September 2006

ALTERNATIVE DISPUTE RESOLUTION
JUDICIAL LAW

• Nonsignatory Seeking Contract Benefit Must Follow Arbitration Agreement. M.A. Mortenson Co. had subcontracted with North East to perform work on a government contract. When North East began to default, Gem took over performance of the subcontract between Mortenson and North East. After completing the work, Gem claimed that Mortenson failed to pay Gem and brought an action in federal district court. Mortenson sought to compel arbitration of Gem’s claims because the contract between Mortenson and North East contained an arbitration clause. Gem argued that the court lacked personal jurisdiction because Gem did not sign the contract containing the arbitration clause. The United States District Court for the District of Minnesota determined that the issue of personal jurisdiction over Gem was based on whether Gem was equitably estopped from denying its duty to arbitrate. By admitting that it took over North East’s contract and filed a court action claiming that Mortenson breached the contract, Gem was claiming a benefit under the contract containing the arbitration clause. Thus, Gem was bound to its obligations under the contract, including the arbitration provision. M.A. Mortenson Co. v. Gem Mechanical Servs., Inc., 2006 WL 1997367 (D. Minn. 07/14/06).

• Arbitration Disallowed Where Discovery and Mutuality Missing. McDaniels sued Hospice, her former employer, alleging discrimination, retaliation, and other claims. Hospice moved to compel arbitration pursuant to an arbitration agreement contained in an employee handbook. McDaniels opposed the motion and argued that the arbitration agreement was unconscionable. The United States District Court for the Northern District of California found that the arbitration agreement was procedurally unconscionable for two reasons: (1) McDaniels had no opportunity to negotiate the agreement; and (2) the agreement was imposed on McDaniels as a condition of her employment. The court also found that the arbitration agreement was substantively unconscionable for four reasons: (1) the agreement disallowed any discovery prior to the arbitration hearing; (2) the handbook gave Hospice a unilateral right to "add, modify or delete" its provisions "at any time, without advance notice," (3) the agreement required only McDaniels to follow the specified procedures; and (4) the agreement required McDaniels to pay half the costs of arbitration. McDaniels was not provided with a meaningful opportunity to consider the arbitration agreement, so the arbitration agreement was not enforced. McDaniels v. Hospice of Napa Valley, 2006 WL 20382760 (N.D. Cal. 07/19/06).

• Class Action Waiver Upheld Under Texas Law. Sherr bought a notebook computer from Dell over the phone. When buying the computer, Sherr agreed to Dell’s terms and conditions of sale, which included a broad arbitration clause, a waiver of the purchaser’s right to bring a class action, and a Texas choice of law provision. Sherr later brought a putative class action against Dell, alleging that a design defect caused the computer to overheat. When Dell moved to compel arbitration, Sherr opposed the motion and argued that the arbitration agreement was unconscionable. The United States District Court for the Southern District of New York found that Sherr failed to prove the arbitration agreement was procedurally unconscionable because Sherr could have bought a computer from another company. Since Texas law governed the agreement, the Court upheld the class action waiver and stated that the right to proceed on a class-wide basis does not supersede a contracting party’s right to arbitrate under the Federal Arbitration Act. The court also rejected Sherr’s argument that the cost of arbitration would be prohibitively expensive, and noted that potential benefits of the arbitration process are lower costs and more efficient resolution. Finally, the court observed that the agreement allowed for the recovery of attorneys fees and that Dell would pay for certain expenses exceeding the cost of court filing fees. Sherr v. Dell, Inc., 2006 WL 2109436 (S.D.N.Y. 07/27/06).

— Darin T. Allen
Chair-Elect, MSBA ADR Section

September 2006

BANKRUPTCY
JUDICIAL LAW

• Preferential Transfer Litigation. Scott P. Peltz ("Peltz"), the court-appointed plan administer of the debtor’s Chapter 11 proceedings, commenced an action against Gulfcoast Workstation Corp. ("Gulfcoast") to avoid certain preferential transfers. A preferential transfer is that which is to or for the benefit of a creditor, on account of an antecedent debt, owed by the debtor before the transfer was made, made while the debtor was insolvent and within 90 days of the filing of debtor’s bankruptcy petition. 11 U.S.C. §547 (b). In its defense, Gulfcoast argued that the payments were subject to the ordinary course of business exception. This exception, as it exists for cases filed prior to October 17, 2005 (the date the Bankruptcy Abuse and Consumer Protection Act took effect), excepts from avoidance transfers for debts incurred in the ordinary course of business, made in the ordinary course of business, and made according to ordinary business terms. 11 U.S.C. §547 (c). Gulfcoast did not demonstrate that use of remittance advice notations was an ordinary business term throughout the computer resale industry, failing to meet its burden. The Court of Appeals found the ordinary course of business exception inapplicable in this instance. Gulfcoast Workstation Corp. v. Peltz (In re Bridge Info. Sys., Inc.), No. 05-2984 (8th Cir. 2006).

• Ratification of Unauthorized Bankruptcy Filing. In an unusual set of circumstances, the debtor was able to take advantage of a bankruptcy petition and subsequent proceedings allegedly filed without her knowledge or authorization. The bankruptcy petition benefited the debtor by staying certain creditor actions. After discovering the filing, the debtor attended the necessary hearings and hired different counsel. This new counsel then filed a motion to dismiss or convert the debtor’s Chapter 7 case to one under Chapter 11. The debtor’s authority for this motion was that she never signed the original petition. The Chapter 7 Trustee and other creditors opposed the motion, alleging prepetition fraudulent transfers, the automatic stay benefited the debtor, and that the debtor had been acting in bad faith throughout the bankruptcy proceedings. Noting the general rule that cases are dismissed if the debtor doesn’t execute the bankruptcy petition, the Bankruptcy Appellate Panel determined that the debtor was estopped from relying on her alleged lack of knowledge concerning the original bankruptcy filing because she enjoyed the benefits of the bankruptcy petition. The Bankruptcy Appellate Panel then went on to note that the debtor intended, and still desires, to be under bankruptcy protection, and that she was uncooperative with the Chapter 7 Trustee. Based on these facts, the Bankruptcy Appellate Panel affirmed the Bankruptcy Court’s denial of the motion to convert. Willis v. Rice, et al. (In re Willis), No. 05-6058EA (B.A.P. 8th Cir. 2006).

— Drew Moratzka
Mackall, Crounse & Moore, PLC

September 2006

CIVIL LITIGATION
JUDICIAL LAW

• Summary Judgment Hearing; Notice Requirement. The would-be buyers of a home in New Ulm sued to enforce a purchase agreement. The sellers claimed that the agreement had been canceled by the failure of an inspection contingency. The parties brought cross motions for summary judgment, the latest of which was filed on November 8, 2005. Following a summary judgment hearing held on November 16, 2005, the district court found for the sellers.

On appeal, the purchasers argued, among other things, that the district court erred in holding a summary judgment hearing only eight days after the filing of the motion. Indeed, under Minn. R. Civ. P. 56.03, summary judgment motions shall not "be served less than ten days before the time fixed for the hearing." Nevertheless, the Court of Appeals affirmed. Chief Judge Toussaint reasoned that, because the issue had been decided on undisputed facts as a matter of law, and because the purchasers did not show any prejudice resulting from the truncated schedule, the district court did not err in granting summary judgment. Oliva et al. v. Lantz et al., A05-2502 (Minn. App. 08/08/06).

• Lack of Diligence Precludes Discovery Request; Finding of Bad Faith Not Prerequisite to Sanctions Award. Cargill served a complaint on Jorgenson Farms in January 2005, claiming that Jorgenson breached a contract to sell Cargill 80,000 bushels of corn. Before the action was filed, Jorgenson told Cargill that no contract existed and that Jorgenson would seek sanctions if Cargill pursued the lawsuit. Jorgenson kept its promise. When Cargill filed the lawsuit in July 2005, Jorgenson moved for summary judgment and for sanctions under Minn. Stat. §549.211 and Minn. R. Civ. P. 11.03.

At a hearing in August, Cargill asked for additional time to conduct discovery under Minn. R. Civ. P. 56.06 before the court ruled on Jorgenson’s summary judgment motion. The district court denied the request for additional discovery, granted Jorgenson’s summary judgment motion, and awarded $5,000 in sanctions.

Cargill appealed, arguing among other things that the district court abused its discretion by refusing to provide additional time for discovery and by awarding sanctions. On the discovery issue, the Court of Appeals noted that Cargill had seven months during which it could have conducted discovery between service of the complaint and the summary judgment hearing. The Court of Appeals found that Cargill’s lack of diligence in seeking discovery justified the denial of its request for additional time.

Cargill also argued that the district court abused its discretion by imposing sanctions without making a finding that Cargill or its counsel acted in bad faith. The Court of Appeals affirmed the sanctions award, observing that Cargill had been on notice of Jorgenson’s position (that there was no contract, and that Cargill’s position was frivolous) since October 2004, yet Cargill had failed to either conduct discovery or dismiss its claim. Minn. Stat. §549.211, subd. 2, permits an award of sanctions where a party fails to conduct a reasonable investigation to ensure that the pleadings are not being presented for an improper purpose. Unlike its predecessor statute, it does not require a finding of "bad faith." Compare Minn. Stat. §549.211 (2004) with Minn. Stat. §549.21, subd. 2 (1996), repealed by 1997 Minn. Laws ch. 213, art. 2, §6. Cargill Inc. v. Jorgenson Farms, A05-2287 (Minn. App. 08/08/06).

