfilling certain narrow prerequisites, one of which requires the irs "to take a position." In this case, a husband and wife, whose position was substantially upheld in administrative proceedings, were not entitled to recover their costs because the irs had not taken a position, as the term is narrowly defined by irc Code §7430. Rathbun, 125 T.C. No. 2 (2005).
• Suit To Recover Overpaid Interest Barred By Stipulation In Prior Refund Suit. Stipulation of dismissal executed by the irs and a taxpayer in a prior excise tax case constituted an enforceable contract that bars the irs’s subsequent lawsuit seeking to recover interest that was overpaid in that prior lawsuit as a result of the irs’s mistakes in calculation. United States v. Talley Defense Systems Inc., 96 aftr 2d ¶2005-5997 (D. Ariz. 2005).
• Jurisdiction Over Suits For Interest On Overpayments. The court held under the "any sum" wording of 28 U.S.C. §1346(a)(1) it had subject matter jurisdiction with respect to suits for interest on an overpayment of tax. E.W. Scripps Co. v. United States, No. 03-448 (6th Cir. 08/19/05).
• Covenant Not To Compete; No Value For State Taxation. A covenant not to compete did not have value in California and would not support California’s rights to tax the payments for the covenant intangible to the outstate shareholder. Milhous v. California Franchise Tax Board, No. D043058 (Cal. Ct. App. 08/12/05).
• California’s Drop Shipment Rule. The Court of Appeals in California ruled that a Wisconsin shoe manufacturer/wholesaler, authorized to do business in California, was liable for use tax on shoes that it sold to two Wisconsin subsidiaries for resale in California. It shipped the shoes from its Wisconsin warehouse to the subsidiaries’ California mail order customers. The wholesaler was deemed a "retailer" liable for collecting use taxes under the state’s drop shipment rule. The application of the drop shipment rule did not violate the Commerce Clause inasmuch as California was not taxing the wholesaler’s out-of-state activities — the activity that was being taxed was the use of the shoes in-state. Mason Shoe Mfg. Co. v. SBE, Dkt. No. A104964 (Calif. Ct. App. 08/30/05).
• Claim-Of-Right Rule; Environmental Remediation Costs. A business that was required to incur additional environmental remediation costs for its manufacturing sites from 1992 to 1995 could not invoke the claim-of-right provisions of irc Code §1341 to allocate such costs to its taxable years 1940 to 1987 when its federal income tax rates were higher. Reynolds Metals Co. v. United States, No. 3:02cv670-jrs (E.D. Va. 08/22/05).
• Assessment Of Business Tax; Trademark-Holding Company. The Commerce Clause did not bar assessment of New Jersey’s Corporate Business Tax against a foreign corporation with respect to licensing fees received from an in-state retailer for the use of trademarks, trade names, and service marks owned by the foreign corporation, despite a lack of physical presence in the state. Lanco Inc. v. New Jersey Division of Taxation, No. A-3285-03TI (N.J. Super. Ct. A Div. 08/24/05).
• Retroactive Application Of State’s Broader Nexus Standard Upheld. The Michigan Department of Treasury was not estopped from retroactively applying a broader nexus standard for application of the state’s single business tax, notwithstanding that the taxpayer relied on prior narrower administrative interpretations of the statute’s definition of what constitutes in-state business activity. J.W. Hobbs Corp. v. Michigan Department of Treasury, No. 254069 (Mich. Ct. App. 09/01/05).
• Times Mirror Divestment Of Matthew Bender Not Tax-Free. Transaction by which Times Mirror divested itself of legal publishing business conducted by its subsidiary Matthew Bender & Co. did not qualify as a tax-free reorganization because the terms and provisions of the contractual documents effected a sale. Tribune Co. v. Commissioner, 125 T.C. No. 8 (2005).
• Penalty Affirmance. Forty percent penalty imposed by irs against Long Term Capital Holdings lp for understating its tax liability in connection with an abusive tax shelter transaction was affirmed. Long Term Capital Holdings LP v. United States, No. 04-5687 (2nd Cir. 09/27/05).
