September 2005

ALTERNATIVE DISPUTE
RESOLUTION
Judicial Law

• Arbitration Award Upheld; No Manifest Disregard For Law. An employment agreement between St. John’s Mercy Medical Center and oral surgeon John Delfino provided that St. John’s would indemnify Delfino for defense costs arising out of professional services and obligations. Delfino was sued by his former private practice assistant director under a separate agreement between Delfino and the assistant director for various tort claims, including a claim of fraud. St. John’s agreed to indemnify Delfino for all of the claims, except the fraud claim. After a jury found in favor of the assistant director on the fraud claim, Delfino demanded that St. John’s reimburse all of his defense costs, which St. John’s refused to do. The dispute over the defense costs between Delfino and St. John’s went to arbitration, where an arbitrator determined that St. John’s breached its duty to defend and awarded Delfino $575,342.37. St. John’s then sued to vacate the award claiming that the arbitrator exhibited a manifest disregard for the law. The Court of Appeals for the 8th Circuit noted that the evidentiary standard to support a motion to vacate an arbitration award for manifest disregard of the law involves an arbitrator citing to relevant law and then proceeding to ignore it. After reviewing the arbitrator’s actions in making the award, the Court of Appeals held that the arbitrator’s award of attorney fees to Delfino based on St. John’s breach of the agreement to indemnify Delfino in the lawsuit did not evidence manifest disregard for the law. St. John’s Mercy Medical Center v. Delfino, M.D., 2005 WL 1618787 (8th Cir. 07/12/2005).

• Broad Arbitration Clause Favors Binding Arbitration. MedCam brought suit against MCNC for the breach of an agreement to jointly develop medical imaging technology. The agreement restricted the parties’ ability to disclose or transfer the technology developed under the agreement, and restricted MCNC from competing with MedCam for two years after the agreement was terminated. Most importantly, the agreement specified that "all disputes arising out of or in connection with the agreement" were to be resolved through binding arbitration. After several years of jointly developing technology under the agreement, MCNC terminated the agreement and began working with other companies to develop optical technology. MedCam claimed that MCNC improperly transferred technology and violated the noncompete clause of the agreement. MedCam asked the district court to compel arbitration of its claims against MCNC under the Federal Arbitration Act (faa). The district court granted MedCam’s motion to compel arbitration, and MCNC appealed. Upon review, the 8th Circuit Court of Appeals determined that the agreement contained a broadly worded arbitration clause covering all disputes arising from the agreement. Given that MedCam’s claims arose from the agreement, the claims were subject to binding arbitration under the arbitration clause. MedCam Inc. v. MCNC, 2005 WL 1661487 (8th Cir. 07/18/2005).

— Darin T. Allen
National Arbitration Forum

September 2005

EMPLOYMENT & LABOR LAW
Judicial Law

• Employment Contracts. A 25-mile, three-year noncompete clause contained in contracts of a pair of veterinarians working at a clinic was scaled back to one-year by the Minnesota Court of Appeals. Confirming a ruling of the district court, the appellate tribunal held that the temporal duration prescribed by the parties was unreasonable, primarily because the former clinic could find replacement personnel and train them to the level of the departing vets within six months to a year. The court also affirmed an award of costs to the vets on grounds that they were deemed to be the "prevailing parties" by the trial court. Head v. Morris Veterinary Center, Inc., 2005 WL 1620328 (Minn. App. 2005) (unpublished).

In a second noncompete case decided by the appellate court within a recent two-month span, the court upheld a trial court ruling that the sellers of an aquatic weed removal business did not violate a noncompete clause that prohibited them from engaging in "substantial similar services" selling aquatic weed removal products to retail customers. The terms of the noncompete prohibited them only from engaging in competitive services, rather than selling of products. The court, however, reversed dismissal of the lawsuit and remanded it for consideration whether the sellers had violated the noncompete clause by furnishing the names of customers to their son, who began a competitive weed removal system. Duy v. Lake Weed-A-Way, Inc., 2005 WL 1154291 (Minn. App. 2005) (unpublished).

But in a third case, an employment agreement was held to be ambiguous and a resigned employee, thus, entitled to more compensation than was called for in the agreement. The documentation stating that the employee’s compensation package would be a certain amount was ambiguous because the company added terms to it that the employee never saw. But the employee is not entitled to attorney’s fees under Minn. Stat. §181.14, the "prompt payment" statute, because he did not make a "post-resignation" demand for payment. Outdoor Environments, Inc. v. Maro, 2005 WL 102898 (Minn. App. 2005) (unpublished).

• Whistleblowing. A common law cause of action for wrongful termination in violation of "public policy" exists under Minnesota law, independent of the whistleblower statute, according to a ruling of the Minnesota Court of Appeals. Reexamining prior case law, the court held that the "public policy" tort, which preceded enactment of the whistleblower statute, is still legally cognizable if an employee is terminated for refusing to follow an illegal directive. But the complaint in this case was dismissed because the employee, who alleged that he was terminated because of his role as a "member" in the nonprofit corporation, did not state that he had been terminated because he failed to perform an illegal act directed by management. Nelson v. Productive Alternatives, Inc. 696 N.W.2d 841, 844 (Minn. App. 2005).

