July 2007

BANKRUPTCY
JUDICIAL LAW

• Application of Constitutional Standing; In Pari Delicto Doctrine. The 8th Circuit held that a corporate insider’s collusion with third parties to injure the corporation does not deprive the corporation (or a subsequently appointed bankruptcy trustee) of standing to sue third parties. Chapter 7 Trustee Timothy D. Moratzka brought an action against former attorneys for the debtor for assisting the debtor’s majority shareholder in completing a fraudulent transfer of the debtor’s assets. The 8th Circuit reversed the district court’s and Bankruptcy Court’s decisions, which held the trustee lacked standing.

In its standing analysis, the 8th Circuit made two important points. First, it explained that whether a party has standing to bring certain claims, and whether those claims are barred by an equitable defense (such as in pari delicto), are two separate questions. Second, the 8th Circuit noted that a bankruptcy trustee is the proper plaintiff for a cause of action belonging to the bankruptcy estate, even if creditors of the bankruptcy estate are the only beneficiaries of the pursued cause of action. Circuit Judge Colloton, with whom Chief Judge Loken joined, authored a concurring opinion. Moratzka v. Morris, et al. (In re Senior Cottages of America, LLC), __ F.3d __, 2007 WL 958145 (8th Cir. 2007).

(Trustee Moratzka is a partner in the author’s law firm. Ed.)

• Payment Not on Account of Antecedent Debt. Where the Chapter 11 plan administrator for the debtor commenced an adversary proceeding seeking to avoid the transfer of an alleged preferential payment under section 547(b) of the Bankruptcy Code, the 8th Circuit allowed the transfer, determining the payment did not involve an antecedent debt. Section 547(b) authorized the plan administrator (who was given the same powers as a bankruptcy trustee) to avoid transfers of the debtor that were made on account of an antecedent debt within 90 days of the debtor’s bankruptcy filing if the debtor was insolvent as of the date of the transfer, or became insolvent because of the transfer, and if the creditor received more than it would have through a liquidation of the debtor’s assets.

The parties agreed that all elements of section 547(b) were established except whether the payment was made on account of an antecedent debt. The 8th Circuit started by noting that a debt is antecedent if it was incurred prior to the preferential transfer. It went on to state that a debt is incurred when the debtor first becomes legally obligated to pay. Under unique circumstances involving a settlement, the 8th Circuit determined the payment did not involve an antecedent debt. Peltz v. Edward C. Vancil, Inc. (In re Bridge Information Systems, Inc.), 460 F.3d 1041 (8th Cir. 2006)

— Drew Moratzka
Mackall Crounse & Moore PLC

July 2007

July 2007

CRIMINAL LAW
JUDICIAL LAW

• DWI/Implied Consent: Opening Car Door with Unresponsive Driver. Some time after midnight, a patrolling police officer came upon the respondent in a parking lot of an otherwise empty ballroom. The engine was running, and the doors were closed with the windows up. After observing the respondent apparently asleep, the officer tapped on the window and asked the respondent to lower it, to which he received no response. After knocking on the window several more times and asking that the window be lowered, the respondent leaned over, tapped on the inside of the window, and turned away on the seat. The officer knocked again and asked several more times before opening the unlocked driver’s door. The officer immediately noticed indicia of intoxication.

Held, the officer did not seize the respondent by the simple act of opening the car door. Whatever its subjective intention, the respondent’s act of tapping on the window and turning away, followed by his continued unresponsiveness, could not reasonably have been interpreted as a statement in communicating his desire to end the encounter. Even if the opening of the door did amount to a seizure, the officer was justified in doing so in order to investigate and assess the physical well-being of the driver. To hold otherwise would unduly burden an officer’s duty to provide assistance to persons in medical need. Brian Jean Overvig v. Commissioner of Public Safety, A06-1043 (Minn. App. 05/08/07). www.lawlibrary.state.mn.us/archive/ctappub/0705/opa061043-0508.htm

• Blakely: Juveniles Facing Presumptive Certification. Following In Re J.C.P., 716 N.W.2d 664 (Minn. App. 2006), the Court of Appeals states the presumptive certification statute, Minn. Stat. §260B.125, is not subject to a Blakely analysis. Because the statute is of a pretrial jurisdictional nature, the 6th Amendment protections are inapplicable. In the Matter of the Welfare of D.W., A06-2069 (Minn. App. 05/15/07). www.lawlibrary.state.mn.us/archive/ctappub/0705/opa062069-0515.htm

• Search and Seizure: Dog Sniff Outside Common Hallway. Police received a citizen tip, from an apartment complex employee, that he or she had received information from maintenance employees that they believed they had observed marijuana-growing lights inside the appellant’s apartment; in addition, appellant would not let them come into his apartment to investigate or repair a possible water leak. In response to this information, a dog, certified by the U.S. Police Canine Association to detect drugs, alerted to the presence of a narcotic odor in the first floor hallway of the apartment building at the threshold of the appellant’s door. Finally, a background check revealed that the appellant had a history of criminal activity.