— Jim Mayer
— Jennifer Kitchak
Fredrikson & Byron PA

September 2006

CRIMINAL LAW
JUDICIAL LAW

• Domestic Abuse: First Degree Murder; Proving Past Pattern of Abuse; Bifurcation of Trial. In affirming a conviction for first degree domestic assault murder, the Supreme Court reaffirms that while the state must prove a "pattern of domestic abuse," it is not required that the state prove each past incident beyond a reasonable doubt. Also, the district court did not abuse its discretion by denying the appellant’s motion to bifurcate his trial into a guilt phase and a past pattern of domestic abuse phase. The concurring opinion, however, states some concern about the issue of bifurcation and the possibility of undue prejudice. State v. Brett Arnold Laine, A03-1551 (Minn. 06/05/06). www.lawlibrary.state.mn.us/archive/supct/0606/opa031551-0608.htm

• Blakely: No Forfeiture of Rights by Failure to Assert; Conviction Elements of Offense Not Aggravating, Sentencing Factors for Other Offense. The appellant was convicted of 28 counts of drug-related offenses, and given a 268-month sentence, representing a 67-month upward departure. At the time of the sentencing, Blakely had not been decided, but the time to appeal to the U.S. Supreme Court had not expired. During the sentencing hearing, the defendant did not assert his rights under Blakely, nor did the trial court advise the appellant of his right to have a jury trial under sentencing factors.

Held, there was no "forfeiture" or waiver of Blakely rights by failing to make a timely objection in district court. "When it comes to the waiver of at least two fundamental rights, the right to a jury trial and a right to counsel, the law is clear that these rights cannot be waived by silence. For the right to a jury trial, we need to go no further than Minn. R. Crim. P. 26.01, subd. 1 (2)(a): the defendant, with the approval of the court, may waive jury trial provided the defendant does so personally in writing or orally upon the record in open court …".

Next, the Supreme Court rejects the state’s argument that the aggravating or sentencing factors for one offense may be supplied by the conviction elements of another offense. Extending the doctrine of State v. Peterson, 329 N.W.2d 58, 60 (Minn. 1983), namely, that the elements of an offense cannot be used as aggravating factors to impose an upward sentence in departure for that same offense, the Minnesota Supreme Court rejects the "substitution" of Blakely’s proof requirements by importing elements proved in the convictions for other counts. State v. Anthony Osborne Sr., C1-03-253 (Minn. 06/08/06). www.lawlibrary.state.mn.us/archive/supct/0606/op030253-0608.htm

• Blakely: Determining Date of Offense Where New Statute Increases Penalty. In a prosecution for criminal sexual conduct for acts which occurred during a period straddling the effective date of a new penalty (58 months greater), Blakely applies, and a jury must determine, by proof beyond a reasonable doubt, the date of the offense for which the defendant is being sentenced. The Supreme Court adopts the appellant’s reasoning that deciding the date on which the sexual encounter incurred was tantamount to an upward departure. Furthermore, the appellant did not forfeit or waive his right to a Blakely determination, following Osborne, supra, nor did he do so by failing to request a special interrogatory under pre-Blakely law, through which a defendant has the right to have a jury determine the date of his offense. State v. James Howard DeRosier, A03-1718 (Minn. 06/29/06). www.lawlibrary.state.mn.us/archive/supct/0606/opa031718-0629.htm

• 5th Amendment: Extension of Prison Term for Failure to Participate in Sex Offenders Treatment. In a habeas proceeding, the appellant contends that his 5th Amendment privileges are violated by compelling him to discuss the facts of his offense of conviction in a mandated prison sex offender treatment program (S.O.T.P.). The consequence for not participating in the S.O.T.P. is a longer time in prison before parole or supervised release. At the time of the Department of Corrections consequence, the appellant’s time for direct appeal had expired. Appellant argues, however, that as long as he has the ability to file a post-conviction petition, the 5th Amendment is still implicated. Held, absent a showing of manifest injustice, once an inmate’s direct review period has concluded, he no longer enjoys a 5th Amendment privilege to refuse to participate in a S.O.T.P. John William Henderson v. Joan Fabian, A06-439 (Minn. App. 06/06/06). www.lawlibrary.state.mn.us/archive/ctappub/0606/opa060439-0606.htm

• Sentence: Conditional Release Periods May Not Be Imposed Consecutively. Appellant was convicted of two counts of sexual misconduct, first degree and second degree. He was given a 480-month sentence on the first degree and a 42-month sentence on the second degree, to be served consecutively. The court then imposed two ten-year consecutive terms of conditional release, pursuant to Minn. Stat. §609.109, subd. 7 (a).

Held, there was no authority for imposing consecutive terms of conditional release. In this case of first impression, the Court of Appeals holds that, while the statute does not expressly provide for multiple or consecutive conditional release periods, it does require that the conditional release period begin after incarceration. "After serving consecutive sentences, a person can only be released from prison once." The statute requires that conditional release begin with release from prison, following completion of the sentence, and may not, by its terms, follow a prior term of conditional release. Even if the statute is ambiguous, the rule of lenity applies. Hence, one of the two periods of conditional release is vacated. Howard Wayne Miller v. State of Minnesota, A05-952 (Minn. App.06/06/06). www.lawlibrary.state.mn.us/archive/ctappub/0606/opa050952-0606.htm

• Sentence: Credit for Time Served in Phase One of Challenge Incarceration Program. Appellant successfully completed the "boot camp" phase of the three-part Challenge Incarceration Program (CIP) offered by the Minnesota Department of Corrections for nonviolent offenders. The appellant was ejected from the program during phase three, and was imprisoned for the remainder of his sentence, with no allowance for credit for the time he was in boot camp. In this case of first impression, the Court of Appeals notes that Minn. Stat. §244.171 subd. 4 does not expressly state that boot camp time be excluded from the calculation of the term of imprisonment before an offender is removed from the program. Declining to add what the Legislature has omitted, the Court of Appeals grants day-for-day credit for the time the appellant spent in boot camp. Andrew Allen Guth v. Joan Fabian, A05-1554 (Minn. App. 06/13/06). www.lawlibrary.state.mn.us/archive/ctappub/0606/opa051554-0613.htm

• Sentence: Restitution Order May Include Depletion of Accrued Employment Leave Time. The appellant severely injured a child, resulting in a fractured skull and brain surgery requiring three weeks’ hospitalization. During this period, the child’s parents spent a considerable time tending to him at the hospital. This required them to be away from work and the child’s father expended "flex leave" and "comp leave" that he had accrued through his employment. In this case of first impression, the Court of Appeals holds that the forced depletion of comp time or leave is compensable as restitution under Minn. Stat. §611A.04. In re M.R.H., A05-929 (Minn. App. 06/13/06). www.lawlibrary.state.mn.us/archive/ctappub/0606/opa050929-0613.htm

• Jury Instructions: Request for Lesser Included Offense and Self-Defense Jury Instructions Required. Appellant and his girlfriend were engaged in a heated argument, during which time, appellant maintains, the victim shot him, and he then tried to take the gun from her and it went off again. Both the defendant and the victim were shot. The nonfatal wound to appellant’s head was from close range, as evidenced by the presence of powder burns around the wound. The state maintained that the appellant shot and killed the victim, gave himself a flesh wound to the head, and then placed the gun in the victim’s hand to make it look like she had shot herself. The victim’s autopsy confirmed a very large amount of methamphetamine. The appellant’s blood alcohol level was .188 percent.

Held, the district court erred by denying the defendant’s request for a heat-of-passion instruction, which is a lesser included offense of second-degree intentional murder. There was a rational basis for this request, based on the intensity of the argument and the presence of controlled substances. Viewing the evidence in the light most favorable to the appellant, a rational jury could have made a reasonable inference that the appellant’s reasoning was clouded and his willpower weakened at the time of the shooting, and therefore he acted in the heat of passion.

Secondly, a self-defense instruction should have been given. There was evidence to support appellant’s claim that the victim was the aggressor. From a subjective viewpoint, the appellant did have an actual honest belief that he was in imminent danger of death or great bodily harm. Rejecting the restrictive view from other states, the Supreme Court holds, for the first time, that a self-defense instruction may be warranted when the evidence of self-defense is entirely circumstantial, and a defendant need not testify and provide direct evidence of his or her state of mind in order to be entitled to the instruction. Here, the appellant did not testify directly that he believed he was in imminent danger of death or great bodily harm, but it appears reasonable to infer that he did have an actual honest belief. State v. James Evans Johnson, A04-385 (Minn. 06/29/06). www.lawlibrary.state.mn.us/archive/supct/0606/opa040385-0629.htm

— Frederic Bruno
Frederic Bruno & Associates

September 2006

EMPLOYMENT AND LABOR LAW
JUDICIAL LAW

• Gender Discrimination; Pay Equity. The Minnesota Court of Appeals found a 13 percent pay disparity between a woman working as a clerk-accountant for a soil and water conservation district was sufficient evidence that her suit should not have been dismissed under the Minnesota Pay Equity Act. The Minnesota Court of Appeals reversed dismissal of the lawsuit on grounds that the trial court engaged in improper fact finding in entering summary judgment on the claim of sex discrimination. A reasonable fact finder could conclude that the district had a "preconceived" notion that the woman’s work was not worth more than 87 percent of the salary of male technicians, and that this preconception was rooted in gender discrimination. Loew v. Dodge County Soil and Water Conservation District, 2006 WL 1229641 (Minn. App. 05/09/06) (unpublished).

