August 2007

In this month's "Notes & Trends:


Home-Warranty Claims. In a published opinion, the Court of Appeals answered certified questions from the district court, which had denied the builder’s motion for summary judgment, seeking dismissal of the home-warranty claim.

Appellant built the home in the mid-1990s. Respondent purchased the home from the original owner in May 2000. When respondent attempted to sell the home in the fall of 2002, a potential buyer backed out of the transaction after having the home inspected. The following spring, 2003, respondent had the home inspected herself, and that inspection revealed a number of alleged structural defects. Less than six months later respondent served a Summons and Complaint upon appellant, alleging breach of warranty, among other claims, and respondent attached to the Complaint the ten-page inspection report which alleged the construction defects. Respondent did not provide appellant with any written notice prior to the Summons and Complaint.

An additional complicating factor was that, after serving the Summons and Complaint, respondent defaulted on her mortgage, and the home was sold at foreclosure in June 2006. Further, respondent testified that she had no intent to redeem by the statutory redemption deadline of December 2, 2006.

Appellant moved for summary judgment. The district court granted the motion with respect to respondent’s claims for breach of contract and negligence, but denied the motion with respect to respondent’s home-warranty claim. Further, the district court found that respondent had standing as a "vendee" under the terms of the home warranty statute, because she retained ownership until the redemption period expired. Most significantly, the court found that respondent gave proper written notice under the home warranty provision by serving the Summons and Complaint within six months of discovering the damage or loss.

The district court certified two questions for appeal:

1. Whether respondent provided adequate written notice under §327A.03(a); and

2. Whether respondent is a vendee after the foreclosure, but before the redemption deadline.

The Court of Appeals answered both questions in the affirmative.

Appellant contended that the notice provision of Minn. Stat. §327A.03(a) (2006) is a condition precedent to commencing a lawsuit. Therefore, the Summons and Complaint could not satisfy the condition precedent. As a matter of statutory construction, the court first looked to the plain language of the provision. Appellant contended that the statute’s plain intent is to obligate homeowners to give written notice as a condition precedent to commencing suit so that the contractor has an opportunity to cure any loss or defect. The Court of Appeals disagreed, holding that the statutory provision does not limit the form that the written notice must take, nor does it provide that the notice must be given before commencing suit. The court found that the singular purpose for the notice provision is to limit the time in which a homeowner may assert a home warranty claim against a contractor. Thus, the Court of Appeals concluded that the district court properly found that the Summons and Complaint complied with the statute’s notice requirements.

With respect to the second questin, whether respondent, who was in the process of losing her home in a foreclosure action, has standing to make the home-warranty claim, the court notes that the pertinent statutory provisions specifically allow claims by vendees. A vendee is defined as not only the initial vendee, but any subsequent purchasers, and warranties shall survive the passing of legal or equitable title to the vendee. Further, the court held that respondent was a vendee, not only during the time up to the foreclosure sale, but during the period of redemption. Since the certified question from the district court was limited to the narrow issue of whether respondent was a vendee entitled to pursue her home-warranty claim during the redemption period, the Court Appeals’ answer is limited to that narrow question as well. Lisa Peterson v. Phillip Johnson, A06-1830, 2007 WL 1816276 (Minn. App., 06/26/07).

Primary Assumption of the Risk. Appellant suffered personal injuries when he collided with respondent on a ski slope. Respondent moved for summary judgment on the grounds of primary assumption of the risk. The district court granted respondent’s motion, and the Court of Appeals affirmed.

The sole issue for consideration on appeal was whether appellant’s assumption of the risk precluded his negligence claim. The Court of Appeals noted that this issue is generally a question for the jury, but that when reasonable people can draw only one conclusion from undisputed facts, the issue may be decided by the court as a matter of law.

If it can be said that plaintiff assumes well-known incidental risks, then the defendant has no duty to protect the plaintiff from those risks. Further, under the doctrine, plaintiff must voluntarily enter into a situation where the defendant’s negligence may be obvious, but the plaintiff consents to defendant’s negligence and agrees to undertake to look out for himself and relieve the defendant of his duty. In summary, the doctrine applies if three conditions are met: 1) Plaintiff knows the risk; 2) Plaintiff appreciates the risk; and 3. Plaintiff has a chance to avoid the risk. Andren v. White-Rogers Co., 465 N.W. 2d 102 (Minn. App. 1991).

During his discovery deposition, appellant conceded that he knew that he might collide with other skiers and that collisions, accidents, and injuries do occur in skiing.

Appellant correctly argued that no Minnesota appellate court had addressed and recognized the specific issue of primary assumption of the risk as between skiers. However, the Court of Appeals found ample support for the inference and recognition of primary assumption of the risk in analogous skiing cases. Further, the court cited several Minnesota cases in which the doctrine of primary assumption of the risk has been applied to claims between participants in other sporting events. Neal Peterson v. David Donahue, A06-1824, 2007 WL 1816266 (Minn. App. 06/26/07).

— Andrew T. Shern
Murnane Brandt

August 2007

In this month's "Notes & Trends:


Joinder; Acquittal Bar Redefined. The parties agreed that the trial court improperly joined three theft-by-swindle charges because they were not related. These three individual and separate incidents were also joined with a "base" offense of identity theft. At trial, the defendant was acquitted of the identity theft charge, but convicted of the three separate unrelated counts (involving Target, Sears and Marshall Fields). The Court of Appeals reversed the conviction because joinder was improper under a Spreigl analysis: Since the defendant was acquitted of one of the theft-by-swindle charges, evidence related to that charge was not admissible as Spreigl evidence at the trials of the other offenses, hence the admission of evidence from the improperly joined offense was, per se, prejudicial. The Supreme Court holds that in order to be inadmissible Spreigl evidence under Wakefield, 278 N.W.2d 307 (Minn. 1979), the acquittal must have occurred before the trial at which the evidence is being sought to be introduced. The Court of Appeals is reversed. State vs. Rossco A. Ross, A04-1715 (Minn. 06/07/07).

Probation Violations: Consideration of Juvenile Record; Revocation Hearing Requirement. Appellant, when age 18, had been certified as an adult, and was charged with racketeering, conspiracy to commit a controlled substance crime in the first degree, controlled substance crimes, and robbery counts. Following his release from prison, he was placed on supervised release and was given a probationary term by the trial judge. The probationary term had not expired when this action commenced. The appellant never officially signed a probation contract in Minnesota, but failed to receive such services in Illinois after he had received permission to transfer his probation to that state. At the probation violation hearing, the presiding judge was not the same judge who had originally sentenced the appellant. The district court made the required Austin findings, and used the defendant’s juvenile record, and information contained in the certification study, in making its decision to revoke probation. The court noted that the appellant had changed his residence without informing the supervising agent, his efforts to find employment were minimal, and that he had used marijuana on a daily basis. Held, it was appropriate, in this case, in order to assess the threat to the public and need for confinement, to analyze the defendant’s juvenile record, as well as the certification study. The court does note, however, that "at some point, a probationer must be judged on the basis of his adult conduct, free from his juvenile record. Here we note that Osborne’s certification study was completed in October 2001, and the district court revoked probation in February 2005." This is considered to be a relatively short time frame and the similarity of the offenses displays a pattern of criminal conduct. Finally, the court states: "We decline to adopt a requirement that only a sentencing judge may hear subsequent probation violations". State v. Ricky A. Osborne, A05-988 (Minn. 06/07/07).

Search and Seizure; Photographs Taken During Emergency Warrantless Entry. Police received a hang-up 911 call from a St. Paul residence. As part of standard protocol, two St. Paul police officers were dispatched to the residence, where they knocked on the front door and no one answered. Police knocked and announced their presence and stated they were going to enter the home. When no one answered, officers entered the home and checked all the rooms to make sure that everyone was safe. While searching the house, one of the officers found a bedroom in which the ceiling, walls, doorframe, closet and furniture were all covered with graffiti. The officer then went to his squad to retrieve a camera and returned to the bedroom where he took seven photographs of the graffiti. The officer testified that when he took them, no crime had been committed, but he thought that the pictures could be for information only. Two weeks later, a graffiti investigator from St. Paul reported two new incidents concerning multiple businesses which were later connected to the appellant in this case by virtue of the pictures which had been taken from the residence. Held, the photographs must be suppressed. In applying the emergency exception to the warrantless search rule, the scope of the search must be limited to the emergency. Here, photographing the graffiti was not connected to the emergency, and exceeded the scope of the permissible emergency aid search. When the officer testified, he stated that no crime had been committed, and he took the pictures for informational, not evidentiary purposes. Therefore, there was no probable cause to believe that a crime had been committed at the time the photographs were taken. In re J.W.L., A06-863 (Minn. App. 06/05/07).

Search and Seizure; Warrantless Search Allowed. The appellant was on probation for a felony, and one of the conditions included no firearms. The appellant’s probation officer received information from the defendant’s mother stating that the appellant had assaulted her in Wisconsin and that, according to her daughter, the appellant kept guns under his bed and large amounts of methamphetamine in a secret room. The probation officer called the Superior Police Department and confirmed that the appellant had been arrested for domestic assault. As part of his probation agreement, the appellant agreed to warrantless, suspicionless searches of his person and property. The probation officer, along with two law enforcement agents, arrived at Anderson’s residence and told appellant that they were there to conduct a search in keeping with General Condition 6 of the probation agreement, to which the appellant responded, "That’s fine. I’ve got nothing to hide." Police recovered weapons. Held, in this case of first impression, such a search need only be supported by reasonable suspicion and based upon a valid probation condition. Under these circumstances, the court finds reasonable suspicion existed based on the information imparted to the probation officer, and that, based on the record before it, the probation condition is presumed to be valid. The Court of Appeals declines to reach the issue of whether, absent a valid probation condition, a probation search based on reasonable suspicion violates the 4th Amendment. State v. William Arthur Anderson, A05-1167 (Minn. 06/14/07).