— Frederic Bruno
Frederic Bruno & Associates

July 2007

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

• Age Discrimination; Retaliation. A Minnesota school district employee could not pursue a claim of retaliation after she was transferred following her filing of an age discrimination charge. The appellate court upheld a ruling of the U.S. District Court in Minnesota that the employee failed to show that the school district’s reason for the transfer was pretextual and that there was a causal link between the discrimination charge and the subsequent transfer. Stewart v. Independent School District No. 196, 481 F.3d 1034 (8th Cir. 2007).

• Discrimination; Retaliation. A public works employee who claimed that he was fired in retaliation for complaining about discrimination failed. Dismissal of the employee’s claim was affirmed because there was no evidence that the termination was casually related to complaints that the employee made to management about his working conditions. Carrington v. City of Des Moines, 481 F.3d 1046 (8th Cir. 2007).

• Discrimination; Age & Disability. An warehouse supervisor who was not allowed to return to work after completion of a disability leave alleged discrimination based on age and disability and the court’s decision in his favor was upheld. An award to the employee of compensatory damages, together with an award by the trial court of back pay, punitive damages, and emotional distress damages was upheld when a new company, who bought the employee’s former company, refused to rehire him after his disability leave ended. Christensen v. Titan Distribution, Inc., 481 F.3d 1085 (8th Cir. 2007).

• Race Discrimination; Failure to Address Previous Complaints. An African-American couple’s race discrimination claim against a retail store for refusing to wait on them and uttering a racial insult was allowed to proceed in a decision by the 8th Circuit. The appellate court overturned dismissal of the lawsuit because the couple presented sufficient evidence that the retail facility kept a store person on the sales floor despite previous complaints. This can give rise to vicarious liability on the part of the retail facility under the Civil Rights Act barring discrimination in making and enforcing contracts, 42 U.S.C. §1991. Because fact issues remained regarding whether the facility "knew or should have known of [the] ‘racially hostile propensities’" of its employees and "failed to take reasonable measures to stop it," the case was remanded for a jury trial. Green v. Dillard’s, Inc., 2007 WL 1012941 (8th Cir. 2007).

• Disability Benefits; Independent Contractor. The 8th Circuit upheld the decision of the U.S. District Court for the District of Minnesota rejecting an individual’s claim for long-term disability benefits under an employment disability policy. The appellate court ruled that the claimant was not entitled to disability benefits as a result of a snowboarding accident because he was an independent contractor, rather than an employee, and not entitled to benefits under the policy which only covered employees. Hillstrom v. Kenefick, __ F.3d __, 2007 WL 1039557 (8th Cir. 2007).

• ERISA; Long-Term Disability Benefits. A factory worker was denied ERISA long-term disability benefits by the 8th Circuit, which found he was not eligible for disability benefits because he was able to do sedentary work with minimal restrictions. Rutledge v. Liberty Life Assurance Co., 481 F.3d 655 (8th Cir. 2007).

• ERISA; Severance Benefits Denied "for Cause." A fired bank employee who wrongfully accessed corporation files was denied ERISA severances benefits by the 8th Circuit. The 8th Circuit affirmed a ruling of U.S. District Court Judge Ann Montgomery in Minnesota that the employee was not entitled to benefits because the discharge was for "cause." Anderson v. U.S. Bancorp, __ F.3d __, 2007 WL 1189426 (8th Cir. 2007).

• Workers Compensation; Disability; Equal Protection. The Minnesota Supreme Court is considering whether a portion of the workers compensation law is unconstitutional. The Court heard arguments in early May on a challenge to the decision of the Workers Compensation Court of Appeals upholding denial of permanent total disability benefits to a 69-year-old employee with an 8th grade education under Minn. Stat. §176.101, subd. 5(2), which sets a sliding scale of percentages of disability based on age and education-level. The challenge asserts that the measure violates the Equal Protection Clause. Elcha v. Bitcam & Ohren Masonry and Grinnell Mutual Group, A06-1849.

• Unemployment Compensation; Severance. An employee’s receipt of severance pay after he had received unemployment benefits was not improper in a recent case before the Minnesota Court of Appeals. The employee, who received benefits while on involuntary furlough, later was laid off and received a severance package. Since he was not incurring severance during the furlough, he was eligible for benefits during that period. Garcia v. Alstom Signaling, Inc., 729 N.W.2d 30 (Minn. App. 2007).

• Unemployment Compensation; Fraud. A determination of fraud in an employment compensation case was reversed on grounds that the unemployment judge did not articulate why the testimony of the employer was believed and the employee not credited regarding work absences and tardiness. Kariniemi v. R&H Painting, Inc., 2007 WL 1121250 (Minn. App. 2007).

July 2007

ENVIRONMENTAL LAW
JUDICIAL LAW

• CERCLA; Cost Recovery for Voluntary Cleanups. The United States Supreme Court at last resolved a question left open by its landmark 2004 decision in Cooper Industries, Inc. v. Aviall Services, Inc., 543 U.S. 157 (2004); namely, may a "potentially responsible party" ("PRP") sue another PRP under CERCLA §107(a) to recover costs the first PRP incurred voluntarily in cleaning up a contaminated site? On June 11, 2007, the Court unanimously agreed with the 8th Circuit, which had previously answered that question in the affirmative.