• Sexual Harassment; Hostile Work Environment. A sexual harassment claim by a woman based upon crude sexual banter by male coworkers that occurred sporadically over a 20-year period of time was found not actionable by the 8th Circuit Court of Appeals. The claim of hostile work environment was properly dismissed because there was insufficient evidence that the banter adversely affected any "term, condition, or privilege of employment," which is necessary to sustain a sexual harassment claim under Title VII of the Federal Civil Rights Act. Nitsche v. CEO of Osage Valley Electric Cooperative, 446 F.3d 841 (8th Cir. 2006).

• FMLA; Retaliation. The 8th Circuit Court of Appeals upheld dismissal of a lawsuit by a hospital sonograph operator, who was unable to perform her work because of carpal tunnel syndrome. The claimant’s assertion that her termination was retaliatory after she returned from an FMLA leave was untenable because she was unable to perform the "essential" functions of her job, which required extensive use of her arms that were afflicted with carpal tunnel syndrome. Bloom v. Metro Heart Corp., 440 F.3d 1025 (8th Cir. 2006).

• FMLA; Retaliation. The 8th Circuit reached a different conclusion in another FMLA retaliation case, upholding a verdict in excess of $300,000 including back pay, front pay, liquidated damages, and attorneys fees for the appellant employee. The employee was subjected to differential treatment and then fired for alleged cell phone misuse, after taking permissible FMLA leaves over three consecutive years. The employer’s proffered grounds for terminating the employee — that she used a company-provided cell phone outside of the workplace — was pretextual since other employees had not been disciplined for similar cell phone usage outside work. Hite v. Vermeer Mfg. Co., 446 F.3d 858 (8th Cir. 2006).

• FMLA; Promissory Estoppel. The 8th Circuit ruled that a police officer could not assert promissory estoppel against his municipal employer, which ran his sick leave concurrent with his 12 weeks of FMLA leave. The city did not inaccurately represent that he could use his accrued sick leave to extend his FMLA leave. Slentz v. City of Republic, 448 F.3d 1008 (8th Cir. 2006).

• FMLA; Judicial Estoppel. The federal appellate court overturned a ruling of judicial estoppel barring an employee from pursuing an FMLA claim because he did not list it on a bankruptcy filing. The employee was not prevented from suing for his termination in violation of the FMLA because he did not know of his FMLA claim at the time he filed his bankruptcy schedule, which omitted a claim for wrongful discharge after he was fired for taking time off to help his ailing father. Stallings v. Hussman, 447 F.3d 1041 (8th Cir. 2006).

• Whistleblowing; Wrongful Discharge Claim; "Public Policy." The Minnesota Supreme Court ruled that the whistleblower law, Minn. Stat. §181.932, does not preclude a common law wrongful discharge claim based on "public policy." But the Court upheld dismissal of the claim by a terminated employee of a nonprofit corporation, who claimed he was retaliated against for his vote as a member of the organization, because the discharge did not violate any "clear" public policy. Nelson v. Productive Alternatives, Inc., 715 N.W.2d 452 (Minn. 2006).

• Whistleblowing; Arbitrator’s Award Did Not Make Whole. A discharged union worker, reinstated by an arbitrator under a "just cause" clause in a collective bargaining agreement, was allowed by the Minnesota Court of Appeals to pursue a statutory whistleblowers claim. Although the employee regained his job, he was not made whole by the arbitrator’s award since he may be entitled to greater damages, including emotional distress, attorneys fees, and punitive damages under the whistleblower statute. Grothe v. Ramsey Auction Programs, Inc., 2006 WL 1529447 (Minn. App. 06/06/06) (unpublished).

• Unemployment Compensation; Refusal to Sign Warning. An employee’s refusal to sign a written warning from his employer for suspected inebriation on the job did not constitute grounds for "misconduct" disqualifying the employee from entitlement to unemployment compensation benefits. The Court of Appeals reversed a ruling of the Department of Employment & Economic Development (DEED) that the employee was ineligible for benefits on grounds of "misconduct" for failing to sign the statement prepared by the employer. The employee was justified in not signing the document because the employer did not merely ask him to indicate receipt of the warning but sought the employee to agree with its contents, which were inaccurate. Tate v. STS Mfg, Inc., 2006 WL 1460729 (Minn. App. 05/30/06) (unpublished).

• Unemployment Compensation; Adequacy of Job Search. A jobless man’s search for work was deemed inadequate, warranting denial of unemployment compensation benefits. The employee, who was terminated from his job as a truck driver and technician for a construction company, sought other work by reading newspaper advertisements, applying for one or two jobs a month, contacting his former employer, and conducting a single search of an electronic employment data base. Agreeing with the DEED, the appellate court held that the job search was inadequate and reflected the claimant’s lack of "genuine attachment to the workforce," which made him ineligible for unemployment benefits under Minn. Stat. §268.085, subd. (4), which requires that an employee be "available for suitable employment and [be] actively seeking" such work. Hebzinski v. Dep’t. of Employment & Econ. Dev., 2006 WL 1229505 (Minn. App. 05/09/06) (unpublished).

• Unemployment Compensation; Reliance on Incorrect Advice. Incorrect information given by an employee of DEED resulted in a favorable ruling for an unemployment compensation claimant. The claimant was incorrectly told by a DEED employee not to file a claim until after his employer made a decision whether he would receive severance pay, but the employer did not decide to pay a severance payment until about ten weeks later. Following the advice given by the DEED representative, the employee did not file a claim for benefits until the employer’s final decision, which delayed his receipt of unemployment benefits by about ten weeks. Reversing a decision of an unemployment compensation judge, the Court of Appeals ruled that the employee should be eligible for benefits as of the time he would have applied, when he was terminated, rather than ten weeks later, on grounds that he was "effectively prevented from filing" at that time. The court praised DEED for its "remarkable candor in disagreeing with the unemployment law judge’s decision based upon the claimant being "told incorrectly not to file benefits … where he had no written materials at the time that would have advised him to the contrary." Morales v. Dep’t. of Employment & Econ. Dev., 713 N.W.2d 882 (Minn. App. 2006).

• Unemployment Compensation; "Reasonable Employee." An employee whose salary was reduced by 35 percent subsequently made a claim of harassment and discrimination and then took a leave of absence under the Family Medial & Leave Act (FMLA) after an investigation refuted her claims. When she did not return from the leave due to her claim of discrimination and harassment, she sought unemployment benefits. Upholding denial of the benefits, the court held that her salary reduction, which was "performance based," would be subject to increase if she improved her performance. Based upon the "totality of the circumstances … an average, reasonable employee would not have quit." Currie v. Help Systems, 2006 WL 1073072 (Minn. App. 2006) (unpublished).

• Unemployment Compensation; "Good Reason." A woman merchant who quit after being told that her falsification of her records might lead to her termination was deemed ineligible for unemployment benefits. The employee was not discharged, but quit, without "good reason" attributable to the employer. Chappelear v. Zale Delaware, Inc., 2006 WL 1673397 (Minn. App. 2006).

• Unemployment Compensation; Insufficient Staffing. A part-time assistant teacher at a child learning center quit as a result of insufficient staffing. Her claim for unemployment benefits was denied because there was "no evidence of actual safety or unacceptable risk" due to short staffing of personnel. Had she reported the problem earlier, the facility had staff that could have filled in. Therefore, her quitting was unjustified and she was not entitled to unemployment benefits. Montague v. Alphabet Junction Learning Center, LLC, 2006 WL 1073400 (Minn. App. 2006) (unpublished).

• Unemployment Compensation; Seasonal Worker. An employee who did seasonal work for a sign company was given an option to work in the shop during the winter and collect full wages or claim to be laid off and collect unemployment. The employee opted for the latter, but was denied unemployment benefits on grounds that he voluntarily quit by accepting the lay-off alternative. There was work available for the employee, and he was "not being laid off due to lack of work." Gephart v. Safety Signs, LLC, 2006 WL 1073404 (Minn. App. 2006) (unpublished).

— Marshall H. Tanick
Mansfield, Tanick & Cohen, P.A.