Search and Seizure; Expansion of Terry/Automobile Search; Furtive Movement. Appellant was pulled over for a traffic stop based upon an unilluminated rear license plate. He pulled slowly into an alley, and did not stop right away. Using a spotlight, police observed the appellant to make furtive lateral movements in the front seat, including ducking and "lunging" type behavior. Suspecting a gun, police performed a felony stop, and the appellant was ordered out of his vehicle at gunpoint and was required to lie on the ground. A frisk of the appellant yielded no weapons or contraband. A search of the interior of the vehicle yielded no guns or contraband. A third search, in the form of a dog-sniff, indicated no controlled substances. Police did not know, at any relevant time of the searches, that appellant was felon. A fourth search by a later-arriving officer involved prying away a door panel, which yielded a 9 mm. rifle. Held, the fourth search, involving prying away the door panel, was impermissible under the state constitution. Following LaFave, the Supreme Court holds that it was impermissible to perform a second search of the vehicle. The reasonable suspicion that officers had when they first searched Flowers in the vehicle had dissipated. Without more, the officers could not conduct another search of the vehicle based on the same suspicions. There were no new behaviors or information imparted to the police that would justify the second search of the vehicle. Hence, under Terry, this second search exceeded the "carefully limited frisk for weapons" which is permissible by Terry. The court also notes that a majority of cases from other jurisdictions hold that a driver’s furtive movements alone do not supply probable cause to allow for a search of a vehicle under the automobile exception. State v. Dontrell Dyna Flowers, A05-213 (Minn. 06/28/07).

Search and Seizure; Hot Pursuit Entry of Residence and Warrantless Arrest. Police responded to reports of a fight at a party. A defendant in this case ran away from the officer, who yelled "Stop" and "Police" several times. The police officer pursued defendant Johnson into the house where he was arrested. Held, it was an appropriate hot pursuit entry of the defendant Johnson’s residence because fleeing on foot is a serious offense, a misdemeanor punishable under Minn. Stat. §609.487, Subd. 6, which distinguishes this case from the activity in Welsh v. Wisconsin, 466 U.S. 740 (1984), which concluded that night-time entry into a home to arrest an individual for DWI was prohibited under the 4th Amendment because Wisconsin considers that activity to be a noncriminal civil forfeiture offense for which no imprisonment is possible. State vs. Samuel Patrick Morin, et al., A06-02, -04, -05, -06 (Minn. App. 06/26/07).

Firearms; Felony Reduced to Misdemeanor; Crime of Violence. The appellant had successfully completed a stay of imposition/probationary period, such that his prior felony conviction for burglary, a felony, was deemed to be a misdemeanor. Appellant argues that the prohibition against firearms contained in Minn. Stat. §624.712 was amended in 2003 to state that "crime of violence" means "felony convictions of" all listed offenses, including burglary. Following Moon, the Court of Appeals rejects this argument, and notes that courts have been instructed to consider the elements of a prior offense, rather than its subsequent disposition, when determining whether the offense is a crime of violence. For this reason, the appellant "has been convicted" of a felony burglary, and is prohibited from possessing firearms. State v. Anderson, supra.

Sentence: Review of Criminal History Calculations; Offense Committed After Discharge from Indeterminate Probationary Term. Appellant entered into a plea agreement with the assumption that he had a criminal history score of 2 when, after the PSR, he was given a criminal history of 4, based upon an undisclosed burglary conviction and a custody status point assigned by the probation officer. When the appellant was convicted for the burglary charge, he was placed on probation for a period "not to exceed the statutory maximum" of ten years. Forty-five months after that, and 34 months prior to the current offenses, the appellant was discharged from probation. The probation officer, however, assigned a custody status point under Minnesota Sentencing Guidelines II.B.2.c, which allows a custody status point to offenders who "committed the current offense within the period of the initial length of the stay pronounced by the sentencing judge for a prior felony". Held, citing Misquadace, sentencing under the guidelines is a not a right that accrues to a person convicted of a felony, but is a procedure based on state policy to maintain uniformity. Hence, a sentence based on an incorrect criminal history score is an illegal sentence, and is correctable anytime under Minn. R. Crim. P. 27.03, Subd. 9. Furthermore, a defendant cannot either waive, or forfeit by silence, any objection to the computation of the criminal history. Next, the Court of Appeals holds that the custody status point was improperly assigned. If the original judge had placed the appellant on probation for ten years, and discharged the appellant early from probation on any date before the expiration of the ten years, the appellant would have still been within the "initial length of stay" when he committed the current offense. However, because the burglary probation was imposed "for a period not to exceed the statutory maximum," the initial length of the probationary term was as short as zero and as long as ten years. Hence, the burglary was not committed within the original pronounced probationary term. State v. Daniel Leslie Maurstad, A04-1000 (Minn. 06/14/07).

Blakely; Upward Departure Based Upon Jury Verdict for Lesser Offense. Appellant was convicted of third-degree criminal sexual conduct, calling for a presumptive 78-month imprisonment term. Following a remand, the district court based a 24-month upward sentencing departure on the original jury verdict, which determined that the appellant had also committed the lesser-included offense of child neglect and child endangerment. Those child-offenses formed the basis of the district court’s determination for the upward departure. Held, a jury verdict on one crime may coincidentally satisfy the requirements of Blakely on another crime. Because the jury’s guilty verdict of the lesser offenses necessarily involved findings beyond a reasonable doubt, there is no Blakely violation. State v. Daniel E. Jones, A06-17179 (Minn. App. 06/19/07).\

5th Amendment: Extension of Incarceration as Sanction for Refusal to Admit. The Supreme Court concludes that the United States Supreme Court’s decision in McKune, 536 U.S. 24 (2002), under a plurality analysis, effectively overrules Morrow v. LaFleur, 590 N.W.2d 787 (Minn. 1999), which held that the extension of an inmate’s incarceration by delaying supervised release does not constitute compulsion. Accordingly, Johnson’s privilege against self-incrimination was violated because his direct appeal was still pending at the time he was required to admit his offense and treatment in prison. Secondly, Henderson’s 5th Amendment right was violated because he had testified at trial that he did not commit the crime and admission of the offense in treatment would therefore expose him to prosecution for perjury. Johnson v. Fabian, et al., A05-2498 and A06-439 (Minn. 06/28/07).

Jury Instruction; Constructive Possession/Inference Instruction. In a case concerning possession of a firearm by a felon, the district court initially instructed the jury that the defendant could be found guilty if he either knowingly possessed a pistol or knowingly exercised dominion and control over it. Following a query from the jury during deliberations, the court submitted the following answer: "Knowledge is required for possession. Knowledge may be inferred if the firearm was in a place under his exclusive control to which other people did not normally have access." Held, the district court’s answer was an improper inference instruction. The Supreme Court is unable to distinguish this instruction from the improper inference instructions struck down in Olson, 428 N.W.2d at 215, and Litzau, 615 N.W.2d at 186, n. 8. State v. Flowers, supra.

Assault; Spitting at Police Officer. The Court of Appeals rejects the defense argument that in order for spitting at a police officer to be a felony, there must also be an independent act of assault. The conduct of spitting at a police officer who was performing his duties is, by itself, properly charged as a felony under Minn. Stat. §609.2231, Subd. 1. State v. Robert Andrew Lee Kelley, A06-408 (Minn. App. 06/26/07).

Obstructing Legal Process; Fleeing Police Officer. Appellant cannot be punished under the provisions of obstructing legal process by fleeing on foot from a police officer, a violation under Minn. Stat. §609.487, Subd. 6. Fleeing is not conduct which is directed at the police, and the statute of obstructing legal process applies only to conduct directed at police officers engaged in the performance of their official duties. Furthermore, fleeing on foot is a separate criminal offense. State v. Morin, supra.

— Frederic Bruno
Frederic Bruno & Associates

August 2007

In this month's "Notes & Trends:


Sexual Harassment; Correctional Facility. Improper behavior by inmates directed to a female employee of a juvenile correctional facility was deemed not to constitute sexual harassment or create a hostile environment. Affirming the ruling of the U.S. District Court in Minnesota, the 8th Circuit Court of Appeals held that the actions of the inmates cannot be ascribed to the institution. Furthermore, behavior by coworkers, such as requesting dates, does not constitute sufficiently "severe and pervasive" misbehavior that would warrant a sex harassment claim because the conduct did not adversely affect the term, conditions, or privilege of employment. Vajdl v. Mesabi Academy of Kidspeace, Inc., 484 F.3d 546 (8th Cir. 2007).

Sexual Harassment; Job Transfer. A retail clerk who sued for sex discrimination and hostile environment did not establish that transfer of her job constituted adverse action. The 8th Circuit held there was an insufficient showing of adverse action by the employer and, furthermore, the employee did not bring her claims within the statutory time. Holland v. Sam’s Club, 487 F.3d 641, (8th Cir. 2007).