The opinion, written by Justice Thomas (the author of the majority opinion in Aviall), held that the "plain terms" of the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") §107(a)(4)(B) allows "any other person" besides the governmental entities listed under §107(a)(4)(A) to recover "any necessary costs of response" incurred by that "other person." The plain meaning of the term "any other person," the Court held, includes parties who themselves may be liable for response costs under section 107(a).

In finding for the PRP seeking to recover its costs, the Court rejected a number of arguments advanced by the petitioner United States. The most significant of these was the argument that permitting PRPs to use section 107(a) to sue another PRP, rather than limiting PRP claims to those that can be brought under CERCLA §113(f)(1), will allow PRPs to avoid section 113(f)(1)’s shorter statute of limitations. The government also warned that PRPs would also be able to avoid equitable apportionment under section 113(f)(1) in favor of section 107(a)’s joint and several liability, if the Court found PRPs could sue under the latter provision. The Court, however, dismissed these concerns because it saw sections 107(a) and 113(f)(1) as creating two separate and distinct claims. Section 107(a) is only available to parties who themselves have incurred response costs voluntarily. A payment made in satisfaction of a settlement or pursuant to a court order is not one voluntarily incurred by the party itself. On the other hand, section 113(f)(1) is intended to allow a party who has been or may be held liable out of proportion to its share of liability to sue another PRP for contribution to address that inequity. As the two sections create two very different forms of recovery in two different situations, the Court found the government’s concerns over a "blurring" between the two statutory provisions to be misplaced. United States v. Atlantic Research Corp., 127 S.Ct. 2331 (2007).

• Endangered Species Act; Agency Responsibilities. On the second-to-last day of this year’s term, a 5-4 majority of the U.S. Supreme Court found that the U.S. Environmental Protection Agency ("EPA") does not have to ensure that the approval of a state’s permitting program application is unlikely to jeopardize an endangered or threatened species. Section 7(a)(2) of the Endangered Species Act of 1973 ("ESA") requires federal agencies to consult with agencies designated by the secretaries of commerce and the interior to insure that a proposed agency action will not jeopardize a species. On the other hand, section 402(b) of the Clean Water Act ("CWA") provides that the EPA "shall approve" the transfer of National Pollutant Discharge Elimination System ("NPDES") permitting authority to a state that applies for that authority and meets nine specific criteria. Defenders of Wildlife challenged the EPA’s approval of Arizona’s NPDES program application on the grounds that the EPA failed to satisfy the requirements of ESA §7(a)(2). The 9th Circuit eventually agreed and vacated the EPA’s transfer decision.

The Supreme Court reversed and remanded that determination. The Court held that 50 CFR §402.03, the rule promulgated by the National Marine Fisheries Service and the Fish and Wildlife Service to implement section 7(a)(2), resolves the seemingly irreconcilable requirements of the ESA §7(a)(2) and CWA §402(b). 50 CFR §402.03 states that ESA §7(a)(2) applies only to discretionary agency actions. CWA §402(b), the majority held, leaves no room for discretion: if an applicant satisfies the nine criteria in the statute, the EPA "shall approve" the transfer of authority. The Court gave Chevron deference to this regulatory interpretation of ESA §7(a)(2)’s scope in upholding the EPA’s "nondiscretionary" approval of Arizona’s application. National Assoc. of Home Builders, et al. v. Defenders of Wildlife, 551 U.S. __, 2007 WL 1801745.

— Bill Hefner
The Environmental Law Group

July 2007

FEDERAL PRACTICE
JUDICIAL LAW

• Fed. R. Civ. P. 12(b)(6); Sherman Act Claims. In one of several recent Supreme Court decisions that will make life more difficult for plaintiffs and appellants, the Court reinstated the dismissal of Sherman Act claims under Fed. R. Civ. P. 12(b)(6). While the opinion is – on its face – limited to Sherman Act claims, the Court’s decision can be read as grafting a "plausibility" element onto Rule 8’s "short and plain statement" requirement, and brings into question almost 50 years of caselaw construing Fed. R. Civ. P. 12(b)(6). Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007).

• PSLRA; "Strong Inference" Requirement. In a second decision, the Supreme Court interpreted the "strong inference" requirement of the PSLRA as requiring a court to consider "plausible opposing inferences" in determining whether a plaintiff has offered a "cogent and compelling" inference of scienter. Tellabs, Inc. v. Makor Issues & Rights, Ltd., ___ S. Ct. ___ (2007).

• "Unique Circumstances" Doctrine; Notice of Appeal. In a third decision, the Court overruled the long-established "unique circumstances" doctrine and held that "the timely filing of a notice of appeal in a civil case is a jurisdictional requirement." Bowles v. Russell, 127 S. Ct. 2360 (2007).

• Failure to Disclose Expert; Summary Judgment. The 8th Circuit affirmed the trial court’s decision striking the affidavit of an expert whose opinion had not been disclosed within the deadlines established in the pretrial order. White v. Howmedica, ___ F.3d ___ (8th Cir. 2007).

• Foreign Antisuit Injunction. The 8th Circuit addressed for the first time the standard to be applied in connection with a request for a foreign antisuit injunction, and adopted the so-called "conservative approach" favored by the 1st, 2nd, 3rd, 6th and D.C. circuits. Goss Int’l Corp. v. Man Roland Druckmaschinen Aktiengesellschaft, ___ F.3d ___ (8th Cir. 2007).

