April 2008

April 2008

April 2008

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

• Noncompete Agreement; Newspaper Advertising.  The Minnesota Court of Appeals ruled that a noncompete agreement entered into by an optometrist who sold the business could validly proscribe him from soliciting through newspaper advertisements aimed at a target audience within a five-mile restricted area, even though the optometrist’s new business was located outside of that territory.  Because the advertisements were “certainly striving for the same customers or market,” they are validly proscribed by a noncompete and nonsolicitation clause in the sale of the business transaction. Sealock v. Petersen, 2008 WL 314146 (Minn. App. 02/05/08) (unpublished).

• Noncompete Agreement; Consideration. Multiple promotions and salary increases over a 17-year period constituted sufficient consideration to uphold a noncompete clause for a rehabilitation counselor in a case before the Court of Appeals.  Reversing a lower court ruling, the appellate court held that the continued advancement by the employee within the company warranted upholding a noncompete clause. Witzke v. Mesabi Rehabilitation Services, Inc., 2008 WL 314535 (Minn. App. 02/05/08) (unpublished).

• Noncompete Agreement; Consideration.  A construction supervisor who was given a $500 payment and a noncompete agreement to sign six months after he began his employment was barred from subsequent competition in violation of the agreement.  The $500 payment was deemed to be “not an insignificant amount,” which supported the noncompete agreement, as did the employee’s “continued employment,” which may not have been “sufficient alone” to warrant enforcement but was a further justification for enjoining the competitive activities of the employee. Tenant Construction, Inc. v. Mason, 2008 WL 314515 (Minn. App. 02/05/08) (unpublished).

• Disability Discrimination.  A temporary lifting restriction of 5-10 pounds upon an employee was not sufficiently significant to constitute disability within the meaning of the Minnesota Human Rights Act and, therefore, warranted dismissal of the employee’s disability discrimination claim.  The employee’s limitations did not constitute a “material limit on a major life activity,” which is necessary to trigger protective status under the disability discrimination prong of the Minnesota Human Rights Act, Minn. Stat. § 363A.03, subd. 12.  Leitner v. Gartner Studios, Inc., 2008 WL 314177 (Minn. App. 2008) (unpublished)

• Sexual Harassment; “Hostile Work Environment.”  Isolated comments, a pair of which had sexual overtones, did not create an actionable claim for sexual harassment in this recent 8th Circuit case.  The appellate court affirmed a ruling of U.S. District Court Judge John Tunheim that a few inappropriate and scatological remarks did not establish the existence of a hostile work environment, which requires showing that “the workplace was so permeated with discriminate conduct that a hostile work environment under Title VII existed.” Anda v. Wickes Furniture Co., Inc., 2008 WL 425608 (8th Cir. 2008).

• Retaliation; Workers Compensation Claim. Although a nurse was fired shortly after filing a claim under the workers compensation statute, Minn. Stat. §176.82, subd. 1, her claim of retaliation by the employer was not actionable.  The hospital where she worked established that, due to limitations placed upon her by her physician because of an injury, she was no longer able to perform her job and she failed to prove that the employer’s reason for her termination was pretextual. Lundquist v. Rice Memorial Hospital, A07-683, 2008 WL 467439 (Minn. App. 02/12/08) (unpublished).

• Retaliation; Whistleblower. The 8th Circuit Court of Appeals affirmed a ruling of the U.S. District Court in Minnesota that a nursing director was not entitled to pursue a claim under the whistleblower statute, Minn. Stat. §181.932, after she was fired for complaining about compliance failures at the nursing facility where she worked.  Because her duties required her to oversee compliance, she was not a whistleblower under the “duty” doctrine, which bars an employee from asserting whistleblower rights if the concerns expressed by the employee were part of the employee’s job duties. Skare v. Extendicare Health Services, Inc., 2008 WL 341464 (8th Cir. 2008),

• Retaliation; Reassignment. An employee at a prison who confronted a supervisor for alleged sexual harassment of a coworker was not entitled to claim retaliation after he was reassigned to a less favorable position. The 8th Circuit affirmed summary judgment for the prison on grounds that the decision to reassign the employee was made before any complaints were made.  Further, the employee’s claim that the employer improperly docked his pay also was rejected. Culton v. Missouri Department of Corrections, 2008 F.3d (8th Cir. 2008). 

• Unemployment Compensation; Falsified Timesheets.  An employee who was discharged for falsifying timesheets, even though the supervisor told her and another employee that they would be paid for the entire ten-hour shift if they worked overtime regardless if they worked a full ten hours, was not entitled to unemployment compensation benefits. The employee was disqualified from receiving unemployment benefits because she claimed ten hours of work on five separate days when she had not worked overtime. Shackleford v. Contingent Workforce Solutions, LLC, A07-0127, 2008 WL 323220 (Minn. App. 02/12/08) (unpublished). 

• Unemployment Compensation; Working Other Job. An employee who collected unemployment benefits while working on another job, but falsely stated on multiple occasions that he had not been working, was properly disqualified from receiving unemployment compensation benefits. The employee’s claim that, because he was not fluent in English, he had difficulty understanding the questions propounded to him by the unemployment authorities lacked credibility. Because his intentional behavior was fraudulent, he was subject to a 25 percent penalty as part of his repayment obligation. Chalbi v. Department of Employment & Economic Development, A06-2357, 2008 WL 313939 (Minn. App. 02/05/08) (unpublished). 

LEGISLATION

A pair of parallel bills has been introduced in Congress to increase the protection of employees whose civil rights have been violated.

H.R. 2159 in the House and S. 2554 in the Senate are entitled the Civil Rights Act of 2008.  They both would increase penalties for violation of civil rights and fair labor laws, as well as give students protection from harassment in schools.  The bills are supported by a collection of Democratic legislators, including Senators Barack Obama and Hillary Clinton, among others.

The legislation would ensure that federal funds are not used to subsidize discrimination by allowing individuals to seek relief when federal funds are used for practices that have an unjustified discriminatory impact.  The legislation would overrule the decision of the U.S. Supreme Court in Alexander v. Sandoval, 532 U.S. 275 (2001), which held that there is no private right of action to enforce disparate-impact regulations promulgated under Title VI.  In addition, the measure would give students the same protection from unlawful harassment at school as employees have at work.  Under current law, schools that receive federal funds cannot be sued if a teacher or classmate harasses another student unless the school had actual notice of the harassment.

— Marshall H. Tanick
Mansfield, Tanick & Cohen PA

April 2008

ENVIRONMENTAL LAW
ADMINISTRATIVE ACTION

• Regional Haze Rule; Wilderness Areas. In February, the Minnesota Pollution Control Agency sought input on a proposed revision to the State Implementation Plan (“SIP”) to meet the requirements of the federal Regional Haze Rule, 40 C.F.R. §§51.300 - .309.  The proposed SIP revisions address short- and long-term strategies for addressing nitrogen oxide (“NOx”) and sulfur dioxide emissions that may affect visibility in Minnesota’s two Class I areas, the Boundary Waters Canoe Area Wilderness and Voyageurs National Park, and certain Class I areas outside of Minnesota.  The MPCA will accept comments on the proposed SIP revision until April 16, 2008.  A copy of the proposed revision is available at www.pca.state.mn.us/air/regionalhaze.html#sip.