Sexual Harassment; Qualified Immunity. The 8th Circuit held that a state university and various officials were entitled to qualified immunity against a sexual harassment claim brought by a student who alleged that she was harassed at the school. School officials cannot be sued under Title IX of the Federal Civil Rights Act or under Section 1983, based upon violation of Title IX. Cox v. Sugg, 484 F.3d 1062 (8th Cir. 2007).\

Racial Discrimination; No Reasonable Inference. A claim that an employer discriminated against a retail manager trainee because of his Arabic race following the September, 2001 terrorist attacks was deemed not actionable. The 8th Circuit affirmed a ruling of the U.S. District Court in Minnesota that the claimant failed to establish any reasonable inference of discrimination against him. Elnashar v. Speedway SuperAmerica, 484 F.3d 1046 (8th Cir. 2007).

Age Discrimination; Voluntary Severance Plan. An employer’s voluntary severance plan did not constitute age discrimination in a lawsuit brought by a stock broker after he left the company. The claim under the Age Discrimination and Employment Act (ADEA) failed because the stock broker did not show that he was replaced by a younger employee, a necessary element for this type of age discrimination claim. Morgan v. A.G. Edwards & Sons, Inc., 486 F.3d 1034 (8th Cir. 2007).

Pregnancy Discrimination; Unactionable "Stray Remark". An employee’s comments to a coworker nurse to "use precaution" because another nurse was apparently out on leave did not constitute evidence of pregnancy discrimination. Affirming a ruling of the U.S. District Court in Minnesota, the 8th Circuit held that the comment constituted a "stray remark," which is not actionable, and did not reflect a negative attitude toward her pregnancy or indicate how the employer would treat the employee if she became pregnant. Fjelsta v. Zogg Dermatology, 2007 WL 1531237 (8th Cir. 2007).

Unemployment Compensation; Reconsideration. A claimant for unemployment benefits who missed a contested hearing because he was hospitalized for asthma was entitled to reconsideration of his case. The Minnesota Court of Appeals held that an unemployment law judge erred in refusing to reconsider the case when it was undisputed that the employee missed the hearing because of illness. Megas v. A & M Business Interior Services, Inc., LLC, 2007 WL 1470478 (Minn. App. 2007) (unpublished).

Unemployment Compensation; Employees Who Quit. A pair of employees who quit their jobs were denied unemployment compensation benefits by the Court of Appeals. The employee submitted a two-week notice of resignation, but was then terminated immediately by the company. While the employee is entitled to benefits during the two-week notice period, no benefits are due to the claimant for the period after that because the employee voluntarily quit the job. Huisman v. Total Card, Inc, A06-1002 (Minn. App. 05/22/07) (unpublished).

Unemployment Compensation; Change in Commission Structure. An employee who quit because a change in commission structure resulted in lower commissions was denied unemployment benefits. The change in commission resulted in a decline of about 11 percent in the employee’s gross salary, which does not meet the level of decrease generally required to find that the employee had "good reason" to quit, which usually requires a diminution of wages of about 15 percent, or more. Additionally, the decline in earnings was due to a decline in performance, not totally because of unilateral change in commission structure by the employer. Lynch v. Northland Group, 2007 WL 1470424 (Minn. App. 2007) (unpublished).

— Marshall Tanick
Mansfield Tanick & Cohen, PA

August 2007

In this month's "Notes & Trends:


Criminal Liability Under the Clean Water Act. The 8th Circuit recently affirmed a 24-month sentence of a Minnesota man convicted of violating, or aiding and abetting the violation of, the Clean Water Act.

The defendant worked for a small, family-owned metal-plating business in Maple Grove. The business had obtained a permit from the Metropolitan Council of Environmental Services (MCES) to discharge wastes into the sewer system after those wastes had been pretreated so that the wastes would not damage the public water system.

In April 2003, the MCES and other environmental authorities began investigating whether the business was adhering to permit requirements concerning the pretreatment of waste. The investigation revealed significant violations of the discharge permit. Based on the investigation, the government obtained a search warrant. The search revealed that the business was using hoses to bypass an inoperable pretreatment system.

An indictment was brought against the defendant and others. After a consolidated jury trial before United States District Court Judge John R. Tunheim, the defendant was convicted of knowingly violating or aiding and abetting the violation of the Clean Water Act by discharging untreated liquid industrial wastes directly into the public sewer system.

The 8th Circuit noted that to sustain the conviction, the government must show that the defendant "associated himself with the [illegal discharges], participated in it as something [he] wished to bring about, and acted in such a way as to ensure its success … . In other words, the government must prove that [the defendant] encouraged the perpetrators in order for him to be convicted of aiding and abetting the violation of the Clean Water Act." On review of the record, the 8th Circuit found the evidence sufficient.

First, several witnesses testified that the defendant presented himself as a supervisor or manager. He was the person often sought out by MCES officials and to whom other employees would refer those officials with regard to environmental compliance.

Second, a witness testified that he was ordered by the defendant to discharge untreated waste directly into the sewer system. When he refused and informed the defendant that he had contacted the EPA, the defendant "stomped out of the building" and soon returned with a marijuana pipe and told the witness that he was fired for smoking marijuana.

Third, the shop foreman testified that, when MCES did onsite testing of the business in April 2003, the defendant added a dye to the waste chemicals to make the chemicals look like clean water and directed another employee to add fresh water to a trough where the testing equipment had been installed.

Finally, another employee testified that the defendant had told him to discharge the waste water from the metal plating lines and had instructed him to drain a tank of dirty waste water directly into the sewer.

The 8th Circuit observed that this evidence demonstrated that the defendant was more than a passive observer of the illegal discharges. The evidence supported the conclusion that the defendant "was actively involved in directing the discharges and had taken steps to prevent MCES’s discovery of the illegal activities." United States v. Opare-Addo, 486 F.3d 414 (8th Cir. 2007).

—Christopher M. McGlincey
—Jeffrey J. Harrington
Leonard, Street and Deinard, PA

August 2007

In this month's "Notes & Trends:


Fed. R. Civ. P. 12(b)(6); Notice Pleading; "Abrogation" of Conley v. Gibson. Last month this column noted the Supreme Court’s decision in Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007), and questioned whether its holding was to be limited to antitrust cases or whether it might have far broader impact. Judge Kyle recently offered his answer to that question, sua sponte ordering the parties to address the impact of Bell Atlantic Corp. on defendants’ pending motions to dismiss in a municipal liability action, while noting that Bell Atlantic Corp. had "changed the legal landscape for evaluating motions to dismiss." Jenkins v. County of Hennepin, 2007 WL 1965552 (D. Minn. 07/03/07).

Review of Arbitration Awards; Certiorari. The Supreme Court has granted certiorari and will review a 9th Circuit decision holding that parties to an arbitration agreement cannot contractually agree to a judicial review of an arbitration award broader than the narrow review authorized by the Federal Arbitration Act. The 8th Circuit opinion in UHC Management Co. v. Computer Sciences Corp., 148 F.3d 992 (8th Cir. 1998), previously suggested in dicta that contractually expanded review is not available under the FAA. Hall Street Assocs., L.L.C. v. Mattel, Inc., 196 Fed. Appx. 476 (9th Cir. 2006), cert. granted, ___ S. Ct. ___ (2007).

Motion to Transfer Venue Versus Forum Non Conveniens. Judge Montgomery denied a motion to transfer an action to the District of Arizona, noting that while the defendant claimed to seek relief under the doctrine of forum non conveniens, that doctrine applies "only in cases where the alternative forum is abroad." Landform Eng’g Co. v. American Property Dev., Inc., 2007 WL 1875935 (D. Minn. 06/28/07).

Motion to Amend Notice of Removal. Reversing an order by Magistrate Judge Graham, Judge Magnuson granted a motion by one group of defendants to amend their Notice of Removal so as to allow the action to be transferred to multidistrict litigation. Thorne v. Wyeth, 2007 WL 1455989 (D. Minn. 05/15/07).

Motion to Remit Subpoena. Chief Magistrate Judge Erickson granted defendants’ motion to stay and remit enforcement of a subpoena to the District of New Jersey where the underlying action was pending. Floorgraphics, Inc. v. News America Marketing In-Store Services, Inc., 2007 WL 1544572 (D. Minn. 05/23/07).

Motion to Remand Granted. Judge Kyle granted the plaintiff’s motion to remand, rejecting Target’s argument that it was merely a "nominal" defendant whose presence should not be counted for purposes of the court’s diversity jurisdiction. Tabish v. Target Corp., 2007 WL 1862095 (D. Minn. 06/26/07).

— Josh Jacobson
Law Office of Josh Jacobson

August 2007

In this month's "Notes & Trends:


Patent Claims: Infringement Where Elements Exceed Those Listed. Judge Davis held that the patent-claim term "includes" is open-ended, and can be infringed by products having more elements than those specifically listed in the claim. 3M sued Tomar for infringement of a patent having to do with emergency vehicles’ remote control of traffic signals. Tomar argued that the patent-claim term "includes" should limit the invention to traffic signal systems containing only the listed elements and no additional elements. For example, if the listed elements were A, B, and C, Tomar argued that a device having A, B, C and D would not infringe because the additional element, D, was foreclosed by use of the word "includes." The court rejected Tomar’s narrow construction, holding that the term "includes" was open-ended, like the term "comprising," meaning additional elements not listed in the claim do not prevent infringement. The court stated: "Neither includes, nor comprising, forecloses additional elements that need not satisfy the stated claim limitations." 3M Innovative Props. Co. v. Tomar Elecs., Inc., Civ. No. 05-756 (D. Minn. 04/20/07).