• Discrimination. The doctrine of equitable tolling revived a claim of age and sex discrimination by a former air traffic controller in Minnesota. The controller, a man, had been fired in 1981 by President Reagan due to participating in an unlawful strike. He claimed that he was wrongfully passed over when President Clinton lifted a rehiring ban on former strikers. But he did not assert an internal claim of discrimination within the required 45 days of the alleged discrimination in 1998. The 8th Circuit reversed dismissal of the lawsuit, holding that his filing of a charge of discrimination four years later may be timely because he did not know that rehiring was taking place until four years later. The case was remanded to the district court in Minnesota for an evidentiary hearing. Coons v. Mineta, 410 F.3d 1036. (8^th Cir. 2005).

An award of actual damages and front pay for a disability discrimination claimant with multiple sclerosis was reversed by the 8th Circuit. While liability was upheld for failure to accommodate under the Americans with Disability Act (ADA), the employee is entitled only to nominal damages and reinstatement, rather than any compensatory damages or front pay, and reduced attorney’s fees due to the "limited success on the merits." Voeltz v. Arctic Cat, Inc., 406 F.3d 1047 (8^th Cir. 2005).

A provision in a collective bargaining agreement between management and a multiemployer group establishing a ratio for retaining older employees in the workforce was deemed violative of the Minnesota Human Rights Act by the 8th Circuit Court of Appeals. The clause, which was intended to protect older employees in the construction trade, required that one of every five employees be 50 years or older. Affirming a ruling of U.S. District Court Judge Paul Magnuson in Minnesota, the appellate court deemed the clause violative of the age discrimination provision of the state law which, unlike its federal counterpart, the Age Discrimination in Employment Act (ADEA), contains no age threshold. Whereas the federal ADEA bars discrimination against only older workers, the Human Rights provision more broadly forbids any age-based decision making. Ace Electrical Contractors, Inc. v. IBEW, Local 297, 2005 WL 1639458 (8th Cir. 2005).

• Arbitration. Although polygraphs, or lie detectors, are not usable in court proceedings, the Minnesota Court of Appeals recently upheld an arbitration decision reinstating a discharged police officer based, in large part, on his passing a polygraph test. The court affirmed a decision of the St. Louis County District Court confirming an arbitration decision reinstating a police officer, who had been discharged for assaulting a woman after he had been acquitted of a criminal charge. The arbitrator allowed into evidence a polygraph test that the officer passed. The city challenged the arbitration decision on grounds that the arbitrator exceeded his powers and violated public policy by relying on the polygraph, which is inadmissible in judicial proceedings. But the appellate court rejected the argument, holding that, while not admissible in "court cases," the polygraph could be used, in the discretion of the arbitrator, in the arbitral proceeding. City of Duluth v. Duluth Police Local, 2005 WL 162352 (Minn. App. 2005) (unpublished),

The 8th Circuit ruled that an employee was not obligated to arbitrate a dispute over elimination of discounted health insurance benefits for retired members of a labor union. The arrangement was not arbitrable, said the court, because it was contained in a separate side letter to the collective bargaining agreement and, thus, was not covered by the grievance-arbitrator provision in the labor contract. United Steelworkers of America v. Duluth Clinic, 2005 WL 1569462 (8th Cir. 2005) (unpublished).

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

September 2005

FEDERAL PRACTICE
Judicial Law

• Subpoenas; FRCP 45(c)(3)(A)(iii). The 8th Circuit held that a district court abused its discretion in quashing a plaintiff’s subpoenas where the subpoenas sought relevant information and met each of the requirements of Fed. R. Civ. P. 45(c)(3)(A)(iii). Pointer v. DART, __ F.3d __ (8th Cir. 2005).

• Interlocutory Appeal. Judge Davis denied the defendant’s motion for certification for interlocutory appeal under 28 U.S.C. §1292(b), finding no "substantial ground for difference of opinion" to warrant an interlocutory appeal.

Gerdts v. SmithKline Beecham Corp., 2005 WL 1827865 (D. Minn. 07/29/05).

• Extension of Time to Respond. Despite a vigorous dissent by Judge Bye, the 8th Circuit found no abuse of discretion in a district court’s denial of a pro se plaintiff’s request for an extension of time to respond to the defendant’s summary judgment motion despite a death in the plaintiff’s family. Soliman v. Johanns, 412 F.3d 920 (8th Cir. 2005).

• Diversity Jurisdiction; Residence. Judge Tunheim adopted Magistrate Judge Noel’s Report and Recommendation that plaintiff’s purported diversity action be dismissed for lack of subject matter jurisdiction because the plaintiff’s allegations regarding his "residence" were insufficient to invoke the court’s diversity jurisdiction.

Rasidescu v. University of Minnesota, 2005 WL 1593042 (D. Minn. 07/01/05).

• Arbitration; Manifest Disregard. The 8th Circuit refused to apply the "manifest disregard" doctrine to overturn an arbitration award. St. John’s Mercy Medical Center v. Delfino, 2005 WL 1618787 (8th Cir. 07/12/2005).

• Rule 11. Judge Davis denied the defendant’s request for Rule 11 sanctions because that request was not contained in a separate motion. Dorsey & Whitney LLP v. Allco Finance Corp., 2005 WL 1656912 (D. Minn. 07/14/05).

Judge Ericksen denied plaintiff’s request for Rule 11 sanctions, finding no evidence that defendant’s counterclaims were brought for an "improper purpose." U.S. Foodservice, Inc. v. Rezac, 2005 WL 1661529 (D. Minn. 07/15/05).