• Diversity Action; Joinder of Nondiverse Defendant. The 8th Circuit affirmed the denial of a motion to remand in a diversity action that had been removed based on the alleged fraudulent joinder of a nondiverse defendant. Simpson v. Thomure, 484 F.3d 1081 (8th Cir. 2007).

• Law of the Case; Evidence. The 8th Circuit reversed summary judgment for the defendant for a second time, finding that its earlier decision established the law of the case, and that the defendant had failed to offer the "substantially different" evidence that was required to warrant summary judgment on remand from its prior decision. Maxfield v. Cintas Corp., ___ F.3d ___ (8th Cir. 2007).

• Right to Compel Arbitration; Bankruptcy. The 8th Circuit found that appellants had waived their right to compel arbitration by filing a proof of claim in a Chapter 13 bankruptcy, participating in six hearings in the bankruptcy court, filing substantive motions and serving "extensive" discovery. Lewallen v. Green Tree Servicing, L.L.C., ___ F.3d ___ (8th Cir. 2007).

• Certified Questions; Fed. R. Civ. P. 54(b). Judge Frank certified "controlling questions of law" for interlocutory appeal under 28 U.S.C. §1292(b), finding that there were "substantial grounds for difference of opinion," but denied a request to enter a partial judgment under Fed. R. Civ. P. 54(b). Pagliolo v. Guidant Corp., 2007 WL 1567617 (D. Minn. 05/29/07).

• Action to Compel Arbitration; Summary Judgment. Judge Kyle awarded summary judgment to the plaintiffs sua sponte in an action seeking to compel arbitration. United Steel, Paper and Forestry, Rubber, Mfg., Energy, Allied Indus. and Service Workers Int’l Union v. Carlisle Power Transmission Products, Inc., ___ F. Supp. 2d ___ (D. Minn. 2007).

• Rule 11. Judge Magnuson denied a request for Rule 11 sanctions, finding that while the plaintiff’s claims were unavailing, they were "not utterly frivolous, groundless or for an improper purpose." Peterson v. Argent Mortgage Co., 2007 WL 1725355 (D. Minn. 06/14/07).

July 2007

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Trademark Infringement; "Willful." Judge Michael Davis held that a trademark owner could not prove willful infringement where the defendant adopted a mark that incorporated its owner’s name. Cosi, Inc., a chain of casual restaurants, sued Kozy’s Steaks and Seafood, a single fine dining restaurant in Minneapolis, for infringement of the COSI trademark. The court granted Kozy’s motion for partial summary judgment on Cosi’s claim for attorneys fees, which requires a showing of willful and deliberate trademark infringement. Conduct is "willful" if voluntary and intentional, but not necessarily malicious. The court found that the following facts, as a matter of law, precluded a finding of willful infringement: Kozy’s was logically named after its owner, Mr. Kozlak; a trademark search was conducted and counsel was consulted in confirming the availability of the name; the establishments offered different services (fine dining versus casual); and no Cosi restaurant existed in Minnesota at the time Kozy’s was opened. Cosi, Inc. v. WK Holdings, LLC, Civ. No. 05-2770 (D. Minn. 05/01/07).

• Patent Terms: "Normal to" and "Substantially Equal." Judge Joan Ericksen recently considered the meaning of patent terms "normal to" and "substantially equal" in the context of a patent for a cement block retaining wall. Allan Block sued County Materials for patent infringement. Both parties agreed "normal to" referred to formation of a right angle relative to two surfaces. The dispute was whether the phrase also required the two surfaces abut. Using the dictionary definition of "angle" (two lines extending from the same point), the court concluded the two surfaces must touch. As to the meaning of "substantially equal," both parties agreed that "substantially" is commonly used in patent claims as a word of approximation, but disagreed as to whether it imposed any strict numerical measurement. The court concluded it did not because the specification did not define the phrase, nor did it mention any such measurement. The court rejected County Block’s reliance on any extrinsic evidence suggesting otherwise. Allan Block Corporation v. County Materials Corp., Civ. No. 05-2879 (D. Minn. 04/26/07).

• Patent Suits; Declaratory Judgment Jurisdiction. The Federal Circuit has adopted a new test for the existence of declaratory judgment jurisdiction in patent suits. A two-part "reasonable apprehension of suit test" had previously been used. That test considered whether a patentee’s conduct created reasonable apprehension of an infringement suit on the part of a declaratory judgment plaintiff, and whether that plaintiff was infringing or taking steps with the intent to infringe. Responding to the Supreme Court’s rejection of that test in MedImmune v. Genentech, 127 S. Ct. 764 (2007), the court set forth the following new test: declaratory judgment jurisdiction exists "where a patentee asserts rights under a patent based on certain identified ongoing or planned activity of another party, and where that party contends that it has the right to engage in the accused activity without license."