September 2006

ENVIRONMENTAL LAW
JUDICIAL LAW

• Clean Water Act; Federal Jurisdiction Over Wetlands. On June 19, 2006, on a 5-4 vote, the United States Supreme Court vacated and remanded two consolidated 6th Circuit decisions concerning the extent of wetland jurisdiction under Section 404 of the Clean Water Act, 33 U.S.C. §1321 et seq. ("CWA"). At issue was the meaning of "waters of the United States" under the CWA. A five-justice majority rejected the Army Corps of Engineers’ and 6th Circuit’s expansive interpretation, which would appear to encompass all wetlands that are connected to navigable waters through nonnavigable tributaries and man-made ditches, however remote, even when the wetlands are separated from the man-made ditches by a berm. The five justices comprising the majority did not agree, however, on when, if ever, such wetlands constitute "waters of the United States" subject to federal regulation. In Solid Waste Agency of Northern Cook County v. U.S. Army Corps of Engineers, 531 U.S. 159 (2001) ("SWANCC"), the Court held that federal jurisdiction over wetlands does not extend to wholly intrastate ponds and wetlands that lack a hydrologic connection to waters that are navigable-in-fact. The instant case affirms SWANCC’s requirement of a hydrologic connection, but makes clear that Section 404 jurisdiction does not extend to all wetlands that have such a connection.

In the first of the two consolidated cases, John Rapanos was originally convicted in Michigan of knowingly discharging pollutants into the waters of the United States without a permit in violation of Section 404 of the CWA. Rapanos’ conviction was subsequently vacated and remanded by the Supreme Court for reconsideration in light of the Court’s holding in SWANCC. The 6th Circuit reinstated the conviction, holding that the wetlands at issue, while not located adjacent to any navigable waters, drain to a man-made ditch that, through nonnavigable tributaries, eventually drains into navigable waters. In the 6th Circuit’s view, this eventual drainage into navigable-in-fact waters distinguished the wetlands on the Rapanos property from those in SWANCC and provided a sufficient nexus for federal regulation under the Clean Water Act. U.S. v. Rapanos, 339 F.3d 447 (6th Cir. 2003).

The second of the consolidated cases concerns Keith and June Carabell who were denied a Section 404 permit by the Army Corps of Engineers. The wetlands at issue are similar to those in Rapanos in that they are adjacent to a man-made ditch which flows into tributaries of navigable waters. The 6th Circuit affirmed the Corps’ denial of the permit for the essentially same reasons as it upheld the conviction in Rapanos. Carabell v. U.S. Army Corps of Engineers, 391 F.3d 704 (6th Cir. 2004).

Section 404 of the CWA prohibits the discharge of dredged or fill material into "navigable waters" without a permit. The act defines "navigable waters" as "the waters of the United States." Rapanos and the Carabells argued that wetlands separated from navigable-in-fact waters by a nonnavigable, man-made ditch are not subject to the act’s prohibition on discharge of pollutants without a permit.

The five-justice majority rejected as overly broad a definition of "waters of the United States" that includes wetlands separated from navigable waters by man-made dikes or barriers. Relying principally on the standard dictionary definition of "waters," four of the five justices comprising the majority concluded that "waters of the United States" includes "only those relatively permanent, standing or continuously flowing bodies of water ‘forming geographic features,’" such as streams, oceans, rivers and lakes and adjacent wetlands that have a continuous surface connection with that water, "making it difficult to determine where the ‘water’ ends and the ‘wetland’ begins." Citing SWANCC and United States v. Riverside Bayview Homes, Inc., 474 U.S. 121 (1985), these justices reasoned that wetlands adjacent to traditionally navigable waters qualify as "waters of the United States" because of "the inherent difficulties of defining precise bounds to regulable waters" where the waters flow directly into abutting wetlands. However, where the wetlands are separated from navigable waters by a physically remote hydrologic connection such as a man-made ditch, there is no such "boundary-drawing problem," and such wetlands are plainly not "waters of the United States" subject to federal regulation. The plurality concluded that the cases had to be remanded to the district court to determine whether both of these requirements were met.

Concurring only in the judgment that the 6th Circuit’s decisions were vacated and remanded, Justice Kennedy concluded that additional fact-finding was required to determine not whether the plurality’s requirements were met, but whether the wetlands possessed a "‘significant nexus’ to waters that are or were navigable-in-fact or that could reasonably be so made." Justice Kennedy relied primarily on the SWANCC court’s focus on whether a "significant nexus" existed between the isolated ponds at issue in that case and other "navigable waters." Justice Kennedy opined that the plurality’s definition of "navigable waters" imposed limitations outside of the statutory text and frustrated the statutory purpose of restricting dumping and filling in the nation’s waters. However, Justice Kennedy also criticized the Corps’ expansive definition, which, he wrote, eviscerated the requirement that waters be "navigable" in order to be regulated under the Clean Water Act. Instead, Justice Kennedy concluded that lower courts must conduct a fact-intensive inquiry into whether there exists a "significant nexus" between the wetlands and navigable waters. Justice Kennedy explained that, consistent with the purpose of the act, a "significant nexus" exists "if the wetlands, either alone or in combination with similarly situated lands in the region, significantly affect the chemical, physical, and biological integrity of other covered waters more readily understood as ‘navigable." In contrast, if the wetlands have only a speculative or insubstantial effect on water quality, no "significant nexus" exists and the wetlands do not qualify as "navigable waters" within the scope of federal regulation.

Although the Supreme Court remanded the cases for further proceedings, it did not specify whether those proceedings were to be consistent with Justice Scalia’s plurality opinion or Justice Kennedy’s concurrence. Rapanos v. U.S., 126 S. Ct. 2208 (2006).

• Clean Water Act; "Addition" of Pollutants. In a decision issued on June 13, 2006, the 2d Circuit Court of Appeals refused to reconsider its earlier holding that the presence of pollutants in an "interbasin" transfer was an "addition" of pollutant that triggered the Clean Water Act’s permit requirements, and affirmed the lower court’s assessment of civil penalties against New York City for discharging water from a reservoir into a creek as part of its drinking water system.

To supply its residents with drinking water, New York City discharged water from a reservoir in the Catskill Mountains into the Esopus Creek, which eventually flows into the city. Fishermen’s groups brought a citizen suit under the Clean Water Act complaining that the discharge polluted the creek. In an October 2001 decision, the 2d Circuit held that the discharge of water from one distinct water body into another is "addition of [a] pollutant" under the act, such that a permit is required. On remand, the district court imposed civil penalties of $5,749,000. The city appealed.

The 2d Circuit rejected the city’s argument that intervening developments required reconsideration of its earlier decision. First, the 2d Circuit reaffirmed its distinction between "intrabasin" water transfers (in which water is taken from a source, polluted, and then returned to the original source) and "interbasin" transfers (in which water is taken from a polluted source and then transferred to a new and separate body). Even though pollutants are present in both transfers, the 2d Circuit noted that the Supreme Court had recently cited with approval the distinction between inter- and intra-basin transfers. Second, the 2d Circuit again rejected the city’s "unitary water" theory that all navigable waters in the United States are one body of water. Third, the 2d Circuit rejected the city’s argument that its prior decision impermissibly treaded on the states’ power to regulate water within their borders. Catskill Mountains Chapter of Trout Unlimited, Inc. v. City of New York, __ F.3d __, 2006 WL 1612695 (2d Cir. 06/13/06).

• CERCLA; Counterclaim as Basis for 113(f) Action. A defendant’s own counterclaim was enough to defeat its motion to dismiss a CERCLA 113(f)(1) action against it, according to a slip opinion of the U.S. District Court for the District of Minnesota. In Cooper Industries, Inc. v. Aviall Services, Inc., 543 U.S. 157 (2004), the U.S. Supreme Court held that a Potentially Responsible Party ("PRP") may only bring a contribution action against another PRP under CERCLA 113(f)(1) after the former had itself been the subject of a CERCLA 106 or 107(a) action. In the case before the district court, the plaintiff, a prior property owner of a contaminated site, had not been the subject of either a CERCLA 106 or 107(a) action before it filed its 113(f)(1) claim against the defendant, another former property owner. Thus, the defendant moved for dismissal of the 113(f)(1) claim on the basis of the Aviall decision. The district court acknowledged that when it first filed its action, the plaintiff had no basis under Aviall to maintain its contribution action against the defendant. It then held, however, that because the defendant filed a counterclaim under CERCLA 107 against the plaintiff, that action ripened the plaintiff’s 113(f)(1) action against defendant. Spectrum International Holdings, Inc. v. Universal Cooperatives, Inc., No. 04-99, 2006 WL 2033377, (D. Minn. 2006).

• CERCLA; Reach of Section 107. The 2nd Circuit Court of Appeals has again taken the lead in expanding CERCLA 107’s reach in the wake of the U.S. Supreme Court’s Aviall decision. Previously, in Consolidated Edison Co. of N.Y. Inc. v. UGI Utils., Inc., 423 F.3d 90 (2d Cir. 2005), the 2nd Circuit held that a Potentially Responsible Party ("PRP") could sue another PRP under CERCLA 107 if the former were seeking cost recovery for a voluntary cleanup not mandated by the government. It recently extended this ruling even farther to hold that a PRP that eventually entered into consent orders with a state regulatory authority could sue under 107(a) to recover response costs it incurred prior to entering into the consent orders. Schaefer v. Town of Victor, __ F.3d __, 2006 WL 1921940.