Copyright: Wrong Answers and Red Herrings. Judge Davis held that wrong answers created for a test prep book’s answer sets are likely copyrightable. Kaplan sued a competing test prep company, Marketshare, for copyright infringement of materials found in a series of test prep books. Kaplan sought a preliminary injunction that would enjoin Marketshare from using the test prep book’s generic information, restatements of statutes, math formulas, definitions, and ideas embodied in story problems. The court reiterated that facts and ideas are not copyrightable. However, Kaplan’s wrong answer choices and red herrings were found by the court as likely protectable original expression. Thus, all of Marketshare’s answer choice sets containing more than one answer in common with Kaplan’s answer sets were held to be potentially infringing. The court ordered Marketshare preliminarily enjoined from selling, distributing, and displaying the potentially infringing answer sets in its test prep books. DF Inst., Inc. v. Marketshare EDS, Civ. No. 07-1348 (D. Minn. 06/01/07).

Patents: Functional and Ornamental Design. Judge Schiltz held that even if the arch shape depicted in a design patent was functional, its particular ornamental shape could still be claimed and protected as depicted in the drawings. Torspo Hockey sued Kor Hockey, the owner of a design patent for the base of a hockey skate, seeking a declaratory judgment of noninfringement and invalidity of the patent. Kor moved for a preliminary injunction. While determining the proper claim construction to evaluate the preliminary injunction, the court reasoned that "a functional element of a design can be claimed [in a design patent] to the extent that its ornamental features are depicted in [the] design patent’s drawings." Thus, the court held that even if the arch shape on the bottom portion of the skate boot had been deemed functional, its particular ornamental shape as depicted in the design patent drawings was still a limitation of the claimed design. The court denied Kor’s motion for a preliminary injunction. Torspo Hockey Int’l, Inc. v. Kor Hockey Ltd., Civ. No. 07-1348 (D. Minn. 06/01/07).

— Tony Zeuli
— Wade Whisenant
Merchant & Gould

August 2007

In this month's "Notes & Trends:


Child Endangerment; Evidentiary Hearing Required. In an unpublished decision, where a young child had made several statements regarding alleged sexual abuse by her father, the Court of Appeals held that the district court erroneously made its decision not to restrict the father’s parenting time. The appellate court then took the extraordinary step of suspending the father’s unsupervised parenting on an interim basis until the district court could make a decision on the merits in the case.

The parties had been divorced and the court had granted them joint legal custody and awarded the mother sole physical custody. The Judgment and Decree also imposed a parenting time schedule which gradually increased the father’s unsupervised parenting time with the child. Subsequent to the divorce, a domestic abuse order for protection was issued against the father, based apparently on the parties’ agreement to enter such an order. The parties complied with the parenting time schedule until the child returned from a visit with her father and indicated that he had hurt her.

As a result, the mother filed another petition for an order for protection, alleging sexual abuse of the child by her father. After the hearing, the district court denied the order for protection stating that while the statements of the child were suggestive of possible sexual abuse, the child’s allegations were not conclusive and did not meet or even approach a preponderance of the evidence such as to allow the court, much less compel the court, to issue a domestic abuse order on behalf of the child.

Some months later, the mother again moved the district court to suspend the father’s parenting time and to evaluate the father. The child had again made allegations of abuse by the father. This time the mother presented letters and affidavits from the child’s maternal grandparents and a psychologist to support her allegations. During a medical examination arranged by the psychologist, the child made inconsistent statements and, according to that expert, the examination failed to produce any corroborating physical evidence. In response, the district court issued an order finding that the mother had failed to establish a prima facie case warranting the imposition of restrictions on respondent’s parenting time and that the mother had failed to prove by a preponderance of the evidence that the child was harmed by her father. The court went on to find that visitation was not likely to endanger the child’s physical or emotional health. The district court appointed a parenting time expeditor and found the mother in contempt of court for failure to comply with the access schedule. The mother appealed the decision.

The Court of Appeals held that the district court erroneously made its decision not to restrict the father’s parenting time without first holding an evidentiary hearing. According to the Court of Appeals, the law requires that if a parent makes specific allegations of endangerment, the court must hold an evidentiary hearing. Based on the record before it, the Court of Appeals concluded that the mother’s allegations had the requisite specificity warranting an evidentiary hearing and that the district court had abused its discretion.

The Court of Appeals then took the extraordinary step of suspending the father’s unsupervised parenting on an interim basis. The Court of Appeals noted that it was mindful that the mother did not specifically move the appellate court for the suspension of parenting time; nevertheless, the appellate court considered such relief implicit in her request for parenting time restrictions. The Court of Appeals further noted that it has the authority to take any action "as the interest of justice may require" and that the state has an interest in protecting the wellbeing of children. Durbin v. Saylor, A06-866 (Minn. App. 05/15/07) (unpublished).

Termination of Parental Rights; Failure to Rebut Presumption of Unfitness. In a published decision, the Minnesota Court of Appeals reviewed a district court termination of the mother’s parental rights as to her fifth child. The trial court found that the mother had failed to rebut the presumption of parental unfitness that arose when she involuntarily transferred custody of her fourth child. Four other statutory grounds for termination were also supported by the district court’s findings. The mother challenged the termination, arguing that the district court erred by taking judicial notice of the involuntary transfer order and that she overcame the presumption of unfitness. The Court of Appeals held that the district court properly relied on the involuntary transfer order and that the mother did not introduce sufficient evidence to overcome the presumption. In the Matter of the Welfare of the Child of: T.D., Parent, A06-2109 Minn. App. 05/22/07).

Termination of Parental Rights; Mental Health Issues. The Court of Appeals, in an unpublished decision, reviewed a mother’s challenge of the termination of her parental rights as to her child. Here the county sought termination of her rights in part because of her mental health issues. On the morning of trial, the mother filed a petition to voluntarily terminate her parental rights. When the district court questioned her about that determination, the mother stated that she was of sound mind, her mental illness did not interfere with her ability to decide to terminate her parental rights, and that she did not need additional time to consider her decision. After the trial court accepted the petition and terminated the mother’s rights, she brought a petition to vacate her voluntary termination of parental rights, claiming that her voluntary petition to terminate was the result of undue influence and that the record did not show good cause for termination.

The Court of Appeals, in affirming the district court’s decision to deny the petition to vacate the voluntary termination petition, observed that concerns regarding the mother’s mental health were expressed on behalf of the mother by her caregivers and attorneys, but even so, that did not mean that her will was overcome. The Court of Appeals held that the mother failed to make a prima facie case of undue influence and that the district court did not err in denying, without an evidentiary hearing, the mother’s petition to vacate her voluntary termination of her parental rights. In the Matter of the Welfare of the Child of: W.M.W., A07-134 (Minn. App. 06/19/07).

Juvenile Delinquency; Certification; Blakely. In a published decision, the Court of Appeals reviewed a district court decision where the state had charged a minor with aiding and abetting a second-degree assault involving a dangerous weapon other than a firearm. Because the minor was 17 years old at the time of the crime, and the state believed this to be a presumptive certification offense, the state moved to certify the case for adult prosecution. The district court agreed that this was a presumptive certification case, but denied the motion to certify and instead designated the case as an extended jurisdiction juvenile ("EJJ") case. The minor child challenged the EJJ designation, arguing that the district court erred in determining that the presumptive certification statute is constitutional, that the case warranted a presumptive, rather than nonpresumptive certification petition, and that there was probable cause that the appellant aided and abetted in a second-degree assault involving a dangerous weapon.

The Court of Appeals held that the United States Supreme Court decision of Blakely v. Washington does not render the presumptive certification statute (Minn. Stat. §260B.125, Subd. 3 (2004)) unconstitutional and that the district court’s determination regarding presumptive certification was appropriate. The appropriateness was based on the fact that the charge contained in the petition, aiding and abetting a second-degree assault involving a dangerous weapon other than a firearm, and its statutory presumptive sentence supported that determination. In the Matter of the Welfare of D.W., A06-2069 (Minn. App. 05/15/07).

Juvenile Delinquency; Certification Denied. In an unpublished decision, the Minnesota Court of Appeals reviewed a determination by the district court certifying a juvenile as an adult. In this case, the Court of Appeals observed that even though the seriousness of the juvenile’s offenses — those being first-degree criminal sexual conduct and kidnapping — and his culpability supported adult certification, the district court erred by certifying the juvenile as an adult. The concerns raised by the Court of Appeals were that the juvenile presented clear and convincing evidence that appropriate programs in the juvenile system were available and willing to accept him, and the psychologist who completed the certification study found that the juvenile was not a sexual predator and would have adequate time to complete treatment before his 21st birthday. Thus, the Court of Appeals found that the evidence failed to support the trial court’s finding that insufficient time remained to effectively supervise the juvenile and rehabilitate him within the juvenile system. In the Matter of the Welfare of: A.C.H., Child, A06-2365 (Minn. App. 05/29/07).

— Gary A. Debele
Walling, Berg & Debele PA

August 2007


New Construction Warranties; Notice Requirements and Standing. The Minnesota Court of Appeals has recently addressed two issues concerning the statutory warranties for new home construction. In the context of an attempted sale of her home, the owner of the property discovered alleged construction defects. She did not provide separate notice of the problem to the builder of the home, but rather simply served a summons and complaint, which contained an inspection report itemizing the defects. The owner subsequently defaulted on her mortgage and the lender foreclosed. The owner testified that she had no intent to redeem her interest, but the record did not reflect whether the redemption period had expired and the owner had failed to redeem. In the lawsuit against the builder, which alleged breach of warranty and other claims, the builder moved for summary judgment. The district court granted the builder’s motion, in part, dismissing all claims except the statutory warranty claims.