• Jurisdiction; Federal Arbitration Act. Judge Doty granted defendants’ motion to dismiss under Fed. R. Civ. P. 12(b)(1), finding that the Federal Arbitration Act does not provide an independent basis for federal question jurisdiction. Qwest Dex, Inc. v. Hearthside Restaurant, Inc., __ F. Supp. 2d __ (D. Minn. 2005).

• "Law of the Case." The 8th Circuit rejected plaintiffs’ argument that the defendants’ filing of a second summary judgment motion violated the law of the case doctrine. Mosley v. City of Northwoods, __ F.3d __ (8th Cir. 2005).

• Uncooperative Plaintiffs. Uncooperative plaintiffs did not fair well in several cases, with Judge Magnuson dismissing a pro se plaintiff’s claims with prejudice under Fed. R. Civ. P. 37 as a sanction for her repeated refusal to appear for her deposition, and Chief Magistrate Judge Lebedoff recommending this dismissal of another plaintiff’s claims pursuant to Fed. R. Civ. P. 41(b) under similar circumstances. Smith ex. rel. Smith v. Auge, 2005 WL 1420817 (D. Minn. 06/16/05); Tolliver v. City of Minneapolis, 2005 WL 1719376 (D. Minn. 06/20/05).

— Josh Jacobson
Law Office of Josh Jacobson

September 2005

INTELLECTUAL PROPERTY
Judicial Law

• Patents; Jurisdiction; Counterclaims. The Court of Appeals for the 8th Circuit decided its first substantive patent issue in over 20 years. In 1982 the Court of Appeals for the Federal Circuit was created and vested with appellate jurisdiction over patent issues. Until recently, the jurisdiction of the Federal Circuit was considered to be exclusive and the circuit courts stopped hearing patent issues. The Supreme Court in Holmes Group v. Vornado Air Circulation, 535 U.S. 826 (2002), however, held that Federal Circuit jurisdiction only attaches when an issue of patent law is raised in a well-pleaded complaint, not in a counter-claim. Mid-States Stainless pled the issues of patent law in a counter-claim against Schinzing. The 8th Circuit ruled that it had appellate jurisdiction to hear the case because the issues of patent law were pled in a counter-claim, rather than in the complaint. Schinzing v. Mid-States Stainless, Inc., No. 04-2535 (8th Cir. 07/15/05).

• Patent Claim Terms; "Ordinary and Customary Meaning." The Court of Appeals for the Federal Circuit resolved a split in its own authority when it held that dictionary definitions do not trump other claim construction evidence such as patent claims, patent specifications, and the prosecution history of a patent in determining the meaning of claim terms. Claim terms must be given their ordinary and customary meaning to persons of skill in the art, unless the inventor has specifically defined the word. A split formed over the prominence of dictionary definitions in determining the ordinary and customary meanings. Some cases had held that dictionary definitions should be given greater emphasis than other types of evidence. The Court clarified that dictionary definitions are useful when the meaning of the claim term is not readily apparent from other evidence. Generally, however, the claims provide the context for defining the claim terms. The specification provides the basis for construing the claims. And, the prosecution history reveals how the inventor and the examiner understood the claims and the specification and whether limitations were created in the course of allowing the patent. In short, the courts must look to all the evidence in construing patent claims, giving dictionaries no greater weight than other evidence. Phillips v. AWH Corp., No. 03-1269, -1286 (Fed. Cir. 07/12/05).

• Patents; Scope of Claims; Specification Limitations. Judge Kyle ruled that a limitation cited throughout a patent specification raised a sufficiently substantial question as to the scope of a set of patent claims that did not expressly include the limitation to defeat a motion for preliminary injunction. Fiber Optics Design moved for a preliminary injunction to prohibit Seasonal Specialties from selling a led light string allegedly infringing a Fiber Optics Design patent. Seasonal Specialties contended that its led light string was non-infringing because it included a limitation of the patent claims not expressly included in those claims, current-limiting circuitry. Seasonal Specialties cited numerous instances in the patent specification discussing functionality "without current-limiting circuitry." Fiber Optics Design countered that Seasonal Specialties was improperly reading limitations from the specification into the claims. The court considered the "twin axioms" that limitations from the specification should not be read into the claims, but that claims must nonetheless be read in view of the specification. Denying the motion for preliminary injunction, the court held that Seasonal Specialties raised a substantial question of whether the Fiber Optics Design patent claims excluded led light strings using current-restricting circuitry. Fiber Optics Design, Inc. v. Seasonal Specialties, L.L.C., Civ. No. 05-660 (D. Minn. 07/01/05).

— Tony Zeuli
— Joshua P. Graham
Merchant & Gould

September 2005

Juvenile law
Judicial Law

• Termination of Parental Rights; Insufficiency of Evidence. In an unpublished decision of the Minnesota Court of Appeals, a father challenged the termination of his parental rights to his two children, arguing that the district court erred when it found five statutory bases for termination, namely, abandonment, neglect of parental duties, palpable unfitness to parent, failure to correct conditions, and child neglect. The Court of Appeals agreed and vacated the termination of parental rights, determining that the district court’s findings were not supported by substantial evidence.