LEGISLATION

• Clean Water Legacy Act; Compliance with Federal Clean Water Act. The Minnesota Legislature adopted the Clean Water Legacy Act to provide the authority, direction and funding needed to achieve and maintain water quality standards under §303(d) of the federal Clean Water Act. S.F. 762, authored by Sen. Dennis Frederickson (R-New Ulm), and H.F. 826, authored by Rep. Dennis Ozment, establishes a process to evaluate the state’s waters, to identify impaired waters, to set a total maximum daily load for impaired waters, and to implement a plan to remove impairments. This legislation provides funding to comply with the Total Maximum Daily Load (TMDL) requirements under the federal Clean Water Act, creates a governance structure for the assessment and clean-up of Minnesota’s contaminated waters, and establishes a clean water council in charge of appropriating funds for water assessment and clean-up. The bill grants specific statutory authority to the Pollution Control Agency to allow for nutrient loading offsets for impaired waters prior to the completion of a TMDL, as long as the offset results in decreased loading of the nutrient to the impaired water. 2006 Minn. Laws Ch. 251.

• Electronics Waste Disposal. As of July 1, 2006, it is unlawful in Minnesota to place electronic products containing cathode-ray tubes in mixed municipal solid waste.

Originally passed in 2003, Minn. Stat. §115A.9565 makes it illegal to place electronic products that contain cathode-ray tubes (e.g., computers, televisions, etc.) in the garbage for curbside pickup. The law’s effective date was originally set at July 1, 2005, but was delayed during the 2005 Special Session to July 1, 2006 with the expectation that the state would also enact a statute establishing state-sponsored drop-off points to which individuals could bring old televisions and computer monitors for reuse, refurbishing or recycling. But no such statute was passed, and, instead, under the newly effective law, those items must be disposed of at local recycling centers, or at a retailer holding a "take-back" event. 2005 Minn. Laws (1st Special Session) Ch. 1, §132.

— Robert Devolve
Leonard, Street and Deinard
— Bill Hefner
The Environmental Law Group

FEDERAL PRACTICE
JUDICIAL LAW

• Summary Judgment. Judge Lay dissented in a recent 8th Circuit decision which affirmed summary judgment for an employer in an employment retaliation case, stating that: "Too many courts in this circuit, both district and appellate, are utilizing summary judgment in cases where issues of fact remain. This is especially true in cases where witness credibility will be determinative. In these instances, a jury, not the courts, should ultimately decide whether the plaintiff has proven her case. Summary judgment should be the exception, not the rule." Melvin v. Car-Freshener Corp., ___ F.3d ___ (8th Cir. 2006).

• Alteration of Witness Statement; Sanctions. While he denied a motion for discovery-related sanctions arising out of the alleged alteration of a witness statement by counsel, Judge Frank decried the "dangerous game attorneys play when they draft witness statements," noting that "they risk turning themselves into witnesses" when they do so, and that "such conduct will not be tolerated in the future." Eniva Corp. v. Global Water Solutions, Inc., ___ F. Supp. 2d ___ (D. Minn. 2006).

• Motion to Amend; Standards for Review. The 8th Circuit has again held that while the denial of a motion to amend is to be reviewed under an abuse of discretion standard, any underlying legal conclusions regarding the futility of the proposed amendment are to be reviewed de novo. Marmo v. Tyson Fresh Meats, Inc. ___ F.3d ___ (8th Cir. 2006).

• Option to Replead Securities Fraud Claims. Judge Magnuson granted defendants’ motion to dismiss securities fraud claims, but dismissed those claims without prejudice, while allowing plaintiffs 30 days to replead. In Re Navarre Corp. Sec. Lit., 2006 WL 1795141 (D. Minn. 06/28/06).

• Arbitration; Order to Arbitrate; Jurisdiction. Judge Doty granted a motion to stay an arbitration pending the appeal of an order directing that the arbitration proceed, but also found that he lacked jurisdiction to clarify or reexamine the order that had been appealed. Twin Cities Galleries, LLC v. Media Arts Group, Inc., 431 F. Supp. 2d 980 (D. Minn. 2006).

• Motion to Set Aside Default. Judge Davis granted a motion to set aside default, finding that the defendant corporation’s default was due to "miscommunication" in the general counsel’s office rather than an attempt to "intentionally" disregard the action or "purposefully" disobey the Court’s rules. Metcalf v. E.I. Du Pont de Nemours and Co., 2006 WL 1877069 (D. Minn. 07/06/06).

• Federal Jurisdiction Retained; State Law Claims. Judge Tunheim elected to retain jurisdiction over supplemental state law claims even after the plaintiff’s federal claims were dismissed under Rule 12. Kroll v. St. Cloud Hospital, 2006 WL 1851138 (D. Minn. 06/30/06).

• Motion to Strike Untimely Jury Demand Denied. Judge Ericksen adopted a Report and Recommendation by Magistrate Judge Nelson recommending that a motion to strike an untimely jury demand be denied in accordance with the discretion afforded by Fed. R. Civ. P. 39(b). Microsoft Corp. v. Ion Technologies Corp., 2006 WL 2085429 (D. Minn. 07/25/06).

• Discovery: Refusal to Compel. The 8th Circuit found no abuse of discretion in a district court’s refusal to compel discovery in the absence of any evidence that the parties had attempted to resolve the discovery dispute in accordance with Fed. R. Civ. P. 37(a)(2)(A) prior to involving the court. Robinson v. Potter, ___ F.3d ___ (8th Cir. 2006).

• Transfer of Venue. Judge Kyle granted a motion to transfer venue to the District of New Jersey under 28 U.S.C. §1404(a), relying primarily on the "permissive" forum selection clause in the underlying contract and the fact that the "operative events" occurred in New Jersey. Product Fabricators, Inc. v. CIT Communications Finance Corp., 2006 WL 2085413 (D. Minn. 07/25/06).

• Plaintiff Required to Join Party as Defendant. Judge Ericksen adopted a Report and Recommendation by Magistrate Judge Graham which recommended that a Rule 12(b)(7) motion to dismiss for failure to join an indispensable party be denied, but that the plaintiff be required to join that party as a defendant. St. James v. New Prague Area Community Center, 2006 WL 2069197 (D. Minn. 07/26/06).

— Josh Jacobson
Law Office of Josh Jacobson

September 2006

JUVENILE LAW
JUDICIAL LAW

• Termination of Parental Rights; Permanent Foster Care. On appeal from the termination of her parental rights, appellant mother challenged a statutory revision found in Minn. Stat. §260C.201, subd. 11 (d)(3)(i) dealing with the placement of children into permanent foster care. She alleged that limitations on such a placement did not apply to her case and that the provision violated the constitutional separation of powers doctrine and the court’s inherent authority to act in the best interests of children. With this particular statutory provision, the Legislature modified the statute in 2005 to provide that a court may order a child into long-term foster care only if it approves the responsible social service agency’s compelling reasons. The amendment became effective during the pendency of this particular case.

Here, the county sought termination of the mother’s parental rights or transfer of legal custody to a third party rather than long-term foster care. The guardian ad litem moved to amend the county’s petition to seek long-term foster care. The county argued that under the amended statute, only the county was in a position to recommend long-term foster care, and that none of the other parties in the case could advocate for such a placement. The particular statutory amendment at issue in the case has caused a significant amount of controversy in child protection and termination of parental rights cases, as often it is the guardian ad litem or a parent or an interested third party who advocates placement for long-term foster care over the objection of the county. In many cases, the county pays the bulk of the costs for long-term foster care.

In this unpublished decision, the Court of Appeals noted that even before this 2005 amendment, long-term foster care was not a favored disposition for children. However, the Court of Appeals concluded that the district court had based its refusal to place the children in long-term foster care on the children’s interests rather than any limits on the court’s discretion imposed by this amended statute. The Court of Appeals affirmed that decision and declined to decide whether the 2004 or the 2005 version of the statute applied, and further, declined to determine whether the statute violates the constitutional separation of powers doctrine. In the Matter of the Welfare of the Children of D.B., A05-2426 (Minn. App. 08/01/06). www.lawlibrary.state.mn.us/archive/ctapun/0608/opa052426-0801.htm

• Termination of Parental Rights; Grounds Not in Petition. In another unpublished decision, parents appealed from a termination of their parental rights. One of the parents asserted that the district court erred by determining that she failed to rebut the presumption of probable unfitness arising from previous involuntary terminations. The other parent argued that service of the termination of parental rights petition was defective because it did not allege that he had abandoned the child, which was the basis upon which the court terminated his parental rights. The Court of Appeals affirmed the district court’s termination of the mother’s parental rights because she failed to present affirmative evidence of her ability to parent. As to the father, the Court of Appeals reversed and remanded because the termination was based on a ground not included in the petition. Such an action is not permitted either by the governing statute applied to terminations of parental rights or by fundamental notions of due process. In the Matter of the Welfare of the Child of: G.F. and J.S.-M., A05-2529 (Minn. App. 08/01/06). www.lawlibrary.state.mn.us/archive/ctapun/0608/opa052426-0801.htm

• Termination of Parental Rights; Custody; Best Interests. In an unpublished decision, the Minnesota Court of Appeals reviewed an appeal by a guardian ad litem challenging a district court’s order transferring custody of a minor child to his grandmother. Here the county had filed a petition to terminate parental rights of both the mother and father of a six-year-old boy, or in the alternative, to transfer permanent custody to a suitable third person. By the time the matter was called for trial, the parents and the county had reached a settlement by which they agreed that it would be in the child’s best interest if he were transferred to the custody of his paternal grandmother. The guardian ad litem objected to the transfer and assumed the burden of proving a petition for termination. After trial, the district court granted custody of the minor to his paternal grandmother. The Court of Appeals reversed and remanded, holding that the evidence failed to show that the transfer would be in the child’s best interest. The Court of Appeals observed that the grandmother’s background and current circumstances raised serious questions about her suitability, despite her good intentions, such that in the view of the Court of Appeals, the clear and convincing standard had not been satisfied. In the Matter of the Welfare of the Child of S.B. and D.W., Parents, A05-2386 (Minn. App. 07/18/06). www.lawlibrary.state.mn.us/archive/ctapun/0607/opa052386-0718.htm

• Juvenile Delinquency; 4th Amendment. The United States Court of Appeals for the 8th Circuit issued a decision in which it reviewed a federal district court decision in South Dakota. Here the 8th Circuit held that in light of the state’s legitimate responsibility to act in loco parentis with respect to juveniles taken into lawful state custody, a partial strip search of a juvenile was reasonable within the meaning of the 4th Amendment and did not violate her constitutional rights. Because there was a direct causal link between the search of the juvenile and the municipal policy in question, the county did not violate the juvenile’s rights. Jodie Smook vs. Minnehaha County, A05-1363 (8th Cir. 08/09/06).