Rather than proceed to trial, the district court certified two questions for the Court of Appeals to decide: 1) whether serving the summons and complaint met a statutorily imposed requirement of notice to the builder; 2) whether a homeowner may maintain an action for a warranty claim after the mortgage has been foreclosed, but before the homeowner’s redemption period expires.

Minn. Stat. §327A.03(a) provides that a vendor of new construction is not liable under a statutory home warranty if the loss or damage is not reported in writing to the vendor within six months after the vendee discovers or should have discovered the problem. The summons and complaint in this case was served within six months after discovery of the issue by the owner. The complaint provided the builder with notice of the loss. The builder argued that the notice must be given before the lawsuit may be commenced. The Court of Appeals concluded that the language of the statute did not support such an interpretation. According to the court, the purpose of the provision is simply to limit the time that a homeowner can assert a home warranty claim. By timely serving the complaint, the owner met the requirements of the statute.

The builder also argued that the owner no longer had standing to pursue a warranty claim due to the foreclosure. The court disagreed. As the court noted, a property owner retains ownership during the redemption period. As a result, the owner maintained her status as vendee. The court did not, however, address a significant issue. More specifically, the court left open the question of the effect on the lawsuit once the redemption period expired if, in fact, the owner did not redeem. The court also declined to address a concern raised by the builder of whether the builder could be forced to compensate the owner and then compensate the subsequent owner of the property who acquires out of the foreclosure sale. Certified questions answered in the affirmative. Peterson v. Johnson, A06-1830 (Minn. App. 06/26/07).

Application of Cartway Statute to State-Owned Land. Paul Ridgeway owned two land lot parcels of property. Two private roads provided or potentially could provide access to the property. One road was over the land of Diane Silver and the other was over lands owned by the DNR. When Silver refused to permit Ridgeway to continue to use the road across her property, Ridgeway petitioned for the establishment of a cartway over Silver’s property under Minn. Stat. §164.08. The statute permits a township (or in this case a county acting on behalf of a township) to establish a cartway to landlocked property over the property of others. Before the county board, Silver argued that a cartway should be imposed over the DNR land rather than her property. The county disagreed and voted to establish a cartway over the Silver property. The county’s decision was based, at least in part, upon its opinion that it could not establish a cartway over state-owned lands.

Silver challenged the county’s decision in district court. The district court vacated the county’s decision and remanded the issue back to the county board. The district court concluded that the county’s opinion that it could not establish a cartway over state lands was incorrect and also concluded that the county had not balanced the interests of all involved in making its decision. Ridgeway appealed. The Court of Appeals reversed and remanded. The court first addressed the district court’s determination that the county had the authority to establish a cartway over DNR property. As is plain from the language of the statute, when the government imposes a cartway over the lands of others, it is exercising its eminent domain powers. It is well-established, however, that a lesser subdivision of government may not exercise eminent domain power over state-owned lands unless the Legislature has expressly given it authority to do so. Silver argued that the statute provided such authority. But the Court of Appeals could find no specific reference in the statute that would permit a lower body to take state lands.

The court also disagreed with the district court’s conclusion that the county’s decision was invalid for failing to properly balance the interests of all involved. The Court of Appeals noted that the cartway decision was a legislative one, which to defeat requires a showing that the county acted arbitrarily or capriciously. The court found no unreasonableness present in the decision. The case leaves the door open for the proposition that a governmental body, when considering a cartway petition, must balance the interests of the parties. But the court found no evidence that the board failed to properly balance those interests. The Court of Appeals nevertheless remanded the matter to allow the district court to consider the amount of compensation paid to Silver for the taking of her property interest. Reversed and remanded. Silver v. Ridgeway, A06-1600 (Minn. App. 06/19/07).

— C.J. Deike
Edina Realty Home Services

August 2007

In this month's "Notes & Trends:


Income Tax: Murphy Reversed; Taxation of Nonphysical Injury Award. Upon rehearing, the D.C. Circuit reversed a prior decision issued by the same court in August of 2006. The case involved the tax treatment of compensatory damages paid for emotional distress and loss of reputation awarded to a taxpayer in an administrative action against her former employer. The taxpayer argued that, under IRC §104(a)(2), her award should have been excluded from her gross income because it was compensation received "on account of personal physical injuries or physical sickness." The court originally held that while the award was not exempt from taxation pursuant to section 104(a)(2), it also did not constitute "income" within the meaning of the 16th Amendment and therefore could not be taxed. The decision was heavily criticized, and arguments were again heard following the government’s petition for rehearing en banc. The thrust of the government’s argument was that even though the award was not income, there is no constitutional impediment to taxing it because a tax on the award is not a direct tax and is imposed uniformly. In this instance, the court agreed. The court again concluded that the award was not received on account of personal physical injuries, and therefore is not exempt from taxation pursuant to section 104(a)(2); however, it now held that the award should be included in "gross income" on the grounds that the tax upon the award is an excise and not a direct tax subject to the apportionment requirement of Article I, Section 9 of the Constitution. The judgment of the district court was affirmed based upon the newly argued ground that the award, even if it is not income within the meaning of the 16th Amendment, is within the reach of the congressional power to tax under the Constitution. Murphy v. IRS, No. 05-5139 (D.C. Cir. 07/03/07).

Procedure: Establishment Clause; Standing where Executive Funds Derived from General Appropriations. Taxpayers brought an Establishment Clause challenge to the creation, via executive orders, of a White House office and several groups within federal agencies designed to ensure that faith-based community groups remained eligible for federal financial support. No congressional action was involved in the creation of these groups, nor did Congress appropriate any funding for their activities. The taxpayers’ only basis for standing was their status as federal taxpayers who were opposed to the use of such funding by the Executive Branch. At the appellate level, the 7th Circuit held that federal taxpayers could challenge Executive Branch programs on Establishment Clause grounds so long as the activities are financed by a congressional appropriation, even where the funds are from appropriations for general administrative expenses. The Supreme Court disagreed. The Court stated that the taxpayers neither challenged any specific congressional action nor asked the Court to invalidate any congressional enactment or program as unconstitutional. This, of course, could not be done since the expenditures at issue were not made pursuant to a congressional act, but under general appropriations to the Executive Branch. Such appropriations did not expressly authorize, direct, or even mention the expenditures in question, which resulted from executive discretion, not congressional action. Because there was no congressional action, the taxpayers lack standing for their Establishment Clause challenge. Hein v. Freedom From Religion Foundation Inc., No. 06-157, ___ U.S. ___ (06/25/07).

Income Tax: "Transfer" in Treatment of Stock Options. During the year at issue, taxpayer exercised options to purchase in excess of 25,000 shares of her employer’s stock. Because of the large gain realized on the exercise, her employer required reimbursement for the withholding tax before it would transfer title, for which the taxpayer found outside financing. The stock proceeded to decrease in value to the extent that the taxpayer suffered a capital loss, and the fact that the options were not tax-qualified made a potential modest capital loss much greater. To limit her liability, the taxpayer’s return stated that the shares had not been "transferred" to her at the exercise, which instead occurred when the shares were ultimately sold. This request was initially honored by the IRS, but a subsequent audit revealed the refund had been erroneous and led to a demand of $514,000 in back taxes and interest. The court was left to consider whether a "transfer" may be postponed even after the option’s exercise, on the theory that borrowing to finance the transaction amounts to a second option that replaces the first. The taxpayer argued that a transfer occurs only when a taxpayer puts her own money into a transaction since the taxpayer never otherwise puts her own assets at risk. The 7th Circuit disagreed and found that sufficient risk occurs where the investor bears the risk that an asset’s price will decline. Thus, a transfer occurs when a taxpayer exercises an option and acquires full legal and beneficial ownership of stock, for the owner is subject to market risk from that time on. The taxpayer clearly bore the risk of falling assets; thus, a transfer occurred and she was liable for the deficiency. Racine v. Commissioner, No. 06-4103 (7th Cir. 07/03/07).

Partnership Tax: Classification of a Sham as a Partnership Item. Taxpayer formed RJT, a limited liability company, in October of 2001 and one week later agreed with Deutsche Bank to sell one another, for approximately $20 million, nearly identical "bonus coupons" that became payable in December of 2001. The taxpayer then contributed the coupons to RJT and assigned RJT the burden of paying back any related redemption costs. On the redemption date, both RJT and Deutsche Bank failed to make payments on the coupons, and, that same day, taxpayer liquidated his interest in RJT. On its partnership return for the year, RJT failed to report either the bonus coupon contribution or the assignment of its bonus coupon obligation. The taxpayer, however, reported a short-term capital loss on his individual return of approximately $21 million resulting from RJT’s liquidation. The IRS subsequently issued a notice of FPAA in regard to RJT’s partnership return on the grounds that the transaction was a sham. The 8th Circuit, affirming the decision of the Tax Court, agreed that as a partnership item, RJT was a sham that lacked economic substance and was formed to artificially overstate the basis of the taxpayer’s interest. The court rejected the assertion that a sham status cannot constitute a partnership item since no provision in Subtitle A explicitly requires that a partnership make such a determination for purposes of deriving individual income tax. The fact that a sham is not referenced by Subtitle A does not mean it cannot constitute a valid partnership item. The language requiring a partnership to take into account items "under any provision of subtitle A" is sufficiently broad to include shams. The partnership readjustment was upheld. RJT Investments X v. Commissioner, No. 06-3259 (8th Cir. 07/02/07).