Despite the reversal of the termination of parental rights, the Court of Appeals concluded that it would be appropriate for the children to remain in protective services until there was a satisfactory completion of the case plan, which should require anger management counseling and mental illness treatment. Thus, the termination of parental rights was reversed, but the matter was remanded for a continuation of the chips proceeding until a complete investigation and case plan could be satisfied. In the Matter of the Welfare of the Children of S.L.J and R.E.G, A04-2302 (Minn. App. 06/14/05) (unpublished). http://www.lawlibrary.state.mn.us/archive/ctapun/0506/opa042302-0614.htm

• Termination of Parental Rights; Voluntary, Involuntary Petition. In a published decision, the Minnesota Court of Appeals reviewed a challenge by a mother and a father to the termination of parental rights in which they asserted, among other things, that the district court erred by applying the presumption of palpable unfitness to each of them. Here the parents consented to permanent transfer of legal and physical custody of a child in exchange for a county’s promise not to pursue termination of parental rights based on the parent’s agreement that the files and records before the district court established the statutory criteria for the transfer. The Court of Appeals held this to be an involuntary transfer of custody for purposes of application of a presumption of palpable unfitness to be a party to the parent child relationship in a subsequent proceeding. In its analysis, the Court of Appeals reviewed a prior decision where it rejected a blanket rule that an admission to an involuntary TPR petition converts the petition into a voluntary petition.

The court observed that circumstances that justify involuntary termination do not necessarily justify voluntary termination under the statute, and there are at least two procedures that parents can use to convert an involuntary petition into a voluntary petition: the parents can file a new petition supported by a factual basis articulating good cause for voluntary termination, or they can formally amend the original petition and cite the good cause standard for voluntary termination as the statutory basis for the petition. The court in this case concluded that the same reasoning applies to a permanent transfer of custody, which is an alternative permanency placement to TPR As a result, the court concluded that a parent’s consent to the transfer did not automatically change the transfer from involuntary to voluntary.

Importantly, the Court of Appeals took this opportunity to caution counsel and district courts to make clear records when transforming a petition for voluntary permanency placement into a voluntary termination of parental rights for good cause. Without clear evidence that an agreement relinquishing parental rights is voluntary and for good cause and is not merely an admission of ground for an involuntary placement, the presumption of palpable unfitness may not be avoided. In the Matter of the Child of A.S. and A.M., Parents, A04-2344, A04-2357 (Minn. App. 07/05/05). http://www.lawlibrary.state.mn.us/archive/ctappub/0507/opa042344-0705.htm

• Juvenile Delinquency; Waiver of Right. In a published decision, a juvenile appealed from an order adjudicating him delinquent on one count of second-degree assault, arguing that he was denied effective assistance of counsel because counsel failed to advise him on the record that he had a right to testify and he did not waive his right to do so. The Court of Appeals affirmed the adjudication. However, the Court of Appeals repeated a cautionary instruction from a previous similar decision where it stated that the district court should spend as much or more time with a juvenile than with an adult, satisfying itself that any waiver of an essential right is proper and that the juvenile understands the consequences of the waiver. Even after the attorney has laid the proper record, district courts should get the defendant’s personal consent to the waiver on the record, either in camera or in open court, whichever the district court decides. In the Matter of the Welfare of C.J.W.J, A04-1200 (Minn. App. 06/21/05). http://www.lawlibrary.state.mn.us/archive/ctappub/0506/opa041200-0621.htm

• Juvenile Delinquency; EJJ Designation Hearing. In an unpublished decision, the Minnesota Court of Appeals reviewed a challenge by a juvenile delinquent in which he claimed the district court’s order designating him as an extended jurisdiction juvenile should be vacated because the hearing on the matter was not timely held. The Court of Appeals agreed, finding that the district court violated the statutory deadlines for the designation hearing. The Court of Appeals noted that the statutory deadlines with respect to a designation hearing are absolute. Here the district court failed to comply with both the 30-day and the 90-day mandatory time rules. In the Matter of the Welfare of V.S.V, A04-1987 (Minn. App. 06/28/05) (unpublished). http://www.lawlibrary.state.mn.us/archive/ctapun/0506/opa041987-0628.htm

• Rules of Juvenile Delinquency Procedure. In a previous column, amendments to the Minnesota Rules of Juvenile Delinquency procedure were discussed. By an order dated July 11, 2005, the Minnesota Supreme Court ordered those amendments to take affect in all juvenile delinquency actions commenced after 12:00 midnight on September 1, 2005. The text of the amendments can be found on the Court’s Web site at www.courts.state.mn.us

— Gary A. Debele
Walling, Berg & Debele PA

September 2005

REAL PROPERTY
Judicial Law

• Purchase Agreement. Buyer rented an apartment in a building owned by Seller. In April 2001 the parties entered into a purchase agreement for the property. In preparation for the closing, Buyer obtained a loan commitment, abstract of title, appraisal and homeowner’s insurance. Because Buyer attempted to reduce the purchase price, Seller failed to attend the closing. Notwithstanding, Buyer continued to live in the building making several attempts to force the closing. When Buyer stopped paying rent, Seller commenced an eviction action on July 1, 2003. Buyer then filed an action for specific performance or damages for Seller’s breach of the purchase agreement. The district court ruled that when Buyer attempted to renegotiate the terms of the purchase agreement and then failed to seek specific performance within six months of the closing date as provided in the purchase agreement, Buyer abandoned the purchase agreement and her claim for specific performance. The Court of Appeals affirmed the district court’s consideration of abandonment in connection with the specific performance claim, however reversed and remanded for the district court to rule on Buyer’s claim for damages. "A party seeking to prove abandonment of a contract must present clear and convincing evidence of an intention by the other party to abandon its rights." In considering the factors outlined by the Minnesota Supreme Court in determining if a contract for deed is abandoned, the court noted that the facts do not support abandonment with respect to Buyer’s damages claim. Buyer made legitimate attempts to purchase the property by preparing for the closing, paying real estate taxes, and occupying the property. Moreover, Seller failed to cancel the purchase agreement pursuant to Minn. Stat. §559.21 to avoid any ambiguity that Buyer abandoned her rights under the purchase agreement. Loppe vs. Steiner, A04-2012 (Minn. App. 07/19/05). http://www.lawlibrary.state.mn.us/archive/ctappub/0507/opa042012-0719.htm