— Gary A. Debele
Walling, Berg & Debele

TAX
JUDICIAL LAW

• Real Property Valuation: Conservation Reserve Program Payments; Valuing Farm Land. The Minnesota Tax Court addressed the valuation of farm properties and the application of Conservation Reserve Program contract ("CRP") payments in three recent cases, reaching the same result in each. The court held that CRP payments made to the taxpayers should be considered in valuing farm land but at a discount from fair market value. Richard and Elaine Fagen v. County of Chippewa, C7-04-196, 2006 Minn. Tax Lexis 17 (Minn. T. Ct. 06/30/06), Dean Dambroten v. County of Chippewa, C3-04-194, 2006 Minn. Tax Lexis 18 (Minn. T. Ct. 06/30/06) and Alvin and Carol Berends v. County of Chippewa, C5-04-195, 2006 Minn. Tax Lexis 19 (Minn. T. Ct. 06/30/06).

• Tax Protestor’s Arguments Rejected. The Minnesota Tax Court held that the commissioner-filed returns for 1996 through and including 1998 were validly assessed over taxpayer’s constitutional and statutory challenges. The wage income was subject to tax. The income tax was not unconstitutional because the 16th Amendment to the U.S. Constitution was not properly ratified. Secondly, the Court held that it had jurisdiction of constitutional issues since the case had been transferred to the Hennepin County District Court twice. Under the Erie procedure and applicable case law, the Tax Court is imbued with constitutional jurisdiction. Thirdly, the Taxpayer Bill of Rights was not violated nor was MBNA American Bank v. Commissioner of Revenue, 694 N.W.2d 778 (Minn. 2005) implicated. There was no timeliness issue (statute of limitations) involved in the case because taxpayer had filed timely appeals. Lastly, the court held that Minn. Stat. §§271.06, Subd. 6 and 289A.35, which provide that the commissioner’s order is prima facie correct and valid, were constitutional. Deanna L. Byers v. Commissioner of Revenue, Docket No. 7408-R, 2006 WL 995717 (Minn. T. Ct. 04/04/06).

• Excise Tax—Unemployment Benefits: "Experience—Rating Transfer". The Minnesota Court of Appeals held that the commissioner of employment and economic development did not err in transferring the old experience rating of a reorganized affiliate to the new subsidiary. A previous popular technique was to take an existing business and reorganize it so that its experience ratio would be less than presently operated. In an effort to stop the erosion of the tax base, Congress mandated new federal "employment tax dumping" rules. This case was decided under the existing Minnesota statute, Minn. Stat. §268.051, Subd. 4(i), which empowers the commissioner to provide the old experience ratio upon "transfer [of] all or a part of the experience rating" without requiring a determination of successorship if "the commissioner finds that a transaction was done, in whole or in part, to avoid an experience rating or the transfer of an experience rating." (Emphasis supplied). Spherion Pacific Workforce, LLC v. Commissioner of Employment and Economic Development, A05-1391, 2006 WL 146023 (Minn. App. 05/30/06).

• Real Property: Assessment Valuation. The taxpayer purchased the subject property, a church, a year before the assessment for $150,000 and intended it to be his primary residence. As part of the sale transaction, the prior owner of the church had procured an assessment which valued the property as of May, 2003 at $350,000 and this was introduced as evidence at the trial. The assessor’s value as of January 2, 2004 was $305,700, while the taxpayer’s testimony was that the value of the property was $165,000, increasing its value by 10 percent for inflation from the purchase price. There was a failure of proof by the taxpayer. No appraisal was submitted by him other than the appraisal of the prior owner and his own testimony, and therefore, the court affirmed the assessor’s valuation. Brian E. Schneider v. County of Chisago, CV-05-304, 2006 Minn. Tax Lexis 11 (Minn. T. Ct. 04/03/06).

• Income Tax: IRC §104; Damages on Account of Personal Physical Injury. The Minnesota Court of Appeals held that the district court’s conclusion that the settlement between the parties was not related to physical injuries was an advisory opinion and that the district court had no jurisdiction to determine the issue, which was not before it. The appellate court reversed and remanded to the district court with a proposed order stating "the Court acknowledges the intent of the settling parties that these sums constitute damages received on account of personal physical injury within the meaning of Section 104(a)(2) of the Internal Revenue Code of 1986 as amended." E.S., a minor, by her parents v. Independent School District No. 271, A05-2298, 2006 WL 1985571 (Minn. App. 07/18/06) (unpublished).

• Procedure: Time to Appeal Assessment; Period Not Tolled by Discussions. The Minnesota Supreme Court affirmed the Tax Court, holding that Piney Ridge had 60 days after the order to either appeal the assessment to the Tax Court or file an administrative appeal to the Department of Revenue. Minnesota law does not provide that the discussions or negotiations with the commissioner toll or suspend the appeal period. Accordingly, the Court held that Piney Ridge did not perfect an administrative appeal to either the commissioner or the Tax Court. Piney Ridge Lodge, Inc. v. Commissioner of Revenue, A05-2387, 2006 WL 2075231 (Minn. 07/27/06).

• Real Property: Tax Exemption as Purely Public Charity Denied. The Minnesota Tax Court denied the nonprofit Afton Historical Press exemption from property taxes for years payable 2004, 2005, and 2006. The court applied the factors set forth in North Star Research Institute v. County of Hennepin, 736 NW 2nd 754, 757 (Minn. 1975). Afton is a publishing house that is devoted to publishing books that explore and celebrate Minnesota’s history and culture. The nonprofit was principally funded by the McMillan Family but solicits contributions from the public to make donations to schools. Its other revenue source is retail sales. The taxpayer normally seeks out a proposed donor to fund the project and then the donor indicates what school or tax exempt entity the books will be donated to. The court found that the North Star factors numbered 1, 4, and 6 were met. However, the 2nd (whether the entity involved is supported by donations and gifts); 3rd (whether the recipients of the charitable benefits are required to pay for the assistance received); and 5th (whether the beneficiaries of the "charity" are restricted or unrestricted and, if restricted, whether the class of persons to whom the charity is made available is one having a reasonable relationship to the charitable objectives) factors of the North Star test were failed. Consequently, Afton did not qualify for exemption from real property taxation under Minn. Stat. §272.02, Sub. 7. Afton Historical Society Press v. the County of Washington, C5-04-2979, C4-05-3521, and C8-06-1961, 2006 Minn. Tax Lexis 21 (Minn. T. Ct. 07/19/06).

• IRS Collections; No Abuse of Discretion Despite Error. The Tax Court held that an individual cannot challenge his underlying tax liability in a collection’s due process hearing under IRC §6330(c)(2)(B) when he previously received a statutory deficiency notice and failed to challenge the determination or petition the Tax Court for a redetermination. Greg A. Bell v. Commissioner, 126 T.C. No. 18 (2006).

• Interest Abatement Request; Jurisdiction. The Federal Circuit, affirming the Court of Federal Claims, determined that the court lacked jurisdiction over a couple’s case seeking review of an IRS decision to deny their interest abatement request, stating that IRC §6404(h) grants the Tax Court exclusive jurisdiction to review IRS interest abatement decisions. John F. Hinck et us. V. United States, 05-5099, 97 AFTR 2d ¶ 2006-2336 (Fed. Cir. 05/04/06).

• Withholding Taxes: Certain Separation Payments Subject to Tax. Separation payments made pursuant to employee protective agreements allowing an employee to separate, to transfer, or to remain on furlough do not constitute supplemental unemployment compensation benefits under IRC §3402(o), and are therefore subject to federal employment taxes. IRC §3402(o) defines supplemental unemployment compensation benefits as "amounts … paid to an employee, pursuant to a plan to which the employer is a party, because of an employee’s involuntary separation from employment (whether or not such separation is temporary), resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions." CSX Corp. v. United States, 95-858T, 97 AFTR 2d ¶ 2006-1090 (Fed. Cl. 06/22/06).