FICA: Employer-Covered Lodging and Per Diem Expenses for Employees Away from Home. Taxpayer was employed by an airline that had the ability under its collective bargaining agreement to reassign its employees to different locations. For the year in question, taxpayer was assigned to work in Alaska, which required a significant amount of time away from his home in Minnesota. The airline covered lodging and per diem expenses during these trips and withheld income and FICA taxes based on the value of such expenses. Taxpayer filed action seeking refund of the related FICA taxes withheld. The 8th Circuit held that while the expenses should not have been classified as wages for FICA purposes if they were deductible under IRC §162(a)(2), the expenses were not deductible under that section because they were not incurred "while away from home" or "in the pursuit of a trade or business." Thus, payment of such expenses by the employer qualified as "wages" subject to FICA taxes. Jordan v. U.S., No. 06-2443 (8th Cir. 06/21/07).

Trust Tax: Charitable Deduction for Split-Interest Trust. Decedent created a single trust that was to be distributed evenly between both charitable and noncharitable beneficiaries. After distributing nearly $400,000 to the charitable beneficiary, the trustee claimed a charitable deduction of that same amount, which was denied by the IRS. The trustee sought a refund on the grounds that IRC §2055(e) does not prevent an estate from claiming a charitable deduction where proceeds go to split interests. The 3rd Circuit disagreed. The court found that the plain language of section 2055(e) clearly disallows any charitable deduction when an interest in the same property passes to both charitable and noncharitable beneficiaries. Here, the same property was held in a single trust for two beneficiaries, charitable and noncharitable. Even though legislative evidence indicates deductions for such payments were not targeted by Congress, that fact does not overrule the statute’s language. The refund was denied. Galloway v. U.S., No. 06-3007 (3rd Cir. 06/21/07).

Procedure: Special Limitations Period for Refunds; Capital Losses Carrybacks. In a case of first impression, the Federal Circuit considered whether the special limitations period for refund claims under IRC §6511(a) makes timely an otherwise late refund claim related to overpayments attributable to capital loss carrybacks. In this case, the corporate taxpayer made an overpayment of federal income taxes in a year following one in which it had experienced long-term capital loss, and did not bring a claim for refund until after the standard three-year term had run. The commissioner disallowed the claim as untimely, and the taxpayer challenged that determination based on the special limitations period. The court stated that the special provision of section 6511(a) is available only if an overpayment is "attributable to a carryback" of a net capital loss. It further found that the overpayment was not due to, caused by, or generated by the taxpayer’s carryback of capital loss to the tax year which preceded the year of loss; therefore, the overpayment was not "attributable to" capital loss carryback. This was so even though amount of overpayment could not be determined until capital loss was first carried back to the preceding tax year. The complaint was dismissed as untimely. Electrolux Holdings, Inc. v. U.S., No. 2006-5106 (Fed. Cir. 06/20/07).

Income Tax: Income Tax Applicable to Native American Residents Regardless of Citizenship. The taxpayer, a Native American, claimed he was exempt from income taxation on the ground that he is a member of the Canadian Micmac Indian Nation and not a United States citizen. The court stated that even if the facts are as the taxpayer states, he is required to pay income taxes as a resident of the United States. The rules of federal taxation are applicable regardless of citizenship. Metallic v. Commissioner, No. 06-2387 (1st Cir. 05/31/07).

Procedure: "Google" as Means of Ascertaining Taxpayer Address. Taxpayer, the owner of a vacant lot, became delinquent in paying taxes on the property. The county tax bureau subsequently attempted to send several forms of notice to the taxpayer, and eventually sold the property at judicial sale. The taxpayer asserted that the bureau made an insufficient attempt to ascertain his address and that the sale should thus be set aside. At trial, the bureau argued that the "Google" search of the taxpayer’s name and the subsequent calling of the number the search obtained was sufficient. The court disagreed. Citing the rule that a reasonable investigation be one that uses ordinary common sense business practices to ascertain an address, it rejected the notion that the computer search was sufficient. The judicial sale was set aside. Fernandez v. Tax Claim Bureau of Northampton County, No. 1600 C.D. 2006 (Penn. Comm. Ct. 05/30/07).

Income Tax: Limitation on Capital Loss Deductions; AMT. Plaintiffs included a number of taxpayers that had incurred significant capital losses upon the exercise of incentive stock options. To offset the AMT due pertaining to those transactions, taxpayers argued that they were entitled to an AMT capital loss carryover that could be used against prior years. This request was rejected. The court concluded that the Code does not allow a taxpayer to circumvent sections 172 and 1211 by including capital losses in AMT adjustments for purposes of the AMT net operating loss. The plain language of the Code clearly indicated that the limitations of those sections apply to the deduction of AMT capital losses. Pierce v. United States, No. 05-1071T (Ct. Fed. Cl. 05/31/07).

Income Tax: Deduction for Expenses Incurred in Acquiring Pilots License. Taxpayer was employed as an aeronautical engineer for a subcontractor that provided engineering and technical management services to NASA. The taxpayer also pursued his commercial pilots license at a nearby college, and claimed $18,755 as educational expenses for the year in question. This deduction was rejected by the commissioner. While the Tax Court agreed with the taxpayer that such training improved his aeronautical engineering skills, his ability to evaluate cockpit ergonomics and design, and his skills in testing and evaluating aircraft flight systems software, the course of study would ultimately lead to his receipt of a commercial pilot certificate. Because the program of study qualified him for a new trade or business, he was not eligible to deduct the tuition and is liable for expenses. Thompson v. Commissioner, T.C. Memo. 2007-174.

Income Tax: Subsequently Created Charitable Donation Receipts. Taxpayer attempted to claim deductions related to the donation of property to a charitable organization for the year in question. Documentation of these donations was not provided on the original return, and the commissioner subsequently disallowed the deductions. At trial, taxpayer testified that she had gone to the foundation to which she donated the property and had one of its agents fill in receipts according to what the taxpayer told her. The taxpayer provided no further evidence as to how she determined the items that appeared on the receipts. The Tax Court found such receipts unreliable, since they merely consisted of the agent writing down the items in question. Based on the lack of evidence, the deductions were properly disallowed. Barnes v. Commissioner, T.C. Memo. 2007-141.

Collection: Innocent Spouse Relief; Ewing Upheld. Taxpayer challenged the commissioner’s decision to deny innocent spouse relief under IRC §6015(f). At all times during her marriage, taxpayer’s husband had been in charge of the finances of the taxpayer and himself, which included the duty of filing tax returns. For several years, the husband failed to file several state and federal tax returns, and in subsequent criminal action he was compelled to file returns for all the years in question. Taxpayer brought action denying tax liability for the years her husband had failed to file. Because she did not meet the requirements of either IRC §6015(b) or 6015(c), the commissioner reviewed her claim under the equitable standard of section 6015(f). In considering the facts, the Tax Court first rejected the commissioner’s request that the court limit its review to the administrative record, an approach adopted by the 8th Circuit. Robinette v. Commissioner, 439 F.3d 455 (8th Cir. 2006). In considering the substantive issues, the court disagreed with the commissioner’s determination that denying relief to the taxpayer would not "create" economic hardship, since such hardship already exists and will continue to exist regardless of relief. This determination was patently wrong and should not have been used against the taxpayer. Likewise, the determination that providing relief would lack any benefit, was also incorrect and should not have been weighed against the taxpayer. Based on all the facts and circumstances available to the court, the commissioner’s denial of relief was arbitrary, capricious, and without sound basis in fact or law. His decision was thus reversed. Beatty v. Commissioner, T.C. Memo. 2007-167.

Personal Service Corporation Classification. Taxpayer corporation challenged the commissioner’s determination that it was a personal service corporation subject to the flat 35 percent tax rate applicable to such corporations under IRC §11(b)(2). Taxpayer argued that, because less than substantially all — less than 95 percent — of its activities were devoted to the performance of architectural services, it was not a qualified personal service corporation. Here, it was asserted that 70 percent of corporate activities involved architectural services while the remaining 30 percent involved "nonarchitectural" services. The taxpayer further asserted that it was not Congress’ intent to impose the flat tax on such a corporation. The Tax Court did not agree. The court first pointed out that the corporation was owned 100 percent by employees who performed architectural services. Further, the income and hourly performance data provided was insufficient to prove that less than substantially all of its activities were devoted to the performance of services. As such, the corporation was appropriately taxed at the flat rate and liable for the deficiency. Calpo Hom & Dong Architects, Inc. v. Commissioner, T.C. Memo. 2007-140.

Income Tax: Deductions for Excessive Losses Related to "Pyramid Scheme." Taxpayer was involved in four separate direct marketing operations that allowed her to earn commissions on the products she was able to sell and to earn additional income by recruiting other individuals to join the operation. The products sold by the taxpayer included energy supplements, skin-care products, business marketing software, and a tax relief system. Taxpayer claimed business deductions pertaining to the losses from her marketing efforts based on wages, the business use of their residence, car and truck expenses, and supplies. The commissioner rejected all of these expenses on the grounds that they were not incurred pursuant to a for-profit business, and the Tax Court agreed. The court found that the taxpayer failed to employ the elementary business practices that one would expect of individuals pursuing an activity with a profit objective. There was no coherent plan for eventually generating a profit. The incurrence of losses for five consecutive years totaling $159,000 is also evidence that no valid desire for profit existed. The court also found it interesting that the tax relief product marketed by the taxpayer was merely a tool to convert personal expenses into business expense deductions with a home-based business. The deficiencies and accuracy-related penalties were upheld. Smith v. Commissioner, T.C. Memo. 2007-154.