• Stormwater Permit Revisions.  Also in February the MPCA solicited comment on draft revisions to its National Pollutant Discharge Elimination System/State Disposal System General Permit for Stormwater Associated with Construction Activity, General Permit No. MNR100001.  The MPCA intends to finalize and reissue the new permit before the expiration of the current permit on August 1, 2008.  The draft permit includes new requirements for impaired waters covered by U.S. Environmental Protection Agency-approved total maximum daily loads (“TMDLs”).  The draft permit also includes revised requirements for changes in permit coverage, training and temporary and permanent cover.  The MPCA accepted written comments on and hearing requests regarding the draft NPDES/SDS general stormwater construction permit until March 26, 2008. A copy of the draft revised permit is available at www.pca.state.mn.us/publications/sw-c-draftpermit-0208.pdf.  

• Solid Waste Management Outside Metro.  Finally, the MPCA published a Notice of Intent to Adopt Rules without a Public Hearing with regard to the rules that govern the development, adoption and implementation of Solid Waste Management Plans by county and solid waste management districts outside of the seven-county metropolitan area.  The amendments to the rules, Minn. R. 9215.0500 - .0880, would include a repeal of rules 9215.0570 and 9215.0810, which require counties and districts to analyze and explore alternatives to landfilling in their plans.  The MPCA accepted written comments on the amendments to the solid waste management plan rules until March 26, 2008. A copy of the proposed amendments is available at www.pca.state.mn.us/news/data/bdc.cfm?noticeID=278273&blobID=22470&docTypeID=4. 

— Bill Hefner
The Environmental Law Group

April 2008

FEDERAL PRACTICE
JUDICIAL LAW

• Personal Jurisdiction; Remand for Jurisdictional Discovery. The 8th Circuit held that the district court had abused its discretion in staying all discovery pending resolution of a motion to dismiss for lack of personal jurisdiction, and remanded claims against one defendant to the district court for “tailored” jurisdictional discovery.  Steinbuch v. Cutler, No. 07-1509, ___ F.3d ___ (8th Cir. 03/06/08). 

• Appellate Jurisdiction; “Bogus” Final Order; Dismissal Without Prejudice. The 8th Circuit once again has criticized the “distasteful tactic” of dismissing claims without prejudice in order to “evade” statutory limits on appellate jurisdiction and create “bogus” appealable final orders.  Given these comments, attorneys who continue to utilize this tactic do so at their own peril.  Fairbrook Leasing, Inc. v. Mesaba Aviation, Inc., No. 07-2027, ___ F.3d ___ (8th Cir. 03/04/08). 

• Fed. R. Civ. P. 60(b)(2) and (c); Deadline for Motion; Amended Judgment. Adopting the prevailing view among the circuit courts, the 8th Circuit held that the entry of an amended judgment does not restart the one-year limitations period for motions under Fed. R. Civ. P. 60(b)(2) where the amended judgment does not disturb the previously settled legal rights and obligations of the parties.  Jones v. Swanson, 512 F.3d 1045 (8th Cir. 2008). 

• Removal; Validity of Consent by Out of State Attorney. The 8th Circuit rejected plaintiffs’ appeal of the denial of their motion to remand, finding that a consent to removal filed on behalf of one defendant was valid despite the fact that it had been signed by an attorney who was not admitted to practice before the district court.  Pritchett v. Cottrell, Inc., 512 F.3d 1037 (8th Cir. 2008). 

• Reply Brief; New Argument; Intervening Change in Law. The 8th Circuit considered an argument relating to Arkansas law raised for the first time in an appellant’s reply brief where the Arkansas Supreme Court issued an intervening decision that was dispositive on the disputed issue.  Newton v. Clinical Reference Lab., Inc., No. 07-1111, ___ F.3d ___ (8th Cir. 02/22/08). 

• Certified Questions; Minn. Stat. §480.065 Subd. 3. Judges Ericksen and Kyle both recently certified questions to the Minnesota Supreme Court pursuant to Minn. Stat. §480.065 Subd. 3.  In Judge Ericksen’s case, there was no controlling appellate decision.  In contrast, Judge Kyle’s certification arose out of seemingly contradictory decisions from the 8th Circuit and the Minnesota Court of Appeals.  Jackson v. Mortgage Elec. Regis. Sys., Inc., 2008 WL 558726 (D. Minn. 02/27/08).  General Cas. Co. v. Wozniak Travel, Inc., 2008 WL 440747 (D. Minn. 02/14/08). 

• Rule 8; Short and Plain Statement; Page Limits. Criticizing plaintiffs’ 153-page, 626-paragraph complaint as a “blatant violation” of the “short and plain statement” requirement of Fed. R. Civ. P. 8(a)(2), Judge Schiltz ordered that plaintiffs’ complaint be dismissed in its entirety, subject only to their filing a timely amended complaint not to exceed 15,000 words.  Judge Schiltz further held that a married couple represented by the same counsel were to be deemed a “single party” for purposes of the Local Rules.  Murrin v. Fischer, 2008 WL 540857 (D. Minn. 02/25/08). 

• CAFA; Subject Matter Jurisdiction after Denial of Class Certification. Judge Schiltz denied a motion to certify a plaintiff class where the court’s subject matter jurisdiction had been invoked under CAFA, and then instructed the parties to submit supplemental briefs on the “new and evolving legal issue” of whether the court could retain jurisdiction over the individual plaintiffs’ claims following denial of the class certification motion. Good v. Ameriprise Financial, Inc., 2008 WL 185714 (01/18/08). 

• Multiple Violations of Pretrial Order; Dismissal with Prejudice. Judge Davis dismissed an action with prejudice after plaintiff’s counsel failed to comply with the deadlines set forth in the court’s pretrial order and then failed to respond to an order warning that the case would be dismissed if submissions were not received ten days prior to trial.  Judge Davis also directed the clerk of the court to send a copy of his order to the Office of Lawyers Professional Responsibility.  Siems v. City of Minneapolis, 531 F. Supp. 2d 1069 (D. Minn. 2008). 

• Arbitration; Waiver by Pursuit of Litigation. Judge Schiltz held that the federal courts rather than the arbitrators are to decide whether parties have waived their right to arbitrate by pursuing litigation, and that the plaintiffs waived their right to arbitrate their FLSA claims when they opted in to an FLSA class action and engaged in subsequent motion practice. Parler v. KFC Corp., 529 F. Supp. 2d 1009 (D. Minn. 2008). 