• Tax Evader Case; Sentencing. The 8th Circuit, vacating and remanding a district court’s sentencing of a tax evader, held that the court abused its discretion in departing too far from the sentencing guidelines. Based on the offense, any sentence without imprisonment was wholly unreasonable. The taxpayer did not file or underreported $900,00 in income over a three year period. United States v. Gerald Ture, 05-3142, 97 AFTR 2d ¶ 2006-2880 (8th Cir. 06/13/06).

• RICO Action Against Noncollecting Competitor Lacks Proximate Cause. The U.S. Supreme Court held that a company may not be sued by a competitor under 18 USC §1962(c) of the Federal Racketeer Influenced and Corrupt Organization Act ("RICO") for the company’s unlawful failure to collect New York sale tax. The company was challenging an action brought by a competitor that alleged that it lost sales as a result of company’s offering lower prices on the same products by failing to collect sales tax and fraudulently concealing its action from the state. The competitor could not maintain a RICO claim based on §1962(c) of the act because there was no proximate cause resulting in a direct relation between the injury asserted and the injurious conduct alleged. In reaching this conclusion, the Court relied on its earlier opinion in Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992). Anza et al. v. Ideal Steel Supply Corp., 04-433, 126 S. Ct. 1991 (2006).

• Taxability of Settlement Payment; Duty to File. District Court held that an insurance company had a "good-faith basis" for filing a Form 1099 for payment made under a settlement agreement. The company had no duty to file an amended form because the IRS should decide whether the payment is taxable income. There was a provision in the settlement agreement stating the settlement proceeds were paid as compensation for personal and/or emotional injuries and damages. Robert J. Ward v. American Family Life Assurance Co. of Columbus, 2:05-CV-02120, 97 AFTR 2d ¶ 2006-2612 (D.S.C. 05/16/06).

• Valuation Documents Not Protected by Work Product or Privilege. A district court held that an estate’s valuation documents are no longer protected as work product or covered under attorney-client privilege. The estate agreed to allow the IRS to review the documents and the preparers of the documents were named as expert witnesses. Estate of Douglas L. Manship et al. v. U.S., 04-CV91-M2, 97 AFTR 2d ¶ 2006-2448 (M.D. La. 04/13/06).

• Innocent Spouse Decision; Jurisdiction. The 8th Circuit, vacating a Tax Court decision, held that the court lacked jurisdiction to hear an individual’s appeal of an IRS innocent spouse decision when the IRS hadn’t issued a statutory deficiency notice for the years she sought innocent spouse relief. Nancy A. Sjodin v. Commissioner, 05-1110, 97 AFTR 2d ¶ 2006-2622 (8th Cir. 05/30/06).

• Rejection of Compromise Offer on "AMT" Owed From ISO Exercise. After first deciding that it had the jurisdiction to address the issue under IRC §7122(a) and §6330(c), the 8th Circuit, affirming the Tax Court, held that IRS did not abuse its discretion in rejecting a taxpayer’s offer in compromise relating to alternative minimum tax ("AMT") liability that resulted from his exercise of incentive stock options in 2000. Speltz, 05-3054, 98 AFTR 2d ¶2006-5132 (8th Cir. 07/14/06).

• Contingent Liability Transaction; No Capital Loss. The Court of Appeals for the Federal Circuit, reversing the Court of Federal Claims, held that a company couldn’t claim a $379 million capital loss. Although the transaction that created the high basis in stock that was sold literally complied with statutory requirements of IRC §357, it had to be disregarded because it lacked "economic substance." Coltec Industries, Inc. v. U.S., 05-5111, 98 AFTR ¶2006-5095 (Fed. Cir. 06/12/06).

• Statute of Limitations Bars Refund of Taxes Mistakenly Paid. The 11th Circuit reversed a district court decision that allowed a refund of taxes erroneously paid by the taxpayer. Even though the claim for refund was received after the expiration of the three-year period for filing refund claims under IRC §6511, the district court allowed the refund because it found that Code §6511 does not apply where a return is not required in the first place. The appellate court disagreed, finding that the statute applies in this type of situation and that it operated to bar the refund. The taxpayer’s argument that IRC §2401(a) (the six year statute of limitations) applied was rejected. Wachovia Bank v. U.S., 05-12814, 98 AFTR 2d ¶2006-5111 (11th Cir. 2006).

• Excise Taxes; Conversion to Non-Exempt Status. The 5th Circuit reversed a controversial 2002 Tax Court decision holding that the transfer of the assets of nonprofit home health care agencies to S corporations controlled by the nonprofits’ owners was subject to excess-benefit transaction excise taxes under IRC §4958. The appellate court reversed because of numerous errors committed by IRS and the Tax Court. Among these, the court found: error as a matter of law in the affirmation of IRS’s decision to impose excise taxes after IRS failed to meet its burden of proving that the taxes were correctly assessed; error as a matter of law in selection of the method to value the assets and liabilities transferred; and clearly erroneous fact findings in applying that valuation method. Michael T. Caracci, 02-60912, 98 AFTR 2d ¶2006-5096 (5th Cir. 07/11/06).

• Amended Refund Claim Avoids Statute of Limitations. The IRS lost a refund case when the Federal Claims Court decided that a taxpayer’s amended refund claim was not barred by the statute of limitations. The timely original claim was amended after the three-year limitations period had expired. No matter that the amended claim was for 400 times the amount of the original refund claim (a $9,000 to $3.6 million difference). As long as the amended claim was germane to the original claim and was presented before the original claim had been resolved, the IRS should not have been "surprised." The refund was generated by a credit under IRC §7422(d) and §6407 but the IRS had destroyed the Form 2188 certifying the taxpayer’s credit as required by the regulations. The IRS should lose simply because it could not prove when the payment was made by the credit. Parker Hannifin Corp. v. U.S., 05-1041T, 97 AFTR 2d ¶ 2006-2568 (Fed. Cl. 05/23/06).

• Airline Hub Exemption from State Taxes. The Wisconsin Supreme Court held a Wisconsin statute granting an exemption for real property taxes for Midwest and Air Wisconsin but not for Northwest was constitutional. The Court concluded that 49 U.S.C. §40116 precludes (1) dormant Commerce Clause review of the hub exemption; (2) the exemption does not violate the Equal Protection Clause; and (3) the hub exemption does not violate the Uniformity Clause of the Wisconsin Constitution. The Court reversed the lower court’s decision that the hub exemption violated the Commerce Clause. The exemption applied to all property at the headquarters hub facility located in Wisconsin. Northwest challenged the hub exemption on the grounds that it offered Midwest and Air Wisconsin a competitive advantage. Northwest Airlines, Inc. v. Wisconsin Department of Revenue, 2004 AP 319, 717 N.W.2d 280 (Wis. 2006).

• Innocent Spouse Relief: Nondeficiency Stand-Alone Petition. Mr. Billings learned that his wife had embezzled money in 1999. He filed an amended joint return with his wife for that year and requested innocent spouse relief under IRC §6015(e) from the U.S. Tax Court. The type of petition that he filed is known as a "nondeficiency stand-alone" petition. It was a "nondeficiency" because the IRS accepted his amended return as filed and asserted no deficiency against him. It was "stand-alone" because his claim for innocent spouse relief was made under IRC §6015 and not as part of a deficiency action or in response to an IRS decision to begin collecting his tax debt through liens or levies. In a previous case, Ewing v. Commissioner, 118 T.C. 494 (2002), the Tax Court agreed that it had jurisdiction to hear such cases. However, the decision in Ewing was reversed by the 9th Circuit (439 F.3d 1009 (9th Cir. 2006)) and that position was adopted by the 8th Circuit in Bartman v. Commissioner, 446 F.3d 785, 787 (8th Cir. 2006). The Tax Court has thrown in the towel and agreed that it lacked jurisdiction. The issue may ultimately be nothing more than a footnote since a bill, S.F. 3523, has been introduced in the Senate. The bill would allow nondeficiency stand-alone petitions to be filed "with respect to liability for taxes which are unpaid after the date of the enactment" of the act. Billings v. Commissioner, 127 T.C. No. 2 (2006).

• Rollover From Husband’s IRA to Wife’s IRA; Penalty. The U.S. Tax Court held that a surviving wife, who rolled over her husband’s IRA into her own IRA, must pay the IRC §72(t) 10 percent penalty on a pre-age-59-1/2 withdrawal from her IRA. Once she transferred the funds to her separately owned IRA, the amount received from the decedent’s IRA lost its character as a distribution made to a beneficiary upon a decedent’s death. Charlotte and Charles T. Gee, 127 TC No. 1 (2006).

• Single Sex Couple Denied Joint Return Status. The 8th Circuit affirmed a district court dismissal of an individual’s claim that he is entitled to a refund based on his filing a married joint return with his partner. He is barred from relitigating the validity of his marriage because it has been previously litigated in the Minnesota state courts. J. Michael McConnell v. United States, 05-1781, 98 AFTR 2d ¶ 2006-5134 (8th Cir. 07/17/06).