• Foreclosure. Landowner applied for a mortgage from a professional lender to pay off federal tax liens and a contract for deed. After obtaining a title report, the lender agreed to give the landowner a loan. While the loan application was pending, landowner gave a mortgage and quit claim deed to the property to his business associate, David Ripley. The mortgage was recorded on January 3, 2003. The lender closed on its loan to landowner on January 31 and on February 3 Ripley recorded the quit claim deed. Lender’s mortgage was recorded on February 7. Landowner defaulted under both mortgages and Ripley brought a mortgage-foreclosure action against the property. The district court ruled that Ripley’s mortgage had priority over the lender’s mortgage and that lender was not entitled to equitable relief. The Court of Appeals affirmed the district court, holding that the Minnesota Recording Act clearly establishes mortgage priority from the date of recording. A purchaser with notice of the rights of others is not a bona fide purchaser and under Minn. Stat. §507.32 a purchaser is deemed to have constructive notice of any properly recorded instrument. Lastly, the court found that the lender is not entitled to priority over the Ripley mortgage under the doctrine of equitable subrogation because the lender had constructive notice of the Ripley mortgage and the lender is a sophisticated party, who is held to a higher standard. Ripley vs. Piehl, trustee, et al. A04-1962 (Minn. App. 07/26/05). http://www.lawlibrary.state.mn.us/archive/ctappub/0507/opa041962-0726.htm

— Melissa Baer
Lindquist & Vennum

TAX
Judicial Law

• Income Tax: No Federal Jurisdiction Over State Levy. The U.S. District Court held that it lacked jurisdiction over taxpayers’ claims that an agent of the commissioner wrongly executed a levy over their securities accounts in order to satisfy a Minnesota personal income tax liability. The 11th Amendment to the Constitution and the Federal Tax Injunction Act, 28 U.S.C. §1341, barred district court jurisdiction over the claims against the agent in his official capacity. The state of Minnesota was the real party in interest and the taxpayers did not allege that available state remedies were inadequate. Further, the taxpayers’ action against the broker-dealer for honoring the levy was dismissed, because Minnesota law specifically discharges persons who honor levies for delinquent tax from obligation or liability. The pro se litigant was warned that pro se litigants are bound by the Minnesota Rules of Professional Conduct, which prohibit a lawyer from communicating with a party known to be represented by another lawyer in the matter unless the lawyer has the consent of the other lawyer or is authorized by law to do so. Bisciglia v. Lee, No. 04 4977, 2005 WL 1081349 (D. Minn.), (DSD/SM), 04/01/05),

• Income Tax: Tax Protestor. The Minnesota Tax Court held that the taxpayer was liable for a commissioner-filed return for the years 2000, 2001, and 2002 and rejected his claim that he was single with seven withholding allowances. The court rejected the withholding exemption since the taxpayer produced no evidence in support; the court similarly rejected his contentions that the Minnesota tax scheme was unconstitutional and that the collection procedures violated Due Process. DeWayne Jansen v. Commissioner of Revenue, Nos. 7695-R and 7722-R, 2005 Minn. Tax lexis 30 (Minn. T. Ct. 06/02/05),

• Income Tax: Tax Protestor. The Minnesota Tax Court held that a taxpayer’s contentions for failure to file income tax returns for the years 2000, 2001, and 2002 that there was no constitutional authority to tax his income or that the irs had yet to determine the taxpayer’s liability for federal income tax deficiencies for the years at issue were meritless. Duff R. Dorschner v. Commissioner of Revenue, No. 7700-R, 2005 Minn. Tax lexis 31 (Minn. T. Ct. 06/02/05).

• Real Property Taxes: Fair Market Value. The Tax Court determined that the value for a 168-unit multitenant senior apartment building was $7.7 million on January 2, 2003 and $8.6 million on January 2, 2004, using the income, sales, and cost methods of valuing property and then utilizing reconciliation. The property was originally assessed by the assessor at $8,840,000 on January 2, 2003 and $10 million on January 2, 2004. The taxpayer’s expert valued the building at $7.7 million in 2003 and $8.6 million in 2004, while the county’s expert valued the property at $9,355,000 in 2003 and $9,699,000 in 2004. The court agreed with the experts that little weight should be given to the cost approach because of the age of the building and relied heavily on the income and sales methods. The dispute on the sales approach principally related to adjustments for time, location, and amenities. The issues regarding the income approach related to differences in computing the operating income and the capitalization rate, which is associated with the purchase of an income producing property. Rockwood Place Apartments Limited Partnership v. County of Ramsey, C7-03-4285 and CO-04-4879, 2005 WL 1684429 (Minn. T. Ct. 06/09/05).