• Multiple Decisions on Motions to Remand; Attorney Fees Denied in Each Case. In the first remand-related decision, Judge Kyle held the individual defendants’ new employer was bound by the forum-selection provisions in their noncompete agreements, and further held that the existence of a forum-selection clause that barred the individual defendants from removing the action also barred them from consenting to the new employer’s attempted removal.  However, Judge Kyle declined to award fees under 28 U.S.C. 1447(c), finding that the removal was not “objectively unreasonable.”

In the second decision, Judge Frank, granting plaintiffs’ motion to remand, rejected defendants’ attempt to remove on the basis of fraudulent joinder following the involuntary dismissal of claims against the sole nondiverse defendant.  However, the motion for attorneys fees under 28 U.S.C. §1447(c) was denied, with Judge Frank finding that the defendants had “in good faith attempted to extend [8]th Circuit precedent.” 

In the final decision, Judge Doty remanded plaintiffs’ claims, each of which sought “an amount no greater than $74,999 inclusive of attorney fees, costs, disbursements” and any other type of damages, finding that plaintiffs’ post-removal settlement demand of $100,000 per plaintiff was insufficient to overcome the presumption against federal jurisdiction.  However, Judge Doty denied plaintiffs’ request for attorneys fees under 28 U.S.C. §1447(c), finding that the defendant “had an objectively reasonable basis for seeking removal.” Medtronic, Inc. v. Endologix, Inc., 530 F. Supp. 2d 1054 (D. Minn. 2008).  St. Jude Medical S.C., Inc. v. ELA Medical, Inc., 2008 WL 163643 (D. Minn. 01/17/08).  Ahmed v. GCA Production Services, Inc., 2008 WL 512694 (D. Minn. 02/22/08). 

• 28 U.S.C. §1292(b); Interlocutory Appeal Denied. Judge Davis denied a motion to certify for interlocutory appeal two issues arising out of the denial of a motion to dismiss, finding that defendants had failed to demonstrate the factors necessary to justify a 28 U.S.C. §1292(b) appeal. Peterson v. Seagate U.S. LLC, ___ F. Supp. 2d ___ (D. Minn. 2008). 

— Josh Jacobson
Law Offices of Josh Jacobson

April 2008

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Patents: Failure to Submit Evidence of Noninfringement. Failing to submit evidence of noninfringement and relying on the plaintiff’s burden of proof proved fatal to a defendant in a patent case.  Judge Davis held that an inventor’s declaration and claim chart, in the absence of contrary evidence, was sufficient to grant summary judgment of infringement.  The plaintiff, Northbrook Digital, in a motion for summary judgment, submitted only an inventor’s declaration and claim chart explaining how each claim element is met by the accused product.  The defendant, Browster, provided no responsive claim chart or other explanation as to why its product did not infringe.  Instead, Browster opposed the motion arguing that the claim terms were in dispute and that Northbrook failed to meet its burden of proof on infringement.  The court ruled, however, that Northbrook had presented a prima facie case of infringement though the inventor, who may be an expert, and there was no noninfringement evidence.  Northbrook Digital Corp. v. Browster, Inc., No. 06-4206.

• IP Insurance Coverage; Trademark Infringement; Minnesota. The Minnesota Supreme Court may finally decide an important intellectual-property insurance coverage issue:  Whether trademark infringement constitutes “advertising injury” invoking coverage under Commercial General Liability and Commercial Umbrella policies.  Wozniak Travel was sued for trademark infringement.  Wozniak tendered the defense to its insurer, General Casualty.  General Casualty filed an action seeking a declaration that it need not provide coverage or defense because trademark infringement is not covered under the “advertising injury” provision of the policies.  The parties both moved for summary judgment citing different authority.  Judge Kyle stayed the parties’ motions for summary judgment pending certification of the issue to the Minnesota Supreme Court in view of an apparent split of authority. 

The split of authority stems from two decisions, the 1997 unpublished Williamson decision of the Minnesota Court of Appeals (holding trademark infringement is included in the definition of “advertising injury”) and the published 1999 decision of the 8th Circuit in Callas (holding there is not coverage for trademark infringement).  The court recognized that the Callas court is binding law.  However, the Callas court did not reference Williamson, but rather relied on 6th Circuit law.  The court noted that it and other courts find the Williamson case more persuasive.  General Casualty Co. of Wis. v. Wozniak Travel, Inc., No. 07-3515.

• Copyright Infringement; Pro Se Plaintiff.  A pro se plaintiff catches a copyright infringer in lie after lie and makes him pay. Judge Montgomery held that Vilana Financial and Vilana Realty, owned by Andrew Vilenchik, were liable for nearly $20,000 for copying two photos taken by Chris Gregerson.  Gregerson, a local photographer, sued the defendants for using two of his stock photographs in advertisements.  Defendants alleged that they licensed the photos from a Michael Zubitskiy and evidenced that claim by a notarized agreement.  The court found that the agreement was forged, that Mr. Zubitskiy does not exist, and that the defendants copied Gregerson’s photos.  The court awarded Gregerson $4,462 in actual damages for defendants’ use of the photos, $10,000 is statutory damages and $5,000 for removing the copyright notices and digital watermark, which constitute copyright management information under the copyright act.  Gregerson v. Vilana Financial, Inc., No. 06-1164.

— Tony Zeuli
— Tom Leach
Merchant & Gould

REAL PROPERTY
JUDICIAL LAW

• Substantive Due Process; Equal Protection; Taking.  The owner purchased property on which her father operated an auto sales and repair business under a conditional use permit (“CUP”).  The CUP was granted to the father under an undue hardship exception and was to expire upon change of ownership of the business.  Upon the death of her father, the owner applied to continue the CUP.  The city’s planning commission denied the application because the property failed to meet the code requirements regarding lot size and vehicle access in relation to a nearby intersection.  The city council upheld the denial of the CUP and the owner sued the city arguing substantive due process, equal protection, and taking.  The federal district court held that the owner failed to establish a protected property interest to support her substantive due process claim because the property did not meet all of the conditions required for a CUP.  Moreover, the court held that the city’s decision was not arbitrary or capricious.  The owner claimed that the property had not changed since the previous CUP was granted, but the court noted that the previous CUP was granted under an undue hardship exception and that the owner failed to demonstrate the same undue hardship. The court held that the owner’s equal protection claim failed because the owner and the former owner were not similarly situated because of the city’s discretionary finding of an exceptional undue hardship for the former owner.  The court denied the owner’s takings claim because a CUP is a government entitlement and not subject to a takings claim.  Moreover, the court held that the owner did not establish that by denying the CUP the city deprived her of all economically beneficial use of the property. Snaza v. City of St. Paul, 2008 WL 323212 (D. Minn. 2008).