• Ohio Investment Tax Credit. The U.S. Supreme Court agreed to decide the constitutionality of an Ohio investment tax credit scheme that grants businesses credit against the state’s corporate franchise tax if they increase their ownership of new manufacturing equipment in the state during the year. The lower court ruled that Ohio’s tax credit could not be upheld under the Commerce Clause. The state’s attempt to create location incentives through the state’s power to tax by credits was to be treated differently from permissible direct subsidiaries despite the similarity in terms of end-result economic impact. The distinction between a subsidy and a tax credit, in the constitutional sense, results from the fact that the tax credit involves state regulation of interstate commerce through its power to tax. DaimlerChrysler Corp. v. Cuno, U.S. No. 04-1704, cert. granted (09/27/05); Wilkins v. Cuno, U.S. No. 04-1724, cert. granted (09/27/05).
• Income Tax: Education Tax Credit And Subtraction Discussed. Families that incur expenses related to kindergarten through grade 12 education may qualify for both a Minnesota personal income tax credit and subtraction or qualify for only the subtraction, depending on household income. Examples of qualifying expenses generally include school supply purchases, private school tuition, instructor fees and tuition for after school academic classes, and home computer related expenditures. Beginning with tax year 2005, the education credit is no longer limited to $2,000 per family. If household income is $33,500 or less, the maximum family credit is limited to $1,000 times the number of qualifying children in grades K-12. If household income is more than $33,500, the credit is reduced by $1 for each $4 of household income over $33,500 for families with one qualifying child and by $2 for each $4 of household income $33,500 for families with two or more qualifying children. News Release, Minnesota Department of Revenue, 07/22/05.
• Standard Mileage Rate Increases. In response to the recent dramatic gas price increases, irs announced the optional standard mileage rate was increased 8¢ to 48.5¢ a mile for all business miles driven between September 1 and December 31, 2005, up from 40.5¢ for the first eight months of 2005. The rate of computing deductible medical or moving expenses between September 1 and December 31, 2005 was boosted to 22¢ a mile, up from 15¢ for the first eight months of 2005. IR 2005-99.
• Aircraft Leases: Application Of Passive Activity Loss Rules And Air Transportation Excise Tax. The irs concluded that an S corporation’s lease of an aircraft, without a pilot or maintenance crew, to a related C corporation for the latter’s air transportation needs was a rental activity subject to the passive activity loss limitations, but was not subject to the irc Code §4261 excise tax on air transportation. On the other hand, another corporation’s lease of an aircraft, with pilot and maintenance crew, to a related corporation for its air transportation needs, was not a rental activity subject to the pal limitations, but was subject to the air transportation excise tax. Rev. Rul. 2005-64, 2005-39 irb 608.
• Tool Allowance Arrangement Is Nonaccountable Plan. The irs ruled an employer’s tool allowance arrangement is not an accountable plan and that all amounts paid under the arrangement are, therefore, includable wage income to the employees and subject to withholding and federal employment taxes. Rev. Rul. 2005-52; 2005-35 irb 1.
• Disclosing Reportable Transaction Penalties To The SEC. The irs provided guidance to persons required to pay penalties under irc Code §6662(h), irc Code §6662A, or irc Code §6707A, and which is required under irc Code §6707A(e) to disclose them on reports filed with the sec. The new revenue procedure describes the report on which the disclosures must be made, the information that must be disclosed, and the deadlines by which persons must make the disclosures on reports filed with the sec on the Form 10-K. Rev. Proc. 2005-51; 2005-33 irb 296.
• Trust Fund Recovery Penalty; Unlimited Assessment Period. irs concluded that a responsible person liable for the trust fund recovery penalty is subject to the same assessment period that applies to the employer’s return. Thus, where the employer has committed fraud, willfully attempted to evade tax, or failed to file an employment tax return, an unlimited assessment period applies. Chief Counsel Advice 200532046.