• Procedure: Representing Corporation in Tax Case. The Minnesota Supreme Court affirmed holding that a complaint filed on behalf of a corporation and signed by a nonattorney is defective but may be cured by the addition of an attorney’s signature if: (1) the corporation acts without knowledge that its action was improper; (2) the corporation diligently corrects its mistake by obtaining counsel, but in no event may it appear in court in the matter without an attorney; (3) the nonattorney’s participation is minimal; and (4) the nonattorney’s participation results in no prejudice to the opposing party. Therefore, an attorney’s signature to the corporation’s complaint that is defective is an amendment that relates back to the date of the initial complaint. Save Our Creeks v. City of Brooklyn Park, A03-1794, 2005 WL 1475324 (Minn. 06/23/05).

• Procedure: Costs and Disbursements Levy. The Minnesota Tax Court denied county’s motion for sanctions and other costs and disbursements since taxpayer had dismissed the action under Minnesota Rule of Civil Procedure 41.01(a) before an answer or motion for summary judgment had been made by the county. The court relied upon the Minnesota Supreme Court reasoning in Southdale Circle Partnership v. County of Hennepin, 424 N.W.2d 536 (Minn. 1988). James S. Harris, III v. County of Hennepin, No. 30363 & 31716, 2005 WL 1684473 (Minn. T. Ct. 06/15/05).

• Procedure: Consolidation of Property Cases. The Minnesota Tax Court consolidated a personal and real property action filed in 13 individual counties under Minnesota Rule Civ. P. 42.01. The commissioner will represent all of the counties. Alliance Pipeline L.P. v. Commissioner of Revenue, No. 7712-R, 2005 WL 1684420 (Minn. T. Ct. 06/24/05).

• State Alcohol Regulations Violate Commerce Clause. The U.S. Supreme Court held that Michigan and New York statutes prohibiting out-of-state wineries from shipping wine directly to instate consumers, while permitting instate wineries to do so, discriminated against interstate commerce in violation of the Commerce Clause. The Court concluded that the 21st Amendment (which repealed Prohibition) did not permit states to circumvent the dormant Commerce Clause when regulating the importation and distribution of alcohol. Granholm v. Heald, 125 S.Ct. 1885 (2005); rulings below as Heald v. Engler, 342 F.2d 517 (6th Cir., 2003), and Swedenburg v. Kelly, 358 F.3d 223 (2nd Cir., 2004).

• U.S. Tax Court Transparency. The United States Supreme Court condemned the U.S. Tax Court’s practice of keeping the initial opinions of special trial judges out of the record and away from the parties and the public. The Tax Court failed to follow the language of its own Rule 183, which contemplates that the "report" submitted by a special trial judge is the one prepared solely by that judge, rather than a revised report prepared in collaboration with the regular judge assigned to make the final decision. Ballard v. Commissioner of Internal Revenue, 73 U.S.L.W. 4194 (2005). Subsequently, the U.S. Tax Court announced plans to change its court rules to disclose the reports of special trial judges. The proposed amendments are available online at the court’s Web site at http://www.ustaxcourt.gov.

• Transfer of Assets to Cut Taxable Estate. Decedent’s transfer of assets to a family partnership, in exchange for a 99 percent limited partnership interest, fails as a device to reduce taxable estate from the value of the assets themselves to the lesser value of the limited partnership interest, because decedent retained possession and enjoyment of the assets in violation of IRC Code Section 2036. Strangi v. Commissioner, No. 03-60992, 96 AFTR 2d ¶2005-5048 (5th Cir. 2005).

• Conspiracy to Defraud; Filing Materially False Returns. Convictions against construction corporate owners/father and son and corporate manager for conspiring to defraud U.S., filing materially false returns, and failing to account for withholding taxes in scheme using off-the-books cash checks to "casual workers" were affirmed. Founder/father’s good faith defense that he was acting only at controller’s advice without intent to avoid or evade tax was refuted by credible witness testimony that he participated in meeting discussing scheme’s illegality; was actively involved in daily corp. operations; and personally profited from scheme. U.S. v. Radtke, 96 AFTR 2d ¶2005-5053 (8th Cir. 2005).

• Deductions for Food and Beverage Allowance. The U.S. Tax Court held that a truck driver leasing company’s deductions for per diem payments paid to the drivers as a food and beverage allowance were subject to the limitation on meal and entertainment expenses under IRC Code Section 274 because the leasing company, rather than its trucking company clients, was the employer of the drivers. Transport Labor Contract/Leasing Inc. & Subsidiaries v. Commissioner, T.C. Memo. 2005-173 (2005) supplementing 123 T.C. 154 (2004).

• Check-the-Box Regulations; Self-Employment Tax Levy. A taxpayer’s attempt to escape a levy to satisfy unpaid self-employment taxes by claiming that the check-the-box regulations under Code Section 7701 were an invalid exercise of irs authority to issue interpretative regulations under IRC Code Section 7805 was rejected. The taxpayer was the sole member of an LLC, which the check-the-box regulations treated as a disregarded entity under a default rule. As a result, the LLC’s income was treated as earned directly by the taxpayer for self-employment tax purposes. The court found the statute was ambiguous but that the irs relied on a permissible interpretation under the test of Chevron, U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1969). Littriello v. U.S., 95 AFTR 2d, ¶2005-2581 (D.C. Ky 2005). Cf. Rev Rul 2004-41, 2004-18.