• Mortgage Foreclosure.  In a class action suit, removed to federal district court based on diversity jurisdiction, mortgage debtor plaintiffs alleged that Mortgage Electronic Registration Systems, Inc. (“MERS”) violates Minn. Stat. chapter 580 by foreclosing mortgages by advertisement by not recording mortgage assignments and by not listing all assignees in the notices of sale. Plaintiffs moved the court for a temporary restraining order (“TRO”) to stay all foreclosures of MERS mortgages in Minnesota.  The court acknowledged the threat of irreparable harm and the balancing of harms favored the plaintiffs, but the court denied the TRO because the plaintiffs’ likelihood of success on the merits was “slim.”  The court cited to Minn. Stat. §507.413 which authorizes MERS, as a designated nominee, to foreclose mortgages in Minnesota.  The court stated that it was unlikely that the Minnesota Supreme Court would interpret Minnesota’s foreclosure by advertisement statute to require MERS to record the beneficial interests tracked within the MERS systems before MERS may invoke the foreclosure-by-advertisement statute.  The court, by subsequent order, certified the following question to the Minnesota Supreme Court: “When MERS serves as mortgagee of record as nominee for a lender and that lender’s successors and assigns, and the original lender subsequently sells, assigns, or transfers its rights under the mortgage, has there been an assignment of the mortgage that must be recorded pursuant to Minn. Stat. §580.02 (2006) before MERS can commence a foreclosure by advertisement?”  Jackson v. Mortgage Electronic Registration Systems, Inc., 2008 WL 413293 and 2008 WL 558726 (D. Minn. 2008).

• Garnishment; Mechanics Liens.  The creditor obtained a money judgment against a debtor who had a mechanics lien on certain real property.  In an effort to collect against the debtor, the creditor served a garnishment summons on the owner of the property burdened by the mechanics lien.  The owner denied owning property belonging to the debtor.  The district court granted summary judgment in favor of the creditor and entered a money judgment against the property owner.  In an unpublished case, the Court of Appeals reversed based on the fact that the property owner had no contract with the debtor, had no personal liability to the debtor, and the debtor did not have a personal judgment against the property owner.  The Court of Appeals noted that in a garnishment proceeding, the garnishing creditor stands in the shoes of the debtor when proceeding against the garnishee.  Crown Equipment Rental Co., Inc. v. J. B. Builders, LLC, 2008 WL 570819 (Minn. App. 2008).

• Eminent Domain.  The Metropolitan Airports Commission condemned a compensable interest in real property, and the tenant claimed an interest in the property’s immovable fixtures.  The court-appointed commissioners’ award was allocated between the value of the land and the value of the immovable fixtures.  The district court ruled that the tenant was entitled to the value of the immovable fixtures.  The Court of Appeals reversed in an unpublished case, noting that tenants are not entitled to share in an award for takings when the lease contains a condemnation clause.  The court acknowledged that the parties could agree that a tenant could retain its rights to a future takings award by not including a condemnation clause in the lease, but the court refused to interpret the lease to have specifically retained the tenant’s rights in the property after condemnation.  Moreover, the court found that even if the lease retained the tenant’s rights after condemnation, the lease required a separate award for immovable fixtures.  The court ruled that the commissioner’s allocation of the award between land and immovable fixtures did not constitute a separate award.  Metropolitan Airports Comm’n v. Noble, 2008 WL 434721 (Minn. App. 2008).

— Michael Kreun
Beisel & Dunlevy

April 2008

TAX
JUDICIAL LAW

• Sales Tax on Fuel; Railway Carriers ; “4-R Act.”  The 8th Circuit reversed the federal district court and held that Minnesota’s sales and use tax on diesel fuel purchases used by railway carriers is a discriminatory tax against railway carriers in violation of 49 U.S.C. 11501(b)(4) (the “4-R Act”).  In Burlington Northern, Santa Fe Railway Co. v. Lohman, 193 F.3rd 984, 985 (8th Cir. 1999), the court had held that the “competitive mode” comparison class, which comprises the railroad’s direct competitors, was the proper comparison class for ascertaining whether a sales and use tax scheme violated the “4-R Act.”  A state’s overall tax structure need not be examined under the “4-R Act.”  Held, only those taxes imposed upon the railroads are taken into account in determining whether those taxes are discriminatory.  While recognizing, within the competitive mode, that barges and ships were also subject to the same tax imposed upon the railroads, the court ruled the fact that two other members of the competitive class—motor carriers and air carriers—were omitted required a reversal based on the above precedent. Union Pacific Railroad Company & Soo Line Railroad Company v. Minnesota Department of Revenue, et al., 507 F.3d 693 (8th Cir. 2007).

• Real Property: Residential Tax Challenge.  The Minnesota Tax Court dismissed a valuation challenge by a residential property owner because of a lack of proof of over-valuation.  The home was originally built and the land acquired in 2002 for $900,000 and additional improvements were made in 2002 for about $100,000.  For the assessment on January 2, 2006, the assessor placed an estimated market value of $1.6 million.  The taxpayer testified herself without the assistance of an expert and relied solely on newspaper articles showing that the value of homes in North Oaks was going down.  The court stated that the taxpayer failed to meet her burden of proof and overcome the presumption of validity of the assessor’s estimated market value because she failed to provide evidence that the property was overvalued.  The information submitted in the newspaper articles did not necessarily support the taxpayer’s argument that her market price was decreasing or that the value of her house decreased.  The court indicated it had no way of determining whether the properties mentioned in the articles were comparable or overpriced to start with. Krishna Jain vs. County of Ramsey, C3-07-3725, 2008 WL 114353 (Minn. T. Ct. 01/08/08).

• Real Property Tax: 60-Day Rule; Property Not Income-Producing.  The Minnesota Tax Court rejected the county’s assertion that certain property owned by the Allina Medical Clinic was income-producing property and therefore subject to the 60-Day Rule under Minn. Stat. §278.05, Subd. 6(a).  The traditional notion of “income-producing” property is property that generates rental income for its owner on the basis of an arm’s-length, market-based lease but the term is not necessarily limited to rental property.  In this case, the taxpayer received a nominal fee and was not in the business of renting the Allina Clinic in order to generate income; rather it was organized to generate its income as a healthcare provider.  The use of less than one percent of its premises to generate a rental of $120 per week did not transform the property into an income-producing property and subject the property to the 60-Day Rule. Allina Medical Clinic v. County of Washington, C2-02-1994, et al., 2008 WL 169734 (Minn. T. Ct. 01/15/08).

• Real Property Tax: 60-Day Rule Violated.  The Minnesota Tax Court dismissed the taxpayer’s appeal because the assessor was not allowed a reasonable inspection of the property owned by the taxpayers under Minn. Stat. §273.20 and Minn. R. Civ. P. 34, after repeated requests by the county and admonishments from the court to do so. G. William Pfeiffer & Marilyn M. Maltby v. County of Scott, No. 70-CV-07-9849 (Minn. T. Ct. 02/12/08).