July 2007

REAL PROPERTY
JUDICIAL LAW

• Fiduciary Duty; Professional Negligence. Homeowners sued an architectural firm for breach of contract and professional negligence. The district court granted homeowners summary judgment, sua sponte, and ruled the architectural firm failed to inform the homeowners that one of the project architects was not licensed in Minnesota and held him out as a qualified architect. The district court ruled that the architectural firm committed professional negligence as a matter of law, that the architectural firm owed a fiduciary duty to the homeowners and breached that duty, and the homeowners were entitled to the return of the fees paid. The Court of Appeals reversed the district court, held genuine issues of material fact existed as to whether the architectural firm held out the unlicensed architect as a licensed architect, that there is no per se fiduciary relationship between an architect and client, and that the existence of a fiduciary relationship was a fact issue for trial. Carlson v. SALA Architects, Inc., 2007 WL 1598756 (06/05/07).

• Contract for Deed Cancellation; Injunction. In an unpublished opinion with a dissent, the Minnesota Court of Appeals reversed the district court’s temporary injunction restraining the cancellation of a contract for deed because the contract vendee did not serve or file a summons and complaint prior to the statutory effective termination date. The court held that Minn. Stat. §559.211 (2006) requires a contract vendee to commence an action before seeking a temporary injunction to restrain the termination of the contract. The court reaffirmed that injunctive relief is a remedy and not a cause of action and that a cause of action must exist before injunctive relief may be granted. Lumbar v. Welsh, 2007 WL 1531971 (05/29/07).

LEGISLATION

• Predatory Mortgage Lending; Requirements. Establishes an agency relationship between a mortgage broker and a borrower. A residential mortgage originator or servicer must verify the borrower’s reasonable ability to make the scheduled payments and may not make a residential mortgage loan that does not have a reasonable, tangible net benefit to the borrower considering all of the circumstances. http://wdoc.house.leg.state.mn.us/leg/LS85/HF1004.3.pdf

July 2007

TAX
JUDICIAL LAW

• Sales Tax: Grain Bins Not Exempt "Farm Machinery". Affirming the Minnesota Tax Court, the Minnesota Supreme Court held that grain bins purchased by the taxpayer for installation at farm sites and part of the grain drying system did not qualify as "farm machinery," and therefore were subject to use tax. The Court rejected the taxpayer’s argument that the "grain bins" were machinery used "directly and principally in the production for sale"; that the bins were used in harvesting agricultural products; and that the bins were a "similar installation" under the statute. Further, "grains bins," even though integral parts of grain dryer systems, were specifically excluded from the statute. The plain wording of the statutory language did not include "grain bins" incorporated into grain drying systems since other parts of the statute included equipment and machinery used in specified "systems." Therefore, the purchase of the grain bins was subject to use tax. Custom Ag Service of Montevideo v Commissioner of Revenue, 728 N.W.2d 910 (Minn. 2007).

• Real Property Taxes: Taxable Real Estate Differentiated From Exempt Equipment. The Minnesota Tax Court was called upon to determine whether certain bins, tanks, sheds, ponds, and silos were taxable real property or exempt equipment under Minn. Stat. §272.03. Under current law, a structure is taxable real property if it: 1) has walls, ceilings, roofs, or floors, and 2) provides building-like functionality including structural, insulation, or temperature control functions, or 3) provides protection from the elements, even if it also has special functions distinct from that of a building. See Minn. Stat. §272.03, Subd. 1(c). Applying this test, the court found that all of the contested items were real property, and therefore, subject to property tax valuation. American Crystal Sugar Company v. County of Polk, C1-05-574, C3-05-575, CX-06-373, and C4-06-367, 2007 WL 987084 (Minn. T. Ct. 03/30/07).

• Real Property Taxes: Failure to File Pollution Control Exemption Application. The Minnesota Tax Court dismissed American Crystal Sugar’s pollution control exemption request and granted summary judgment to the County of Polk. The court ruled that a taxpayer must file an application with the commissioner of revenue in order to obtain a pollution control exemption under Minn. Stat. §272.02, Subd. 10. Because of the taxpayer’s failure to fulfill the statutory requirements by filing an application requesting a pollution control exemption, no exemption could be granted. American Crystal Sugar Company v. County of Polk, supra.

• Real Property: Valuation of Apartment Buildings. The Minnesota Tax Court relied on the income approach to reduce the assessed value for apartment units located in St. Paul. The taxpayer owned 108 apartment units, listed as a Class C apartment buildings, that were used for multifamily residential purposes. The Ramsey County Assessor, for January 2, 2004, estimated the value of the property at $5,940,000 and the county’s expert testified that the value was $4,568,000. The sole owner of the LLC testified that the value was $3,675,000, which the court disregarded since he was not an appraisal expert and his methodology was "incorrect and incomplete." The court agreed with the county’s expert that the cost approach was inappropriate because the units were too old and the sales approach was not viable because the sample was too small. Therefore, the court looked to the income approach to arrive at the final assessed value, and accepted the value of the county’s expert since his methodology and analysis was credible. Oaks California Drive, LLC v. County of Ramsey, C3-05-2649, 2007 WL 1051572 (Minn. T.Ct. 04/04/07).