Income Tax: AMT Applicable to "Nonwealthy Working Class." Taxpayer worked as a licensed practical nurse during the tax year at issue, in which he reported $121,309 on his Form W-2. In calculating his tax return, the taxpayer did not include any Alternative Minimum Tax ("AMT"), and the commissioner subsequently issued a notice of deficiency for $4,176. The taxpayer’s sole argument before the Tax Court was that Congress did not intend for the AMT to apply to taxpayers like him, who are in the "nonwealthy working class." The taxpayer asserted that he works two jobs, night shifts, weekends, and overtime to support his family. The Tax Court proved insufficiently moved. While sympathetic to the taxpayer’s position, the court stated that the plain language of the statute makes AMT applicable to lower-income taxpayers, not just the wealthy. The deficiency was upheld. Kamara v. Commissioner, T.C. Summ. Op. 2007-103.

Income Tax: Book Writing by College Professor. Taxpayer was an assistant professor of biology whose duties consisted of both teaching and scholarly research. During the year in question, taxpayer entered into an agreement with a publisher to write a book pertaining to the analysis of biological structures with computers. The taxpayer contends that the expenses related to the writing of this book constituted a separate business activity, and he claimed deductions in excess of $13,000 related to the use of his home office, supplies used, and travel done to research the topic. The commissioner rejected these deductions, and the Tax Court agreed. The court found that the book-writing duties were merely an outgrowth of the taxpayer’s duties to the university. While professors are generally not required to write books as a part of their profession, it did not follow that the writing of a book constitutes a separate business activity. Here, the book’s topic was in the same subject and the contract specifically identified him as a professor at the university. As such, the deductions were appropriately denied. Xiong v. Commissioner, T.C. Summ. Op. 2007-96.

Income Tax: Voluntary Payments to Exwife. In July 2000, a court issued an order for spousal support outlining the obligations for future spousal support payments to be made by the taxpayer to his exwife. The order specified that there was no legally actionable duty on taxpayer’s part to make any payments during the year in question; however, the taxpayer did provide $2,000 a month "out of concern for his children." The taxpayer’s attempt to deduct these payments under IRC §71 was rejected by the commissioner. The Tax Court agreed with the taxpayer in finding that there is no requirement that payments be made under a legally enforceable duty in order to qualify for the alimony deduction; the only requirement is that any payment be "received by (or on behalf of) a spouse under a divorce or separation instrument." In fact, the amendment to that section in 1984 specifically repealed the requirement that the payment be based on a legal support obligation. As such, the voluntary payments to his exwife satisfied the conditions of section 71, and were properly deductible as alimony. Webb v. Commissioner, T.C. Summ. Op. 2007-91.

Income Tax: Minnesota; Failure to File. The Minnesota Tax Court found that the taxpayer had failed to file income tax returns form 2000 and 2001 despite receiving income from Edina Couriers during those years. In addition the Tax Court refused to remove the presiding judge despite a motion to the chief judge of the court to do so. The Minnesota Supreme Court upheld the substantive decision, finding it was supported by substantial evidence, and further found no error with the procedural decision of the Tax Court either. Byers v. Commissioner of Revenue, A06-2450 (Minn. 07/05/07).

Treatment of Advisory Fees Paid by Trusts. The United States Supreme Court will hear arguments regarding the treatment of investment advisory fees incurred in the management of trust property. The sole issue for determination in the case is whether investment advisory fees paid by the trust are fully deductible under the exception provided in IRC §67(e)(1) or whether the fees are deductible only to the extent that they exceed 2 percent of the trust’s adjusted gross income pursuant to section 67(a). Both the 2nd Circuit and the Tax Court previously held the payment of such fees are subject to the 2 percent floor. Knight v. Commissioner, No. 06-1286 (06/25/07). See also 467 F.3d 149 (2d Cir. 2006); 124 T.C. No. 19 (2005).


Corporate Tax Treatment of Interests in LLCs. A recent revenue ruling provides guidance on the issue of whether a corporation holding a membership interest in a limited liability company ("LLC") that is classified as a partnership for tax purposes is engaged in the active conduct of a trade or business for purposes of IRC §355(b). In making future determinations, the IRS will look primarily to whether (i) the corporation is engaged in the active conduct of LLC’s business for purposes of section 355(b) and (ii) whether the corporation performs active and substantial management functions. Rev. Rul. 2007-42, 2007-28 I.R.B. XXXX (07/09/07).

Acceptable Political Activities of Charitable Organizations. Guidance has been issued discussing the facts and circumstances to be considered to determine whether an organization is qualified for exemption from income tax under IRC §501(a) as a charitable organization. The ruling outlines the factual analysis to be completed in the specific contexts of voter education, voter registration, individual activity by organization leaders, candidate appearances, issue advocacy, business activity, and websites. Organizations failing to meet the standards identified will fail to qualify for exempt status. Rev. Rul. 2007-41, 2007-25 I.R.B. 1421.

Transitional Relief for Tax Return Preparers. The IRS has outlined the rules for transitory relief in regard to the return-preparer penalty provisions under IRC §6694, which were recently amended by the Small Business and Work Opportunity Act of 2007. The act amends several provisions to extend the application of preparer penalties, alter the standards of conduct required to avoid penalties, and increase applicable penalties. The IRS is still working to resolve issues regarding the activities that constitute return preparation and who qualifies as a return preparer within the meaning of section 7701(a)(36). The transitional relief will apply to all returns, amended returns, and refund claims due on or before December 31, 2007. IRS Notice 2007-54, 2007-27 I.R.B. 12.

Treatment of Partnership Property Transferred in Satisfaction of Guaranteed Payment. Guidance has been issued regarding the treatment of a transfer of partnership property to a partner in satisfaction of a guaranteed payment under IRC §707(c). The IRS stated that such transfers to partners shall be treated as a sale or exchange under section 1001, and not a distribution under section 731. The ruling also provides that because the transfer is a sale or exchange, it is not a section 731 distribution, and the nonrecognition rule of that section does not apply. Rev. Rul. 2007-40, 2007-25 I.R.B. 1426.

Updated Innocent Spouse Form. The IRS announced the availability of the updated Form 8857, Request for Innocent Spouse Relief, that is designed to help reduce both follow-up questions and the burden on taxpayers. The redesigned form streamlines the elements of the old Form 8857 and Form 12510, and requires the taxpayer to answer more questions initially. The IRS estimates that the new design will eliminate 30,000 follow-up letters annually. IRS News Release IR-2007-125 (07/05/07).

Updated Rules for E-File Providers. A recent revenue procedure outlines the obligations owed by authorized IRS e-file providers to the IRS, taxpayers, and other participants in the e-file program. The revenue procedure also establishes the penalties that may be imposed on e-file providers, as well as the monitoring and administrative review processes that may be undertaken by the agency. The effective date for the new rules was June 25, 2007. Rev. Proc. 2007–40, 2007-26 I.R.B. 1488.

No More Private Letter Rulings, Determinations Letters Regarding Treatment of Gifts. The IRS expanded its list of taxable issues for which it will no longer provide letter rulings or determination letters to include questions of whether the transfer of a gift or inheritance constitutes a gift within the meaning of IRC §102(a). The agency’s rationale for such an approach is based on the inherently factual nature of the problems involved in such determinations. Rev. Proc. 2007–39, 2007-25 I.R.B. 1446.

Definition of Highly Paid Employees for Purposes of Section 162. A new IRS notice provides guidance for identifying "covered employees" for purposes of IRC §162(m)(3). For such employees, corporations are not permitted to deduct any remuneration that is in excess of $1 million. The agency stated that guidance regarding the definition of covered employees was necessary given the SEC’s recently amended disclosure rules, which no longer track with the definition of section 162(m)(3). The IRS will now interpret such employees to include any employee that is the principal executive officer of the taxpayer or an individual acting in such a capacity, or any employee whose total compensation for that taxable year is required to be reported to shareholders under the Exchange Act by reason of such employee being among the three highest compensated officers for the taxable year. The agency is aware that this definition will not include some individuals for whom disclosure is required under the Exchange Act. IRS Notice 2007–49, 2007-25 I.R.B. 1429.

Tax Treatment of Cancellation of Distribution Agreement by Manufacturer. An IRS revenue ruling analyzes the issue of whether the canceling of a distributor agreement between a manufacturer and a distributor of the manufacturer’s products constitutes a sale or exchange of property. In the provided hypothetical, the manufacturer desires to discontinue production of a product and offers a distributor payment in exchange for the cancellation of the agreement. The IRS will hold that such a cancellation will constitute a sale or exchange of property if the distributor has made a substantial capital investment in the distributorship and the investment is reflected in physical assets. Further, any resulting gain to the distributor shall be treated as capital gain if the agreement is a capital asset. Rev. Rul. 2007–37, 2007-24 I.R.B. 1390.

Miscellaneous IRS Announcements

• Applicable interest rates for underpayments, overpayment. Rev. Rul. 2007–39, 2007-26 I.R.B. 1449.

• Federal rates and adjusted federal rates for July, 2007. Rev. Rul. 2007-44, 2007-28 I.R.B. XXXX (07/09/07).

• Organizations now classified as private. Announcement 2007–60, 2007-26 I.R.B. 1499.

• Notice of intent to issue guidance on treatment of lodging expenses. IRS Notice 2007–47, 2007-24 I.R.B. 1393.