• Procedure: Appeal Dismissed as Untimely.  The Minnesota Tax Court dismissed the taxpayer’s Petition for Lien and Levy Action and their Final Notice and Demand for Payment as being untimely and therefore the court lacked subject matter jurisdiction.  The court reiterated that a levy or collection action or subsequent administrative actions by the commissioner, such as correspondence, telephone calls and meetings with the taxpayer, neither constitute appealable orders nor operate to extend the time of limitations for filing an appeal.  See, Wierschke v. Commissioner of Revenue, No. 4600, 1986 WL 9379 (Minn. T. Ct. 10/09/86).  Under the facts, the taxpayer did not appeal his order but fully paid the levy and collection notice and then attempted to appeal after the appeal time had expired. Jeremy & Crolyn Gjovik, f/k/a Premier Detail, Inc. v. Commissioner of Revenue, No. 7940-R, 2007 WL 4088172 (Minn. T. Ct. 11/14/07).

• Procedure: Amendment of Real Property Petition; Constitutional Claims.  The Minnesota Tax Court allowed American Crystal Sugar Company to amend its petition to include constitutional claims such as Equal Protection but bifurcated the trial on valuation and discrimination into two separate and distinct parts.  The constitutional claims will take place after the valuation controversy is resolved to allow the county adequate time to conduct the trial on valuation and respond to discovery on the constitutional claims. American Crystal Sugar Company v. County of Polk, Nos. C1-05-574 et al., 2007 WL 4531027 (Minn. T. Ct. 11/28/07).

• Real Property Tax:  60-Day Rule Violated.  The Minnesota Tax Court dismissed the taxpayer’s petition for failure to comply with the 60-Day Rule found in Minn. Stat. §278.05, Subd. 6(a).  The court rejected the taxpayer’s argument that it was not subject to the 60-Day Rule because it was owner-occupied.  The fact that there were related entities involved did not excuse the taxpayer from complying with the 60-Day Rule since they were separate entities. McDonald’s Corporation v. County of Scott, No. 70-CV-07-9810, 2008 WL ____ (Minn. T. Ct. 02/22/08).

• Real Property:  Reduced Valuations of Low Income Housing.  The Minnesota Tax Court reduced the assessed values of low-income housing apartment units and townhouses.  In putting the final value at $346,000, well-below the values at which the property had been appraised and assessed in the prior two years, the court dismissed the county’s appraiser’s valuation since it was done more than 18 months after the assessment date.  In addition, it accepted the taxpayer’s appraiser’s exclusive use of the income approach because of the difficulty of estimating depreciation for the cost approach and the lack of suitable comparables.  Ashland Dellwood Apartments LLC v. County of Isanti, Nos. 3-CV-06-77 and 30-CV-07-259, 2008 WL _____ (Minn. T. Ct. 02/12/08).

• Partnership Transaction; “Economic Substance” Attack Rejected.  In a partnership proceeding, the United States Tax Court granted partial summary judgment to one of the limited partners, finding that the liquidating transactions engaged in by the partnership and the distributions made to the partners had a legitimate “business purpose” that resulted in nonrecognition of gain to them under IRC §731(a)(1) and §752.  Countryside Limited Partnership et al. v. Commissioner, T.C. Memo. 2008-3 (2008).

• “Economic Substance” Doctrine; Losses from Option-Based Tax Shelter Transactions.  In a major victory for IRS, the Court of Federal Claims relied on the “economic substance” doctrine to bar losses generated by a complex partnership transaction involving purchased and sold euro-call options.  The court relied heavily on the “economic substance” doctrine as enunciated by the Court of Appeals for the Federal Circuit in Coltec Industries, 454 F.3d 1340 (Fed. Cir. 2006).  Jade Trading, LLC v. U.S. 100 AFTR 2d ¶ 2007-5591 (Ct. Fed. Cl. 2007).

• ESOP Redemption Payments.  A district court held that a corporation could deduct payments to redeem stock held in its employee stock ownership plan under IRC §404(k).  The IRS argued that even if the cash distribution redemptive dividends were deductible under IRC §404(k), the deductions were disallowed by IRC §162(k) because the amounts were paid or incurred “in connection with” the redemption of its stock.  The court also found that an IRS Revenue Ruling 2001-6 mandating a contrary result was not properly authorized by the Code. General Mills, Inc. v. U.S.,101 AFTR 2d ¶ 2008-381 (D. Minn. 2008).

• Claim of Right; Payments to Settle Antitrust Suit.  The U.S. Court of Appeals for the Federal Circuit held that an oil company was not entitled to a refund under IRC §1341 for payments it made in settlement of an antitrust suit, which the company claimed retroactively increased its costs of goods sold for past tax years.  Pennzoil-Quaker State Co. v. United States,101 AFTR 2d ¶ 2008-415 (Fed. Cir. 2008).

• Retroactive Application of “Son-of-Boss” Regulations.  In Klamatch Strategic Investment Fund LLC v. United States, 440 F. Supp. 2d 605 (E.D. Tex. 2006), the anti-”Son of Boss” Regulation §1.752-6 could not be applied retroactively by the IRS to tax shelters entered into prior to June 24, 2003 (when §1.752-6 was issued as a temporary regulation).  However, the 7th Circuit upheld the application of Reg. §1.752-6 retroactively to October 18, 1999.  Cemco Investors, LLC V. Forest Chartered Holdings, Ltd., No. 07-2220 (7th Cir. 02/07/08).

• Equitable Recoupment Doctrine Applied Absent Subject Matter Jurisdiction.  In a case of first impression, the United States Tax Court held that where it has original jurisdiction to redetermine a deficiency under IRC §6213(a), it may apply the equitable recoupment doctrine even though it lacks subject matter jurisdiction over the type of tax to which the equitable recoupment claim is directed.  The case dealt with the Medicare tax that an employer and employee paid on amounts deducted as reasonable compensation but that were later held to be disguised dividends.  Menard, 130 TC No. 4 (2008).

• Pension is Alimony.  The United States Tax Court ruled that a taxpayer’s payments to an exspouse under the Uniform Services Former Spouse Protection Act representing her share of his military retirement pay were deductible alimony payments.  The court determined the payments satisfied the requirements of IRC §71 even though they were listed as a division of marital property in the divorce agreement.  Neil Jerome Proctor v. Commissioner, 129 TC No. 12 (2008).

• Abatement of Employment Tax Assessment; Bank Error.  The court ruled that employment tax penalties and interest for the 1999-2002 tax years could not be abated due to “reasonable cause,” even though the taxpayer was unaware that its in-house accountant and its office manager had failed to perform their payroll tax duties.  However, the court said that there may be “reasonable cause” to abate an employment tax assessment for the 2003-2004 tax years because of a bank error.  Don Johnson Motors, Inc. v. U.S., 101 AFTR 2d 2008-370 (D. Tex. 2007).