• Real Property: Owner Intervention in Property Tax Contest With Tenant. The Minnesota Tax Court allowed the owner to intervene in a dispute between the tenant and the county over valuation of a piece of property. The subject property appealed from was a small portion of a larger piece but both properties were owned by the same owner. The properties were subject to a TIF agreement. The court applied the four-factor test set forth in Minneapolis Star and Tribune Co. v. Schumacher, 392 N.W. 2d 197, 207 (Minn. 1986) and held that there was a timely application for intervention, the owner had an interest relating to the properties, the petitioning taxpayer could not adequately represent the interest of the owner, and a decision could impair the owner’s ability to contest the TIF agreement. Kmart Corporation v. County of Dakota, No. 19-C2-06-7638 and C8-05-7570, 2007 Minn. Tax LEXIS 16 (Minn. T. Ct. 04/13/07).

• Real Property: Requirements for "Public Charity." The Minnesota Tax Court denied HealthEast and its lessee the University of Minnesota Physicians a real property exemption for an institution of "pubic charity." HealthEast, a holding company, owned and provided management services to a number of hospitals and clinics, one of which was Bethesda Clinic, located just north of the State Capitol. Bethesda Clinic was owned and operated by the University of Minnesota Physicians under a lease from HealthEast. Property subject to a lease for a term of at least one year can qualify for exempt status if 1) the owner qualifies as one of the tax exempt entities listed in Minn. Stat. §273.19, and 2) the property qualifies for property tax exemption when considering the lessee as the "owner" of the property. The court applied the test of North Star Research Institute v. County of Hennepin, 306 Minn. 1, 236 N.W.2d 754, 757 (Minn. 1975) and held that HealthEast failed four out of the six factors, principally because it was a holding company not directly providing medical services and could not impute related-entities activities. Furthermore, although not necessarily given notice in the opinion of the court, the lessee – University of Minnesota Physicians – also failed the North Star factors, principally because there was no evidence that the fees charged by it were below cost or at a market rate. Therefore, Bethesda Clinic was not entitled to tax-exempt status for the assessment years 2002, 2003, and 2004. HealthEast and University of Minnesota Physicians v. County of Ramsey, C4-03-4664, C3-04-4505, and C0-05-4553, 2007 WL 1319417 (Minn. T. Ct. 05/01/07).

• Nexus: Internet Retailer with Affiliate Bricks-and-Mortar Retail Store. The U.S. District Court for the Eastern District of Louisiana held that an online retailer that sold items in a Louisiana parish and had an affiliated store in the parish was not liable for the collection of sales and use taxes because it did not have "substantial nexus." In reaching this conclusion, the court found that the activities of the bookstore on behalf of the online retailer (e.g., cross-promotional advertising, selling gift cards that could be used to purchase items online, preferential return policy) were insufficient to attribute the bookstore’s physical presence to the online retailer. The court explained that the activities performed by an affiliated bricks-and-mortar book store within the parish for the internet retailer were not of the "magnitude necessary" to establish that the store marketed the internet retailer’s products on its behalf within the parish. The court also commented that "the existence of a close corporate relationship between companies and a common corporate name ("Barnes & Noble") does not mean that the physical presence of one is imputed to the other" pursuant to an attributional nexus theory. St. Tammany Parish Tax Collector v. Barnes and Noble. Com, Inc., No. 2:05-CV-5695 (E.D. La. 03/22/07).

• Non-Taxpayer Sales Included in Numerator of Combined Group’s New York Receipts Factor. In a New York corporate franchise tax case concerning the business allocation percentage of an entertainment company’s combined group, the court permitted the commissioner to include the New York destination sales of a nontaxpayer subsidiary in the numerator of the group’s receipts factor. The taxpayer argued that the business allocation percentage used by the commissioner violated Federal P.L. 86-272. However, by including the subsidiary’s New York sales receipts in the numerator of the business allocation percentage, the commissioner was not imposing a tax upon the subsidiary. Instead, the commissioner was attempting to best measure the combined group’s taxable instate activity through the use of a formula. The court also rejected the assertion that the taxpayer’s film negatives should have been included in the property factor of the apportionment formula at the fair market value expressed by the taxpayer’s expert. Disney Enterprises, Inc. v. Tax Appeals Tribunal, No. 99719 (New York Supreme Court, Appellate Division, Third Department, 03/01/07).

• State Taxes: Rule Providing for Discretionary Adjustment Cannot Abrogate Existing Rule. In a matter on remand from the Oregon Supreme Court, the Oregon Tax Court finds that OAR 150-314.280-(M) cannot and does not allow the commissioner, on audit, to require adjustments to a bank’s returns that were filed in accordance with an existing substantive rule. US Bancorp v. Oregon Department of Revenue, No. TC 4531 (Or. 03/13/07).

• Challenge to FPAA Failed Because Partnership Limitation Period Isn’t Separate From General One. At issue was the general three-year statute of limitations in IRC §6501(a) and the limitations period set forth in IRC §6229(a), which is part of the TEFRA unified partnership audit procedures. The Federal Circuit recently held that IRC §6229(a) sets forth a "minimum period" that may act as an extension of the general rules — not as a separate, partnership-specific statute of limitations. IRC §6229 establishes the minimum period for the assessment of any tax attributable to partnership items (or affected items) notwithstanding the period provided for in IRC §6501. IRC §6229 is not a stand-alone statute of limitations but can extend the IRC §6501 period of limitations with respect to the tax attributable to partnership items or affected items. Stated another way, IRC Code §§6229 and 6501 provide alternative periods within which to assess tax with respect to partnership items, with the latter expiring period governing in a particular case. AD Global Fund, LLC et al. v. United States, 99 AFTR 2d 2007-1259 (Fed. Cir. 2007). See also J&J Fernandez Ventures LP et al. v. united States, No. 1:05-CV-00026 C.A. (Fed. Cl. 2007); G-5 Investment Partnership v. Commissioner, 128 T.C. No. 15 (2007) and Kligfeld Holdings, et al. v. Commissioner of Revenue, 128 T.C. No. 16 (2007).