• Shelter Participants’ RICO Claims. Two federal district courts follow differing approaches on rico claims of plaintiffs, who participated in so-called cobra tax shelters involving foreign exchange option contracts. The U.S. District Court for the District of New York ruled in Ling, et al. v. Deutsche Bank, AG, 95 AFTR 2d ¶2005-2585 (D.C. N.Y. 2005) that shelter participants are barred from asserting a racketeering claim against parties who marketed the shelter to them, since their allegations could instead serve as a basis for securities fraud claims. But the U.S. District Court for the Southern District of New York grants plaintiffs in Blythe v. Deutsche Bank, AG, No. 04 CV 5867 (SAS), (S.D.N.Y. 05/31/05) leave to amend their complaint so that some plaintiffs could pursue a rico claim, and others a securities fraud claim.

• Severance Payments Not Capital Asset. A U.S. District Court held that termination-of-employment payments an insurance agent received under a corporate agreement with an insurer were not long-term capital gains but rather ordinary income. Charles E. Trantina et ux. v. United States, 95 AFTR 2d, ¶2005-2830 (D. Ariz. 2005).

• Discovery; Disclosure of Tax Shelter Documents. Court orders continuation of discovery using tax shelter documents produced by nonparty BDO Seidman in response to summonses issued by irs: A protective order was granted to maintain confidentiality of return information, but the irs may seek to unseal documents for use at trial. The irs consented to the protective order that covers the confidentiality of the challenged documents for discovery purposes only. irs still has the right to ask that the documents be unsealed for use at trial. In the meantime, the irs may use the documents in discovery. Jade Trading LLC v. United States, No. 03-2164T (Fed. Cl. 05/27/05).

Administrative Matters

• Procedure: Electronic Images of Powers of Attorney. In Minnesota Department of Revenue modification of Revenue Notice No. 1992-07 (05/31/05), the commissioner indicated that he will accept either the original or a power of attorney by electronic transmission, as long as it is in a format that cannot be altered. Previously, the commissioner had no stated position on electronic images. See "Modification of Revenue Notice No. 1992-07" (05/31/05).

• Sales Tax: Petroleum Products. The commissioner proposed and published rules on petroleum products found in State Register, Volume 29, No. 34, pp. 983-985 (02/22/05) and they were adopted as proposed. See 29 SR 1450 (05/23/05).

• Sales and Use Tax: VOIP Services. In Minnesota Revenue Notice 05-3 (05/31/05), the commissioner ruled that Voiceover Internet Protocol ("VOIP") Services are a "telecommunications service" as defined by Minn. Stat. §297A.61 (24) that is subject to the Minnesota state sales and use tax. VOIP is not an information service and therefore nontaxable since it uses computer processing application solely for the management, control or operations of a telecommunications system or the management of a telecommunications service. Although VOIP uses Internet protocol that allows the transmission of packeted data across the network, it merely serves to address and route the voice, data, or audio.

• Sales and Use Tax: "Reasonable Rental Value"; Motor Vehicles. In Minnesota Department of Revenue Notice #05-05 (06/20/05), the commissioner set forth its position on the meaning of "reasonable rental value" under Chapter 297A when a dealer purchases for a motor vehicle resale and subsequently uses it. The reasonable rental value for purposes of Minn. Stat. §297B.035(5) is determined by calculating the daily rental value times the number of days or portions of days on which used for other than demonstration purposes. The Annual Lease Value Table is reproduced in the Revenue Notice.

• Sales Tax Exemption: "Hospital" Services. In modification of Revenue Notice 98-02, the commissioner amended his previous Revenue Notice to clarify the term "hospital" for purposes of the sales and use tax exemption for purchases used in providing hospital services. Hospital components, such as clinics, rehabilitation centers, and outpatient surgical centers must be approved as charitable under IRC Code Section 501(c)(3) in order to qualify for the exemption. Rural health clinics may qualify for the exemption if approved by the Centers for Medicare and Medicaid Services as provider based. Examples provided include nursing homes, assisted living facilities, or independent living facilities. See Revenue Notice 98-02: "Sales and Use Tax — Hospital Exemption" (07/05/05).

• Sales Tax: Bad Debts. In Minnesota Department of Revenue Notice 05-07, the commissioner states his position on "bad debt" deductions from the "sales price" for items. In general, Minn. Stat. §297A.81 defines "bad debts," which definition is further limited by Minn. Stat. §289A.40(2). Bad debts so defined may be deducted on the taxpayer’s sales tax return for the period in which the bad debt is written off as uncollectible. The Minnesota Rules Part 8130.7400, Subpart 1, provide that uncollectible debts will be recognized as a deduction for sales tax purposes when given recognition by direct charge-off for federal income tax purposes or, if the retailer is not required to file income tax returns, the bad debt will be charged off in accordance with "generally accepted accounting principles." See Revenue Notice 05-07: "Sales and Use Tax — Bad Debts; Deductions of Uncollectible Debts; Applying Payments Received on Previously Claimed Bad Debt", 30 SR 54 (07/18/05).

Looking Ahead

• Petitions for Certiorari. The U.S. Supreme Court has been petitioned for grant of certiorari on a number of significant tax issues.

In the case of U.S. Bancorp and Subsidiaries v. Oregon Department of Revenue, No. 04-1455 (04/29/05) the issue presented was: When state retroactively applies tax regulation as far back as eight years before regulations was promulgated, does state violate Due Process clause of the 14th Amendment?