• Collection Due Process Impartiality.  The 10th Circuit reversed a United States Tax Court opinion that held that an appeals officer’s consideration of a couple’s liabilities for two tax years during Collection Due Process (“CDP”) proceedings for an earlier year did not disqualify the officer in a subsequent CDP hearing for those years on grounds of “prior involvement” under IRC Code §6330(b)(3).  In reversing, the court wrote that once an appeals officer has involvement with an unpaid tax liability, regardless of whether it is the subject of the liability under review, he is no longer impartial for purposes of IRC §6330(b)(3).  Louis A. Cox et ux. v. Commissioner, No. 06-9004 (10th Cir. 2008).

• Penalty for Failure to Use Electronic Deposit; Taxes Paid on Time.  The United States District Court ruled that a company that paid its taxes on time by check may still be penalized under IRC §6656 by the IRS for failing to deposit the tax payments electronically, as prescribed by regulation issued under IRC §31.6302-1(h).  Fallu Productions Inc. v. United States, 101 AFTR 2d ¶ 2008-477 (S.D.N.Y. 02/13/08).

• No Disparate Treatment.  Schering-Plough filed suit in the federal district court to recover almost $500 million in taxes paid based on interest rate swaps for 1989-1992.  The trial court granted partial summary judgment for the IRS, thus stopping the taxpayer’s principal ground for refund: disparate treatment by the IRS in an FSA involving an unrelated similarly situated taxpayer in the same industry (i.e., another pharmaceutical company that “repatriated” foreign income).  The court rejected the disparate treatment claim on these grounds:

1. Even if there were a right to get the same Private Letter Ruling (“PLR”) another taxpayer gets until that one is revoked, that does not apply to FSAs because they are not issued to or at the request of taxpayers.

2. In any event, the fountainhead of disparate treatment law, IBM, 343 F.2d 914 (Ct. Cl. 1965), cert den., 382 U.S. 1028 (1966), was distinguishable as an exacerbated case involving two conflicting PLRs, and was effectively overturned by Dickman, 465 U.S. 330 (1984), which the court read for the proposition that “the IRS is not required to apply an erroneous interpretation of the law simply because it previously made an erroneous interpretation with respect to another.”  Schering-Plough Corp., No. 05-2575 (D. N.J. 2007).

• Captive REIT; Deductions for Rents Disallowed.  The North Carolina superior court held that Wal-Mart’s REIT and other subsidiary transactions had no economic substance and lacked “business purpose,” and therefore deductions for rents were properly disallowed by use of combined returns.  The state is statutorily authorized to determine a corporate taxpayer’s “true net income” and may require a consolidated or combined return to be filed by the company and its subsidiaries and affiliates to do so.  The Revenue Department also was within its authority when it levied a 25 percent “large tax deficiency” penalty on the retailers. Wal-Mart Stores East v. Hinton, No. 06-CVS-3928 (N.C. Super. Ct. 01/04/08).

• Regulation on Foreign Corporation; Filing Date.  The 3rd Circuit reversed the United States Tax Court that invalidated the time of filing requirement regulations issued to supplement IRC §882 (c) (2).  The dispute in the case arose from the filing deadline set forth in Treasury Regulations §1.882-4(a)(3)(i).  The regulation requires that a foreign corporation file a return within 18 months of the filing deadline set in IRC §6072 in order to claim real property activity tax deductions.  The U.S. Tax Court noted that Congress placed the words “time” and “manner” together in several code sections, indicating that when Congress intended a time limit to apply, it did so with the phrase “time and manner.”  Because the lower court found that the plain meaning of “manner” did not inherently include an element of time, it concluded that Congress did not intend §882(c)(2) to embody a filing deadline.  The 3rd Circuit reversed and held that Congress’s use of the word “manner” in the statute creates ambiguity because Congress has not spoken to the precise question at issue.  The court found IRC §882(c)(2) to be ambiguous, and therefore the IRS was justified in promulgating a rule that prescribed a filing deadline.  Swallows Holding v. Commissioner, 101 AFTR 2d ¶ 2008-XXXX (3rd Cir. 2008).

• Receipt of Royalty Income; “Nexus.” A Delaware intangible holding company’s receipt of royalty income from an affiliated entity for the licensing of its trademarks and trade names, which the entity used for retail business activities in Louisiana, constituted “substantial nexus” in Louisiana within the limits of the Commerce Clause of the U.S. Constitution and Quill Corp. v. North Dakota, 504 US 298 (1992).  The company had no physical presence in Louisiana but was still held subject to the state’s corporate income and franchise taxes for the receipt of royalty income.  Geoffrey Bridges v. Geoffrey, Inc., No. 2007 CA 1063 (La. App. Ct., 1st Cir. 02/08/08).

• Partner’s Tax Liability on Disputed Funds.  An individual who was a partner in a partnership had to pay tax on his distributive share of the partnership’s income, notwithstanding that the partnership’s receipts had been placed in an escrow account pending the outcome of a suit by the individual against the other partner.  Burke, 99 AFTR 2d ¶ 2007-2637 (1st Circ. 2007), cert. denied United States Supreme Court (02/19/08).

• Federal Crop Insurance Proceeds; Deferral.  The U.S. Tax Court held that two farming partnerships and their partners may not, under IRC §451(d), defer reporting as income until 2002 federal crop insurance proceeds the partnerships received in 2001 relating to their destroyed sugar beet crops.  Generally, a cash method taxpayer reports income in the year of receipt.  See IRC §451(a).  However, under IRC §451(d) an exception is provided for farmers, if they normally report income from the sale of crops in a year following crop production.  Under the IRC §451(d) exception, a cash method farmer who normally reports income from the sale of his crops in the year following crop production may elect to defer treating as income crop insurance proceeds received in a year until a following year.  In Revenue Ruling 74-145, the deferral of recognition was available to a farmer who deferred not all but more than 50 percent of his crop income, a percentage which IRS referred to as a “substantial portion” of the farmer’s annual crop income.  In this case, the partnerships reported only 35 percent of sugar beet income in 2000 and 65 percent in 2001.  The court held that both of these figures suggest that the crop insurance proceeds the partnership received in 2001 should be reported in 2001.  To hold otherwise would distort the income reported in 2001 and 2002.  Nelson v. Commissioner, 130 T.C. No. 5 (2008).

ADMINISTRATIVE ACTION

• Electronic Filing Requirements; Exempt Organizations.  Two new electronic fling requirements for tax-exempt organizations went into effect after December 31, 2006.  Certain tax-exempt organizations will have a new filing requirement imposed by the Pension Protection Act of 2006.  For tax periods beginning after December 31, 2006, tax-exempt organizations whose gross receipts are normally less than $25,000 must electronically file an annual notice.  The IRS is developing a filing system for the annual electronic notice and will publicize filing procedures upon completion of the filing system.  Some tax-exempt organizations will be required to electronically file their Forms 990.  For tax years ending on or after December 31, 2006, tax-exempt organizations will be required to e-file if they have $10 million or more in total assets and file 250 or more returns a year.  In addition, private foundations and charitable trusts will be required to e-file Form 990-PF regardless of their asset size, if they file at least 250 returns.  More information about e-filing for charities and nonprofits, including the list of approved e-file providers, is available at the Charities & Non-Profits page on the IRS website at www.irs.gov/efile/article/0,,id=108211,00.html.