• No Retroactive Application of IRC §752 Regulations to Completed Transactions. The D.C. Tax Court held that two partnerships’ contingent obligations consisting of loan premiums and prepayment amounts were not "liabilities" under IRC §752 and therefore did not increase the partners’ basis in their partnership interests. The entities were actually LLCs taxed like partnerships. It also held that IRS’s retroactive change to a regulation to include contingent obligations in the definition of "liability" under IRC §752 was ineffective as against the taxpayers in this case. The IRS could not apply the regulations retroactively before August 11, 2000, when the IRS issued Notice 2000-44, 2000-2 CB 255. Kamath Strategic Investment Fund LLC v. U.S, 5:04-CV 278, 98 AFTR 2d ¶ 2006-5179 (D.C. Tx. 07/20/06).

ADMINISTRATIVE DEVELOPMENTS

• Sales & Use Tax: Motor Vehicle Leases; Sales Price; Taxes and Fees Includability. In Minnesota Department of Revenue Notice No. 06-08 (07/31/06), the commissioner stated its position on the imposition of the state sales tax and other taxes on motor vehicle leases upon rental of the vehicle by customers for periods of not more than 28 days. The commissioner’s position is to impose the 6.5 percent state sales tax, the 6.2 percent motor vehicle rental tax, the 3 percent motor vehicle rental fee, and the local sales tax to the total amount paid for the rental as part of the "Sales Price" as found in Minn. Stat. §297A.61, Subd. 7. The "Sales Price" includes all taxes, charges, fees or assessments that are legally imposed upon the lessor even though they may be passed on to the lessee and separately stated on the bill. Examples of fees or charges are: facility usage fee, franchise fee, and the Concession Recovery Fee and the Rental Auto Facility Charge imposed by the Metropolitan Airports Commission. Consequently, if a rental business leased a vehicle to a customer in Minneapolis, and the lease was for a period of four days at a rate of $30 per day, the total lease payment of $120 would be subject to the 6.5 percent state sales tax, the 6.2 percent motor vehicle rental tax, the 3 percent motor vehicle rental fee, and the 0.5 percent Minneapolis City Sales Tax. In addition, if there was a $2 per day facility usage fee or Rental Auto Facility Charge and a Concession Recovery Fee of 9.5 percent or $2.85, there would be an additional $4.85 per day added to the $30 per day lease payment and the taxes would then be imposed on that total.

• Sales & Use Tax: Taxable Price; Natural Gas Used for Pipeline Compressor Operation. In Minnesota Department of Revenue Notice No. 06-09 (07/31/06), the commissioner stated its position on the taxable price for natural gas used in a pipeline compressor operation in light of a legislative amendment to law to overrule Great Lakes Transmission, L.P., v. the Commissioner of Revenue, 638 N.W. 2d 435 (Minn. 2002). That decision was effectively overruled by new Minn. Stat. §297A.68, Subd. 2(d) which provides that the industrial production exemption does not include the transmission of natural gas and other related resources through or by pipes or other means. Therefore, the commissioner takes the position that natural gas purchased and used by pipeline company in and during the course of its operations is subject to Minnesota sales and use tax. The taxable price of the gas must be determined by an arms-length price or if unavailable, the commissioner relies on a number of alternatives, such as the 30-Day Spot Price.

• Standard for Reporting Tax Positions. The "FASB" (Financial Accounting Standards Board) issued an authoritative interpretation clarifying the manner in which enterprises account for uncertainty in income taxes. The basic yardstick, a "more likely than not" standard, is intended to enhance the relevancy and comparability of financial reporting by companies. The interpretation is effective for fiscal years beginning after December 15, 2006, but earlier application of the interpretation is permitted. FASB No. 48, "Accounting for Uncertainty in Income Taxes", clarifying FASB Statement No. 109.

• Rescission of Conversion of LLC to Corporation Permitted. The IRS ruled that taxpayer’s conversion from a limited liability company (treated for federal tax purposes as a partnership) into a corporation could be rescinded during the year of conversion so that taxpayer would be treated as a partnership at all times during the year in question. Taxpayer converted to a corporation in anticipation of making an initial public offering of its stock. However, as a result of a "precipitous and unexpected deterioration in market conditions" the initial public offering was canceled shortly after the conversion. It was represented that there was no plan to attempt another public offering in the near future. PLR 200613027.

• Employee Health Reimbursement Card Substantiation Options. IRS gives employers more ways to substantiate claimed medical expenses when employees use debit and credit cards in medical reimbursement plans and dependent care assistance programs. The notice clarifies the methods and requirements of substantiating medical expenses charged to cards under health flexible spending arrangements and health reimbursement arrangements first outlined in Revenue Ruling 2003-43. Notice 2006-69.

• Reporting Payments to Attorneys. IRS issued final regulations on information reporting of payments of gross proceeds to attorneys. The regulations, which reflect some new exceptions and other changes, will apply for payments made in and after 2007. They will affect attorneys who receive payments of gross proceeds on behalf of their clients and certain payors (for example, defendants in lawsuits and their insurance companies and agents) that, in the course of their trades or businesses, make payments to these attorneys. TD 9270, 07/12/2006; Regulations §1.6041-1; Regulations §1.6041-3; Regulations §1.6045-5.

• New Offer in Compromise Rule. In a notice, information release, and fact sheet, IRS highlighted how the Tax Increase Prevention and Reconciliation Act of 2005 changes the way IRS’s offer in compromise ("OIC") program will operate, effective July 16, 2006. Under the new rules, taxpayers submitting lump-sum offers must make a 20 percent nonrefundable, up-front payment to IRS. Similarly, taxpayers submitting a periodic-payment OIC must make a nonrefundable, up-front payment of the first proposed installment, while IRS evaluates the offer. Notice 2006-68, 2006-31 IRB; IR 2006-106; Fact Sheet 2006-22.

• IRS Legal Advice. IRS officials outlined a major initiative to streamline the procedures for providing legal advice to taxpayers and its own field offices, hoping to expedite targeted advice to resolve tax disputes. All advice will be nonprecedential and will be subject to publication procedures under IRC §6110. Changes for streamlining the TAM process, which are largely procedural, will be in Rev. Proc. 2007-2. Code Sec. 6110 Rev. Proc. 2007-2.

• Health Insurance Costs Not Deductible from Self-Employment Income. The IRS made its position clear that a self-employed individual cannot deduct health insurance costs from his or her self-employment income reported on Schedule C of Form 1040. Instead, the insurance costs must be deducted on Form 1040 as an adjustment to the individual’s gross income. Since the amounts do not reduce Schedule C income, the individual will pay more in employment taxes. CCA 20063001.

LEGISLATION

n Minnesota Tax Legislation in 2006. The Legislature adjourned on May 22, 2006 and enacted the 2006 Omnibus Tax Bill (H.F. 785 and codified as Chapter 259). The Legislature evenly split the surplus between an increase in spending $202 million and $202 million in tax cuts and adjourned to await the November elections.

Highlights of the 2006 Legislation include:

Federal Conformity. In general, Minnesota conforms to the IRC as amended through May 18, 2006. For individuals, Minnesota has now conformed to the current federal standard deduction for married filers effective in tax year 2006.

New Credits. Two new tax credits are provided for individuals and businesses: a refundable income tax credit to owners of cattle for one-half the expenses incurred to conduct bovine tuberculosis testing and a refundable credit equal to $59 per month for active military service in a combat zone retroactive to active service in September 11, 2001. The credit amounts from 2001 through 2006 may be claimed on 2006 income tax returns.

Individual’s AMT Exemption. The Minnesota AMT exemption for individuals was increased for all filing classes, effective in tax year 2006. The law also provides for the exemption amounts to be indexed annually for inflation beginning in tax years 2007.

Local Sales Taxes. The act modified existing local sales tax authorities for the cities of Hermantown, Winona, and Worthington. It also authorized new sales taxes for the cities of Austin, Baxter, Brainerd, and Owatonna subject to voter approval.

Reduction in Accelerated June Sales & Use Tax and Excise Taxes. Reduces the percent of June accelerated sales and use taxes that must be submitted from 85 percent to 78 percent, beginning June 2007. Also applies to cigarette, tobacco, and liquor taxes.

Twins Sport Stadium. Laws 2006 H.F. 2480 and S.F. 2297, codified at Chapter 257, effective May 27, 2006, provides for the construction and operation of a new major league ballpark in Minneapolis and authorizes the imposition of a local sales tax of 0.15 percent.

University of Minnesota Football Stadium. The Gopher football stadium was signed into law as H.F. 3423 and S.F. 2460, codified at Chapter 247.

Amendment to Allocation in Expenses. Amends Minn. Stat. §290.17, Subd. 1(b) to provide that deductions are to be assigned in Minnesota only for the expenses that are definitely related to items of income that are assigned to Minnesota. Corporate expenses related to the business of the corporation are allowed as a deduction in the computation of taxable net income and then subject to apportionment. Effective for tax years beginning after December 31, 2005.

"Fee and Tax" Defined. For the first time in Minnesota’s history, there are definitions of a "fee" and a "tax." See Chapter 259, Article XIII, Section 15, which amends Minn. Stat. §645.44. The new law states that any "fee" deemed to be the functional equivalent of a tax must be treated as a tax for all purposes of the law. "Fee" is more narrowly defined than one might normally understand, e.g., compensation for user cost or burden. A "fee," under the statute,