• Personal Liability Imposed for Withholding Taxes and "Financial Hardship" No Defense. The IRS’ proposed levy against a personnel staffing company for unpaid taxes, interest, and penalties for withholding is affirmed where: 1) the company failed to exercise ordinary business care and prudence in the timely discharge of its payroll tax obligations; 2) its failure to do so was not the result of a reasonable cause; and 3) the company was not entitled to an abatement of penalties even assuming arguendo that, under some circumstances, penalties for failure to file, pay, and deposit payroll taxes could be abated for "financial hardship." Staff IT, Inc. v. US, 99 AFTR 2d 2007-1779 (5th Cir. 2007).

• Preparer’s Fraud Keeps Taxpayer’s Income Tax Return Open Indefinitely. In a case of first impression, the U.S. Tax Court has held that an income tax return preparer’s fraud keeps a taxpayer’s income tax return "open" indefinitely under IRC §6501(c)(1), even if the taxpayer had no intent to evade taxes. Vincent Allen, 128 TC No. 4 (2007).

• No Deductions for Expenses of Providing Medical Marijuana. The U.S. Tax Court held that IRC §280E bars deductions for expenses attributable to the provision of medical marijuana but that it doesn’t prohibit deductions for expenses incurred by the same taxpayer in a separate trade or business. Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner, 128 T.C. No. 14 (2007).

• U.S. Tax Court’s Interest Abatement Jurisdiction. The Supreme Court, resolving a conflict in the circuits and affirming the Federal Circuit, held that the Tax Court provides the exclusive forum for judicial review of a failure to abate interest under IRC §6404(e)(1). Hinck v. U.S., 99 AFTR 2d 2007-986 (U.S. 2007).

• Medical Residents; Student FICA Exception. The 11th Circuit, in a case of first impression for it, held that medical residents may qualify for the IRC §3121(b)(10) student FICA exception. Thus, it set aside a summary judgment by a district court that held that medical residents automatically are ineligible for the student FICA exception. U.S. v. Mount Sinai, 99 AFTR 2d 2007-983 (11th Cir. 2007).

• Bankruptcy: Trustee Can Sue for Malpractice and Breach of Fiduciary Duty. The 8th Circuit Court of Appeals reversed the district court’s holding that the bankruptcy trustee lacked standing to bring a claim that lawyers for Senior Cottages committed malpractice and aided and abetted breach of fiduciary duty. Senior Cottages was in the business of developing, building, and managing senior citizen housing projects qualified for low-income housing tax credits. Moratzka v. Morris (In re Senior Cottages of America LLC), No. 05-3867 (8th Cir. 2007).

• Nonprofit With Debt-Financed Rental Property Was "Feeder Organization" Not 501(c)(3) Tax-Exempt Entity. The U.S. Tax Court held that because a nonprofit taxpayer’s rental activity involving debt-financed commercial real estate was UBTI, it was not operated exclusively for a charitable or other exempt purpose and couldn’t qualify as tax-exempt under IRC §501(c)(3). Instead, the taxpayer, which distributed its profits to a Code Sec. 501(c)(3) organization, was a feeder organization under IRC §502. The Tax Court also determined that because IRS’s initial, misdirected adverse determination letter was ineffective for purposes of triggering the 90-day period under IRC §7428(b)(3), CRSO’s petition was timely. Consequently, the court properly had jurisdiction over the matter. CRSO, 128 T.C. 12 (2007).

• Sole LLC Owner Liable for Payroll Taxes. The owner of a single-member limited liability company (LLC) may be held personally liable for the LLC’s unpaid payroll taxes. The court rejected arguments that the check-the-box regulations relied on by IRS to disregard the LLC were invalid. McNamee v. Treasury, 99 AFTR 2d 2007-998 (2nd Cir. 2007).

• Penalties Survive Death of Promoter. Denial of law firm’s motion to quash an IRS summons issued to Bank of America in connection with an investigation into an abusive tax shelter is affirmed. The district court properly held that: 1) penalties under certain statutory sections survived attorney’s death; and 2) the attorney-client privilege did not protect the material requested from the bank. Reiserer v. U.S., 99 AFTR2d 2007-1438 (9^th Cir. 2007).

• Self-Rental Rule Applies to C Corporations. A taxpayer could not apply losses from their various rental properties to offset rental income derived from leases of office space in their home to lessee corporations that they owned. The IRS’s self-rental rule of 1.469-2(f)(6) is valid and is not contrary to IRC §469. Congress validly delegated authority to the secretary of the treasury to promulgate regulations pursuant to IRC §469. The applicability of the regulation at issue is not limited to instances in which a specific tax-avoidance motive is alleged and proven by the IRS. Beecher v. Commissioner, 99 AFTR2d 2007-712 (9th Cir. 2007).