• Self-Created Musical Works, Copyrights as Capital Assets.  The IRS issued proposed and temporary regulations allowing taxpayers to elect to treat the sale or exchange of self-created musical works or copyrights as the sale or exchange of a capital asset.  Prior to the changes, gain from the sale of self-created musical compositions or copyrights in such works was automatically treated as ordinary income and taxed at a higher rate.  The new capital asset treatment must be elected, and expires in 2011.  In general, the rules allow taxpayers to make the election for capital asset treatment for sales and exchanges beginning after May 17, 2006.  Elections must be made separately for each musical composition, or copyright in a musical work, sold or exchanged during the taxable year.  REG 153589-06, T.D. 9397.

• Performance-Based Compensation; Reversal. IRS has held that compensation is not qualified performance-based compensation for purposes of IRC §162(m) “even if the compensation is paid upon the attainment of the performance goal,” if the arrangement provides for payment upon the attainment of a performance goal or for termination without cause, or for good reason, or upon voluntary retirement.  The holding in Rev. Rul. 2008-13 is prospective.  It supports the IRS’s position in Private Letter Ruling 200804004, released January 25, 2008.  It is clear that a payment made on satisfaction of the performance conditions is not vitiated because the compensation can be paid on death, disability, or change in control.  What is at issue is additional payment contingencies—such as involuntary termination without cause, good reason voluntary termination, or retirement—which were previously permitted by the IRS and which have now been reversed.  These rulings have sparked a campaign to persuade the IRS to withdraw or clarify them.  Revenue Ruling 2008-13.

• Noncorporate Limited Partner; Investment Interest Deduction Limitation.  The IRS concluded that where a noncorporate limited partner did not “materially participate” in the partnership’s activity, his distributive share of the interest expense on debt allocable to the entity’s trade or business of trading securities was investment interest, subject to the IRC §163(d)(1) deduction limitation.  Rev. Rul. 2008-12, 2008-10 (IRB).

• Dependent-Qualifying Relative.  An individual is not a “qualifying child” of another taxpayer for purposes of IRC §151(c) dependency exemption if the individual’s parent (or person with respect to whom individual is defined as “qualifying child”) is not required by IRC §6012 to file income tax return and does not file it, or filed solely to obtain refund of withheld income taxes.  Finding that individual is not a qualifying child of “any other taxpayer” would permit taxpayer to claim exemption as long as other requirements (relationship to taxpayer, limited income, and providing at least half of individual’s calendar year support) are satisfied.  Notice 2008-5, 2008-2 IRB 256.

• “Like-Kind” Exchanges of Rentals; New Safe Harbor.  The IRS is offering a “safe harbor” under which it will not challenge whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment for purposes of like-kind exchange treatment under IRC §1031.  The IRS will allow the “tax-free” exchanges for property that is rented to others but also occasionally used by the owners for personal purposes.  Taxpayers must own the housing unit for at least two years before the exchange.  In each of the two years prior to the trade, the taxpayer must rent the property at a fair price for 14 days or more.  IRS will apply a “facts and circumstances” test. Revenue Procedure 2008-16.

• “Bundled Fiduciary Fees” Deductions. Nongrantor trusts and estates will not be required to determine the portion of a “bundled fiduciary fee” that is subject to the 2 percent floor for miscellaneous itemized deductions for tax years beginning before January 1, 2008.  For years before 2008 taxpayers can deduct the full amount of investment advisory costs and other costs subject to the 2 percent floor under IRC §67 that are bundled as part of one commission or fee paid to a trustee or executor.  The interim guidance was issued in light of the U.S. Supreme Court’s decision in Knight v. Commissioner, No. 06-1286 (U.S. 01/16/08).  The Knight case unanimously held that deductions for investment advisory fees paid by a trust are subject to the 2 percent floor.  IRS Notice 2008-32 (03/17/08).

• Corporate Income Tax.  The Minnesota commissioner has issued notice that when either the property or payroll factor does not exist, the taxpayer can elect to calculate its Minnesota franchise (income) tax apportionment formula based upon a two-factor weighted formula without petitioning the commissioner for use under Minn. Stat. §290.20.  Revenue Notice No. 02-06 was revoked and superseded because of changes made in Minn. Stat. §290.191, which changed the apportionment percentages.  Minnesota Department of Revenue Notice No. 08-04 (02/25/08).

LEGISLATION

• 2008 Economic Stimulus Act.  The Congress passed and the president signed into law a $152 billion package of tax rebates and business investment incentives (H.R. 5140) to lessen the impact of a recession in 2008.  The significant provisions for both individuals and businesses are set forth below.

Provisions for Individuals.

The new law provides a credit against 2008 taxes in the amount of $600 for individuals and $1,200 for couples filing joint returns, but the credit is limited to the taxpayer’s 2008 net income tax liability.  Taxpayers with dependent children will receive an additional $300 for each child claimed as a dependent.  The IRS will send a one-time rebate of the credit, basing the calculation on the taxpayer’s 2007 tax return.  The credit (and rebate) is phased out at a rate of 5 percent of adjusted gross income in excess of $75,000 ($150,000 for couples).

A provision targeted to benefit low-income seniors and disabled veterans allows the minimum rebate of $300 ($600 for couples) to anyone who had any net tax liability in 2007 or had at least $3,000 in earned income (including social security) and veteran’s disability benefits.  Although parents are eligible for the “bonus” rebate for dependent children, the dependents are not eligible for any rebate on their own.  See Notice 2008–28 (March 2008) (providing details as to how to claim the rebate and detailing what is “earned income” for the rebate).

Because the rebate checks will be calculated based on the taxpayers’ 2007 tax returns, taxpayers have an incentive to file their personal income tax returns early.

Provisions for Businesses.

Increase in Asset Expensing Election (IRC §179).  The bill increases the amount that can be expensed to $250,000 and the limit on qualifying property to $800,000.  This enhanced deduction is available on qualifying property placed in service during the 2008 tax year.

Bonus Depreciation.  The bill reinstates the 50 percent bonus depreciation deduction (that had expired for most acquisitions at the end of 2004) for qualifying assets placed in service during calendar year 2008.  The provision generally applies to tangible personal property, qualified resold improvements, and purchased computer software.  It applies for both regular tax and the Alternative Minimum Tax.  Additionally, under this provision, the “luxury auto” cap on first-year depreciation is increased by $8,000.

• Minnesota Constitutional Amendment to Raise Sales Tax.  The Legislature passed H.F. 2285 that would increase the sales tax from 6.5 percent to 6.875 percent for the next 25 years.  The voters would have a choice on the constitutional amendment on the November 2008 ballot.  Revenues from the tax increase would be dedicated to the state’s natural resources and cultural programs.