• Rescission Reverses Deliberate Termination Of S Corporation Status. In a recent ruling, the irs addressed a termination of S corporation status caused by the corporation’s sale of its newly issued convertible preferred stock to a group of investment partnerships. After the sale, disagreements arose between the original shareholders and the partnerships. To resolve the disputes, the parties decided to unwind the transaction by agreeing to a return of the preferred stock in exchange for a return of the price paid for it, and to cancellation of the preferred stock. The rescission agreement was given full effect in abrogating the transaction because the rescission agreement restored the parties to the positions they would have occupied but for the rescission. irs P.L.R. 200533002.
• Minnesota Tax Relief For Taxpayers Affected By Hurricane. Taxpayers who qualify for federal extensions and abatements from the irs due to Hurricane Katrina will also be provided tax relief from Minnesota. The dor will abate (cancel) interest and late-filing and late-payment penalties upon request for eligible taxpayers located in Hurricane Katrina Residential Disaster Areas. Abatements may be requested for returns and payments due on or after August 29, 2005. Any interest or late-filling or late-payment penalties will be abated if returns are filed and taxes are paid in full by January 3, 2006. dor Press Release, 09/14/05.
• Minnesota Amnesty Plan For "Abusive Tax Shelter" Users. The dor has implemented an amnesty plan passed by the 2005 Legislature for "abusive" tax shelter users that offers them the opportunity to comply with state tax law without penalty. The plan, in effect through January 31, 2006, offers taxpayers making transactions and using shelters that have been labeled as "abusive" by the irs ability to voluntarily comply with state law and amend their tax returns. Those participating in the voluntary compliance initiative could head off significant penalties once the dor steps up its enforcement efforts next year. "Abusive shelters" are those listed by the irs. Taxpayers have two options to participate in the program — one with appeal rights and one without. Taxpayers who retain their appeal rights are eligible for a waiver of all penalties except those related to negligence and substantial underpayment. Taxpayers who waive their appeal rights are eligible for a waiver of all penalties. The dor has estimated that between 300 to 400 taxpayers are likely to participate. It is expected to generate about $57 million in new revenue over the current two-year budget cycle.
• Minnesota Taxing Federal Retiree Drug Subsidy. Minnesota is one of the first states that will not exempt from state taxes the retiree drug subsidy ("rds") paid to employers and unions that offer retiree prescription drug coverage. The subsidy was provided for in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 to encourage companies and unions to retain retiree prescription drug coverage. By taxing the subsidies because of the 2005 budget shortfall, Minnesota ensures that it does not lose $10 million in tax revenues over the next two years.
• Hurricane Write-Off. Note that individuals will be allowed to deduct 100 percent of cash contributions to most charities if the gift is made between August 28, and December 31, 2005. Normally donors have been limited to a 50 percent deduction for donations. The gifts do not have to be limited to Katrina relief efforts. Katrina Emergency Tax Relief Act of 2005, H.R. 3768.
• Streamlined Sales Tax Project. The Streamlined Sales and Use Tax Agreement ("ssuta") came into effect on October 1, 2005. The initial governing board includes 18 states. Full members of the ssuta are Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, North Carolina, Oklahoma, South Dakota, and West Virginia. Associate members at this writing include: Arkansas, New Jersey, North Dakota, Ohio, Tennessee, Utah, and Wyoming. The full members on the governing board will have the responsibility of amending and interpreting the ssuta. Once the ssuta is in effect, a centralized online registration system should become available. Remote sellers may register on the system on a voluntary basis. By registering, sellers agree to collect and remit tax for sales into all full-member states. For details, go to: http://www.streamlinedsalestax.org.
• Survey Of Administrative Appeal Process. The Washington State Department of Revenue issued a report on "Benchmarking the Administrative Appeals Process." The report reviews that state’s system and provides an overview of information gleaned from surveys of the appeals process in 21 other tax states. It concludes with recommendations based on best practices in areas such as timeliness, measurement, transparency, and public information. You can download the report at: http://www.dor.wa.gov/Docs/Pubs/IndustSpecific/appealbenchmarking study.pdf.