• Statute of Limitations; Remedy for Third-Party Wrongful Levy Claims. Resolving a conflict, the Supreme Court held that IRC §7426(a)(1) provides the exclusive remedy for third-party wrongful levy claims. Thus, once the deadline for bringing a claim under IRC §7426(a)(1) has expired without an action being brought, an aggrieved third-party may not bring an action for a refund under 28 USCS 1346(a)(1). EC Term of Years Trust v. U.S., 99 AFTR2d 899 (U.S. 2007).

• Return Preparation and Bookkeeping Services; "Personal Service Corporation" Statute. The U.S. Tax Court held that a solely owned corporation that prepared tax returns and performed bookkeeping services was engaged in accounting for purposes of the qualified personal service corporation ("PSC") rules. As a result, the corporation was subject to the flat 35 percent tax rate that applies to PSCs. Rainbow Tax Service, Inc., 128 TC No. 5 (2007).

LOOKING AHEAD

• Hedge Fund and Treatment of Manager’s Compensation Under Tax Review. The IRS is investigating the tax treatment of compensation received by fund managers, who are typically paid a management fee equal to 2 percent of the assets under management and 20 percent of all profits, commonly dubbed the "2 and 20." Tax issues being investigated include whether the payments to managers amount to a deferred compensation plan; is the compensation received by the manager taxed as capital gains instead of ordinary income; payment of 1 percent of the 2 percent fee and "lending" the fund the other 1 percent of the fee; how fund managers and investors interpret IRC §864, which wholly exempts from U.S. income tax revenue from "trading in securities or commodities"; and the use of derivatives by funds to avoid withholding on payments of dividends on U.S. stock and securities to foreign taxpayers.

• Tax Accrual Work Papers Includes FIN 48 Documents. The IRS will issue a chief counsel opinion that Financial Accounting Standards Board Interpretation No. 48 ("FIN 48") work papers are tax-accrual work papers that will not be requested by IRS agents in audits. This means that it would be rare and unusual circumstances where an agent would ask for FIN 48 documents unless they fit into one of the four exceptions set out in Announcement 2002-63. Daily Tax Executive, No. 105 at page G-7 (06/01/07).

July 2007

TORTS & INSURANCE
JUDICIAL LAW

• Absolute Privilege; Statements Related to Litigation. The Minnesota Supreme Court has held that 1) statements made in an affidavit in the course of litigation are related to the litigation and are therefore privileged, and 2) the doctrine of absolute privilege applies to statements which "sound in defamation" but are not labeled as defamation.

A law firm sued a former secretary after she made allegedly defamatory statements in an affidavit filed in a lawsuit instituted by a third-party against the law firm. The law firm then sued the secretary, claiming her affidavit was a breach of client and firm confidences, a breach of fiduciary duty, an invasion of privacy, and a civil conspiracy. The law firm did not, however, sue the former secretary in defamation. The secretary moved to dismiss, arguing she was immune from suit because her affidavit — published in the course of a judicial proceeding, was absolutely privileged. The district court, without addressing the secretary’s privilege claim, denied the motion on the grounds that the complaint adequately stated claims.

The Court of Appeals reversed, holding a party who files an affidavit in a judicial proceeding — even if defamatory or malicious — is entitled to absolute immunity, as long as the statement has some relation to or connection with an issue in the case. The law firm appealed, arguing that the majority of the secretary’s statements were aimed at describing a history of unethical and unlawful conduct on the part of one of the lawyers. The firm claimed this was largely irrelevant to the underlying lawsuit, which was simply a compensation dispute between two related entities.

The Supreme Court affirmed. First, the Court determined that the statements made were related to the underlying litigation. The Court’s rationale was that although absolute privilege is not designed to provide blanket protection for any statement made within the course of litigation, the privilege exists to encourage witnesses to engage in open dialogue, and for that reason, a nonparty witness does not have to understand which of their statements may be relevant to the litigation in order to receive protection. In addition, the Court noted that its inquiry was not to determine whether the statements were true, or legally relevant; the only issue was whether the statements were related to the issues in the lawsuit. Using this approach, the Court found that at least some of the statements made were related to the lawsuit.

The next inquiry was whether the law firm’s claims against the secretary were the type barred by the absolute privilege. Again the Supreme Court affirmed, holding that although the law firm styled its claims as breach of confidences, breach of fiduciary duty, and conspiracy, the claims essentially sounded in defamation, and the absolute privilege protects witnesses from lawsuits based on statements made during judicial proceedings where the alleged injury arises from alleged defamatory statements. Mahoney & Hagberg, a Professional Association v. Tracy L. Newgard, A05-1523, (Minn. 03/29/07). www.lawlibrary.state.mn.us/archive/supct/0703/opa051523-0329.htm

• Minnesota No-Fault Act; Dependent-Significant Other. The Minnesota Court of Appeals has held that a live-in significant other of an insured who does not meet the definition of a "dependent" under the insured’s automobile insurance policy or under the Minnesota No-Fault Act may not receive survivor’s economic loss benefits upon the death of the insured.