The following question will now be placed on the election ballot this fall:

Shall the Minnesota Constitution be amended to dedicate funding to protect our drinking water sources; to protect, enhance, and restore our wetlands, prairies, forests, and fish, game, and wildlife habitat; to preserve our arts and cultural heritage; to support our parks and trails; and to protect, enhance, and restore our lakes, rivers, streams, and groundwater by increasing the sales and use tax rate beginning July 1, 2009, by three-eighths of one percent on taxable sales until the year 2034?

LOOKING AHEAD

• Proposed Law for Tax Accidental Waiver of Privileges.  The Senate Judiciary Committee approved S. 2450 that would establish a new federal rule of evidence to protect parties from inadvertently waiving the attorney-client privilege and work-product protection in federal court litigation.  It would create new Federal Rule of Evidence 502 stating that the inadvertent disclosure of privileged materials would not result in a waiver of attorney-client and work-product privileges so long as the party responsible for the disclosure took reasonable steps to prevent release of the material.  Any waiver would be limited to the actual material disclosed and would not extend to all material on the same subject.  However, if the disclosure is done intentionally to gain tactical advantage, the waiver would extend to all related materials on the same subject.  If an inadvertent disclosure is made in federal court, the protection against privilege waiver would also apply in state court.  Inadvertent disclosure first made in a state court proceeding would not waive the privilege in a subsequent federal court proceeding.  Further, if the parties enter into an agreement protecting against privilege waiver in the event of an inadvertent disclosure—commonly used in civil litigation—such an agreement would bind only the parties to the agreement.  The agreement would not protect against privilege waivers as to nonparties unless it is incorporated into a court order.  The proposed rule would apply to court-ordered arbitration proceedings.

— Jerry Geis
Briggs & Morgan

TORTS & INSURANCE
JUDICIAL LAW

• Insurance Coverage; Miller-Shugart Settlement. The 8th Circuit recently issued a ruling on the enforceability of Miller-Shugart agreements.  After hiring Wanzek Construction to perform welding work on pipes that carry corn mash in its ethanol production plant, Corn Plus sued, alleging the work was defective.  Wanzek’s CGL carrier defended under a reservation of rights and started a separate declaratory judgment action seeking a determination of no coverage. 

Wanzek and Corn Plus then entered into a Miller-Shugart agreement for $2.5 million.  An addendum also provided that if the settlement amount was determined to be unreasonable, a court should decide the largest reasonable amount and substitute it for the $2.5 million.

Corn Plus sought a determination that the policies afforded coverage and the Miller-Shugart agreement was reasonable.  The U.S. District Court rejected that contention on several grounds, and the 8th Circuit affirmed.  First, the court concluded that the “your work” and “impaired property” exclusions barred coverage for some damages but that coverage existed for other damages.

Next, the court held the Miller-Shugart agreement was unenforceable as a matter of law for failure to allocate between covered and uncovered damages.  The court determined that without an allocation, it was unable to assess the reasonableness of a settlement for the covered damages and that parties are not allowed to make post-hoc allocations once coverage has been determined.  The court also determined the addendum was contrary to public policy and unenforceable since Minnesota has rejected substituting a court’s determination of a reasonable settlement amount; instead, Minnesota law returns the parties to the status quo and reinstates the underlying action between the claimant and the policyholder when a Miller-Shugart agreement is unenforceable.  Finally, the court declined to reinstate the underlying action in this case because the agreement expressly waived any further rights against Wanzek; the agreement had a severability provision saving the waiver notwithstanding the finding that the agreement was otherwise unenforceable. Corn Plus Co-op. v. Continental Cas. Co. and Lumbermens Mut. Cas. Co., No. 07-1305, ___ F.3d ___, 2008 WL 323219 (8th Cir., 02/07/08).

• Insurance Policy: Enforceability of an Antiassignment Clause. The Minnesota Court of Appeals recently considered whether antiassignment language in three motor vehicle insurance policies barred a purported assignee from disputing the amount of post-loss proceeds due under those policies.  In two of the policies, the antiassignment language precluded the assignment of the insured’s “rights and duties under the policy.”  In the third policy, the antiassignment language stated that “[n]o change of interest in this policy is effective” without the insurer’s consent.

Concluding that these antiassignment clauses barred a purported assignee from disputing the amount of post-loss proceeds due under the policies, the court first reasoned that, absent ambiguity, provisions of an insurance policy are to be given their plain and ordinary meaning.  To this end, the court noted that “[a]ll the clauses here plainly have broad reach, precluding any transfer of a right or interest under the respective policies.”  The court continued, “on the face of each policy, the insured may not assign the right to receive insurance proceeds or the right to litigate a dispute over the amount of proceeds claimed to be due.”

The court also distinguished various cases cited by the assignee for the proposition that an antiassignment clause precluding the assignment of “the policy” is ineffective to bar a post-loss assignment of proceeds.  The court reasoned that none of the insurance policies before it prohibited an assignment of “the policy” in the abstract.  Rather, the antiassignment clauses referred to rights, interests, and duties, and “[t]his prohibitory language is broad enough to reach loss proceeds.”

Finally, the court, applying prior Supreme Court authority, held that the purported assignments were barred because the policies manifested the intention of the parties that contract benefits not be assigned. Star Windshield Repair, Inc. v. Western National Insurance Co., A07-216 et al., 2008 WL 314457 (Minn. App. 02/05/08). www.lawlibrary.state.mn.us/archive/ctappub/0802/opa070216-0205.pdf

• Legal Malpractice; Attorney-Client Relationship; Third-Party Beneficiaries. Miller & Schroeder (“M&S”) hired the Dorsey & Whitney law firm to structure and secure a casino loan.  When the loan went unpaid, the respondent bank sued Dorsey for legal malpractice.  The bank was never Dorsey’s client, but it claimed to have been a “third-party beneficiary” of the legal services that Dorsey performed for M&S.

The district court granted summary judgment for Dorsey on the ground that the bank was neither a client nor a third-party beneficiary.  The Court of Appeals reversed, but on further review the Minnesota Supreme Court reinstated the judgment of the district court.

In light of some confusion in its prior Marker decision, the Supreme Court elaborated on the meaning of “a direct and intended beneficiary” entitled to proceed in a legal malpractice action.  To be a direct and intended beneficiary, an attorney must be aware of the client’s intent to benefit the third party.  A contrary rule would serve to reduce an attorney’s zealous advocacy on behalf of his or her clients for fear of harming an unknown third party.  In this case, the record was devoid of any suggestion that Dorsey knew of its client’s intent to benefit the third party, and there was no evidence that an implied contract for legal services existed between Dorsey and the bank participants.  McIntosh County Bank v. Dorsey & Whitney, LLP,A06-486, (Minn. 03/06/08). www.lawlibrary.state.mn.us/archive/supct/0803/OPA060486-0306.pdf

— David Turner
Bassford Remele, A Professional Association