— Jerry Geis
• Employment; Wrongful Discharge; Sexual Discrimination. Plaintiff, a pastor and teacher in a religious high school, sued the school and its affiliated church synod under the Minnesota Human Rights Act (mhra) alleging discrimination based on sexual orientation. His employment was terminated after he acknowledged his identity as a gay man. The district court granted defendant’s motion for summary judgment. The plaintiff appealed, asserting that his claims were not precluded by the 1st Amendment of the Constitution or the Freedom of Conscience Clause of the Minnesota Constitution and also that he was not exempt from the mhra’s prohibition against sexual discrimination. The synod filed a notice of review alleging it was not the plaintiff’s employer.
The Court of Appeals affirmed, holding that resolution of the plaintiff’s discrimination claim would result in excessive entanglement between the church and the state in violation of the 1st Amendment to the United States Constitution. His claim could not be resolved by neutral principles of law and instead would result in an inquiry into church doctrine and church administrative matters. Similarly, the resolution of the plaintiff’s discrimination claim would violate the Freedom of Conscience Clause of the Minnesota Constitution because it would require the court to analyze the basis for the defendant’s discharge of the plaintiff, which could compel the court to conform the defendant’s religious beliefs to that of conflicting governmental beliefs. The court also held that the defendant is exempt from the mhra’s prohibition against discrimination because both the high school and the synod are religious organizations and the plaintiff was a religious employee.
On the other hand, the court rejected the synod’s argument that it was not an employer within the meaning of the mhra because the synod and the high school were related entities and could be considered a single employer based on the following four factors: (1) common ownership and control, (2) centralized control and operations, (3) interrelation of operations, and (4) common individual management and control of the two entities. The high school was under control of the synod to the extent sufficient to find that the synod is an employer for the purposes of applying mhra. John FR Doe v. Lutheran High School of Greater Minneapolis and Lutheran Church-Missouri Synod, A04-2335 (Minn. App. 08/23/05). www.lawlibrary.state.mn.us/archive/ctappub/0508/opa042335-0823.htm
• Healthcare; Corporate Employment Of Healthcare Practitioners. Plaintiffs, three clinics organized under the Minnesota Business Corporation Act, provided treatment to various individuals injured in automobile accidents. The plaintiffs employed various healthcare practitioners to perform treatments. When two insurers who provided no-fault insurance benefits to some of plaintiffs’ patients stopped paying for the treatment plaintiffs provided, the patients assigned their claims to plaintiffs, and plaintiffs sued the insurers, alleging breach of contract and violation of the Minnesota Fair Claims Practices Act. Defendants argued that because plaintiffs violated the corporate practice-of-medicine doctrine and the Minnesota Professional Firms Act, plaintiffs’ contracts for payment of claims were void.
The district court dismissed all of plaintiffs’ claims, concluding that the plaintiffs were in violation of the corporate practice-of-medicine doctrine. The Court of Appeals reversed, holding that even if Minnesota had adopted the corporate practice-of-medicine doctrine, the doctrine did not bar the corporate employment of chiropractic, physical, or massage therapy practitioners.
The Supreme Court then affirmed in part and reversed and remanded in part. The Court held that the corporate practice-of-medicine doctrine exists in Minnesota, but the doctrine does not bar the corporate employment of physical or massage therapy practitioners but does bar corporate employment of chiropractic practitioners. The Court reasoned that even though the practice of massage therapy fits within the definition of healing, the doctrine does not bar corporate employment because massage therapy practitioners are not statutorily required to complete training and maintain licensure. The Court also determined that even though the practice of physical therapy fits within the definition of healing and that practitioners are required to complete training, pass an examination and maintain licensure, the doctrine does not bar corporate employment because physical therapy practitioners do not have unfettered independent medical judgment. The Court concluded that the doctrine does, however, prohibit the practice of chiropractic care because chiropractic practitioners enjoy unfettered independent medical judgment which should not be subject to corporate interference. The Court remanded to the Court of Appeals for determination of whether defendants are required to pay the outstanding physical therapy and massage therapy bills. Isles Wellness, Inc., n/k/a Minneapolis Wellness, Inc., et al. v. Progressive Northern Insurance Co. and Allstate Indemnity Company, A04-485, A04-486, A04-487, A04-488, A04-489, (Minn. 09/15/05). www.lawlibrary.state.mn.us/archive/supct/0509/opa040485-0915.htm
— Michael A.