Recent Changes to Minnesota Tax Law. The Minnesota Department of Revenue recently released a series of legislative bulletins summarizing and highlighting the significant tax-related law changes enacted during the previous legislative session. Seven different reports have been made available; they pertain to the issues of disclosure, federal tax, property tax, sales tax, special tax, tax-free zones, and miscellaneous items. Legislative Bulletins, Minnesota Department of Revenue (2007) available at


Proposed Amendment to Publicly Traded Partnership Rules. The Senate Finance Committee introduced a new bill that provides the current exception from corporate tax treatment for a publicly traded partnership ("PTP") will no longer apply in the case of a PTP that directly or indirectly derives income from investment adviser services or related asset management services. The effect of the amendment is that such a partnership will be treated as a corporation for tax purposes and be subject to the corporate income tax. The committee stated that it is concerned about the growth in publicly traded partnerships that are taking advantage of an unintended opportunity for disincorporation and elective integration of the corporate and shareholder levels of tax. Committee on Finance, "Baucus-Grassley Bill Addresses Publicly Traded Partnerships: Senators seek to clarify tax treatment for partnerships acting as corporations" (06/14/07) available at


Nationwide Tax Forums Starting Soon. The IRS reminded tax professionals that a series of Nationwide Tax Forums are set to begin in July and recommended early registration to save a seat at the events. Each Forum is a three-day event that provides tax professionals with the most up-to-date tax training presented by IRS experts, as well as an expo featuring representatives of IRS, tax, financial and business communities offering their products, services and expertise. The locations and dates of the Forums are as follows: Atlanta (July 17-19), Chicago (July 31-Aug. 2), Las Vegas (Aug. 21-23), New York (Aug. 28-30), Anaheim (Sept. 11-13), and Orlando (Sept. 18-20). IRS News Release IR-2007-118 (06/15/07).

— Kathryn Sedo
University of Minnesota Law School

August 2007


Insurance Coverage; Duty to Defend. The Minnesota Court of Appeals has held that when a feedlot owner is sued on the basis of noxious and offensive odors, a pollution exclusion in the insurance policy negates any duty to defend insured.

Neighbors sued plaintiff feedlot alleging nuisance, trespass and negligence due to noxious and offensive odors that allegedly prevented them from the quiet enjoyment of their land. The odors originated from plaintiff’s two-stage outdoor concrete lagoon holding approximately 1.5 million gallons of manure. Feedlot tendered notice to its insurer seeking defense and indemnification of the complaint. The insurer declined to defend or indemnify, claiming the policy did not provide coverage because the claim did not arise out of an occurrence and fell within the scope of its pollution exclusion. After successfully defending itself in the underlying case, feedlot brought a declaratory judgment action against insurer seeking reimbursement of $278,415.63 in defense costs. The trial court granted summary judgment in favor of the insurer on several grounds.

The Court of Appeals affirmed the trial court’s judgment, but did not agree with all its reasoning. The appellate court held that the damage complained of in the underlying lawsuit arose from an "occurrence" within the meaning of the policy, rejecting the trial court’s ruling to the contrary. The Court of Appeals reasoned that even though the waste was intentionally stored outdoors, the harm was accidental. It based its ruling on the fact that the feedlot was in compliance with all environmental regulations and county zoning and use ordinances.

The Court of Appeals affirmed the trial court’s decision that the "pollution exclusion" in the insurance policy applied in this case. The exclusion applies to any liability resulting either directly or indirectly from "[t]he discharge of fumes into the atmosphere." The court held that the offensive odors were "fumes" based on the plain meaning of the term. Because the odors were "fumes," and the odors were released "into the atmosphere," the suit against the feedlot was excluded from coverage by the insurance policy’s pollution exclusion and the defendant had no duty to defend or indemnify.

The feedlot argued that the odors in this case fell under the "Accidental Spillage" exception to the pollution exclusion for "sudden or abrupt and accidental or unexpected" discharges. The court disagreed, finding that the release of the odor was not "sudden or abrupt" because the odors were released continuously, not in a series of isolated events.

The court went on to rule that the incidental-liability coverage provisions did not apply because the odors were not caused by a series of isolated events and the damages sought were not for repair or replacement of damaged property. Wakefield Pork, Inc. v. RAM Mut. Ins. Co., A06-847 (Minn. App. 05/15/07).

Professional Malpractice; Expert Disclosure Requirements. The Minnesota Supreme Court has held that Affidavits of Expert Disclosure under Minn. Stat. §544.42, subd. 2 are judged by an objective standard and require, at a minimum, meaningful information on each of the issues for which expert testimony will be required at trial to avoid a directed verdict.

Plaintiffs, an individual and a corporate entity, sued defendant accountants alleging breach of contract, breach of fiduciary duty, accounting malpractice and restitution. Plaintiffs failed to serve an affidavit of expert review with the pleadings as required under Minn. Stat. §544.42. In addition, plaintiffs did not serve an affidavit of expert disclosure within 180 days of the filing of the complaint as required by the same statute. While the defendants did not make a demand for either affidavit, the defendants served expert interrogatories on the plaintiffs. The plaintiffs answered the interrogatories by naming two experts they intended to call at trial, stating the experts would testify based on the facts and conclusions set forth in the complaint. Defendants moved for a dismissal of the complaint in its entirety for failure to serve the expert affidavits. The trial court granted the motion and dismissed the complaint with prejudice.

The Court of Appeals affirmed the dismissal of the count alleging accounting malpractice but reversed and remanded the ruling on the remaining counts for a determination of whether or not they were subject to the affidavit requirements of Minn. Stat. §544.42.

On further review, the Minnesota Supreme Court first held that the expert interrogatories did not constitute a demand for an affidavit of expert review under Minn. Stat. §544.42 because they did not provide adequate notice that an affidavit of expert review was required. However, the Court went on to affirm the dismissal of the accounting malpractice charge because the plaintiffs had failed to serve the affidavit of expert disclosure, and plaintiffs’ response to the interrogatories was not sufficient to satisfy the requirements of Minn. Stat. §544.42.

The Court held that the disclosure must "provide some meaningful information, beyond conclusory statements, that (1) identifies each person the attorney expects to call as an expert; (2) describes the expert’s opinion on the applicable standard of care, as recognized by the professional community; (3) explains the expert’s opinion that the defendant departed from that standard; and (4) summarizes the expert’s opinion that the defendant’s departure was a direct cause of plaintiff’s injuries." In so holding, the Court specifically rejected the application of a "good faith" standard, reading the requirements under Minn. Stat. §544.42 as an objective standard.

Justice Paul H. Anderson, joined by Justice Page, filed an opinion dissenting in part on the ground that the majority’s standards were too harsh and that a modified good faith standard should apply when some meaningful expert disclosure has been given. Brown-Wilbert, Inc., v. Copeland Buhl & Co., A05-340; A05-1952, (Minn. 05/31/07).

Fiduciary Duty: Architect and Client. The Minnesota Court of Appeals has held that no per se fiduciary relationship exists between architect and client and that whether the facts of the case give rise to such a relationship is not an issue for resolution by summary judgment.

Plaintiff clients sued defendant architects for breach of contract and professional negligence, seeking return of all architectural fees paid. The district court ordered summary judgment for plaintiffs, sua sponte, finding that defendants committed professional malpractice by holding out as licensed an unlicensed architect. The district court also determined that the defendants’ conduct constituted a breach of fiduciary duty, and accordingly, plaintiffs were entitled to a return of the fees paid. The district court, however, denied plaintiffs’ motion for attorney fees.

The Court of Appeals reversed, concluding that whether defendants held out an unlicensed architect as qualified was a genuine issue of material fact requiring the trier of fact to weigh evidence and assess credibility. Accordingly, determination of this issue was inappropriate for summary judgment. The court also reversed the determination that defendants owed and breached a fiduciary duty to plaintiffs, holding that there is no per se fiduciary relationship between an architect and a client. The court reasoned that fiduciary relationships exist where one party enjoys a superior position of knowledge and authority, facilitating a level of trust and confidence by the other party, and determined that Minnesota law has not recognized these elements in an architect-client relationship. Although the particular facts of a case may create a fiduciary relationship, the existence of such a relationship is inappropriate for determination on summary judgment. Finally, having reversed the claims of malpractice and breach of fiduciary duty, the court held that plaintiffs’ request for attorney fees was without merit. Carlson v. SALA Architects, Inc., A06-691, (Minn. App. 06/05/07).

Insurance: Mandatory Appraisal Clauses. The appraisal clause mandated by Minn. Stat. §65A.01, subd. 3, to be included in every Minnesota fire-insurance policy to resolve disputes over the amount of loss, is subject to the statutorily mandated two-year limitation on suits or actions on the policy.

Plaintiff sued defendant insurer, seeking enforcement of the appraisal clause included in plaintiff’s fire-insurance policy. The district court granted summary judgment in favor of defendant, holding that plaintiff’s claim was time-barred because she first requested an appraisal after the two-year limitation period in the policy had expired.

The Minnesota Court of Appeals affirmed. The court acknowledged that although the statute of limitation bars only stale judicial actions (and an appraisal is a nonjudicial action because it determines only the amount of loss, not liability for the loss), the appraisal clause is subject to the two-year statute of limitations mandated by Minn. Stat. §65A.01, subd. 3 (2006), because a judicial action would be necessary to determine whether defendant was liable for the appraisal amount. Johnson v. Mut. Serv. Cas. Ins. Co., A06-1478, (Minn. App. 06/05/07).

— David Turner
Bassford, Remele, A Professional Association