In Huckaby v. New York State Division of Appeals, No. 04-1734 (06/27/05) the issue is New York State’s "convenience of the employer" test, under which income derived from work in another state by nonresident employed by New York employer is taxable in New York unless employee’s work is performed out of state for employer’s necessity. The question presented is whether the state’s taxation of 100 percent of a nonresident’s wages even though he performed only 25 percent of services that generated income in the state is out of all proportion to his contacts with and benefits from the state, in violation of Due Process, the Commerce Clause fair apportionment requirement, or Equal Protection.

In A&F Trademark Inc. v. Tolson, No. 04-1625 (06/06/05) the issue concerns whether the Commerce Clause nexus test of Quill Corp. v. North Dakota, 504 U.S. 298 (1992), forbidding taxation in absence of physical presence, applies to all state taxes and does not apply only to state sales and use taxes.

In Wilkins v. Cuno, No. 04-1724 (06/17/05) the question presented is whether the dormant Commerce Clause allows a state to attempt to attract new business investment in the state by offering credits against the state’s general corporate franchiser income tax, when the amount of credit is based on the amount of business investment in the state. This case has raised concerns about the viability of economic development incentives used by the states and should be carefully watched for its outcome.

• Legislation on Abusive Shelters and Tax Havens. S. 1565 was introduced in the Senate to combat abusive tax shelters and off shore tax havens. The measure calls for hefty new penalties for tax shelter promoters, codification and expansion of the government’s authority to impose tough standards on tax opinions, and an end to the benefits of tax deferral and foreign credits for income earned in low-tax jurisdictions.

— Jerry Geis
Briggs & Morgan

September 2005

TORTS & INSURANCE
Judicial Law

• Torts; Survival of Actions; Damages; Collateral Sources. When a person who has been injured by another’s tortious act or omission dies from causes unrelated to the injury, the trustee for the heirs and next of kin may recover as special damages the reasonable value of medical services provided. Recovery is not limited to the amount for which the injured person’s health insurer settled the medical provider’s claim.

The Court of Appeals held that the collateral source statute does not apply to the difference between the amount that was billed and the amount that was settled for by the medical provider. The court instead applied common law as set out in Smith v. Am. States Ins. Co., 586 N.W.2d 784 (Minn. App. 1998). The Smith court held that special damages such as hospital expenses, which are paid by a third party, do not bar the plaintiff from recovering this amount from the defendant, even though it may in effect be a double recovery. Carla Diane Tezak, as trustee for the heirs and next of kin of Martin Tezak, v. Bruce Bachke, et al., A04-2134 (Minn. App. 06/21/05). http://www.lawlibrary.state.mn.us/archive/ctappub/0506/opa042134-0621.htm

• Corporations: Representation By Attorney. The Supreme Court has held that the lack of an attorney’s signature on a complaint served by a corporation, but signed only by a nonattorney spokesperson for the corporation, does not render the complaint a nullity without legal force or effect. The Court affirmed the Court of Appeals’ conclusion that the lack of an attorney’s signature is a curable defect. An amendment to add the signature will be allowed if: (1) the corporation acts without knowledge that its action was improper; (2) the corporation diligently corrects its mistake by obtaining counsel; (3) the nonattorney’s participation is minimal; and (4) the nonattorney’s participation results in no prejudice to the opposing party. The Court noted that in no event may a corporation appear in court without an attorney. Finally, the Court affirmed the decision allowing the amendment to relate back to the date of the original complaint. Save Our Creeks v. City of Brooklyn Park, Minnesota, A03-1794 (Minn. 06/23/05). http://www.lawlibrary.state.mn.us/archive/supct/0506/opa031794-0623.htm

• Attorney Liens; Legal Malpractice. The Court of Appeals has held that in a summary proceeding to establish and determine the amount of an attorney lien pursuant to Minn. Stat. §481.13, the district court need not consider the former client’s allegations that the attorney committed legal malpractice and breach of fiduciary duty in the underlying litigation.

The court reasoned that although the malpractice claims might have been relevant in calculating the amount of the lien, the district court did not have to consider them because attorney-lien actions are conducted in summary proceedings. As a consequence, the practicalities of a summary proceeding, which are characteristically immediate and tend to bridge formal procedures, do not require the district court to transform an attorney lien proceeding into a legal malpractice case on complex issues of professional responsibility. Thomas A. Foster & Associates, Ltd. v. Scott Paulson, et al., A04-2132 (Minn. App. 06/28/05). http://www.lawlibrary.state.mn.us/archive/ctappub/0506/opa042132-0628.htm

• No-Fault Act: Causation. The Supreme Court has held that injuries suffered by an intoxicated driver after she stranded her car in a snowdrift and suffered frostbite trying to walk home are covered under Minnesota’s No-Fault Act because her injuries arose out of a "natural and reasonable incident or consequence" of use of her motor vehicle.

The Court reasoned that when a motor vehicle is stranded due to weather conditions or emergency, it is a natural and reasonable consequence of the use of the vehicle to leave it to seek help or safety. The Court rejected the no-fault insurer’s argument that premises hazards broke the chain of causation leading to the plaintiff’s injuries. The Court also rejected the no-fault insurer’s contention that the plaintiff’s intoxication broke the chain of causation, because it would impermissibly blame the plaintiff for her injuries, which is inconsistent with the purpose of the No-Fault Act. Sheryl L. Dougherty v. State Farm Mutual Insurance Company, A03-1866 (Minn. 07/14/05). http://www.lawlibrary.state.mn.us/archive/supct/0507/opa031866-0714.htm

— Michael Klutho
— David A. Turner
Bassford, Remele, A Professional Association